[Senate Hearing 112-786]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-786
 
           DROWNING IN DEBT: FINANCIAL OUTCOMES OF STUDENTS 

                       AT FOR-PROFIT COLLEGES
=======================================================================


                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,

                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

    EXAMINING FINANCIAL OUTCOMES OF STUDENTS AT FOR-PROFIT COLLEGES

                               __________

                              JUNE 7, 2011

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions


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          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                       TOM HARKIN, Iowa, Chairman

BARBARA A. MIKULSKI, Maryland
JEFF BINGAMAN, New Mexico
PATTY MURRAY, Washington
BERNARD SANDERS (I), Vermont
ROBERT P. CASEY, JR., Pennsylvania
KAY R. HAGAN, North Carolina
JEFF MERKLEY, Oregon
AL FRANKEN, Minnesota
MICHAEL F. BENNET, Colorado
SHELDON WHITEHOUSE, Rhode Island
RICHARD BLUMENTHAL, Connecticut

                                     MICHAEL B. ENZI, Wyoming
                                     LAMAR ALEXANDER, Tennessee
                                     RICHARD BURR, North Carolina
                                     JOHNNY ISAKSON, Georgia
                                     RAND PAUL, Kentucky
                                     ORRIN G. HATCH, Utah
                                     JOHN McCAIN, Arizona
                                     PAT ROBERTS, Kansas
                                     LISA MURKOWSKI, Alaska
                                     MARK KIRK, Illinois
                                       

                      Pamela Smith, Staff Director

                Lauren McFerran, Deputy Staff Director 

     Frank Macchiarola, Republican Staff Director and Chief Counsel

                                  (ii)


                            C O N T E N T S

                               __________


                               STATEMENTS

                         TUESDAY, JUNE 7, 2011

                                                                   Page

                           Committee Members

Harkin, Hon. Tom, Chairman, Committee on Health, Education, 
  Labor, and Pensions, opening statement.........................     1
Mikulski, Hon. Barbara A., a U.S. Senator from the State of 
  Maryland.......................................................     6
Blumenthal, Hon. Richard, a U.S. Senator from the State of 
  Connecticut....................................................    45
Merkley, Hon. Jeff, a U.S. Senator from the State of Oregon......    48
Franken, Hon. Al, a U.S. Senator from the State of Minnesota.....    51
Hagan, Hon. Kay R., a U.S. Senator from the State of North 
  Carolina.......................................................    53

                           Witnesses--Panel I

Baum, Sandy, Independent Higher Education Analyst and Consultant, 
  Chicago, IL....................................................     7
    Prepared statement...........................................     9
Henderson, Wade, President and CEO, Leadership Conference on 
  Civil and Human Rights, Washington, DC.........................    16
    Prepared statement...........................................    18
Schmitt, Eric, former student, Kaplan University, Hampton, IA....    22
    Prepared statement...........................................    25
Abernathy, Pauline, Vice President, The Institute for College 
  Access & Success, Philadelphia, PA.............................    27
    Prepared statement...........................................    29

                           Witness--Panel II

Kanter, Hon. Martha, Under Secretary, U.S. Department of 
  Education, Washington, DC......................................    65
    Prepared statement...........................................    67

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    The Leadership Conference, Wade Henderson and Nancy Zirkin, 
      letter.....................................................    79
    Williams & Connolly, LLP, Kevin T. Baine, letter.............    81
    Eric Schmitt, letter.........................................    83

                                 (iii)



DROWNING IN DEBT: FINANCIAL OUTCOMES OF STUDENTS AT FOR-PROFIT COLLEGES

                              ----------                              


                         TUESDAY, JUNE 7, 2011

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:07 a.m. in 
Room 430, Dirksen Office Building, Hon. Tom Harkin, chairman of 
the committee, presiding.
    Present: Senators Harkin, Mikulski, Hagan, Merkley, 
Franken, Bennet, Whitehouse, and Blumenthal.

                  Opening Statement of Senator Harkin

    The Chairman. The Health, Education, Labor, and Pensions 
Committee will please come to order.
    Four years ago America was caught off guard by the subprime 
mortgage crisis. Fast talking sales people deceived consumers 
into taking out loans that they knew would never be paid back 
and financial speculators hid the risk and passed the debt off 
to investors. What has become clear over the past year, through 
this committee's investigation, is that there is a class of 
subprime colleges within the for-profit sector that are doing 
the exact same thing. Instead of packaging these loans into 
securities and selling them to investors, this time they are 
passing the debt off to American taxpayers in the form of 
federally guaranteed student loans.
    Both student debt and for-profit colleges have a place in 
American higher education. I myself used a student loan to get 
through school. Some for-profit colleges offer important 
flexibility and an educational model that can work for students 
who are seeking educational advancement while also balancing 
jobs and family commitments. But there reaches a point where 
the education provided does not match the cost of the debt. Let 
me be clear, rising student loan debt is a problem for students 
throughout higher education. This is an issue that has received 
serious attention from this committee in recent years and will 
continue to do so going forward.
    So, why then is this hearing focused on for-profit colleges 
and their loan debt? The answer is that for-profit colleges 
have distinguished themselves by asking a higher percentage of 
their students to borrow, more than any other sector of higher 
education. Ninety-six percent of students at for-profit, 
degree-granting colleges borrowed to pay for colleges, 96 
percent, compared to 13 percent at community colleges, 48 
percent at 4-year public and 57 percent at 4-year private 
colleges.
    How do so many students at for-profit colleges wind up with 
debts they can't repay? First it starts with high tuition. I 
will put the first chart up there, which you can see. For a 2-
year associate degree, this is for a 2-year associate business 
degree, with an estimated annual earning power of around 
$40,000 a year, at Corinthian's Everest College. Everest 
charges over $46,000. ITT charges over $44,000. Westwood 
College charges over $35,000. In each case a community college 
nearby, offering a comparable program, costs between $6,000 and 
$9,000 per year. So you can see the difference there from the 
for-profits with the community college in the same associate 
degree program.
    Similarly, high tuition is found in the bachelor degree 
program. That is for the associate degree programs. Now let's 
look at the bachelor degree, 4-year programs. At ITT almost 
$89,000. At Corinthian over $81,000. At Westwood over $70,000. 
Meanwhile, a flagship public school, again in that State, 
Colorado, Florida and Indiana, same programs, for $25,000 to 
$40,000. Less than half as much.
    In order to afford this high tuition, schools point their 
students toward Federal loans. But many of these students are 
having serious trouble repaying these loans. Look at chart 
three. Close to one in four students at a for-profit school is 
defaulting within 3 years and defaults by students at for-
profit schools account for 47 percent. If you see the pie chart 
at the bottom, 47 percent of all student loan defaults. Keep in 
mind, that the for-profit schools only have 10 percent of all 
of the higher education students, yet they are accounting for 
47 percent of the defaults. This next chart will show that. So 
the share of enrollment, on the left, is about 10 percent of 
the for-profit schools of all of the students in higher 
education. But on the right bar graph the share of defaults is 
about 50 percent, 47 percent to be exact.
    One could ask how default rates could be this high. After 
all, there is a law in place intended to penalize institutions 
who students default in the 2 years after leaving school at 
rates that consistently exceed 25 percent. So how does this 
happen? The answer is that some for-profit schools have become 
skilled at manipulating their default statistics. They have 
either hired outside specialists or created its own units of, 
``default management staff,'' who are paid to counsel students 
into repayment options that ensure that students do not default 
within the 2-year window when the government is watching.
    This way schools are able to keep their default rates low 
enough to avoid the Department of Education sanctions that 
would limit their access to Federal financial aid. Later on, 
after our witnesses testify, I have more charts and some 
documents that I will introduce to the record that will show 
how they do that. But managing the cohort default rates merely 
delays default for some students and can result in a higher 
debt when that default occurs.
    If the cost of tuition is so high that it exceeds what a 
student can borrow through the Federal Government, some schools 
are equipped to offer their own loans. That is also happening 
now and this is a chart that shows that. These are essentially 
subprime loans carrying high interest rates and even higher 
estimated levels of default.
    Look, for example, at the top. The Federal Stafford Loan 
Program, interest rate is 6.8 percent and I think the default, 
if I can see it, is around 16 percent, if I am not mistaken. Go 
on down the list. You will see Education Management 
Corporation, their interest is 11.2 percent. Kaplan, 15, that 
has been lowered, by the way, by Kaplan. Congratulations. 
Career Education Corporation, 13. Corinthian, 18 percent. I 
understand some of those, since we have come out with this, 
have started to lower them.
    But you can see the percentages that they are charging and 
you can see the expected defaults. Fifty-five percent, 45 
percent, 80 percent which the schools themselves estimate are 
going to default, they estimate that that many will default and 
yet they are making those loans. Which should raise a lot of 
questions, if you are making those kinds of loans you expect 
that big a default. We will get into that.
    For example, in the next chart we took one school, 
Corinthian. In 2009 and 2010 Corinthian Colleges lent $240 
million to its students at an average interest rate of 13 to 15 
percent with some students paying as much as 18 percent. For 
comparison, the Federal Reserve calculated the average interest 
rate on a credit card in 2009 at 13.4 percent. They would have 
been better off just using their credit cards.
    With their 14.8 percent average interest rate, Corinthian 
sends a pretty clear signal about where their priorities are 
when it comes to shareholders versus students. I suspect that 
is why in 2010 as more and more attention was focused on this, 
the company is lowering their average percent rate.
    But I want to point out one other thing. That $240 million 
that Corinthian loaned to its students at these high interest 
rates, you might say, where did that money come from? Did it 
come from Wall Street? Did it come from a bank? No, it came 
from the taxpayers of this country. The taxpayers who gave 
money to students to borrow. The students then turned the money 
over to Corinthian. Corinthian has this big reserve. They 
didn't pay anything for that money. Taxpayer money. What a 
deal. Then they take that $240 million and they loan it out to 
students at 13 to 15 percent.
    Keep in mind, that is where the money came from. It didn't 
come from some private investor. It came from the taxpayers of 
this country. And yet they are making tremendous interest rates 
by loaning it back out to students, even though they know that 
a high percentage of those students are going to default.
    But high interests rates only tell part of the story. In 
their internal accounting companies estimate the percentage of 
students who will default, as I have said, and in some cases 
how much they expect to lose from these lending programs. The 
internal documents that this committee has gotten over the last 
year shows this. Corinthian estimates that 55 percent of its 
students will default on their institutional loans. It is 
seriously troubling that companies would find it acceptable to 
make these loans with the knowledge that such a high percentage 
of their students will be unable to repay them.
    Think about it, if you were running a small community bank, 
would you make loans to any entity that you knew 50 percent of 
them would never pay it back? While the school knows these 
loans are a terrible investment, the student has no idea they 
are more likely to wind up with ruined credit than a college 
degree and a good job. They don't know that these loans will 
hang around their necks for the rest of their lives. They can't 
discharge them in bankruptcy.
    I have often said the difference between the subprime in 
the mortgage industry and this is if you got a bad house, you 
got a bad deal, you could walk away from it. You can't walk 
away from these loans.
    So behind each student loan default is a person who has an 
unpayable debt hanging around his or her knee and too often 
with no degree to show for it. Someone who may have to put off 
or cancel plans to even continue their education, buy a home, 
maybe even purchase health insurance or start a family. While 
the Federal Government provides several flexible repayment 
options, there is no way to walk away from your student loan, 
like I said that you could with a mortgage.
    Nor is it acceptable to simply blame these default rates on 
the students and some of our documents show that internal 
conversations among people at these colleges say, ``well it is 
the student's fault.'' When a school enrolls a student, sets 
their tuition, recommends that the students take out a loan, 
the school is making a de facto investment recommendation to 
that student. Because schools are so focused on their default 
rates, they are in the best position to know whether the 
student is likely to succeed academically, earn a degree that 
will actually help them secure a good job and be able to repay 
their loans. They are in the best position to know that.
    For those who would say that holding schools accountable 
for whether those students repay their loans will discourage 
them from enrolling low-income and minority students. If they 
say that, I have this in return to say. Access to debt is not 
the same thing as access to the opportunity offered by a good 
education. States have designed a national network of low cost, 
open access community colleges to make sure that students who 
have a low probability of graduating are able to try out higher 
education with very little financial risk. Quite frankly, we 
should be looking for ways to assist community colleges, to 
assist them in their efforts, in their open access, to help 
students who may have gone through high school not with A's and 
B's but maybe C's or lower but who now want to renew 
themselves, want to continue their education, want to better 
themselves. We should be assisting them, not looking for ways 
to enhance more profits for Wall Street investors.
    That is not access. I think this is really the second 
coming of the subprime crisis. At a time when we are focused on 
Federal debt, how can we just maintain policies that foot the 
bills for students to attend schools that have proven to be 
such a bad investment?
    In 2009 for-profit colleges received $18 billion in 
guaranteed student loans. If trends continue we can expect 
nearly half of those to default. This should not be acceptable 
to those of us who are stewards of taxpayers' dollars. High 
default rates mean ruined credit and garnishing wages for 
students and more spending for taxpayers.
    In closing I would just say the Department of Education has 
taken a modest first step toward addressing this program with 
the newly final gainful employment rule. I know that we had all 
been looking forward to hearing from Secretary Duncan, but 
unfortunately he is ill and he will not be able to join us. I 
am sure he will recover soon.
    We are pleased to have the Under Secretary for Education, 
Martha Kanter, with us, on very short notice and appreciate her 
deep expertise on higher education and access for low-income 
and minority students.
    This is the committee's fifth hearing on for-profit 
education companies. The hearings have each helped to give us a 
much more clear picture of how this industry operates, how it 
serves students and taxpayers. I look forward to engaging with 
parties on all sides as we move forward, using the information 
gathered to date into new legislative protections, new 
legislative protections for students and taxpayers.
    I believe it is clear that more needs to be done to ensure 
that taxpayer dollars are being used wisely, to ensure that 
for-profit colleges are actually fulfilling their commitment to 
provide a quality education that leads to better jobs and 
economic advancement.
    I would ask consent at this time to place in the record 
documents that have been produced to the committee on the 
subjects we are covering today.
    Without objection. So ordered.

    [The information referred to can be found at 
www.harkin.senate.gov; click on: Issues & Agenda; then For-
Profit College Investigation; Hearings; hearing title; charts 
and/or documents.]

    The Chairman. Before we get started I would like to just 
take a moment to introduce our witnesses here today.
    On the first panel, from left to right, Dr. Sandy Baum who 
is an independent higher education analyst/consultant, 
professor emeritus of economics at Skidmore College. She is the 
author of The College Board's Annual Trends in Student Aid and 
Trends in College Pricing and is an expert on college 
affordability and student debt. We appreciate your being here.
    Next, we have Mr. Wade Henderson, President and CEO of the 
Leadership Conference on Civil and Human Rights and the 
Leadership Conference Education Fund. Mr. Henderson is a well-
respected leader in the civil rights committee, leads a 
coalition of more than 200 national organizations to promote 
and protect the civil and human rights of all persons in the 
United States. We appreciate your being here, Mr. Henderson.
    Next we have Mr. Eric Schmitt from Hampton, IA. Mr. Schmitt 
holds a bachelor degree in paralegal studies from Kaplan 
University in Cedar Falls, IA and will discuss the challenges 
he has faced with the debt resulting from that degree. We 
appreciate your being here.
    Finally we have Pauline Abernathy from the Institute for 
College Access and Success and the Project on Student Debt. In 
her capacity as vice president she oversees national policy and 
advocacy strategy for the Institute. This will be our first 
panel.
    The second panel, as I said, will be Under Secretary for 
Education, Martha Kanter.
    Senator Mikulski. Mr. Chairman, may I----
    The Chairman. I would yield to Senator Mikulski.

