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Regulating the College Dream: Obstacles in the Way to Upward Mobility (Updated with Transcript)

October 13, 2010

Regulating the College Dream: Obstacles in the Way to Upward Mobility | The Heritage Foundation (Click to watch Video).
Heritage Foundation, October 13, 2010
Dr. Richard Vedder, Ohio University
Dr. Richard Bishirjian, Yorktown University

Transcript:

On July 14, at Macomb Community College in Michigan, President Obama announced the American Graduation Initiative aimed at supporting community colleges in helping a n additional five million Americans earn college degrees and certificates.

He proposed to pay for this initiative, “by ending the wasteful subsidies we currently provide to banks and private lenders for student loans, which will save tens of billions of dollars over the next ten years. Instead of lining the pockets of special interests, it’s time this money went toward the interest of higher education in America.”

In the words of Jackie Gleason, “Not so fast.”

The wealth that is being redistributed in the many initiatives, regulatory proposals, stimulus packages, bailouts and deficit spending of the Obama administration doesn’t originate with the tooth fairy.

Wealth originates with entrepreneurs who put their capital, savings, and personal finances at risk to create new ventures. Many fail, but those that survive drive the American economy, create millions of jobs, and grow the capital deposits of banks and venture funds and donations to millions of charitable organizations that dot the American landscape.

Wealth is not created by government, it is created by entrepreneurs.

Unfortunately, this Administration has made life difficult for entrepreneurs and especially the entrepreneurs who created the for-profit education sector that has brought competition to higher education and educational opportunity to millions of adults who wanted to earn a college degree or improve their employment by earning a credential.

President Obama is right. It is no longer sufficient to earn a high school diploma because the jobs that fed the industrial economy of the 20th century no longer exist.
Look around and ask yourself if what you do for a living today existed when you were born. The world has changed, and in order for us to change with it most of us were fortunate enough to earn the education we needed to succeed in this new economic reality.

At issue then is how best to improve educational opportunity for our children and grandchildren.

As the founder of an accredited for-profit university that is solely Internet-based, I believe the solution is not Obama-like policies that take from the wealth creating sectors of the American economy to finance government education programs.

The solution is to create conditions that allow entrepreneurs to put themselves, their resources and their sweat equity at risk in creating new ventures.
This Administration has done a great deal to harm wealth creation.

The first alarm was sounded when the Dodd-Frank Wall Street Reform and Consumer Protection Act was made public and that legislation called for increased standards for accredited investors.

Unless you are an “accredited investor,” you are not likely to be aware that U.S. citizens may not invest in non-registered securities unless they meet the definition of an accredited investor.

That means that in order to invest in Yorktown University common stock, an investor has to meet either income or net worth standards.

In order for you to invest in a startup company like Yorktown University, you must have assets of $1 million, inclusive of your primary residence, or $200,000 in income for each of the two previous years and a reasonable expectation of income of $200,000 in the current year.

Senator Dodd and Congressman Frank proposed to raise that standard. In their wisdom, or that of someone on the staff of the House Financial Services Committee or the Senate Banking, Housing, and Urban Affairs Committee, proposed to adjust these standards for inflation from 1982.

They increased the net worth requirement to $2.29 million and the annual income standards to $459,000 if single and $688,000 if married. They also proposed to exclude an investor’s primary residence in calculating net worth.

I don’t know about you, but I found it very difficult to find accredited investors interested in education when the standard was $1 million in net worth. By tripling that my job would have been impossible.

If you accept my premise that entrepreneurs placing their lives and capital at risk create wealth, then Dodd/Frank threatened the economic recovery of the United States at a time when it was deep in recession.

If you have a great idea and want to start your own company, you can finance that venture with your own savings, obtain institutional financing from venture funds, or you can locate “accredited” investors and ask them to finance your venture.

By limiting the pool of accredited investors to those with net worth of $2.29 million dollars, Sen. Dodd and Cong. Frank’s proposal would effectively destroy creation of new companies.

In 1933 when the Securities and Exchange Commission was created, there may have been justification for imposing income or net worth limits on some types of investments. Continuing that into the 21st century when the educational level of Americans has increased exponentially merely keeps the middle classes from joining the class of investors that are permitted to invest in high risk startup ventures.

Don’t complain about the concentration of wealth in the hands of the wealthy, if you keep ordinary Americans from investing in startup ventures.

Fortunately, the venture investment community unanimously assailed the Dodd/Frank inflation adjusted definition of accredited investors by arguing that the proposed language would kill our ability to finance economic innovation from start-ups and early-stage businesses.

Though I gave a silent prayer of thanks for that little favor, little did I know that in April I would have to write to my shareholders telling them that the U.S. Department of Education had published proposals for a series of regulations that would adversely affect Yorktown’s ability to attain regional accreditation and plans to purchase a regionally accredited college.

Now, here is the rub: though I am very critical of this Administration, I can’t exclusively blame President Obama.

The instability of the for-profit education industry is the direct result of U.S. government actions that can be traced to the politicization of higher education during the Spellings’ era at the U.S. Department of Education.

