Prospects do not look good for President Obama’s vastly ambitious initiative (not yet really a plan) to take on growing college debt.
Consider that the U.S. Department of Education (DOE) is going into its fifth year, and counting, of efforts to regulate just one higher education sector, for-profit schools, to stop those with the worst record of imposing unmanageable debt from continuing to live on a federal dole. After a big setback in a legal challenge by the industry last year to a new Gainful Employment Rule, DOE has recently resumed its efforts, with a second round of negotiated rulemaking set to begin in September.
The for-profit industry itself has argued for an expansion of regulatory scope to all colleges, presumably not because that would lead to quicker controls on for-profit schools' own operations. The Obama administration may have lost necessary focus. It should be taking on worst things first rather than subjecting even the most efficient, debt-free sectors of higher education to expensive new regulation.
About half of U.S. undergraduates go to community colleges. As of 2011-12, according to the College Board, the average annual published tuition at public two-year schools was $2,963 (sticker price), and after taking into account grant aid and tax benefits, the average student paid nothing for tuition and fees (actually on average they got $810 more in aid than tuition and fees, meaning some money for living expenses). In the most recent figures available on debt (probably getting worse because of public funding cuts leading to higher tuition), 62% of two-year public school graduates incurred no debt, and only 5% finished school with more than $20,000 in debt. Most of the students at community colleges pay as they go by working their way through school. These schools need continued public funding to preserve their largely debt-free culture, which also makes not finishing school a low risk to students’ financial futures. President Obama’s new rating system for all of higher education would not address the problems in this all-important two-year public sector, which offers subsidized education that only costs as much per student as high school.
For-profit schools, which have grown to enroll about 10% of college students, are at the other end of the debt spectrum—their students incur the most debt and have the highest default and delinquency rates (while the schools pay the least for actual education as opposed to marketing and other administrative costs). For an exposition of the for-profit schools' business model, including heavy dependence on federal funds, see my paper from last year; it also provides a comparison to the debt picture at public and non-profit institutions as well as an account of the regulatory process through spring of 2012).
It is good news that DOE hasn’t given up on regulating for-profits better despite a loss, discussed more below, in federal district court in June of 2012. That decision actually provides a roadmap for redoing the Gainful Employment Rule (GER) to pass legal muster, while making it tougher than the very weak regulation that was struck down.