                     Statement of Senator Mikulski

    Senator Mikulski. Thank you, Mr. Chairman. If I could just 
say a few words. I might have to leave before my opportunity to 
raise questions, though I am going to hear all the witnesses.
    I want to thank you for your aggressive leadership in 
bringing this matter to our attention and it is an issue that 
does demand it. I believe that higher education is a very 
important right in our country. That if you want to work hard, 
you should be able to learn so that you can get a degree or a 
certificate that no one can ever take away from you. In our 
country I believe in opportunity and choice, but I also believe 
that we have to be stewards.
    We understand that Federal grants and student loans have 
made educational opportunity a reality for generations. The 
financial risk is taken on by the student and by the taxpayer, 
so we need to make sure that we have a set of rules for who we 
help that doesn't add to student debt that is then crushing and 
then doesn't add to the Federal Government debt--what we think 
is creating opportunity is a hollow opportunity.
    I do believe in choice because I am a product of a small 
Catholic liberal arts school, I got my masters degree from a 
great public land grant university, the University of Maryland. 
I taught at a Jesuit College. I taught at a community college. 
I taught day school. I taught night school. And my students 
taught me a lot.
    Therefore, when you look at just the array of where I had 
the opportunity to teach, and where I had an opportunity to 
learn shows quite a cornucopia of choice in our country, which 
we would want to preserve.
    I also don't believe in gouging and profiteering. This is 
what I am concerned about, that while we are looking for choice 
and opportunity, there is profiteering. I am deeply troubled by 
what I see on these charts, particularly in the way that it 
could affect poor and minority students and the way it could 
affect our returning veterans who think that they have a GI 
bill. I don't want that to turn into a hollow opportunity.
    I look forward to working with you, because we do need 
clear rules of the game. We do need reform. But I also think we 
need to look at why do these students turn to these profit-
making colleges? They obviously fill a niche. They obviously 
recruit students in a unique way. I think we need to look at 
why do they go there for such an enormous amount of debt and 
what niche do they fill and where are we in the community 
college. I won't take this opportunity, because we do want to 
go to the witnesses.
    But, Mr. Chairman, when I go around and talk to my Maryland 
constituents, I meet a lot of young people who took one course 
or one semester at a college. They dropped out to either make 
money or any number of reasons. By the time they lurch around 
for what they think is one opportunity to one other, they do 
not have an academic home, the only consistent thing is their 
student debt.
    Why aren't the community colleges filling more? Is it 
capacity? Is it the way community colleges are organized? I am 
a big fan of community colleges. I think we need to look at the 
niche that they fill and examine what other institutions could 
fill that niche.
    I think there is a lot to learn and as always we learn from 
the students who are the most affected. But I look forward to 
working with you on a clear set of rules of the game, reform 
and maintaining choice and opportunity but not profiteering and 
gouging.
    The Chairman. Senator Mikulski, thank you very much for 
that very profound statement and I can assure we are going to 
lean on your expertise and your background to help us as we 
develop legislation, as you say, to make sure that we have 
choice and open access. I look forward to discussing with you 
the, perhaps an expanded role for community colleges in this 
niche, which they haven't fulfilled and perhaps we need to look 
at how we help them do that. I look forward to working with you 
on that Senator Mikulski.
    We welcome our panel. I have already introduced our 
witnesses. We will start from left to right. All of your 
statements will be made a part of the record, in their 
entirety. I would ask you to sum it up in 5 to 7 minutes, the 
key points, so that we can get into an exchange. I would 
appreciate it.
    Ms. Baum, we will start with you and please proceed.

 STATEMENT OF SANDY BAUM, INDEPENDENT HIGHER EDUCATION ANALYST 
                  AND CONSULTANT, CHICAGO, IL

    Ms. Baum. OK. Thank you, Senator Harkin, members of the 
committee. I appreciate having the opportunity to be here today 
and talk with you about this very important issue of student 
debt and for-profit colleges.
    The Senators have made some very important points. I won't 
repeat all of them, but I do think it is important to begin by 
saying that I am a strong advocate of student loans. I think 
borrowing is a very reasonable and appropriate way for students 
to finance part of their postsecondary education. One of the 
reasons that I am so concerned about what is being discussed 
here today is because I think that the whole student loan 
program is actually at risk and the opportunities generated for 
students are at risk because of some of the abuses that are 
occurring.
    I also believe that the for-profit sector of postsecondary 
education has an important role to play. It is not that it is 
bad for there to be some sort of profit going on in education 
and it is very clear that there are some things that some for-
profit institutions do that provide opportunities for students 
that they are unable to find elsewhere.
    That said, the combination of student debt and for-profit 
institutions is just not working. It is causing severe problems 
for students who are accumulating inordinate amounts of debt, 
it is causing severe problems for taxpayers who can't afford to 
be wasting money in the ways that many of these dollars are 
being wasted, and it is not working for the institutions 
themselves.
    I would think that the for-profit institutions that are 
doing well for their students would be in the front of the line 
of people concerned about improved oversight of the industry so 
that students will be directed into institutions that really 
can serve them, instead of those that are exploiting them.
    It is very important that we address this issue and address 
it carefully. You have presented a lot of data, I know other 
witnesses will present a lot of data and I have a lot of data 
in my written testimony, so I won't focus on data. I would like 
to point out a few numbers. It is very important to recognize 
that almost all students in the for-profit sector borrow, that 
is just not true in other sectors of higher education. So 
virtually no one attending for-profit institutions is actually 
paying with their own money. Virtually no one has parents who 
are paying, because the people who attend for-profit 
institutions, the vast majority are independent students whose 
parents aren't in the picture. Most of them come from low-
income backgrounds, most of them just don't have much money of 
their own.
    Among bachelors degree recipients who received their 
degrees in 2007-8, 60 percent of those from the for-profit 
sector graduated with more than $30,000 of debt. Only 12 
percent of those with degrees from the public sector had that 
much debt. Two-thirds of those students who received associate 
degrees in public colleges had no debt when they graduated, 
only 2 percent of those in the for-profit sector had no debt.
    Completion rates for bachelors degrees in the for-profit 
sector are stunningly low. In less than 2-year programs and 
certificates they do much better, and this may be one of the 
important roles for for-profits in the future.
    The default rates, as you have noted, are extremely high in 
the for-profit sector. I think it is important to note that 
when you look at the default rates on student loans for the 
for-profit sector, that is approximately the percentage of 
students who are defaulting. But when you look at default rates 
for other sectors, particularly for community colleges, so few 
students borrow that the default rate for students is much 
lower than the default rate for borrowers.
    The for-profit institutions frequently talk about the 
demographics of their students and say the reason that our 
students borrow so much and the reason that they default so 
much is because of their demographics, they come from low-
income families. They do. But the fact is that if you control 
for income, if you look at people within any race, ethnicity 
group, in the for-profit sector students borrow much more money 
and default with much more frequency than similar students in 
other sectors.
    For-profit institutions are different. If it weren't that 
it is different to produce things in the for-profit sector, you 
wouldn't have all the free-market advocates complaining about 
the role of government. Of course it is different. It is the 
fiduciary responsibility of the owners and of the managers of 
for-profit publicly held enterprises to maximize profit for 
their shareholders. It is not because they are bad people, that 
is what they have to do. The interests of students can't be at 
the forefront for them.
    This is not a matter of government versus free market. This 
is not a free market. This is government funding and it is a 
market characterized by abysmally poor information. The growth 
in the for-profit sector cannot be explained by consumers just 
making a choice that maximizes their utility. Consumers just 
don't have the information. The students choosing these 
institutions don't have parents who went to college, they don't 
have qualified high school counselors helping them to make 
decisions. Someone has to help them with better information so 
that they will make wiser decisions.
    What we are doing--we have a complicated system of 
financing higher education and we subsidize students in public 
institutions, maybe not enough, but heavily. But the subsidies 
we are giving in the for-profit sector are arbitrarily 
distributed. You default on your student loan, you get a 
subsidy. This is not the way the government should be 
allocating its funds. We should do it consciously and 
carefully.
    So, we need student loans. We need for-profit institutions 
but for-profit institutions can do better. They won't do better 
on their own, their goal is to maximize profits, it has to be. 
We need to change the incentives facing these institutions. We 
need to provide the consumers, the students, with much better 
information about the prospects they face when they attend 
these institutions.
    We risk a very well conceived and effective program, the 
student loan program, if we don't do better at monitoring how 
students are using these loans and how institutions are 
allocating these loans.
    So, I welcome your questions after the other testimony. 
Thank you.
    [The prepared statement of Ms. Baum follows:]
                    Prepared Statement of Sandy Baum
                                summary
    The problem of student debt among students at for-profit 
postsecondary institutions is not a matter of free markets versus 
government intervention. The market for higher education does and 
should rely heavily on market forces. But it is not and never will be a 
textbook example of competitive markets. The for-profit sector, which 
has the potential to make important contributions to educational 
opportunities in the United States, relies on the Federal Government 
for most of its revenues. Virtually all students borrow heavily to 
study in this sector. Almost half of the institutions in this sector 
have official student loan default rates over 20 percent. Some 
institutions in this sector successfully meet the needs of their 
students but they are a dwindling portion of the sector. Unfortunately, 
the rapid enrollment growth in this sector does not reflect informed 
consumer response to a high quality product. With more transparency and 
more consumer protection, the for-profit sector will be able to make 
greater contributions to our educational system without damaging the 
futures of so many vulnerable students.
    There is overwhelming evidence that large numbers of students, 
particularly students from low-income backgrounds, are suffering great 
hardship as a result of the excessive borrowing required to finance 
their enrollment in for-profit institutions. Institutions that leave 
students worse off than they were when they arrived are the exception 
in the public and private nonprofit sectors. Unfortunately, they appear 
to be the norm in the for-profit sector.
    The character of the for-profit sector has changed as it is 
increasingly dominated by large, publicly held companies that are 
compelled by shareholders to maximize profit. Where it exists, good 
will and social consciousness on the part of the officers of these 
companies can only go a limited distance in determining how the firms 
operate.
    Students who enroll in institutions or programs that graduate few 
of their students or that succeed in placing only a small percentage in 
remunerative positions in the fields for which they have been trained 
are playing the lottery. Our political philosophies might lead us to 
debate whether or not we should prevent them from playing this lottery. 
But it is difficult to come up with sound principles of public policy 
that would support our subsidizing them to play this lottery.
    Few students pay with their own money to enroll in these 
institutions. The independent students and dependent students from low-
income families who predominate at for-profit institutions are those 
most likely to be making their educational choices without the advice 
of college-educated parents or well-trained counselors. They deserve 
added consumer protection, rather than maximum opportunity to make 
decisions with a high probability of damaging their futures.
    The existence of a robust Federal student loan program is a tribute 
to our Nation's commitment to post-secondary educational opportunity. 
Higher education is the best investment most young people can make. We 
certainly don't want to discourage students who are not virtually 
assured of success from taking the risk of enrolling. But that doesn't 
mean we should encourage every student to pursue whatever educational 
path might tempt them.
                                 ______
                                 
    The title of this hearing suggests two major areas of concern. One 
is the impact of education debt on students. The other is the role of 
for-profit colleges in serving a growing portion of the postsecondary 
population. Student loans are an important and justified component of 
our higher education financing system. For-profit colleges provide a 
valuable alternative for some students and some institutions in this 
sector engage in some practices that public and private nonprofit 
colleges would be wise to emulate. But there is overwhelming evidence 
that large numbers of students, particularly students from low-income 
backgrounds, are suffering great hardship as a result of the excessive 
borrowing required to finance their enrollment in for-profit 
institutions. It is easy to find individual success stories in this 
sector, just as it is easy to find individual stories of over-borrowing 
and failure in the nonprofit sectors. But these anecdotes can't change 
the compelling story told by the data. Borrowing large sums of money to 
enroll in the for-profit sector is a ticket to personal crisis for a 
large proportion of students. Institutions that leave students worse 
off than they were when they arrived are the exception in the public 
and private nonprofit sectors. Unfortunately, they appear to be the 
norm in the for-profit sector.
    In this testimony, I will begin by summarizing some of the data on 
student debt across postsecondary sectors and will then analyze why we 
face this very serious problem and suggest constructive ways of 
approaching it.
                       student borrowing patterns

                     Table 1.--Student Loan Debt of 2007-8 Degree and Certificate Recipients
----------------------------------------------------------------------------------------------------------------
                                               Degree      Degree      Degree
                                             recipients  recipients  recipients              Average
                                    Median      with      with Non-   with any    Average      Non-     Average
             2007-8               loan debt    Federal     Federal    education   Federal    Federal     total
                                   (2007-8)  loans  (In  loans  (In   loan  (In  loan debt  loan debt  loan debt
                                              percent)    percent)    percent)
----------------------------------------------------------------------------------------------------------------
Bachelor's degree...............    $20,000          62          33          66    $17,800    $12,600    $23,100
  Public 4-Year.................    $17,700          58          28          62    $16,900     $9,800    $20,200
  Private 4-Year................    $22,400          69          42          72    $18,700    $16,900    $27,600
  Private For-Profit............    $32,700          94          64          96    $25,900    $11,500    $33,100
Associate's degree..............    $10,000          43          22          48    $11,100     $7,000    $13,300
  Public 2-Year.................     $7,100          33          15          38     $9,000     $5,700    $10,100
  Private For-Profit............    $18,800          97          60          98    $14,700     $8,400    $19,700
Certificate.....................     $9,000          58          34          63     $8,900     $5,900    $11,300
  Public 2-Year.................     $6,500          24          12          30     $8,900     $4,500     $8,800
  Private For-Profit............     $9,700          85          51          90     $8,600     $5,900    $11,500
----------------------------------------------------------------------------------------------------------------
Source: National Postsecondary Student Aid Study 2008.

    As Table 1 indicates, 62 percent of 2007-8 bachelor's degree 
recipients graduated with student debt. The median debt among borrowers 
was about $20,000. Among those who received their degrees from for-
profit institutions, 96 percent had debt and the median amount they 
borrowed was $32,700. Most of these students took Federal loans, but 
two-thirds of the 4-year college graduates from this sector also relied 
on non-Federal loans, which carry higher interest rates and lack the 
repayment protection provisions of Federal student loans.
    Averages hide important differences among students. While the 
typical college graduate has a manageable amount of student debt and a 
credential that will pay off well in the labor market, there are too 
many exceptions to this pattern. These exceptions are highly 
concentrated in the for-profit sector.

     Table 2.--Distribution of Total Undergraduate Debt by Sector and Type of Degree of Certificate, 2007-8
----------------------------------------------------------------------------------------------------------------
                                                       Less than  $10,000 to  $20,000 to  $30,000 to
                                            No debt     $10,000     $19,999     $29,999     $39,999   $40,000 or
                                              [In         [In         [In         [In         [In      more  [In
                                           percent]    percent]    percent]    percent]    percent]    percent]
----------------------------------------------------------------------------------------------------------------
Bachelor's Degree:
  Public 4-Year.........................          38          16          19          14           6           6
  Private Nonprofit 4-Year..............          28          10          19          17          10          15
  For-Profit............................           4           4          12          23          33          24
Associate's Degree:
  Public 2-Year.........................          62          23           9           3           1           1
  For-Profit............................           2          22          34          23          13           6
Certificate:
  Public 2-Year.........................          70          21           7           1           1           0
  For-Profit............................          10          46          34           8           2           1
----------------------------------------------------------------------------------------------------------------
Note: Data include Federal loans, private loans, and loans from States and institutions. Parent PLUS Loans,
  credit card debt, and loans from friends and family are not included. Percentages may not sum to 100 due to
  rounding. Data include students who attended less than half-time (13 percent of students), and who do not
  qualify for Stafford loans but do qualify for some non-Federal loans.
Source: NPSAS, 2008.

    While many students in other sectors graduate without debt, this is 
not the case in the for-profit sector. Moreover, as reported in Table 
2, 57 percent of 2007-8 bachelor's degree recipients from this sector 
graduated owing $30,000 or more. In contrast, 25 percent of those who 
earned their degrees in the private nonprofit sector and 12 percent 
from the public sector borrowed this much. Over 60 percent of the 
students who earned associate degrees from public 2-year colleges 
graduated debt-free. Only 2 percent of those earning associate degrees 
and 10 percent of those earning certificates from for-profit 
institutions were in this situation. While only 5 percent of public 
sector AA degree recipients owed as much as $20,000, 42 percent of 
those from the for-profit sector had this much debt.\1\
---------------------------------------------------------------------------
    \1\ Sandy Baum and Patricia Steele, ``Who Borrows Most? '' The 
College Board, 2010.

          Table 3: Median Debt of 2007-8 Bachelor's Degree Recipients, by Dependency Status and Income
----------------------------------------------------------------------------------------------------------------
                                                                Dependent Student Family Income
                                             -------------------------------------------------------------------
                                                          $30,000    $60,000    $90,000
                                              Less than      to         to         to      $120,000  Independent
                                               $30,000    $59,999    $89,999    $119,999  or higher    students
----------------------------------------------------------------------------------------------------------------
Public 4-Year...............................    $16,500    $17,400    $17,000    $16,300    $14,500     $20,000
Private Nonprofit 4-Year....................    $21,000    $23,100    $21,100    $22,000    $18,000     $24,600
For-Profit..................................    $30,500    $24,600    $34,600    $28,000    $34,300     $32,700
Percentage with Debt:
  Public 4-Year.............................        68%        69%        61%        52%        40%         68%
  Private Nonprofit 4-Year..................        84%        83%        75%        68%        74%         74%
  For-Profit................................        99%        99%        99%       99%*       99%*         95%
----------------------------------------------------------------------------------------------------------------
Source: NPSAS 2008.