U.S. Secretary of Education, Margaret Spellings, figured out that all she had to do to achieve her goals was not to renew—or threaten—the recognition of an accrediting association to operate. In December 2006, using a little known appointive commission known as NACIQI, the Department chose not to renew the charter of the American Academy of Liberal Education, and it threatened to revoke the charters of the American Bar Association and the Western Association of Schools and Colleges.

What Secretary Spellings wanted was for every college and university in the United States to establish procedures by which to measure the learning outcomes of their students. I’ve written about this extensively and have posted those essays at my personal blog. You can visit dickbishirjian.com to understand my arguments.

My point here is that the Department of Education during the George W. Bush Administration politicized higher education by manipulating the system of accreditation. They figured out that all you had to do to change the policies of higher education was to revoke, or threaten, the charters of the agencies that accredit American colleges and universities.

The Obama Administration learned a lesson from George W. Bush that to achieve your education goals, all you have to do is threaten to revoke the charter of accrediting associations.

In December of last year and again in May of this year, the Inspector General of the U.S. Department of Education threatened loss of its charter of the largest accrediting association officially recognized by the Department to accredit more than 1,000 colleges from West Virginia to Colorado.

That association, commonly referred to as “North Central,” is coincidentally the primary accreditor of Internet-based and for-profit colleges and universities.
If North Central loses its charter, the University of Phoenix, Capella University, American Public University and all the other for-profit education companies this association has accredited will have to obtain accreditation elsewhere.

Since there is no “elsewhere” to go to, the Obama Administration will have effectively killed the for-profit education industry.

Not satisfied with politicizing the accreditation system, the Obama Administration engaged in negotiated rule-making by which the Department of Education proposes to severely limit the operation of for profit colleges. In other words, Congress—which spent five years deliberating and then passing the 2008 Higher Education Opportunity Act—is being circumvented by an administrative procedure by which new regulations are imposed on higher education through a negotiated rule-making process.

And, in order to secure those regulations, the U.S. House of Representatives voted to eliminate the requirement under the Congressional Review Act of 1996 that federal agencies submit their rules to Congress before they can take effect.

With this modification the Obama Administration proposes to control higher education without the consent of the U.S. Congress.

The evil genius behind this attempt to kill the for profit sector of the system of private education that once dominated higher education in America is a little known foundation executive from San Francisco, Robert Shireman.

Shireman was appointed to a top position at the U.S. Department of Education that does not require Senate confirmation and as Deputy Undersecretary of Education Shireman engaged in a process of negotiated rule-making.

In June of this year, those proposed regulations were published in the Federal Register. Support for those proposals was provided by Senator Harkin who held several Senate HELP Committee Hearings and Sen. Durbin who gave a vitriolic speech to the National Press Club in which he attacked for profit education on a number of counts. Most recently a subcommittee of the House Armed Services Committee commenced hearings on the Department of Defense oversight of tuition assistance programs of U.S. military personnel.

A very high percentage of Active Duty military personnel enroll in for-profit colleges and universities because the for-profit sector was the first to utilize new technologies that make it easy for military personnel to earn college credits without attending scheduled classes in bricks and mortar classrooms.

Active Duty U.S. military personnel are encouraged to use TA—tuition assistance—in order to achieve their educational goals and to assure that the U.S. military services are the best educated fighting force in history.

If Tuition Assistance is limited to traditional bricks and mortar institutions, or reduced in ways that limit for-profit institutions from counting military tuition income against Title IV income, some for profit colleges will close their doors and others will be compelled to reduce the number of programs they offer.

A process that began in 1968 when the New Left attacked ROTC programs and demanded that academic credit be denied to officer candidates will have been accomplished by diverting the use of education benefits of Active Duty military personnel away from for-profit institutions.

Thought the Obama Administration calls for an increase in college graduates by five million in ten years, that is merely smokescreen to disguise an overall attempt to kill for-profit private sector education and then, when the carcasses of the for-profits have been buried, to reserve higher education for the public sector.

The reason?

Well let me quote from an essay by Richard Vedder published in the Chronicle of Higher Education on August 30 of this year:

“The Obama administration has had several battles with the for-profits as part of a bigger war against capitalism. In my view, the president is basically a socialist—a person who craves collectivist, government solutions to problems, and is deeply distrustful of private enterprise.”

From that it follows that the Obama Administration does not merely “dislike” the profit motive, it is “offended” by companies that profit and thus capture resources that President Obama believes are best distributed by government. The $300 million-plus profits of the University of Phoenix in 2008 are offensive because they are “taken” from Title IV fund that could be better distributed by the Financial Student Aid division of the Department of Education and used to increase Title IV funds.
How then does the Obama Administration hope to kill off the for profit education sector?

First in importance, and this is my favorite and probably Robert Shireman’s favorite as well, is the proposal to create a new level of state control of higher education.

In April, Shireman travelled all the way to St. Paul, MN to the annual convention of the National Association of State Administrators and Supervisors of Private Schools.

There Shireman told his audience of state regulators that the current system of accreditation was impaired and that we need “substantive” oversight, not “merely of the type required to do business in a state,” but formal legal authorization “subject to adverse action by the state,” and the state must have “a process to review and appropriately act on complaints . . . and to enforce applicable state laws.”

