Consumer Federation of California

The U.S. Department of Education is struggling to find the right way to regulate for-profit colleges. A federal judge in Washington just overturned a major component of the department’s new "gainful employment" rules, which were scheduled to go into effect on Sunday.

Despite the setback, the department has to keep trying to find the right solution. There’s too much at stake.’

For-profit institutions have been under fire lately. On paper, they offer a promising solution to lots of would-be students, especially those who are already working or live in rural areas: flexible schedules and career-focused classes that should help them achieve better options in the job market.

In reality, the $30 billion industry has been associated with all kinds of problems.

Only about 12 percent of secondary students attend a private, for-profit school, but they represent nearly half of all student loan defaults. When they default on their federal student loan payments, taxpayers get stuck with the bill.

At least one reason for this is that the schools are extremely expensive for their target audience – the average debt level at a private, for-profit university was $33,050 in 2008, compared with $23,200 for an average graduating college senior that year. Returning military personnel have reported being besieged by aggressive and misleading marketing from these institutions, who need funding from the GI Bill and other non-Title IV sources to continue getting regular federal student aid. (Between 2000 and 2010, the private sector share of federal student aid money shot up from $4.6 billion to more than $26 billion.)

All of these problems might be workable if the schools actually fulfilled their basic mission. But it turns out that they might not even do that: A new study from the National Bureau of Economic Research has found that students at for-profit schools don’t even get a wage boost from their certificates or degrees.

"There are large, statistically significant, positive effects of obtaining certificates/degrees from a public or not-for-profit institution among those starting in associates degree programs," write authors Kevin Lang and Russell Weinstein, both economics professors at Boston University. "We find no evidence that students gain from obtaining any certificate or degree from a for-profit institution."

Given this grim backdrop, the Department of Education was absolutely correct to set guidelines for institutions to receive federal student aid money. The regulations stipulated that programs had to meet one of three tests: a typical graduate’s estimated annual loan payments had to be less than 13 percent of earnings, or not exceed 30 percent of the graduate’s discretionary income, or at least 35 percent of graduates had to be successfully repaying their loans. Nationwide, 5 percent of career-training programs (all at for-profit institutions) fail to meet all three of the standards, according to the Education Department.

The Association of Private Sector Colleges and Universities sued, and now Judge Rudolph Contreras, of the U.S. District Court in Washington, D.C., has decided that the thresholds were "arbitrary and capricious."

The ruling is a definite win for the for-profit sector, but it doesn’t mean that the fight is over.

Strict transparency requirements about graduation rates and debt loads for potential students – something Contreras encouraged in his ruling – are a good first step toward bringing some clarity into this industry. And the Education Department should develop regulations that offer clear guidelines about repayment rates, preferably ones that are directly linked to how debt defaults affect taxpayers.

There are great benefits for society when more Americans are able to get an education, and for-profit institutions could provide that opportunity for less traditional students. But institutions that aren’t providing any value don’t deserve the support of the federal student aid program.