    Students from affluent families are less dependent than others on 
borrowing to finance their education. The same is true for independent 
students. In 2007-8, 80 percent of the undergraduate students enrolled 
in the for-profit sector were independent, relying only on their own 
resources and financial aid, primarily from the Federal Government. 
Fewer than 60 percent of public 2-year college students were in this 
category. About half of the dependent students enrolled in for-profit 
institutions came from families with incomes below $40,000. This 
compared to 35 percent in 2-year public colleges and about 25 percent 
in 4-year public institutions.\2\
---------------------------------------------------------------------------
    \2\ Sandy Baum, Jennifer Ma, Kathleen Payea, Education Pays 2010, 
The College Board.
---------------------------------------------------------------------------
    However, as shown in Table 3, controlling for dependency status and 
income leaves wide differences in the borrowing patterns across 
sectors. Because very small numbers of dependent students from affluent 
families enroll in for-profit institutions comparisons of low-income 
students are more meaningful. The 68 percent of dependent students from 
families with incomes below $30,000 who borrowed for the bachelor's 
degrees they earned from public colleges in 2007-8 had median debt of 
$16,500. The 99 percent of students from this income category who 
borrowed for the bachelor's degrees they earned from for-profit 
colleges had median debt of $30,500. Independent students graduated 
with median debt of $20,000 from public colleges, $24,600 from private 
nonprofit colleges and $32,700 from for-profit colleges.
    Among low-income Hispanic students, 43 percent of 2007-8 for-profit 
bachelor's degree recipients had debt exceeding $30,500. This was true 
of 22 percent of those earning degrees in the private nonprofit sector 
and only 1 percent of those who graduated from public colleges and 
universities.\3\
---------------------------------------------------------------------------
    \3\ Patricia Steele and Sandy Baum, ``Who Borrows Most? '' The 
College Board, 2010.
---------------------------------------------------------------------------
    The large numbers of students who enroll in postsecondary 
institutions but never earn a degree or certificate are not included in 
these data on the debt levels of graduates. Bachelor's degree 
completion rates are much lower in the for-profit sector than in other 
sectors. Of first-time full-time students who began studying for a 
bachelor's degree at a 4-year institution in 2002, 57 percent earned a 
B.A. at the institution at which they began within 6 years. Completion 
rates averaged 65 percent at private nonprofit, 55 percent at public 4-
year, and 22 percent at private for-profit institutions.
    Among students at for-profit 4-year institutions, 16 percent of 
blacks and 28 percent of Hispanics who enrolled in 2002 had earned a 
bachelor's degree 6 years later. Among those who enrolled at public 4-
year colleges and universities, 39 percent of blacks and 46 percent of 
Hispanics had earned degrees. The gaps between completion rates for 
black first-time full-time students and those for white and Asian 
students are larger in the for-profit sector than in the public and 
private nonprofit sectors.\4\
---------------------------------------------------------------------------
    \4\ NCES, Beginning Postsecondary Students 2009, http://
nces.ed.gov/datalab/index.aspx.
---------------------------------------------------------------------------
    The story for shorter-term institutions, which enroll just over 
one-third of students in the for-profit sector, is much more 
encouraging for that sector. Reported completion rates for 2-year 
institutions include both 2-year degrees and certificates earned over 
shorter periods of time. These completion rates for students who began 
their studies in 2004 were highest in the for-profit sector, where 60 
percent of full-time students completed their credentials within 3 
years, compared to 50 percent of those in private nonprofit and 22 
percent of those attending public 2-year colleges.

 Table 4.--Percentage Borrowing and Average Amounts Borrowed Among All Students and Among Full-Time Students by
                                         Dependency and Sector, 2007-8.
----------------------------------------------------------------------------------------------------------------
                                                                Average                      Average    Private
                                    Percent  Percent   Average  Federal  Percent   Average   private  loans as a
                                      with     with    Federal    loan     with    private     loan   percentage
                                      any    Federal  loan per    per    private   loan per    per     of total
                                      loan    loans   borrower  student   loans    borrower  student   borrowed
----------------------------------------------------------------------------------------------------------------
Full-Time Students:
  All Students....................       54       50    $5,400   $2,700       19     $7,800   $1,500          36
  Dependency:
    Dependent.....................       50       46    $4,800   $2,200       18     $8,400   $1,500          41
    Independent...................       65       62    $7,000   $4,300       23     $6,300   $1,500          25
  Sector:
    Public 4-Year.................       54       50    $5,200   $2,600       15     $7,000   $1,100          29
    Private Nonprofit 4-Year......       66       62    $5,600   $3,500       28    $10,200   $2,900          45
    Public 2-Year.................       23       20    $4,100     $800        7     $4,400     $300          26
    For-Profit....................       92       88    $6,400   $5,700       43     $7,100   $3,100          35
----------------------------------------------------------------------------------------------------------------
Source: Patricia Steele and Sandy Baum, ``How Much are College Students Borrowing,'' The College Board, 2009;
  NPSAS, 2008.

    The annual borrowing data reported in Table 4 include both those 
students who will go on to earn degrees and those who will not. In 
2007-8, when 54 percent of all full-time students relied on loans to 
finance their studies and 19 percent borrowed from private sources, 92 
percent of those enrolled in for-profit institutions borrowed and 43 
percent took private loans. Full-time for-profit students borrowed an 
average of $5,700 in Federal loans and $3,100 in private loans per 
student. Those enrolled in private nonprofit colleges and universities 
borrowed an average of $3,500 in Federal loans and $2,900 in private 
loans per student. The parallel figures for public 4-year colleges were 
$2,600 and $1,100 and public 2-year college students borrowed only an 
average of $800 in Federal loans and $300 in private loans.
                             default rates
    In fiscal year 2009, the official default rate for for-profit 4-
year institutions was 16 percent. For 4-year colleges in the public and 
private nonprofit sectors it was 5 percent. The default rate for for-
profit 2-year schools was 15 percent. For public 2-year colleges it was 
12 percent.\5\ But as noted above, a relatively small percentage of 
students in this sector rely on student loans. While the default rate 
for for-profit institutions is a close approximation of the percentage 
of students from that sector who have defaulted on loans, the default 
rate for community colleges has to be divided by 3 or 4 to arrive at an 
estimate of the percentage of students from that sector who default.
---------------------------------------------------------------------------
    \5\ http://www.ifap.ed.gov/eannouncements/attachments/
052011AttachFY2009FY2009_Draft
NationalCDRWith Prior2yrscomparison.pdf.
---------------------------------------------------------------------------
    Students at some private nonprofit colleges accumulate high debt 
levels because of high sticker prices and inadequate institutional aid. 
However, these schools are few and far between. Out of 1,635 private 
nonprofit schools, 30 have a default rate over 30 percent. Students 
enrolled in these 30 schools constitute 1.1 percent of all private 
nonprofit enrollment and account for 0.8 percent of all private 
nonprofit students in repayment and 4.3 percent of all private 
nonprofit defaults. Ninety-three colleges in this sector--6 percent of 
the total--have a default rate over 20 percent. Students enrolled in 
these 93 schools constitute 8.6 percent of all private nonprofit 
enrollment, and account for 5.2 percent of all private nonprofit 
students in repayment and 20.2 percent of all private nonprofit 
defaults.
    In contrast, out of 1,806 for-profit schools, 273 have a default 
rate over 30 percent. Students enrolled in these schools constitute 
13.8 percent of all for-profit enrollment and account for 15.1 percent 
of all for-profit students in repayment and 24.6 percent of all for-
profit defaults. A startling 792 for-profit schools--44 percent of the 
total--have a default rate over 20 percent. Students enrolled in these 
schools constitute 68.6 percent of all for-profit school's enrollment 
and account for 66.8 percent of all for-profit students in repayment 
and 79.2 percent of all for-profit defaults.\6\
---------------------------------------------------------------------------
    \6\ Data provided by staff of the U.S. Senate Committee on Health, 
Education, Labor, and Pensions in May 2011.
---------------------------------------------------------------------------
    Student loan default is a very real problem for the Federal 
Government. The problem is not just loss in taxpayer dollars. Our 
education financing system is far from perfect, but we have made 
choices about relying on general subsidies from State and local 
governments to public institutions and on targeted Federal subsidies to 
individual students, combining loans with grants. Loans that are not 
repaid end up as subsidies to students allocated partially on the basis 
of financial difficulty, but also on the basis of some combination of 
failure to succeed in the educational system and failure to manage 
responsibilities. But student loan default is an even bigger problem 
for individuals. A student who ends up not benefiting from his 
education who either did not borrow or borrowed a small amount has lost 
time, a financial investment, and an opportunity. But a similar student 
who ends up defaulting on her loans will be plagued by much larger 
financial problems for years to come.
    how is the for-profit sector different from other postsecondary 
                                sectors?
    The prevalence of high debt levels and high default rates in the 
for-profit sector justifies a focus on this sector. Individual 
institutions and categories of students in other sectors who are in 
similar circumstances also merit particular attention. But it is worth 
thinking analytically about why so many problems are concentrated in 
for-profit institutions. Too much of the debate on this issue is tinged 
with ideology. Are critics of the sector opposed to market forces or to 
the idea of profits? Are owners, managers and supporters of the sector 
evil people who cannot see beyond their own pocketbooks?
    The reality is that the fundamental purpose and structure of for-
profit entities differs from that of public and nonprofit entities. If 
the outcomes of these structures could not be differentiated, 
proponents of the free market would not be such strong opponents of a 
larger role for government in the production of goods and services. The 
market works very well for our economy and our society in many cases. 
But it is not difficult to see that all market outcomes are not 
optimal. We have seen all too well in recent years the dangers of 
inadequate consumer protection, inadequate information, and inadequate 
regulation of financial markets. By definition, for-profit enterprises 
are run with the goal of maximizing profits. Managers have a fiduciary 
responsibility to make the interests of owners their primary focus.
    When the for-profit sector was smaller, it consisted largely of 
small privately owned institutions. Some owners of for-profit colleges 
founded their institutions to provide specific opportunities to 
specific types of students and are deeply committed to the well-being 
of their students. But the sector is increasingly dominated by large, 
publicly held companies. Where it exists, good will and social 
consciousness on the part of the officers of these companies can only 
go a limited distance in determining how the firms operate. Comparison 
of compensation levels in the three major sectors of postsecondary 
education is instructive. Average compensation for the five highest-
paid public university chief executives in 2009-10 was $860,000. The 
five highest-paid Ivy League presidents received an average of $1.3 
million in 2008-9. The top five leaders of publicly traded for-profit 
postsecondary institutions received an average of $10.5 million in 
2009.\7\
---------------------------------------------------------------------------
    \7\ http://chronicle.com/premium/stats/990/private/
private.php?year=2009&Order=pay; http:
//chronicle.com/article/Sortable-Table-Compensation/126965/; http://
chronicle.com/article/Graphic-CEO-Compensation-at/66017/.
---------------------------------------------------------------------------
    In our market economy, firms have to continue to grow in order to 
be appealing to investors. Between fall 2000 and fall 2009, full-time 
enrollment in degree-granting institutions in the for-profit sector 
increased from 366,000 to 1.5 million. In just 9 years, the sector went 
from enrolling 4 percent of full-time students (and 3 percent of all 
students) to enrolling 11 percent of full-time students (and 9 percent 
of all students). Among students in this sector, 61 percent are 
enrolled in institutions that offer 4-year degrees, 24 percent are in 
2-year institutions, and 15 percent attend less-than-2-year 
institutions.\8\
---------------------------------------------------------------------------
    \8\ Sandy Baum, Kathleen Little and Kathleen Payea, ``Trends in 
For-Profit Postsecondary Education'', The College Board, forthcoming.
---------------------------------------------------------------------------
    Among students who earned bachelor's degrees, 76,000 (5 percent of 
the total) came from the for-profit sector in 2007-8. The for-profit 
sector awarded 127,000 associate degrees--17 percent of the total. In 
2008-9, students in the for-profit sector received 25 percent of all 
subsidized and 28 percent of all unsubsidized Stafford Loans.\9\
---------------------------------------------------------------------------
    \9\ The College Board, Trends in Student Aid 2010.
---------------------------------------------------------------------------
    Economic theory suggests that market forces lead to efficient 
outcomes if certain stringent conditions are met. These conditions 
include the absence of significant externalities--the costs and 
benefits of the product or activity must accrue to the direct 
participants without significant impact on others--and notably, perfect 
information. Consumers must have the information necessary to make 
sound judgments about which products and services will meet their 
demand. They must understand the characteristics of what they buy, how 
the products and services produced by different firms compare, and the 
prices they will pay. The rapid growth in enrollments in the for-profit 
sector is not just a reflection of increased demand. It's not that so 
many students are suddenly making informed decisions about the best way 
to realize their educational dreams. A combination of aggressive 
recruiting and the growing funding and space constraints in the public 
sector have changed the way students perceive their options.
    The market for higher education meets few of the requirements for 
perfect competition. Students can't buy one, try it, and buy a 
different brand next time if they are unhappy with the outcome. There 
is little market incentive for producers to provide thorough and 
accurate information because they do not rely on repeat customers and 
once students make a choice, it is likely to take them a long time--and 
a lot of payments--before they learn the true properties of what they 
have purchased.
    Well-designed consumer protection makes market forces work more 
effectively. It doesn't make sense to have students give up large 
amounts of time, energy, and money to test for themselves whether 
institutions offer reasonable education and training. Postsecondary 
education is an investment that typically provides a high rate of 
return to both the students who participate and to society as a whole. 
But it can be a risky investment. If we subsidized only students who 
have a very high probability of succeeding and seeing their investment 
pay off handsomely, we would fail to provide opportunities to many 
individuals who cannot afford them on their own. We know some students 
will fail, either because they aren't up to the task or because 
circumstances interfere with their success.
    But we shouldn't subsidize students to play the lottery. Students 
who enroll in institutions or programs that graduate fewer than 20 
percent (or 15 percent or 30 percent) of their students or that succeed 
in placing only a small percentage of their students in remunerative 
positions in the fields for which they have been trained are playing 
the lottery. They are making a significant investment in an undertaking 
that has a stunningly low probability of success. Our political 
philosophies might lead us to debate whether or not we should prevent 
them from playing this lottery. But it is difficult to come up with 
sound principles of public policy that would support our subsidizing 
them to play this lottery. Unfortunately, even the best available 
information is unlikely to discourage the most vulnerable students from 
playing the lottery with a combination of taxpayer funds and funds they 
will only have to pay off in a vague and distant future.
                            public subsidies
    There is nothing inherently wrong with people making profits from 
providing education. And no doubt there are some efficiencies in the 
for-profit sector that could, if applied in other sectors, both improve 
the learning experiences of students and reduce the cost of providing 
those experiences. But holding up this sector as an example of market 
forces at work is simply inaccurate. Many institutions in this sector 
receive close to 90 percent of their revenues from Federal student aid. 
That number is actually higher if the Federal funds that are excluded 
under the 90/10 regulations are considered. Very few students are 
actually paying with their own money to enroll in these institutions. 
Why is it that only independent students and dependent students from 
low-income families choose the for-profit sector? Don't these 
particularly vulnerable students, who are most likely to be making 
their educational choices without the advice of college-educated 
parents or well-trained counselors deserve added consumer protection, 
rather than maximum opportunity to make decisions with a high 
probability of damaging their futures?
    Surely there should be better regulation of an industry that is so 
heavily financed by taxpayers and that has such a dramatic influence on 
the lives of so many Americans--particularly vulnerable Americans. 
Advocates of the sector frequently contend that restrictions on their 
institutions will deprive low-income students of educational 
opportunities. But if these opportunities lead to heavy debt burdens 
and questionable credentials, they are not opportunities in any 
meaningful sense of the word. Is it wrong to regulate payday lenders 
because it might deprive vulnerable individuals of the right to borrow 
money at extraordinary interest rates and generate debts they will 
never be able to repay? Is it wrong to regulate car dealers because we 
might deprive consumers of purchasing cars that have every likelihood 
of self-destructing on the road? Institutions in the for-profit sector 
that are serving their students well should be first in line arguing 
for protection against their colleagues whose drive for profits is 
exploiting students and undermining our ability to use market forces to 
the fullest to further our educational goals.
                               conclusion
    Encouraging students to pursue postsecondary education is vital to 
the future of our Nation and to the futures of individual students, 
particularly those who come from environments where they have limited 
resources and limited educational experiences. The only way we can 
succeed in providing the educational opportunities our diverse 
population requires is to assure the health and stability of a variety 
of postsecondary institutions serving a variety of needs.
    Many people concerned with improving educational opportunities 
speak of student debt as though it were a blight on the higher 
education landscape and a clear sign of the moral weakness of our 
society. In fact, the existence of a robust Federal student loan 
program is a tribute to our Nation's commitment to post-secondary 
educational opportunity. Higher education is the best investment most 
young people can make. No one would suggest that people refrain from 
starting well-conceived and well-researched small businesses if they 
don't have the cash up-front. The idea is that the investment will pay 
off over time--enough to repay the necessary loans and then some. 
Comparisons of the success rate for investments in college and 
investments in small businesses overwhelmingly favor college.
    But college does not turn out to be a good investment for everyone 
who tries it. We certainly don't want to discourage students who are 
not virtually assured of success from taking the risk of enrolling. But 
that doesn't mean we should encourage every student to pursue whatever 
educational path might tempt them. We should certainly think carefully 
about the incentives we provide students and about the extent to which 
we protect them against risk.
    For-profit institutions are capable of improving student outcomes. 
In fact, in anticipation of greater government regulations, some 
institutions have taken steps to restrict the enrollment of students 
with little chance of succeeding, to counsel students more effectively 
about borrowing, and to find other ways of reducing their attrition and 
default rates. But they won't take these steps on their own. The 
students who unwittingly become the victims of the drive for profits 
cannot wait for solutions far in the future.
    Debating how best to resolve the problem of student debt among 
students who enroll in for-profit postsecondary institutions should not 
be a debate about free markets versus government intervention. The 
market for higher education does and should rely heavily on market 
forces. But it is not and never will be a textbook example of 
competitive markets. The for-profit sector, which has the potential to 
make important contributions to educational opportunity in the United 
States, relies on the Federal Government for most of its revenues. 
Virtually all students borrow--and borrow heavily--to study in this 
sector. Almost half of the institutions in this sector have official 
student loan default rates over 20 percent. Some institutions in this 
sector successfully meet the needs of their students but they are a 
dwindling portion of the sector. Unfortunately, the rapid enrollment 
growth in this sector does not reflect informed consumer response to a 
high quality product. With more transparency and more consumer 
protection, the for-profit sector will be able to make greater 
contributions to our educational system without damaging the futures of 
so many vulnerable students.