Down the Hill from here at the Heritage Foundation on 16th Street, NW, the Institute of World Politics, a boutique graduate school of national security studies took fifteen years to attain regional accreditation. Yorktown University attained national accreditation in eight years and if the door to regional accreditation were not shut to for profit Internet institutions, it would take another six to eight years to attain North Central accreditation.

Since the outcome of regional accreditation cannot be certain, no institutional financing is available for startup institutions, which leaves the field of private higher education to religious institutions and the very wealthy with hundreds of millions of dollars to spend on a “hobby.”

Now, if you add a requirement that an Internet institution with a presence in a state—defined by as little as using a Proctor to oversee students taking an examination—must be licensed in every state and those states are directed by the Department of Education to maintain a process of “substantive” licensing–the entire for profit world of Internet-based education will be subject to a crazy quilt of state licensing requirements, annual filing requirements and state licensing fees.
In Virginia, for example, for-profit education companies are assessed a tax on all shares authorized, an annual license fee and scrutiny of state education officers who are authorized to engage in lightening raids and have the authority to close down a school overnight.

Yorktown University chose to leave Virginia and move to Colorado rather than be subject to the powers of a non-elected State Council of Higher Education of Virginia.
My next favorite proposal, and probably Robert Shireman’s, is the proposal to close down participation in Title IV programs of for-profit institutions with high student loan default rates.

The Department of Education, no doubt with some glee, released a database of four years of student loan repayment data on Friday the 13th of August.

The data revealed that Capella University students had a 40% repayment rate; DeVry 38%; American Public University 47%; University of Phoenix 44%; some divisions of Westwood College had repayment rates of less than 20%; Webster University 34% and Walden University 41%.

The cut off for being “fully eligible” is a repayment rate of at least 45%.

Only American Public University has a student loan repayment rate greater than 45%.

An institution is ineligible “if (1) the repayment rate is less than 35% and (2) students who completed the program have a debt-to-earnings ratio above 30% of discretionary income and 12% of total income.”

That is called the “gainful employment” regulation.

For example, average annual earnings of a “Medical Assistant Program” is $17,167. If a student’s loan debt is greater than 12% or $2,060, the institution is ineligible.
How many certificate programs—anywhere—cost $2,000?

These formulae for debt and defaults apply to all Title IV eligible for-profit institutions offering academic and non-degree programs and any non-profit and public institution with Title IV eligible non degree programs.

The gainful employment standard addresses the complaint of the Obama Administration that for-profit college tuition is too high and that too many students have paid for degree and certificate programs that are worthless.

As if on cue, U.S. Senator Dick Durbin (D-Il) gave a speech to the National Press Club on June 30 that put some emotion behind these proposals.

In addition to affirming his support for bringing the states into the accreditation process, closing access to Title IV funds to schools that have defaults of 30 percent over three years or 40 percent in one year; restricting “institutions that receive federal student aid from paying their admissions recruiters on the basis of enrollment numbers”; requiring for-profit colleges to disclose job placement rates”; relating student loans to “gainful employment.” Senator Durbin called for

  • Lowering the 90-percent threshold that allows schools to receive up to 90 percent of their income through federal programs
  • Restricting the use of federal financial aid dollars that can be used for “slick advertising,” such as “billboards, television commercials, and advertisements on the sides of buses”
  • Controlling how much these institutions themselves lend to their own students and
  • Stopping the practice of buying accredited institutions.

Sen. Durbin’s assault raises severe constitutional questions. Restricting normal advertising violates the First Amendment of the U.S. Constitution.

Requiring state licensing of companies not domiciled in that state violates the commerce clause of the Constitution.

Singling out for-profit education for using Title IV funds without including non-profit colleges violates the Due Process clause.

In short, the most important aspects of President Obama’s proposals are unconstitutional on their face, thanks to the philosophy of limited government of the Founders of the Constitution.

Most important, they do not address the underlying problem that the business model for traditional higher education is broken.

There is no justification for “public” education unless it enables students to earn a college education at low cost. Unfortunately, the business model of traditional education makes it extremely expensive to operate a bricks and mortar institution.

Faculty are resistant to change and students seem to want the trappings of a country club even though they incur substantial debt because of the extravagant costs of a country club education.

Most four year public institutions could offer their first two years via the Internet and operate solely as two year senior colleges.

That would reduce the need for investment in new campus buildings, it would eliminate the need for tenured instructors teaching Freshman and Sophomore courses, and, of course, it would reduce the cost of maintaining sporting establishments, coaches with multi-million dollar contracts, and the servitude of so-called “Scholar Athletes” who work for less than what they could earn if they were employed on the farm teams of professional sports.

Here is the bottom line: a college education in America today costs too much and the Obama Administration’s policies will increase those costs, increase the amount of student indebtedness, stifle competition and reduce, not increase, the number of college graduates in the next ten years.

Only competition can reform higher education, not more regulation.


iMy references to proposed “gainful employment” proposals are taken from Ron Holt, Dunn & Davidson, “Analysis of Proposed Gainful Employment (GE) Regulations.”

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