[This post has been updated on 11/7/2011. The US Senate has said that for-profit colleges took in $626 million through the GI Bill, not $1 billion as they had initially reported]
In the last few weeks, there’s been a lot of press about for-profit colleges and federal student aid. The big news is that the eight largest for-profits took in more than
$1 billion$600 million in funding through the Post-9/11 GI Bill. That’s about 25 percent of the total funding administered through the GI Bill last year—just to the top eight for-profits (if you are curious, University of Phoenix got the most money, with $210 million).
Funding given through the GI Bill to students —service members or, in some cases, their families—is in the form of a grant, not a loan. So these students do not have to worry about defaulting on loans, which is good, because 15 percent of students at for-profit colleges end up defaulting—more than triple the rate at private, not-for-profit schools and more than double the default rate at public schools.
Why are for-profit schools recruiting veterans so aggressively? It’s because of a funding regulation known as the “90/10 Rule,” which mandates that institutions of higher education can get no more than 90 percent of their funding from federal student aid; the last 10 percent must be from other sources (the rule was originally the 85/15 Rule, enacted in 1992, and it was loosened to its current ratio in 1998). The rule may seem to be almost pointlessly generous—what school needs to get that much money from the government?—but in fact, for-profits routinely hit the limit. Their tuition is generally high, and their students are often low-income, which means that most tuition is coming in the form of federal loans. It turns out that getting that last, non-federal-loan 10 percent can be tricky.
That’s where the veterans and the GI Bill come in. There’s a bit of a quirk in the way the 90/10 Rule works: It doesn’t say that 10 percent of a school’s funding has to come from outside the federal government; it says that 10 percent has to come from source other than the funds set up by Title IV of the Higher Education Act (Title IV funding for short). The 10 percent can come from elsewhere in the federal government—including the GI bill.
This small loophole is actually a very big deal to for-profits. If they can get 10 percent of their funds from the GI Bill, then they can get the other 90 from Title IV, and that adds up to 100 percent of their money from the federal government. The 90/10 split means that a student who is paid for by GI Bill funds can also let the school take on nine students financed entirely through regular student loans. Suddenly, a veteran can seem a lot less like a prospective student and a lot more like a giant dollar sign. The GI Bill has the unintended consequence of letting for-profits sign up more non-vets than they would otherwise be able to.
There have been a few high-profile reports about overly aggressive recruiting of veterans, including a PBS Frontline report (which you can watch in its entirety here) and an excellent opinion column in the New York Times by Holly Petraeus, who works on veterans’ affairs at the new Consumer Financial Protection Bureau (she also spoke to the Senate HELP Committee about this topic a few months ago).
One clear step that Congress can take to help protect veterans would be to change the GI Bill rules so that its funds count for the 90 percent side of the equation, not the 10 percent. If that change were made, veterans’ benefits would be treated just like other federal funding, and the extra incentive to recruit vets would vanish. In addition, Congress should change to the ratio back to the 85/15 rule. It’s a smaller step, but it’s in the right direction and it wouldn’t be very difficult. We need to change something: the system now is too easily exploited by some schools who are more interested in profits than education.
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