    The Chairman. Thank you very much, Dr. Baum. I guarantee 
you we will have a number of questions to followup on your 
statement. Thank you very much.
    Mr. Henderson, welcome, please proceed.

  STATEMENT OF WADE HENDERSON, PRESIDENT AND CEO, LEADERSHIP 
      CONFERENCE ON CIVIL AND HUMAN RIGHTS, WASHINGTON, DC

    Mr. Henderson. Thank you, Chairman Harkin and good morning 
both to you and to members of the committee.
    As you have already noted, I am Wade Henderson, president 
of the Leadership Conference on Civil and Human Rights, a 
national coalition of over 200 organizations working to build 
an America that is as good as its ideals. I am also proud to 
appear before you today as the Joseph L. Rauh, Jr., Professor 
of Public Interest Law at the David A. Clarke School of Law, 
University of the District of Columbia.
    I want to thank you again for inviting me here today to 
testify on why the civil rights community strongly supports the 
efforts of this committee and those of the Obama administration 
to expand access to postsecondary education.
    Before I address the substance of today's hearing, Mr. 
Chairman, I do want to thank you personally, for your efforts 
in the current appropriations process to protect education 
funding, especially funding for Pell Grants which are a vital 
lifeline for low-income and working families seeking to send 
their children to college. The Leadership Conference believes 
that access to education is a fundamental civil and human 
right, in fact access to high quality education is among the 
most pressing civil and human rights issues of this century.
    This principle is especially important at a time when 
educational attainment and access to employment are more 
closely intertwined than ever and a greater investment in the 
lives and hopes of our Nation's young people is of paramount 
importance.
    To be perfectly blunt, if we don't educate every child, 
every young adult, every working American who seeks to change 
careers and to educate them well, our future as a nation is in 
serious jeopardy.
    The Leadership Conference recognizes the vital role that 
postsecondary education of all types, including in for-profit 
settings, can play in educating and preparing young people for 
the jobs and careers of today and tomorrow.
    The for-profit sector's enrollment has more than tripled 
over the last decade and now comprises 11 percent of the 
Nation's full-time undergraduate enrollment. It enrolls 
disproportionate numbers of women, racial minorities, low-
income students, veterans and older Americans, including many 
working people seeking to further their careers through online 
course work. However, we are alarmed by the mounting evidence 
that the for-profit sector is engaging in what I would call 
predatory lending practices, overcharging for their product, 
failing to deliver on programs leading to gainful employment, 
leaving large numbers of students saddled with enormous debt 
and leaving taxpayers holding the bag. I should note, this is 
debt that is not dischargeable in bankruptcy, it will dog the 
future financial success of these individuals for much of their 
remaining lives.
    As civil rights advocates, this is all too familiar. This 
is the very same thing that we saw with the rampant predatory 
lending that occurred during the housing boom, in which some 
actors in an industry that services low-income and minority 
people decided to take advantage of these individuals simply 
because they believed they could. Government cannot sit by, as 
it did during the housing boom, and allow the worst actors to 
exploit those that they serve while claiming that because they 
provide a valuable service that these communities desperately 
need, they should be exempt from scrutiny.
    Indeed, the reverse is true. It is imperative that we guard 
against powerful institutions taking advantage of and 
exploiting the least among us. That is why the Leadership 
Conference believes that the Department of Education's gainful 
employment rule is a long overdue and important step in 
protecting students and taxpayers from unscrupulous career 
education programs.
    While the rule does not include many of the important 
protections urged by civil rights, students, women's, labor and 
consumer organizations, it does send a strong message to many 
for-profit programs to start putting students first. We 
recognize that they have a fiduciary responsibility to their 
shareholders, but they also have a responsibility to the 
national interest on which they rely in getting the funding 
that supports the institutions they serve.
    For-profit colleges can be a viable option for many 
students who may not have many other options. But that doesn't 
give these businesses the right to exploit those they serve. 
Access to college and career education isn't just about 
enrollment, it isn't just about being able to say that you are 
giving racial minorities and women and low-income people an 
opportunity to reach their dreams, you have to actually provide 
the necessary skills and training that you propose to deliver. 
The degrees and certification that for-profit students obtain 
must be worth more than the paper that they are printed on, 
otherwise what is the point?
    Our Nation's future depends, to a large degree, on how well 
we educate the next generation. We will succeed only if we 
allow students a fair opportunity to obtain the skills and 
knowledge they need to fully participate in our economy and our 
society. The new gainful employment rule, adequate funding for 
both ESEA and student financial aid programs and continued 
efforts by both the Department of Education and this committee, 
will help ensure that they get the chance.
    Our investment in our children, our young people, our older 
working adults must be as great as our dreams for our future, 
nothing less will do.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Henderson follows:]
                  Prepared Statement of Wade Henderson
    Good morning, Chairman Harkin, Senator Enzi, and members of the 
committee. I am Wade Henderson, president and CEO of The Leadership 
Conference on Civil and Human Rights, the Nation's premier civil and 
human rights coalition, representing more than 200 national 
organizations working to build an America that's as good as its ideals. 
I am also proud to serve as the Joseph L. Rauh, Jr., Professor of 
Public Interest Law at the David A. Clarke School of Law, University of 
the District of Columbia.
    Thank you for inviting me here today to testify on why the civil 
rights community strongly supports the efforts of this committee and 
those of the Obama administration to expand access to postsecondary 
education. Mr. Chairman, before I get into the substance of today's 
hearing, I want to particularly commend your efforts in the recent and 
ongoing appropriations process to protect education funding, and 
especially Pell grants, which are a lifeline for low-income and working 
families seeking to send their children to college.
    The Leadership Conference believes that access to education is a 
fundamental civil and human right. This principle is especially 
important at a time when educational attainment and access to 
employment are more closely intertwined than ever before. We live in 
the age of the global economy where quality K-12 public education and 
postsecondary opportunities are necessities and job-related skills are 
in increasingly high demand.
    We know that if we don't educate all children--and educate them 
well--our future as a nation is in serious jeopardy.
    Today, Mr. Chairman, we also know that postsecondary education is 
as important to a person's ability to raise a family and achieve the 
American dream as a high school diploma was when you and I were growing 
up. For example, the most recent report on The Condition of Education 
2011 by the Institute for Education Sciences' National Center for 
Education Statistics (hereinafter ``NCES Report'') reported that in 
2009 ``young adults with a bachelor's degree earned more than twice as 
much as those without a high school diploma or its equivalent, 50 
percent more than high school completers, and 25 percent more than 
those with an associate's degree.'' \1\ The NCES data also underscore 
the importance of higher education to women and their families. For 
example, while earnings of male high school dropouts ($23,000) are 
close to the Federal poverty level, female high school dropouts earn 
far less ($19,000).\2\ And women who obtain associates degrees 
($31,000) still do not earn what men with high school diplomas earn 
($32,900).
---------------------------------------------------------------------------
    \1\ http://nces.ed.gov/programs/coe/figures/figure-er2-2.asp.
    \2\ The 2011 Federal poverty guideline for a family of four is 
$22,350. http://aspe.hhs.gov/poverty/11fedreg.shtml.
---------------------------------------------------------------------------
    The Leadership Conference recognizes the vital role that 
postsecondary education of all types, including in for-profit settings, 
can play in educating and preparing young people for the jobs and 
careers of today and tomorrow. The sector's enrollment has more than 
tripled over the last decade and now comprises 11 percent of the 
Nation's full-time undergraduate enrollment. It enrolls 
disproportionate numbers of women, minorities, low-income students, 
veterans, and older Americans, including many working people seeking to 
further their careers through online coursework.
    We are alarmed, however, about mounting evidence that the for-
profit sector is engaging in predatory lending practices, overcharging 
for their product, failing to deliver on programs leading to ``gainful 
employment,'' leaving large numbers of students saddled with enormous 
debt, and leaving taxpayers holding the bag. For-profit colleges are a 
viable option for many students who may not have very many other 
options, but that doesn't give these businesses the right to exploit 
those they serve.
    According to the NCES Report, the General Accounting Office, and 
this committee's own investigation:

     For-profit colleges charge students more, while 
shortchanging their education. For example, 4-year undergraduate for-
profit colleges charge an average net price of $30,900 per full-time 
school year, much higher than both public ($15,600) and private not-
for-profit ($26,600) schools.\3\ At 2-year institutions, the net price 
at for-profit schools ($24,700) is more than twice that at public 
schools ($10,300).\4\
---------------------------------------------------------------------------
    \3\ NCES Report, Indicator 47-2, ``Average total price, grants, and 
net price for full-time, dependent undergraduates at 4-year 
institutions, by institution control: Academic year 2007-08.''
    \4\ NCES Report, Indicator 47-1, http://nces.ed.gov/programs/coe/
figures/figure-cst-1.asp.
---------------------------------------------------------------------------
     Yet NCES found that private for-profit colleges spend an 
average of only $3,069 per student on academic instruction, whereas 
public institutions spend an average of $7,534 per student and private 
not-for-profit schools spend an average of $15,215 per student on 
instruction. As a consequence of their high price tags and low 
investment in student learning, for-profits can channel a substantial 
portion of their income to marketing and profits.

          At Bridgepoint Education, Inc., for example, 
        marketing accounted for 29.7 percent of spending in 2010 and 
        profit 30.3 percent. The remainder 40 percent covered 
        instruction, student services and faculty salaries, along with 
        lobbying, administration, and executive compensation.\5\ The 
        company reported compensating their CEO more than $20 million 
        in 2009.
---------------------------------------------------------------------------
    \5\ Bridgepoint Education, Inc. SEC Statements, provided to Senate 
HELP Committee.

     For-profit career programs' recruiting practices often 
target low-income and minority students, women, veterans, and older 
students seeking to obtain marketable skills in this difficult economy. 
While seeking to exploit prospective students' vulnerabilities, these 
programs fail to provide sufficient or accurate consumer information on 
the impact of high student loan debt (which is not dischargeable in 
bankruptcy) and on the quality and track record of their programs. For 
example, in documents obtained by this committee, one company's 
training manual identified the following ``student profiles'' for 
recruitment:\6\
---------------------------------------------------------------------------
    \6\ Vatterott Training Manual for Recruiting Staff.

          Welfare Mom w/Kids
          Pregnant Ladies
          Recent Divorce
          Low Self-Esteem
          Vocational Rehabilitation
          Experienced a Recent Death
          Physically/Mentally Abused
          Drug Rehabilitation
          Fired/ Lay Off

     Yet many of these programs fail to deliver on their 
promises to educate students for ``gainful employment,'' as required 
under the Higher Education Act and recently promulgated regulations 
from the Department of Education. Instead, their record is one of high 
withdrawal and staggeringly high debt. For example, the companies 
posting the highest withdrawal rates for associate degree students at 
their schools (ranging from 58 percent to 84 percent in 2009) enroll 
more than 1 million students, and nearly half of all for-profit 
students.
     The for-profit sector is leaving students with a mountain 
of student-loan debt. According to the NCES Report, 10.9 percent of 
students who attended 4-year for-profit institutions default on their 
loans within 2 years of starting repayment, which is more than twice 
the percentage at public and private not-for-profit schools.
     According to Campus Progress, 11 percent of all of higher 
education students in the country attend for-profit schools, yet they 
account for 26 percent of Federal student loans and 44 percent of 
student loan defaults.\7\
---------------------------------------------------------------------------
    \7\ http://thinkprogress.org/education/2011/02/04/177517/for-
profit-data/.

    Mr. Chairman, I recently had the privilege of co-authoring an op-ed 
with the distinguished Congressman from San Jose, CA, Representative 
Michael Honda, D-CA, which I have appended to this testimony. In it, we 
sought to remind readers of the parallels between the victimization of 
students by the for-profit sector and the disastrous mortgage 
foreclosure crisis The Leadership Conference has been fighting for 
---------------------------------------------------------------------------
years. We wrote:

          ``The subprime mortgage disaster caused the greatest loss of 
        wealth from communities of color in modern American history. 
        When banks misled African-American, Asian-American and Latino 
        borrowers into taking on crushing home mortgage debt they could 
        never hope to pay back, we called it what it was--predatory 
        lending.
          Today, many for-profit colleges have picked up where the 
        subprime lenders left off. They are using the same promise of 
        the American dream as bait to trap vulnerable students--the 
        vast majority of whom are women and minorities--into 
        underperforming schools and saddling them with a lifetime of 
        debt.
          As this industry's profits have soared, so have student loan 
        default rates. Students enrolled in for-profit schools 
        represent just 10 percent of all undergraduate students, but 
        account for 44 percent of all student loan defaults.
          The industry says that these schools offer opportunities to 
        low-income students that they couldn't get elsewhere. But the 
        debt being piled on students has devastating consequences, 
        rendering them unable to receive credit to rent an apartment, 
        buy a car or home, or receive future education loans. When 
        these programs fail to deliver on their promises, students 
        suffer for the rest of their adult lives and taxpayers are left 
        on the hook.
          The industry is targeting and taking advantage of women, 
        minority and low-income students. Approximately one out of 
        every four African-American, Asian-American, Latino and low-
        income students start their postsecondary education at a for-
        profit institution. But their graduate rates are far below the 
        rates for such students at public and nonprofit colleges. Just 
        like the subprime mortgage lenders, this industry is profiting 
        off the misery of our country's most vulnerable communities.
          Once the industry had gotten its cut from the government's 
        financial aid program, it left its students without an adequate 
        education, without a job, and with an insurmountable debt load.
          . . . This industry has destroyed people's futures, cost our 
        government billions of dollars, and gotten rich by selling 
        false hopes to those who most need a quality education. It's 
        time for common sense reforms, which will hold the industry 
        accountable to these students and to taxpayers.''

    Before I close, I would like to say a word about the final 
``gainful employment'' rule that was released last week by Secretary 
Duncan.
    The Leadership Conference believes this rule is a long-overdue and 
important step in protecting students and taxpayers from unscrupulous 
career education programs.
    While the rule does not include many important protections urged by 
civil rights, student, women's, labor and consumer organizations, it 
sends a strong message to many for-profit programs to start putting 
students first. Regulation is urgently needed to hold these 
institutions accountable, given the rising tide of debt and default 
rates faced by students enrolled in for-profit programs--the vast 
majority of whom are represented by our coalition's member 
organizations. Its focus has been narrowed to those programs that, 
after 4 years, still fall far short on delivering a quality education. 
Those programs that serve their students well, however, will easily 
pass muster under the rule.
    But just as Wall Street has fought the Consumer Financial 
Protection Bureau and other financial reforms, the for-profit higher 
education industry is fiercely resisting reasonable and modest 
oversight. It spent more than $4 million on hired lobbyists in the 
first quarter of 2011 alone.
    The Leadership Conference has commended members of Congress--
including substantial majorities of the Congressional Black Caucus, the 
Congressional Hispanic Caucus and CAPAC--who opposed efforts to tie the 
Secretary's hands by prohibiting issuance or enforcement of this rule. 
We will continue to urge all members of both the Senate and the House 
to stand behind the President and allow the Secretary to begin 
enforcing it.
    Our Nation's future depends to a large degree on how well we 
educate the next generation. We will succeed only if we allow students 
a fair opportunity to obtain the skills and knowledge they need to 
fully participate in our economy and our society. The new ``gainful 
employment'' rule, adequate funding for both ESEA and student financial 
aid programs, and continued efforts of both the Department and this 
committee, will help ensure they get that chance.
    Thank you.
    
    
                                 ______
                                 

                          [ContraCosta Times]

             Stop Predatory Lending By For-Profit Colleges

             (By Rep. Michael Honda and Wade Henderson)\1\

    THE SUBPRIME mortgage disaster caused the greatest loss of wealth 
from communities of color in modern American history. When banks misled 
African-American, Asian-American and Latino borrowers into taking on 
crushing home mortgage debt they could never hope to pay back, we 
called it what it was--predatory lending. 
---------------------------------------------------------------------------
    \1\ Michael Honda, D-San Jose, is a member of House Budget and 
Appropriations Committees and chair emeritus of the Congressional Asian 
Pacific American Caucus. Wade Henderson is the president and CEO of The 
Leadership Conference on Civil and Human Rights and The Leadership 
Conference Education Fund.
---------------------------------------------------------------------------
    Today, many for-profit colleges have picked up where the subprime 
lenders left off. They are using the same promise of the American dream 
as bait to trap vulnerable students--the vast majority of whom are 
women and minorities--into underperforming schools and saddling them 
with a lifetime of debt.
    The costs to these students and taxpayers are tremendous. In the 
2008-9 school year, the Federal Government invested more than $4 
billion in grant aid to for-profit institutions, quadruple its 
investment just a decade earlier.
    Despite this increased Federal assistance, tuition at for-profit 
institutions continues to far outpace other schools, costing more than 
five times as much as community colleges. These for-profit schools are 
gaming the system--undermining the value of these Pell grants and 
forcing students to take out more loans, not less.
    As this industry's profits have soared, so have student loan 
default rates. Students enrolled in for-profit schools represent just 
10 percent of all undergraduate students, but account for 44 percent of 
all student loan defaults.
    The industry says that these schools offer opportunities to low-
income students that they couldn't get elsewhere. But the debt being 
piled on students has devastating consequences, rendering them unable 
to receive credit to rent an apartment, buy a car or home, or receive 
future education loans. When these programs fail to deliver on their 
promises, students suffer for the rest of their adult lives and 
taxpayers are left on the hook.
    The industry is targeting and taking advantage of women, minority 
and low-income students. Approximately one out of every four African-
American, Asian-American, Latino and low-income students start their 
postsecondary education at a for-profit institution. But their graduate 
rates are far below the rates for such students at public and nonprofit 
colleges. Just like the subprime mortgage lenders, this industry is 
profiting off the misery of our country's most vulnerable communities.
    We strongly believe that the Department of Education has taken the 
right step in proposing a common-sense rule that would hold these 
schools accountable for delivering on their education and career 
promises.
    Under the rules, colleges that fail to demonstrate that their 
programs are preparing students for ``gainful employment'' would risk 
losing their eligibility to participate in Federal education grant and 
loan programs.
    All schools should be held accountable for the educations that they 
provide, including for-profits that have flown under the radar of 
regulation for far too long. These rules respond to the Department of 
Education's recent investigation finding that some in the industry were 
promising students job placement upon completion of their programs and 
failing to deliver on their promises.
    Once the industry had gotten its cut from the government's 
financial aid program, it left its students without an adequate 
education, without a job, and with an insurmountable debt load.
    Just as Wall Street is fighting to undermine the Consumer Financial 
Protection Bureau and other financial reforms, the for-profit college 
industry is fiercely resisting this reasonable oversight.
    It spent more than $4 million on lobbyists in the first quarter of 
2011 alone and has engaged in a documented campaign of staging false 
support in the very minority communities it is victimizing.
    Nothing should stand in the way of real gainful employment rules. 
This industry has destroyed people's futures, cost our government 
billions of dollars, and gotten rich by selling false hopes to those 
who most need a quality education. It's time for common sense reforms 
which will hold the industry accountable to these students and to 
taxpayers.

    The Chairman. Thank you, Mr. Henderson.
    Now we will turn to Mr. Schmitt. Welcome, and again you 
have 7 minutes. Please proceed, Mr. Schmitt.

 STATEMENT OF ERIC SCHMITT, FORMER STUDENT, KAPLAN UNIVERSITY, 
                          HAMPTON, IA

    Mr. Schmitt. Thank you, Chairman Harkin and thank you 
members of the Senate HELP Committee for hearing me today.
    I am coming to you as a former student of the for-profit 
sector, but I would like to say I represent a great many 
students who are not here telling their story.
    I am an alumnus of Kaplan University. Around the time this 
committee and the Department of Education began looking at the 
excesses of the for-profit education sector I received an email 
from my alma mater asking me to get involved by telling the 
U.S. Education Department and Congress why the gainful 
employment regulation is unfair and needs to be stopped. This 
got me interested in what was happening in Washington and I 
knew that I needed to make my voice heard. Since I am sure my 
alma mater wouldn't find what I had to say very useful to their 
cause, I decided to make my voice heard in another forum. After 
taking on $45,000 in student loans and spending years job 
hunting without success, I feel it is important to tell my 
story.
    In 2002 I was working at an inbound customer service firm 
and felt I needed a change for the better. I didn't think a 
traditional college would work for me, being at the time, a 27-
year-old father of two. I met with an admissions counselor who 
told me all about the campus, the college offered day and night 
classes for nontraditional students like me. I chose the 
paralegal path because after a stint on jury duty I discovered 
an intuitive understanding in the public policy and the issues 
that shaped the law. The admissions representative assured me 
this was a good choice, saying Student Services had a hundred 
percent placement out of that program.
    I was excited by a school administrators presentation 
showing that paralegals in my zip code would make between 
$30,000 and $36,000 a year, according to salary.com. I knew 
that I would take out loans to pay for my education, but since 
the school advertised their career-focused programs that gave 
you the skills you needed to work in the field, I figured it 
would be worth it.
    My experience in class at Kaplan was relatively smooth, 
with the exception of the difficulty I had finding the classes 
I needed to graduate. The same introductory classes were always 
being offered, but upper level classes, required for my degree 
were being pushed off. The school told me and other students we 
could do a self study to get those credits. I explained to the 
dean that I wanted to learn in the classroom environment 
because I wanted these skills, not just a letter grade. The 
dean explained they needed to keep the introductory classes on 
the schedule to handle the influx of new enrollees, so there 
was not always resources to handle the upper level classes. 
Since my protest had no affect on the schedule, I adapted and 
took the class through an independent study.
    In 2004 I graduated with an associates degree in paralegal 
studies. I had a 3.76 GPA. I was the president of the law club 
and had the recommendation of most of my instructors. I hoped 
that since I now had my associates of applied science degree my 
job search would be more productive. This did not turn out to 
be the case.
    I wanted to get a jump on finding a job so a few months 
into my second year I began applying to every posting related 
to my field I saw in both the public sector and the private 
sector. I also contacted other employers even if they did not 
advertise open jobs, including law offices, banks, credit 
unions, even bail bond offices. After applying to a position or 
business, I would contact them once or twice a week until the 
position had been filled or that I was notified that there was 
no open positions. I never received a call back for an 
interview.
    The school's Career Services didn't seem prepared or able 
to help me. I stopped in the office on campus a few times but 
always seemed to get contradictory or confusing resume tips 
from them. Career Services would frequently send out emails 
notifying graduates of jobs being offered that I had seen on 
Iowa Workforce Development or in the Waterloo Courier. These 
were job postings that I could apply to on my own, instead of 
driving to the school.
    In early June 2005, with my unemployment running out, I 
finally settled for a job doing inbound customer service. This 
was the very field where I went to get an education in order to 
escape.
    I blamed myself for the failure to find satisfying work and 
thought that returning to school to get a bachelors degree 
would allow me to secure a good job or get me a step closer to 
law school. I found out that Kaplan began offering a bachelors 
degree in paralegal studies that involved part online and part 
on campus learning. I suspected that I would have trouble 
transferring any credits from my associates degree to another 
school, so despite my reservations and the expense, I began 
taking classes toward my bachelors degree, in early 2006.
    I continued on and graduated in 2008 with a 3.16 GPA. Since 
getting my bachelor degree I have had one temporary job using 
it, which lasted 2 weeks. I have hunted for any sort of work to 
get my foot in the door in the legal field. I have applied for 
any posted position I saw as well as sending a cover letter and 
resume to any business that might give me the foothold I need, 
courthouses, county treasurer's offices, county recorder's 
offices, abstract firms, law offices, claims adjustors, banks, 
credit unions and bail bondsmen.
    I took on temporary work with the 2010 Decennial Census, 
which was rewarding, but it didn't have much to do with my 
field of study. Since then, my choices for work have been an 
assembly line laborer in a pesticide plant, a flagger on road 
construction for the season or other temporary work.
    I cannot say that even once my degree has opened any doors 
of employment for me. I slowly learned what most employers 
really thought of the Kaplan degrees and graduates. I had heard 
all through my education that the school really didn't care 
what kind of job you found. There were stories of graduates who 
never found work or even if you tried to transfer that most of 
the other colleges would refuse to accept the credit hours.
    I have since learned that the school counts me as 
successfully placed for the statistics they advertise to 
potential new students.
    Obtaining a degree is viewed by most as a financial plus. 
The judge who reviewed my child support said that despite 
having recently lost my $10.50 an hour janitorial job, I would 
be able to get a job making as much or more with my education. 
But now I owe $45,000 in student loans without a permanent job 
to pay those bills, only very rarely in the past 7 years since 
completing my associates, have I been able to make any payments 
at all and the debt continues to pile up. The loans from my 
associates degree went in default late last year. The loans 
from my bachelors degree are in deferment, but I have no idea 
how I will manage after my deferment time runs out.
    Because of the deferment and forbearances the interest has 
added more than 10 percent on top of my original balance and 
this battle it seems is as if even time is against me.
    I feel that returning to school to get my degree has put me 
further away from my goals than before I started my education. 
I realize it is probably too late for me.
    I am sure there are other parents out there looking to make 
a better life for their families, but the crushing debt and 
lack of opportunity of this mistake has cost me more than any 
amount of money. I had to sell my house after the divorce, 
because I couldn't pay for it. I had to give up opportunities 
to visit with my children. The financial hardship strains the 
most important relationships in my life. I refused, for years, 
to marry my current wife, Mira, for fear of dragging her down 
into this crushing burden. The lifetime promise of a college 
degree has become a lifetime burden that I only can hope I bear 
alone.
    The debt and the magnitude of my mistake is with me like a 
constant weight. I lay awake at night dreading what I might 
have to do to save my family from this burden, to even once 
have considered cutting ties with everyone you love and who 
loves you to save them from a mistake is a horrible burden to 
bear.
    I hope that this committee and the Department of Education 
can make sure that those families like mine have a real chance 
at building their future with a real education. Thank you.
    [The prepared statement of Mr. Schmitt follows:]
                   Prepared Statement of Eric Schmitt
    My name is Eric Schmitt. I am an alumnus of Kaplan University. 
Around the time this committee and the Department of Education began 
looking at the excesses of the for-profit education sector, I received 
an email from my alma mater asking me to ``Get Involved by Telling the 
U.S. Education Department and Congress Why the ``Gainful Employment'' 
Regulation is Unfair and Needs to Be Stopped.'' This got me interested 
in what was happening in Washington and I knew I should make my voice 
heard. Since I am sure my alma mater wouldn't find what I have to say 
useful to their cause, I decided to make my voice heard in another 
forum. After taking on $45,000 in student loans and spending years job-
hunting without success, I feel it is important to tell my story.
    I graduated with an Associate degree and Bachelor's of Science in 
Paralegal Studies with an emphasis in Personal Injury. In the course of 
pursuing my degrees, I have been an on-campus student as well as part 
of a new generation of students, the distance learners attending 
online.
    My involvement with a for-profit college began in 2002; I was 
working at an inbound customer service firm and felt I needed a change 
for the better. I didn't think a traditional college would work for me, 
being, at the time, a 27-year-old father of two. I met with an 
admissions counselor who told me all about the campus. It had day and 
night classes for non-traditional students like me. I took their 
entrance exam (which seemed very simplistic, but who was I to judge?), 
and I chose a major. My suggested choices were between paralegal and 
accounting. I chose the paralegal path because, after a stint on jury 
duty, I discovered an intuitive understanding of the intricacy of the 
legal process and a fascination with the interpretation of fact and 
statute. The admissions representative assured me this was a good 
choice, saying student services placed 100 percent of students out of 
that program.
    In the orientation after I enrolled, all prospective students were 
asked their intended major. An administrator would pull up a slide on a 
power point presentation, which would show us our average salary for 
that profession in our zip code, according to salary.com. I remember 
the paralegal average being $30,000 to $36,000 a year. As part of the 
presentation, one of the school administrators asked for a volunteer to 
come forward. I was the volunteer. He gave me $10. The moral of this 
tale was that for taking a risk, you would be rewarded. He says we all 
took the initiative when we enrolled at Kaplan. The reward, he said, 
was that since the school had such a great reputation with local 
businesses, that finding work in our fields would be easier. Kaplan had 
this great education by focusing their programs on marketable skills 
rather than on general education requirements. I knew that I would take 
out loans to pay for my education, but since the school advertised 
their career-
focused programs that gave you the skills you needed to work in the 
field I figured it would be worth it.
    I worked overnights and went to school in the evening. My 
experience in class at Kaplan was relatively smooth with the exception 
of the difficulty I had finding the classes I needed to graduate. The 
same introductory classes were always being offered, but upper level 
classes required for my degree were pushed off. After putting up a 
petition to appeal to the administration to offer the advanced classes, 
such as law office management, in a classroom format, as opposed to 
self-study, I spoke to the Dean about this issue. I was chided for the 
tone of my petition. I explained to him that I wanted to learn in a 
classroom environment because I wanted these skills, not just a letter 
grade. The Dean responded that they needed to keep these introductory 
classes on the schedule to handle the influx of new enrollees. I 
pointed out that some of us needed this class and other advanced 
classes in order to graduate. Since my protests had no effect on the 
schedule, I adapted and took the class through an independent study, 
meeting once a week with an instructor for an hour.
    During this conversation, the Dean learned of my interest in law 
school. He told me that I could get my law degree online with an 
affiliated school, Concord University. It seemed, with a few hiccups, 
that Kaplan could provide everything I needed to fulfill my dream of 
practicing law. I was sure with my grades and references that I would 
have no difficulties finding a job after graduation.
    My associate degree track required an externship. Ideally I wanted 
to get a paying job that would satisfy the externship and began 
applying to local businesses early in my second year. I used job 
specific and non-targeted resumes to apply to every law office in the 
Waterloo and Cedar Falls area. I only had one response when a law 
office staff secretary who was leaving her job recognized me from 
Kaplan, forwarded my resume to her boss as a possible replacement. I 
was not hired. I finally went to my Program Chair who did help me find 
an attorney I could take my externship through, although it was unpaid. 
My externship was a less than rewarding experience. I quickly learned 
that my supervising attorney was gaining a reputation as an unreliable 
and unethical member of the bar and I felt it necessary to distance 
myself from him.
    In 2004 I graduated with an associate degree in paralegal studies. 
I had a 3.76 GPA, I was president of the Law Club and had the 
recommendation of most of my instructors. Upon graduating, I continued 
my job search. I hoped that since I now had my Associate of Applied 
Science degree, my job search would be more productive.
    This did not turn out to be the case. I wanted to get a jump on 
finding a job so a few months before graduation I began applying to 
every posting related to my field I saw, in both the public sector and 
the private sector. I also contacted other employers even if they did 
not advertise open jobs including law offices, banks, credit unions, 
and even bail bond offices. After applying to a position or a business, 
I would contact them once or twice a week until the position had been 
filled or that I was notified there were no open positions. I never 
received a call back for an interview.
    The school's Career Services didn't seem prepared or able to help 
me. I stopped into the office on campus a few times, but always seemed 
to get contradictory or confusing resume tips from them. Career 
Services would frequently send out emails notifying graduates of jobs 
being offered that I had seen on Iowa Workforce Development or in the 
Waterloo Courier. These were job postings I could apply to on my own 
instead of driving to the school.
    I struggled to find any work with my degree so I took a 4-month 
unpaid internship. I knew there was no chance of being hired, but I 
wanted to improve my likelihood of being picked up elsewhere. I hoped a 
credible reference would help. In early June 2005 with my unemployment 
running out I finally settled for a job doing inbound customer service. 
This was the very field I went to get an education in order to escape.
    In late 2005 I received a letter from Kaplan that they were now 
offering their Bachelor of Science in the Paralegal Studies program on 
campus via the ``School within a School'' program. School within a 
School meant that the online class format was still used, but there was 
a seminar for 1 hour per week on campus or via conference call. In 
early 2006 I enrolled, eager to continue my education since I assumed 
it had to have been my fault that I never received an interview. I also 
wanted desperately to leave the customer service industry and I thought 
that a 4-year degree would better help me do that. The School within a 
School program, I don't believe, even lasted a full year into my 
Bachelor's program. The campus seminars were abruptly ended without 
explanation or acknowledgment. I continued at Kaplan in a fully online 
education environment. I could have tried to transfer, but I had heard 
from many sources that Kaplan credits rarely transferred. The most 
important bit of knowledge I gained during this time was from a one-
term adjunct instructor, who, when I told her of my plan to continue my 
education through Concord Law School, informed me that the school was 
not recognized in Iowa for taking the BAR exam. That information was 
eye opening. The Dean apparently didn't know or forgot to mention this 
little problem with Concord.
    I continued on and graduated in 2008 with a 3.16 GPA. Since getting 
my Baccalaureate degree, I have had one temporary job using it, which 
lasted 2 weeks. I have applied to every opening I have found through my 
continued ongoing search. I have sent my resume far and wide. I 
volunteered and I took on another internship to make more connections 
and build references. I took on temporary work with the 2010 Decennial 
Census, which was rewarding but didn't have much to do with my field of 
study. Since then my choices for work have been an assembly line 
laborer in a pesticide plant, a flagger on road construction for the 
season, or other temporary work.
    So what is the end of my Kaplan ``success story?'' I cannot say 
that even once my degree has opened any doors of employment for me. I 
slowly learned what most employers really thought of Kaplan degrees and 
graduates. I had heard rumors and horror stories all through my 
education that once Kaplan was done with you they really didn't care 
what kind of job you found. There were stories of graduates who never 
found work, and that if you tried to transfer that most other colleges 
refused to accept the credit hours. The judge who reviewed my child 
support said that despite having recently lost my $10.50 an hour 
janitorial job I ``would be able to get a job making as much or more 
with (my) education.'' But now I owe $45,000 in student loans without a 
permanent job to pay those bills. Only very rarely in the past 7 years 
since completing my Associate degree have I been able to make any 
payments at all and the debt continues to pile up. The loans from my 
Associate Degree went into default late last year. The loans from my 
Bachelor's Degree are in deferment but I have no idea how I will manage 
after my deferment allotment runs out. Because of the deferment and 
forbearances, the interest has added thousands of dollars on top of my 
original balance. In this battle it seems as if even time is against 
me.
    I realize it is probably too late for me, but I am sure there are 
other parents out there looking to make a better life for their 
families. The crushing debt and lack of opportunity of this mistake has 
cost me more than any amount of money. I had to sell my house after my 
divorce because I couldn't pay for it. I have had to give up 
opportunities to visit with my children since I could not afford to 
travel to see them. The financial hardship strains the most important 
relationships in my life. I refused for years to marry my current wife 
Mira for fear of dragging her down into this crushing burden. The 
lifetime promise of a college degree has become a lifetime burden that 
I only can hope I bear alone. The debt and the magnitude of my mistake 
is with me like a constant weight. I have lied awake at night dreading 
what I might have to do to save my family from this burden. To even 
once have to consider cutting ties with everyone you love and who loves 
you to save them from a mistake is a horrible burden to bear. I hope 
that this committee and the Department of Education can make sure those 
families like mine have a real chance at building their future with a 
real education.

    The Chairman. Mr. Schmitt, thank you very much for putting 
a human face on this. And for the record, I just want to say 
that we contacted Mr. Schmitt as a result of a letter that you 
wrote to me about this very subject and so I appreciate your 
being here and telling your personal story.
    I know it doesn't relieve the weight any, but there are 
thousands, hundreds of thousands who share your same situation 
around the United States and that is why we are looking into 
this as we are.
    Pauline Abernathy, welcome to the committee and your 
statement will be made a part of the record in its entirety. 
Please proceed.

 STATEMENT OF PAULINE ABERNATHY, VICE PRESIDENT, THE INSTITUTE 
         FOR COLLEGE ACCESS & SUCCESS, PHILADELPHIA, PA

    Ms. Abernathy. Chairman Harkin and members of the 
committee, thank you for the opportunity to testify today. The 
Institute for College Access & Success is a nonprofit research 
and policy organization that works to improve college 
opportunity and outcomes for all Americans so more Americans 
can have completely meaningful credentials without burdensome 
debt.
    As you noted, student debt is increasingly common in all 
sectors of higher education, but compared to other types of 
colleges, debt at for-profit colleges is off the charts. This 
sector has the highest share of students with debt, the highest 
debt loads for degrees and the highest student loan default 
rates. Combine these facts with aggressive recruiting, loan 
completion rates, heavy reliance on Federal funds and 
increasing investigations of widespread fraud, and you have a 
truly toxic mix.
    As others have noted, for-profit career colleges are not 
inherently problematic, indeed they have the potential to spur 
needed technological innovation. What matters to students and 
taxpayers is whether a school provides quality career education 
and training at a reasonable cost, not its structure or 
ownership, but current laws and regulations have created 
incentives for career colleges, many owned by large, publicly 
traded corporations, to reap hefty profits at great expense to 
taxpayers and students.
    As Chairman Harkin stated, virtually all students attending 
career colleges borrow--at both 2-year and 4-year career 
colleges--at least 95 percent of students take out loans. By 
contrast, less than half of students at public colleges borrow 
and only 13 percent of community college students borrow. 
Moreover, a majority of career college graduates graduate with 
both Federal and private student loans and private loans are 
one of the riskiest ways to pay for college. Like Federal 
loans, they are not dischargeable in bankruptcy, but unlike 
Federal loans, they typically have variable interest rates with 
no cap and they lack the affordable repayment options and 
consumer protections that can help Federal student loan 
borrowers stay out of default.
    Low-income, African-American and Hispanic undergraduates at 
career colleges are about three times more likely to borrow 
Federal student loans than their counterparts at other colleges 
and four times more likely to take out private loans. Adults 
who attend career colleges while working full-time are almost 
five times more likely to take out Federal loans and over six 
times more likely to borrow private loans.
    Students at career colleges are not only more likely to 
borrow, they also borrow more, much more. High borrowing rates 
combined with large debt loads significantly increase the risk 
of going to college and there is clear evidence that student 
debt loads at many for-profit schools are unmanageable.
    As the chairman said, career college students account for 
nearly half of all Federal student loan defaults, even though 
the sector enrolls only about 10 percent of all college 
students. More than one in five borrowers who attended a career 
college defaults within 3 years, which is more than double the 
rate at public colleges and more than triple the rate at 
nonprofit colleges. The impact of these defaults, as Mr. 
Schmitt just testified, is severe and long-lasting, both for 
the borrowers and for our economy.
    Student demographics alone do not explain these default 
rates. The Career College Association's own study concludes 
that even after accounting for differences in demographics and 
completion rates, students at for-profit colleges are at least 
twice as likely to default as students at other types of 
schools.
    Indeed, some career colleges do much better than others at 
educating similar students. For instance, there are two 
colleges, for-profit colleges in San Bernardino, CA that are 1 
mile apart from each other. They offer similar programs, charge 
similar amounts and enroll similar shares of low-income 
students. Yet one has a default rate more than twice the other, 
and the one with the lower default rate enrolls a higher share 
of low-income students. Our analysis of Federal data reveals 
that even students who complete an associates degree or 
certificate at a career college are at much greater risk, four 
times greater, than students who graduate from other types of 
schools. In fact, career college graduates are much more likely 
to default than public and nonprofit college dropouts and they 
are almost twice as likely to experience unemployment as 
graduates of other types of schools.
    In sum, these data suggest that Eric Schmitt's experience 
is not uncommon with tens of thousands of students taking on 
huge debt for degrees that have little, if any value in the job 
market. This has grave consequences for individuals and their 
families, for our energy and for taxpayers who are subsidizing 
for-profit colleges to the tune of more than $32 billion last 
year alone.
    The 14 student financial aid regulations that were recently 
finalized by The Department of Education are a step in the 
right direction, but they will not solve all the serious 
problems that these hearings have uncovered.
    For instance, they won't stop Federal funding for 
worthless, unaccredited programs like the one Yasmine Issa 
testified about last year, and they won't provide relief to the 
students and taxpayers that have been victimized by such 
programs. They don't address the problem of schools that have 
literally purchased their regional accreditation. They don't 
put a stop to the subprime loans that some career colleges are 
making to their own students. And they don't prevent for-profit 
corporations from being funded entirely by taxpayer dollars.
    Thank you for the opportunity to testify today.
    [The prepared statement of Ms. Abernathy follows:]
                Prepared Statement of Pauline Abernathy
                                summary
    Pauline Abernathy is vice president of The Institute for College 
Access & Success (TICAS), an independent, nonpartisan, nonprofit 
research and policy organization and home to the national Project on 
Student Debt. TICAS works to improve both educational opportunity and 
outcomes so that more under-represented students complete meaningful 
post-secondary credentials and do so without burdensome debt.
    Our ongoing analyses of student debt trends at the national, State 
and college levels led us to look more closely at what is happening to 
students in the growing career college sector, also known as the 
proprietary or for-profit sector. Compared to other types of colleges, 
career colleges have the largest share of students with debt, the 
highest student debt levels for degree completers, and the worst 
Federal student loan default rates.
    Low-income and minority undergraduates at career colleges are about 
three times more likely to borrow Federal student loans as their 
counterparts at public or nonprofit colleges. Students who attend 
career colleges are also the most likely to take out risky private 
student loans, which are more like credit cards than financial aid and 
lack the important repayment options and consumer protections that come 
with Federal loans.
    Student loan borrowers from career colleges are more than twice as 
likely to default as those from public colleges, and more than three 
times as likely as those from nonprofit colleges. Even students who 
graduate with a degree or certificate at a career college are at much 
greater risk of defaulting than completers from other types of schools. 
Among students who started in 2003-4 and completed an associate's 
degree or certificate by 2006, those who attended career colleges were 
four times more likely to be in default in 2009 than those from public 
or nonprofit colleges. In fact, completers at career colleges were much 
more likely to be in default than students who dropped out of public 
and nonprofit colleges.
    There are high costs for both students and taxpayers when students 
are saddled with loans they cannot repay. Those who default on their 
student loans will have difficulty renting an apartment or buying a 
car, and increasingly, getting a job. The debt can follow you to the 
grave and it is nearly impossible to discharge either Federal or 
private student loans through bankruptcy.
    Because the career college industry relies on federally funded 
grants and taxpayer-backed loans for the bulk of its revenue, we all 
have a lot at stake in the quality and cost of a career college 
education. The sector enrolls about 10 percent of college students but 
accounted for one in four Federal education loan dollars ($25.0 
billion) and Pell Grant dollars ($7.6 billion) in 2009-10. This is 
about double the share of Federal student aid that students at career 
colleges received a decade earlier. In addition, career college 
students represent nearly half (47 percent) of all Federal student loan 
defaults.
    While the Department of Education's new ``gainful employment'' rule 
is a modest step towards preventing Federal taxpayer dollars from being 
wasted on career education programs that leave students with little but 
insurmountable debt, more must be done to prevent the waste of taxpayer 
dollars and to protect students, including veterans. Given the rising 
costs and stakes for students and taxpayers, we thank the committee for 
raising important questions and for its commitment to preserving 
student access to quality, affordable higher education.
                                 ______
                                 
    Chairman Harkin, Ranking Member Enzi and members of the committee, 
thank you for the opportunity to testify on the impact of debt on 
students who attend for-profit career colleges and the need for reforms 
to protect the substantial interests of both students and taxpayers.
    The Institute for College Access & Success (TICAS) is an 
independent, nonpartisan, nonprofit research and policy organization 
based in Oakland, CA. Our mission is to improve both educational 
opportunity and outcomes so that more underrepresented students 
complete meaningful post-secondary credentials and do so without 
incurring burdensome debt. Our Project on Student Debt, launched in 
2005, focuses on increasing public understanding of rising student debt 
and the implications for individuals, families, the economy and 
society.
    Our work has often focused on community colleges because they 
enroll the largest share of the Nation's low-income, underrepresented 
minority, older and part-time students, as well as the majority of 
adult students who work full-time while going to school.\1\ However, in 
our ongoing analyses of student debt trends at the national, State and 
college levels, a disturbing pattern emerged that led us to look more 
closely at what is happening to students in the growing career college 
sector--also known as the proprietary or for-profit college sector.\2\
---------------------------------------------------------------------------
    \1\ Calculations by The Institute for College Access & Success 
(TICAS) on data from the U.S. Department of Education, National Center 
for Education Statistics (NCES), National Postsecondary Student Aid 
Study (NPSAS), 2007-8, http://nces.ed.gov/surveys/npsas. Unless 
otherwise specified, ``students'' refers to undergraduate students 
throughout this testimony.
    \2\ The term ``career colleges'' refers to proprietary or for-
profit colleges throughout this testimony.
---------------------------------------------------------------------------
    Compared to other types of colleges, career colleges have the 
dubious distinction of the highest share of students with debt--with 
the highest debt levels for degree completers and the worst Federal 
student loan default rates. Career colleges now enroll approximately 1 
in 10 post-secondary students in the United States, but they absorb a 
far greater share of Federal student aid: one in four Federal Pell 
Grant and loan dollars goes to students in the career college sector. 
At the same time, career colleges also have the highest share of 
students taking out private (nonfederal) student loans--one of the 
riskiest ways to pay for higher education.\3\
---------------------------------------------------------------------------
    \3\ Unless otherwise noted, in this testimony the term ``private 
loans'' refers to all nonFederal student loans.
---------------------------------------------------------------------------
    Because the career college sector recruits and enrolls a 
disproportionate share of low-income students and students of color, we 
and many other student, civil rights, college access, consumer and 
veterans advocates are particularly concerned about the disparate 
impact of this sector's alarmingly high student debt and default 
levels. Considered together, the career college industry's rapid 
growth, aggressive recruiting practices, heavy reliance on Federal 
funds, high student debt and default levels, and disproportionate 
enrollment of underrepresented students clearly point to high and 
rising stakes for both students and taxpayers.
  high debt and loan defaults: consequences for students and taxpayers
    To be clear, not all student loan debt is harmful. Federal student 
loans fulfill their purpose when they help students get a quality 
education or training so they can pay off their loans, support 
themselves and their families and contribute to our society and 
economy--whether as teachers, truck drivers or technology 
entrepreneurs.
    Indeed, because Federal student loans can be a valuable tool both 
for expanding college access and supporting student success, we have 
urged all community colleges to participate in the Federal student loan 
program, so that their students are not forced to rely on riskier and 
more expensive forms of credit if they need to borrow to stay and 
succeed in school.\4\
---------------------------------------------------------------------------
    \4\ The Project on Student Debt. Still Denied: How Community 
Colleges Shortchange Students by Not Offering Federal Loans. April 
2011. http://ticas.org/files/pub/still_denied.pdf.
---------------------------------------------------------------------------
    While student loans can help students acquire valuable skills and 
credentials, they do carry real risks for borrowers. High student loan 
debt, and even low debt when paired with low earnings, can leave 
students with unmanageable payments that can jeopardize their families' 
basic needs and lead to delinquency and default. Leaving college with 
burdensome debt can also prevent or delay borrowers from taking 
important steps that benefit not only individuals, but also our society 
and economy as a whole. These include starting a business, buying a 
home, marrying, having children, saving for retirement and saving for 
their own children's education.
    Defaulting on a student loan has severe and long-lasting 
consequences.\5\ It can devastate a borrower's credit, making it 
difficult to rent an apartment or buy a car and, increasingly, to get a 
job. Borrowers may be hounded by collectors, and debt can balloon 
because of default and collection fees. Borrowers who default on 
Federal student loans cannot get Federal grants or loans to return to 
school, and the government can garnish wages, seize tax refunds and 
eventually dock Social Security payments. The debt can literally follow 
borrowers to the grave.
---------------------------------------------------------------------------
    \5\ U.S. Department of Education. Collections Guide to Defaulted 
Student Loans. http://www2.ed.gov/offices/OSFAP/DCS/index.html. See 
also, Default and Delinquency, Student Loan Borrower Assistance, 
National Consumer Law Center. http://www.studentloanborrower
assistance.org/default-and-delinquency/.
---------------------------------------------------------------------------
    However, Federal student loans provide a variety of tools and 
consumer protections that can help borrowers manage their debt and 
avoid default. For instance, TICAS developed the policy framework for 
what is now the Income-Based Repayment (IBR) program. IBR caps Federal 
student loan payments at a reasonable percentage of the borrower's 
income and forgives any remaining debt after 25 years of responsible 
payments, or as soon as 10 years for borrowers who work in public 
service.\6\
---------------------------------------------------------------------------
    \6\ For more information on Income-Based Repayment, see 
www.IBRinfo.org.
---------------------------------------------------------------------------
    Borrowers with private student loans, in contrast, can face much 
higher costs and have far fewer options when their payments become 
unmanageable. They are, ultimately, at the mercy of their lenders 
because private loans lack the important deferment options, affordable 
repayment plans, loan forgiveness programs and cancellation rights in 
cases of death, severe disability and school closure that Federal 
student loans provide. Experts agree that private student loans should 
only be used as a last resort.
    Even borrowers in so much financial distress that they meet the 
requirements for declaring bankruptcy find it is nearly impossible to 
have student loan debt discharged, whether for Federal or private 
loans. To put it plainly, it is currently easier to get relief from 
credit card and gambling debt than from student loan debt.
         student debt at career colleges: most students borrow 
                          and they borrow more
    Student loan debt is rising in all sectors of higher education, but 
the career college sector stands out with by far the highest share of 
students who borrow and the highest average debt levels. Any way you 
slice it, students at career colleges are much more likely to have debt 
than students at other types of schools. Nearly every student who 
attends a career college winds up with Federal loans, private loans or 
both.

     In 2007-8, almost all undergraduates (97 percent) 
attending 2-year career colleges took out student loans, while only 13 
percent of undergraduates attending public 2-year colleges took out 
student loans.\7\
---------------------------------------------------------------------------
    \7\ Calculations by TICAS on data from U.S. Department of 
Education, NCES, NPSAS, 2007-08, http://nces.ed.gov.survey/npsas.
---------------------------------------------------------------------------
     In 2007-8, 95 percent of undergraduates attending 4-year 
career colleges took out student loans, while only 47 percent of 
undergraduates attending public 4-year colleges took out student 
loans.\8\
---------------------------------------------------------------------------
    \8\ Ibid.

    Looking only at those who actually receive an associate's or 
bachelor's degree, nearly every student who graduates from a career 
college has loans, compared to significantly lower shares of graduates 
of other types of schools. And after graduation, degree holders from 
career colleges have a lot more debt to pay off, on average, than those 
who graduated with debt from public and nonprofit colleges.\9\
---------------------------------------------------------------------------
    \9\ The term ``nonprofit colleges'' refers to private nonprofit 
colleges throughout this testimony.

     At career colleges, 98 percent of associate's degree 
recipients had loans in 2007-8 and their average debt was $19,700. At 
public and nonprofit colleges, 40 percent of associate's degree 
recipients had loans and their average debt was $10,950.\10\
---------------------------------------------------------------------------
    \10\ Calculations by TICAS on data from U.S. Department of 
Education, NCES, NPSAS, 2007-8, http://nces.ed.gov.survey/npsas.
---------------------------------------------------------------------------
     At career colleges, 96 percent of bachelor's degree 
recipients had student loans in 2007-8 and their average debt was 
$33,050. At public and nonprofit colleges, 65 percent of bachelor's 
degree recipients had loans and their average debt was $22,750.\11\
---------------------------------------------------------------------------
    \11\ Ibid.
---------------------------------------------------------------------------
     Among bachelor's degree recipients, those who attended 
career colleges are much more likely to have very high debt. Almost one 
in four (24 percent) of all 2008 graduates from 4-year career colleges 
owed at least $40,000 in student loans, compared to just 6 percent of 
graduates from public 4-year colleges and 15 percent from nonprofit 4-
year colleges. The average debt for all 4-year college graduates with 
loans, from all sectors, was $23,200.\12\
---------------------------------------------------------------------------
    \12\ The Institute for College Access & Success. High Hopes, Big 
Debts (Class of 2008). May 2010. http://ticas.org/files/pub/
High_Hopes_Big_Debts_2008.pdf.
---------------------------------------------------------------------------
     private student loans: a particular problem at career colleges
    In addition to high overall student debt, the career college sector 
has the largest share of students with private student loans, which 
carry serious financial risks for borrowers. Like credit cards, private 
student loans typically have uncapped, variable interest rates that are 
highest for those who can least afford them. Lenders typically reserve 
the right to raise interest rates and charge high fees for myriad 
reasons and to declare borrowers in default for something as simple as 
being a day late on a payment.
    Private student loan borrowers do not have access to the important 
deferment, repayment, or forgiveness options that come with Federal 
student loans. This leaves most private loan borrowers at the mercy of 
the lender if they face financial distress due to unemployment, 
disability, illness or military deployment, or when a school shuts down 
before they can finish their certificate or degree.
    The odds of taking out a private loan are highest for students at 
career colleges. Among all career college students, 42 percent used a 
private loan in 2007-8, the most recent year for which data are 
available. At nonprofit 4-year schools, 25 percent of students have 
taken out private loans; at public 4-year schools, only 14 percent; and 
at community colleges, just 4 percent.\13\
---------------------------------------------------------------------------
    \13\ The Institute for College Access & Success. Private Loans: 
Facts and Trends. August 2009. http://projectonstudentdebt.org/files/
pub/private_loan_facts_trends_09.pdf. Note that ``private loans'' here 
refers to bank and lender-originated private student loans, not all 
nonFederal student loans.
---------------------------------------------------------------------------
    The majority of students who complete a degree or certificate at a 
career college have private loans.
     In 2007-8, 60 percent of students who completed an 
associate's degree at a career college had private loans, which is four 
times the rate for associate's degree completers at community colleges 
(15 percent).\14\
---------------------------------------------------------------------------
    \14\ Baum, Sandy and Steele, Patricia. How Much are College 
Students Borrowing? The College Board. August 2009. http://
advocacy.collegeboard.org/sites/default/files/09b_552_Policy
Brief_WEB_090730.pdf.
---------------------------------------------------------------------------
     For bachelor's degree completers, 64 percent graduated 
from career colleges with private loans, compared to 28 percent at 
public 4-year colleges and 42 percent at nonprofit 4-year colleges.\15\
---------------------------------------------------------------------------
    \15\ Ibid.
---------------------------------------------------------------------------
     Half (51 percent) of those who completed a certificate at 
career colleges had private loans, compared to 12 percent at community 
colleges.\16\
---------------------------------------------------------------------------
    \16\ Ibid.

    While private student loans are no more a form of financial aid 
than a credit card is when used to pay for tuition or books, they are 
sometimes included in financial aid packages, and some colleges offer 
their own private loans directly to students. Some career colleges have 
been aggressively expanding their own private lending to students who 
are at very high risk of default.\17\
---------------------------------------------------------------------------
    \17\ Pope, Justin. ``For-Profit Colleges' Increased Lending Prompts 
Concerns.'' Associated Press. August 15, 2009. http://www.usatoday.com/
news/education/2009-08-15-profit-college-lending_N.htm.
---------------------------------------------------------------------------
    Pushing these students to take on private loan debt they cannot 
repay can be devastating for the students in the long run, but quite 
profitable for the school. For example, Corinthian Colleges reports 
that a ``significant number'' of its students have institutional loans 
as well as Federal loans, and the company plans to double its 
institutional loan volume to $240 million per year, even though it is 
writing-off 55 percent of these loans.\18\ Other large career college 
companies, such as ITT Educational Services and Career Education 
Corporation, are also lending to their own students, despite 
anticipating to write-off in excess of 40 percent of these loans.\19\
---------------------------------------------------------------------------
    \18\ Corinthian Colleges Q3 2011 conference call. May 3, 2011. 
http://newsroom.cci.edu/eventdetail.cfm?eventid=93960.
    \19\ Career Education Corporation Q1 2009 Earnings Call Transcript. 
May 7, 2009. http://seekingalpha.com/article/136209-career-education-
corporation-q1-2009-earnings-call-transcript?page=-1. ``For-Profit 
Schools Face Detention Not Expulsion.'' Wall Street Journal. August 20, 
2010. ITT Educational Services Q1 2011 Earnings Call. April 21, 2011. 
http://www.ittesi.com/phoenix.zhtml?c=94519&p=irol-
eventDetails&EventId=3923596.
---------------------------------------------------------------------------
    These companies consider these loans good investments because their 
profits from Federal grant and loan dollars far outweigh these write-
offs. Institutional lending became more common after career colleges 
successfully lobbied Congress in 2008 to be able to immediately count 
institutional loans towards the 10 percent of revenues they are 
required to get from sources other than Federal student aid. From July 
2008 through June 2012, the Higher Education Opportunity Act of 2008 
(HEOA) temporarily lets them count the net present value of their 
institutional loans as non-Federal revenue in the year the loans are 
made, rather than counting them as revenue if and when they are 
actually repaid by the students.\20\
---------------------------------------------------------------------------
    \20\ ``For loans made to students by the institution from July 1, 
2008, but before July 1, 2012, the net present value of the loans made 
during a fiscal year if the loans are evidenced by promissory notes, 
issued at intervals related to the institution's enrollment periods, 
and are subject to regular loan repayments and collections. For loans 
made on or after July 1, 2012, only the amount of loan repayments the 
institution receives during a fiscal year, excluding repayment on any 
loans for which the institution previously used the net present value 
in its 90/10 calculation.'' From U.S. Department of Education, ``Dear 
Colleague'' letter summarizing the Higher Education Opportunity Act 
(DCL ID: GEN-08-12 FP-08-10). December 2010. http://www.ifap.
ed.gov/dpcletters/attachments/GEN0812FP0810AttachHEOADCL.pdf.
---------------------------------------------------------------------------
    These career college institutional loans are attempts to get around 
market corrections that appropriately reduced access to expensive, 
subprime private loans for very high-risk borrowers. In 2008, Sallie 
Mae stopped most of its lending to these types of schools because of 
high default rates and other questionable practices.\21\
---------------------------------------------------------------------------
    \21\ ``The Credit Crunch Takes a Toll.'' Inside Higher Ed. January 
23, 2008. http://www.insidehighered.com/news/2008/01/23/credit. See 
also, Burd, Stephen. Subprime Mess Reaches Higher Ed. Higher Ed Watch. 
January 31, 2008. http://higheredwatch.newamerica.net/blogs/
education_policy/2008/01/subprime_student_loan_mess.
---------------------------------------------------------------------------
    Subprime institutional lending is also an attempt to evade the 
statutory requirement that someone other than the Federal Government 
should be willing to pay for a school's education and training. Federal 
law allows career colleges to get up to 90 percent of their revenue 
from Federal student aid. It is common sense that if no one else is 
willing to pay for what a school offers, taxpayers should not be paying 
for it either.
    Students who are pushed into private loans they cannot afford, 
whether the loan is from their school or an outside lender, are stuck 
with the debt even in bankruptcy, while the lenders can simply write 
off the bad debt and move on. Since 2005, bankruptcy law has treated 
private student loans much more harshly than other types of unsecured 
consumer debt, such as credit card debt and even gambling debt. Bills 
recently introduced in the U.S. Senate (S. 1102) and House of 
Representatives (H.R. 2028) would restore fair treatment to private 
student loan borrowers in severe financial distress.
     low-income and underrepresented minority students borrow more 
                           at career colleges
    Most low-income and underrepresented minority students attend 
either public or nonprofit schools, with the greatest concentration at 
community colleges.\22\ Among all African-American and Hispanic 
undergraduates, nearly 8 out of 10 (78 percent) attended public or 
nonprofit schools in 2007-8, including 42 percent at community 
colleges, while 15 percent attended career colleges.\23\ The 
proportions are similar for low-income students and adult students 
working full-time: 80 percent of students with below-median incomes 
attend public and nonprofit colleges, and 81 percent of students age 24 
and older who are working full-time attend public and nonprofit 
colleges.\24\
---------------------------------------------------------------------------
    \22\ Unless otherwise specified, ``low-income'' refers to students 
whose family income is less than the median family income of all U.S. 
undergraduates. Family income includes the student's income for all 
students plus parents' income for dependent students and a spouse's 
income for married independent students. According to the latest 
available Federal data (NPSAS: 08), the median income for dependent 
undergraduate students was $66,637 in 2008, and the median income for 
independent undergraduate students was $26,099. Throughout this 
document, ``underrepresented minorities'' refers to African-American 
and Hispanic students.
    \23\ These percentages do not sum to 100 because some students 
attended more than one college during the 2007-8 year.
    \24\ Calculations by TICAS on data from U.S. Department of 
Education, NCES, NPSAS, 2007-8, http://nces.ed.gov/surveys/npsas.
---------------------------------------------------------------------------
    However, while most low-income and underrepresented minority 
students attend public colleges, these students are also heavily 
recruited by many career colleges, where they enroll disproportionately 
and in growing numbers.

     African-American and Hispanic students make up 28 percent 
of all undergraduates, but they represent nearly half (46 percent) of 
undergraduates in the career college sector.\25\
---------------------------------------------------------------------------
    \25\ Ibid.
---------------------------------------------------------------------------
     Low-income students, many of whom are also students of 
color, are also over-represented at career colleges; 64 percent of 
students attending career colleges have incomes below the median for 
all undergraduates.\26\
---------------------------------------------------------------------------
    \26\ Ibid.

    The majority of students who are low-income, underrepresented 
minorities, and/or adults working full-time do not take out student 
loans to pay for college.\27\ However, those who attend career colleges 
are much more likely to borrow--and borrow more--than their 
counterparts at other types of schools. The data clearly show that 
across levels of income and categories of race/ethnicity, career 
college students borrow more than those who attend elsewhere.
---------------------------------------------------------------------------
    \27\ Ibid.

     At career colleges, low-income and minority undergraduates 
are about three times more likely to borrow Federal student loans--and 
four times more likely to borrow private student loans--as their 
counterparts at public or nonprofit colleges.\28\
---------------------------------------------------------------------------
    \28\ Ibid.
---------------------------------------------------------------------------
     Due at least in part to their over-representation at 
career colleges, 17 percent of African-American undergraduates took out 
a private student loan in 2007-8, making them the most likely to borrow 
these risky products among all racial and ethnic groups. Their rate of 
private loan borrowing has also risen the most steeply, quadrupling 
from 2003-4 to 2007-8.\29\
---------------------------------------------------------------------------
    \29\ Private Loans: Facts and Trends, August 2009. Note that 
``private loans'' here refers to bank and lender-originated private 
student loans, not all nonFederal student loans.
---------------------------------------------------------------------------
     At career colleges, adults working full-time are almost 
five times more likely to borrow Federal student loans--and over six 
times more likely to borrow private student loans--than their 
counterparts at public or nonprofit colleges.\30\
---------------------------------------------------------------------------
    \30\ Calculations by TICAS on data from U.S. Department of 
Education, NCES, NPSAS, 2007-8, http://nces.ed.gov/surveys/npsas.
---------------------------------------------------------------------------
    Pell Grant recipients who graduate from 4-year colleges are more 
likely to have debt--and to have high debt--if they attended a career 
college. Most Pell Grant recipients have family incomes below $40,000. 
Among graduating seniors in 2008, 23 percent of Pell Grant recipients 
from career colleges carried at least $40,000 in student loans, 
compared to 14 percent at all other colleges.\31\
---------------------------------------------------------------------------
    \31\ High Hopes, Big Debts (Class of 2008), May 2010.
---------------------------------------------------------------------------
     higher default rates at career colleges: not just demographics
    Students who attend career colleges face much higher odds of 
defaulting on a Federal student loan than students who attend other 
types of schools. As a sector, career colleges have by far the highest 
default rate for Federal student loans.\32\
---------------------------------------------------------------------------
    \32\ Unless otherwise noted, default rates and shares of defaulters 
reflect only those who default within 2 years of first entering 
repayment. Federal student loan default data are not available by 
borrowers' income or race/ethnicity.
---------------------------------------------------------------------------
     Nearly half of all Federal student loan borrowers who 
entered repayment in 2009 and defaulted by 2010 attended career 
colleges (47 percent), even though only about 10 percent of all 
students attended these schools.\33\
---------------------------------------------------------------------------
    \33\ Calculations by TICAS on data from U.S. Department of 
Education, ``FY 2009 Draft Student Loan Cohort Default Rates,'' posted 
May 20, 2011, http://ifap.ed.gov/eannouncements/attachments/
052011AttachFY2009FY2009DraftNationalCDRWithPrior2yrscomparison.pdf, 
and U.S. Department of Education, NCES, IPEDS, http://
nces.ed.gov.ipeds. Default figures include borrowers who entered 
repayment in Federal fiscal year 2009 and had defaulted by the end of 
the 2010 Federal fiscal year.
---------------------------------------------------------------------------
     The average 2-year default rate for Federal loan borrowers 
at career colleges is more than double the average rate at public 
colleges, and it is more than triple the rate at nonprofit 
colleges.\34\
---------------------------------------------------------------------------
    \34\ Ibid. These 2-year default rates include borrowers who entered 
repayment in Federal fiscal year 2009 and had defaulted by the end of 
the 2010 Federal fiscal year.
---------------------------------------------------------------------------
     The average 3-year default rate at career colleges is 22 
percent, again more than double the rate at public colleges and triple 
the rate at nonprofit colleges (10 percent and 7 percent, 
respectively).\35\ Career colleges with 3-year default rates over 40 
percent received more than $217 million in Pell Grants in 2009-10 
alone.\36\
---------------------------------------------------------------------------
    \35\ Calculations by TICAS on data from the U.S. Department of 
Education, ``Trial Three-Year Cohort Default Rates FY 2008.'' http://
federalstudentaid.ed.gov/datacenter/cohort.html. Accessed May 19, 2011. 
These 3-year default rates represent Federal student loan borrowers who 
entered repayment in Federal fiscal year 2008 and defaulted by the end 
of the 2010 Federal fiscal year.
    \36\ Calculations by TICAS on data from the U.S. Department of 
Education, ``Trial Three-Year Cohort Default Rates FY 2008,'' http://
federalstudentaid.ed.gov/datacenter/cohort.html, and U.S. Department of 
Education, Federal Student Aid Data Center, Programmatic Volume 
Reports. http://federalstudentaid.ed.gov/datacenter/programmatic.html. 
Accessed April 26, 2011. These 3-year default rates represent Federal 
student loan borrowers who entered repayment in Federal fiscal year 
2008 and defaulted by the end of the 2010 Federal fiscal year.

    While student demographics play a role, the evidence is clear that 
demographics are by no means the sole explanation for the sector's high 
---------------------------------------------------------------------------
default rates. Schools play an important role as well.

     The Career College Association's own study concludes that 
even after accounting for differences in student demographics, students 
attending career colleges are at least twice as likely to default as 
students at other types of colleges.\37\
---------------------------------------------------------------------------
    \37\ Charles River Associates for the Career College Association. 
Report on Gainful Employment. April 2010. http://www.whitehouse.gov/
sites/default/files/omb/assets/oira_1840/1840_0423
2010-h.pdf.
---------------------------------------------------------------------------
     Lenders report that the school attended affects a 
student's chance of default. In its private student loan business, 
Sallie Mae expects to see a 30 percent difference in default rates for 
a borrower with a FICO score greater than 700, ``depending on the 
school that borrower attends.'' \38\
---------------------------------------------------------------------------
    \38\ Student Lending Analytics. Highlights of Sallie Mae Investor 
Meeting at Credit Suisse Conference. February 12, 2010. http://
studentlendinganalytics.typepad.com/student_lending_
analytics/2010/02/highlights-of-sallie-mae-investor-meeting-at-credit-
suisse-conference.html.
---------------------------------------------------------------------------
     Career college industry executives regularly tell 
investors that they can lower their default rates. For example, in a 
recent press release, Corinthian Colleges attributes a drop in its 
default rates to ``substantial investment in cohort default management 
over the past 18 months.'' \39\
---------------------------------------------------------------------------
    \39\ Corinthian Colleges, Inc. Corinthian Colleges Reports Fiscal 
2011 Third Quarter Results. May 3, 2011. http://investors.cci.edu/
releasedetail.cfm?ReleaseID=573924.
---------------------------------------------------------------------------
     A 2010 Education Sector report also documents the role 
schools can play in lowering default rates:

          ``[T]he experience of the Texas HBCUs, along with a new 
        statistical analysis of cohort default rates, suggests that 
        dangerously high default rates for institutions that serve at-
        risk students are not inevitable . . . Their [the Texas HBCUs] 
        success is not only applicable to other similar institutions, 
        but to all schools that serve those students most at risk for 
        default and who are committed to helping them succeed.'' \40\
---------------------------------------------------------------------------
    \40\ Dillon, Erin and Smiles, Robert. Lowering Student Loan Default 
Rates: What One Consortium of Historically Black Institutions Did to 
Succeed. Education Sector. February 2010. http://
www.educationsector.org/usr_doc/Default_Rates_HBCU.pdf.

    Indeed, many career colleges have kept Federal student loan default 
rates down during the period when cohort default rates are measured and 
could affect schools' eligibility for Federal student aid. In 
preparation for the shift from measuring a school's cohort default rate 
based on the 2 years of repayment to the first 3 years of repayment, 
the U.S. Department of Education has published data showing what school 
default rates would look like based on a 3-year window. The default 
rates at 202 career colleges were at least 15 percentage points higher 
for a 3-year window compared to a 2-year window (e.g., a school's 
default rate increased from 20 percent to at least 35 percent when the 
additional year was included).\41\ This suggests that colleges kept 
defaults down during, but not after, the period in which they were 
being tracked as a measure of institutional accountability. These 202 
career colleges collectively enrolled 13 percent of all students 
attending career colleges. By comparison, only 10 schools in all other 
sectors saw a similar increase in their default rates when the window 
was extended from 2 to 3 years, and these 10 schools enrolled one-tenth 
of 1 percent of students in all other sectors. Clearly, career colleges 
are not at the mercy of student demographics when it comes to managing 
default rates, and they have demonstrated a willingness and ability to 
be responsive to changes in policy that have implications for their 
bottom line.
---------------------------------------------------------------------------
    \41\ Calculations by TICAS on data from the U.S. Department of 
Education, ``Trial Three-Year Cohort Default Rates FY 2008.'' http://
federalstudentaid.ed.gov/datacenter/cohort.html. Accessed May 19, 2011. 
Foreign institutions and institutions with 50 or fewer borrowers who 
entered repayment in Federal fiscal year 2008 are excluded from the 
count of colleges with large increases in default rates.
---------------------------------------------------------------------------
    consequences of not completing are worse for students at career 
                                colleges
    Completion rates vary considerably both across and within different 
types of schools.\42\ Some schools offer more support than others to 
help students succeed and do a better job of matching students with 
programs suited to them, and students can face all kinds of obstacles 
to completing their course of study, from financial challenges to 
family health crises.
---------------------------------------------------------------------------
    \42\ See, for example: Haycock, Kati, Lynch, M., and Engle, J. 
Opportunity Adrift: Our Flagship Universities are Straying from their 
Public Mission. The Education Trust. January 2010. http://
www.edtrust.org/sites/edtrust.org/files/publications/files/
Opportunity%20Adrift%28%29.pdf. Hess, Frederick, et al. Diplomas and 
Dropouts: Which Colleges Actually Graduate their Students (and Which 
Don't). American Enterprise Institute. June 2009. http://www.aei.org/
docLib/Diplomas%20and%20Dropouts%20final.pdf. Miller, Ben, and Ly, P. 
``College Dropout Factories.'' Washington Monthly. August 23, 2010. 
http://www.washingtonmonthly.com/college_guide/feature/
college_dropout_factories.php?page=all.
---------------------------------------------------------------------------
    Graduaion rates are much lower at career colleges than at other 
types of colleges for students seeking bachelor's degrees, as 
documented by a report issued last year by the College Board.

     The 6-year graduation rate for first-time, full-time 
bachelor's degree students is just 22 percent at 4-year career 
colleges, less than half the rate at public 4-year colleges (55 
percent) and only a third of the rate at nonprofit 4-year colleges (65 
percent).\43\
---------------------------------------------------------------------------
    \43\ Baum, Sandy, Ma, J., and Payea, K. Education Pays: The 
Benefits of Higher Education for Individuals and Society. The College 
Board. September 2010. http://trends.collegeboard.org/downloads/
Education_Pays_2010.pdf.
---------------------------------------------------------------------------
     This rate is lowest for African-American students at 
career colleges (16 percent), much lower than for African-American 
students at public 4-year colleges (39 percent) or nonprofit colleges 
(45 percent). Career colleges also have the widest gap between 
bachelor's degree completion rates for African-American students and 
for White and Asian students.\44\
---------------------------------------------------------------------------
    \44\ Ibid.

    A recent study by The Education Trust found that low graduation 
rates at career colleges cannot be explained away by their admissions 
---------------------------------------------------------------------------
policies.

     At open admission colleges, where all applicants are 
admitted, the graduation rate at 4-year career colleges (11 percent) 
was about three times lower than the rates at public and nonprofit 4-
year colleges (31 percent and 36 percent, respectively).\45\
---------------------------------------------------------------------------
    \45\ The Education Trust. Subprime Opportunity: The Unfulfilled 
Promise of For-Profit Colleges and Universities. November 2010. http://
www.edtrust.org/sites/edtrust.org/files/publications/files/
Subprime_report_1.pdf. The study measured 6-year graduation rates at 4-
year colleges.
---------------------------------------------------------------------------
     At the most selective colleges, which admit less than 50 
percent of applicants, career colleges still had the lowest graduation 
rates: 43 percent, compared to 62 percent at public colleges and 78 
percent at nonprofit colleges.\46\
---------------------------------------------------------------------------
    \46\ Ibid.

    These graduation rates, which all colleges report annually to the 
U.S. Department of Education, paint an incomplete picture because they 
only capture full-time students who complete a degree or certificate 
from the college where they first enrolled. However, recently released 
persistence and completion data from a national longitudinal study that 
includes part-time and transfer students reveal the same trends, not 
only for students pursuing bachelor's degrees, but for those pursing 
associate's degrees and certificates as well.
    Taking into account part-time and transfer students, students at 
career colleges still have the least favorable outcomes. Students who 
started at career colleges in 2003-4 were much less likely to complete 
a credential or stay enrolled than those who started at other types of 
colleges.\47\ In other words, students who started at career colleges 
were more likely to drop out without a degree or certificate.
---------------------------------------------------------------------------
    \47\ Persistence and Attainment of 2003-4 Beginning Postsecondary 
Students: After 6 Years. December 2010. U.S. Department of Education, 
National Center for Education Statistics. http://nces.ed.gov/pubs2011/
2011151.pdf.

     More than three-quarters of students starting at public 
and nonprofit 4-year colleges persist or complete (78 percent and 81 
percent, respectively), compared to less than half of students who 
first enroll at 4-year career colleges (45 percent).\48\
---------------------------------------------------------------------------
    \48\ Ibid.
---------------------------------------------------------------------------
     Students starting at public and nonprofit 2-year colleges 
have roughly comparable persistence and completion rates as those 
starting at 2-year career colleges, but they are more likely to 
complete credentials with higher value. Twelve percent of students 
starting at community colleges ended up completing a bachelor's degree 
within 6 years, compared to almost no students (0 percent) at 2-year 
career colleges.

    Because nearly all students at career colleges borrow to cover the 
high costs, the consequences of not completing are far worse for 
students who drop out of career colleges. Drop-outs from career 
colleges are much more likely to have student loans and have higher 
debt than drop-outs from other colleges. Four out of five (81 percent) 
students who started at career colleges in 2003-4 and dropped out 
within 3 years took out student loans, compared to 23 percent of 
students who dropped out of public and nonprofit colleges. Of those who 
borrowed, the drop-outs from career colleges left with much higher debt 
(17 percent more) than students who dropped out from public and 
nonprofit colleges.\49\
---------------------------------------------------------------------------
    \49\ Calculations by TICAS on data from U.S. Department of 
Education, National Center for Education Statistics (NCES), 2003-04 
Beginning Postsecondary Students Longitudinal Study, Second Follow-up 
(BPS:04/09). http://nces.ed.gov/surveys/bps/.
---------------------------------------------------------------------------
    Moreover, students who drop out of career colleges are much more 
likely to default on their Federal loans than students who drop out of 
other types of colleges. More than one in five (23 percent) students 
who started at career colleges in 2003-4 and dropped out within 3 years 
were in default on their Federal student loans in 2009, compared to 3 
percent of students who dropped out of public and nonprofit 
colleges.\50\
---------------------------------------------------------------------------
    \50\ Ibid.
---------------------------------------------------------------------------
    In other words, students are taking a much bigger risk by going to 
a costly career college than to a community college. Students who do 
not or cannot finish a program of study at a career college are likely 
to be left with a lot of debt that will be difficult to pay off. In 
contrast, those who attend community college and find that they cannot 
keep up with the coursework because of a family illness or job loss, or 
who determine that they are not suited for the field of study they were 
pursuing, will probably have no debt, or very little debt, to pay off. 
Those who did borrow to attend community college will in most cases 
have only Federal student loans, which give borrowers many more options 
for managing their debt and staying out of default.
        debt for worthless degrees--when completion doesn't pay
    While college completion, in general, leaves students better off, a 
worthless or grossly overpriced credential can be worse than no 
credential at all, especially if the graduate borrowed to pay for it. 
We analyzed recently released data and found that students who complete 
a degree or certificate at a career college are at much greater risk of 
defaulting than students who graduate from other types of schools. 
Among students who started in 2003-4 and completed an associate's 
degree or certificate by 2006, those who attended career colleges were 
four times more likely to be in default in 2009 than those who attended 
public or nonprofit colleges (12 percent vs. 3 percent, 
respectively).\51\ In fact, completers at career colleges were much 
more likely to be in default than students who dropped out of public 
and nonprofit colleges.
---------------------------------------------------------------------------
    \51\ Ibid.
---------------------------------------------------------------------------
    The associate's degree and certificate completers from career 
colleges were also almost twice as likely to be unemployed. Forty-one 
percent of students completing associate's degrees or certificates at 
career colleges by 2006 experienced 3 months or more of unemployment 
since their graduation, compared to 22 percent of students graduating 
from public and nonprofit colleges.\52\
---------------------------------------------------------------------------
    \52\ Ibid.
---------------------------------------------------------------------------
    At previous hearings, this committee heard testimony that may help 
to explain why so many career college graduates experience unemployment 
and default. Last June, Yasmine Issa, a single mother, testified that 
she completed a career college program that purported to prepare her 
for work as a sonographer, only to find out $32,000 later--including 
$15,000 in loans--that the program did not actually qualify her to sit 
for the licensing exam or work in the field. The school's recruiters 
went out of their way to tell her that the school was accredited, but 
what they did not tell her was that its sonography program was 
unaccredited and effectively worthless. She found out too late that the 
local community college offered an accredited sonography program for 
about half the cost.
    It is unlikely that any student would know that an accredited 
school could offer an unaccredited program. As David Hawkins of the 
National Association for College Admission Counseling (NACAC) testified 
before this committee last August, ``the information asymmetry between 
the employees in charge of recruiting and prospective students is 
immense. In an unregulated environment, the potential for 
misrepresentation and outright fraud is a clear and present threat, 
which can result in harm to students and, in the case of Federal aid 
and loans, to the taxpayer.'' \53\
---------------------------------------------------------------------------
    \53\ Testimony of David Hawkins, Director of Public Policy and 
Research, National Association for College Admission Counseling, before 
the Senate Health, Education, Labor, and Pensions Committee, Hearing on 
Marketing and Recruitment in For-Profit Education. August 4, 2010. 
http://help.senate.gov/imo/media/doc/Hawkins1.pdf.
---------------------------------------------------------------------------
    For example, an article in last June's issue of Good Housekeeping 
magazine offered a thoughtful but daunting list of 11 different kinds 
of research students should do if they are considering a career 
college, from checking with local public colleges to see if they offer 
similar programs at lower cost, to interviewing prospective employers, 
to figuring out the name of the school's parent company and, if it is 
publicly held, reading its most recent 10-K filing with the SEC.\54\ 
The ability to interpret corporate SEC filings and detailed knowledge 
of the different types of accreditation should not be required to avoid 
getting ripped off by a career college.
---------------------------------------------------------------------------
    \54\ Yeoman, Barry. ``School of Hard Knocks.'' Good Housekeeping. 
June 2010. http://www.barryyeoman.com/articles/hardknocks.html.
---------------------------------------------------------------------------
    Other questionable practices by career colleges can lead to 
worthless degrees. The Chronicle of Higher Education recently reported 
that former and current career college employees say the schools 
pressure them to falsify attendance records, raise grades and 
manipulate job-placement numbers.\55\ According to The Chronicle,
---------------------------------------------------------------------------
    \55\ Field, Kelly. ``Faculty at For-Profits Allege Constant 
Pressure to Keep Students Enrolled.'' The Chronicle of Higher 
Education. May 8, 2011. http://chronicle.com/article/Pawns-in-the-For-
Profit/127424/.

          ``More than a dozen current and former professors from six of 
        the seven largest publicly traded education companies say they 
        were leaned on to dumb down courses, offer lengthy extensions 
---------------------------------------------------------------------------
        and change failing grades.''

    The article also confirmed that many career colleges tie teacher 
pay to the number of students who complete their classes, creating a 
strong financial incentive for teachers to pass students regardless of 
a student's performance. Faculty members reported tremendous pressure 
to keep students enrolled and keep their grades high enough so that 
they continue qualifying for Federal student aid, the primary source of 
revenue for most career colleges. In fact, former faculty at ITT 
Technical Institute reported being fired after reporting altered grades 
or refusing to change students' grades.
                     costs and risks for taxpayers
    Because the career college industry relies on federally funded 
grants and taxpayer-backed loans for the bulk of its revenue, 
taxpayers, as well as students, have a lot at stake in the quality and 
cost of career college education. While career colleges have a 
fiduciary responsibility to act in the best interest of their 
shareholders and generate profits, Congress has a fiduciary 
responsibility to act in the best interest of taxpayers.
    This committee's June 2010 report, Emerging Risk, outlined just how 
heavily taxpayers are subsidizing the career college industry.\56\ 
While career colleges may get up to 90 percent of their revenue from 
Federal student aid from the Department of Education (Title IV grants 
and loans), that extraordinarily high percentage currently excludes 
some Federal student loans, and it does not include other government 
revenue sources, such as G.I. bill benefits or Federal job training 
funds. Here are just a few examples of how much taxpayers are spending 
on career colleges.
---------------------------------------------------------------------------
    \56\ U.S. Senate Health, Education, Labor, and Pensions Committee. 
Emerging Risk?: An Overview of Growth, Spending, Student Debt and 
Unanswered Questions in For-Profit Higher Education. U.S. Senate. June 
24, 2010. http://harkin.senate.gov/documents/pdf/4c23515814dca.pdf.

     One in four Federal Pell Grant dollars ($7.6 billion) went 
to students attending career colleges in 2009-10, almost double the 
share a decade earlier.\57\ In the coming year, career colleges are 
expected to receive an estimated $10.2 billion in Pell Grant 
dollars.\58\
---------------------------------------------------------------------------
    \57\ Calculations by TICAS on data from U.S. Department of 
Education, Office of Postsecondary Education (OPE). ``Pell End of Year 
Report, 2009-10'' and ``Pell End of Year Report, 1999-2000.'' http://
www2.ed.gov/finaid/prof/resources/data/pell-data.html, accessed May 19, 
2011.
    \58\ Calculations by TICAS on data from U.S. Department of 
Education. ``Fiscal Year 2012 Budget Request: Student Financial 
Assistance.'' http://www2.ed.gov/about/overview/budget/budget12/
justifications/p-sfa.pdf.
---------------------------------------------------------------------------
     One in four Federal loan dollars ($25.0 billion) went to 
students at career colleges in 2009-10, more than double the share in 
1999-2000.\59\ In the coming year, career colleges are expected to 
account for an estimated $33 billion in Federal student loans.\60\
---------------------------------------------------------------------------
    \59\ Calculations by TICAS on data from U.S. Department of 
Education, Federal Student Aid Data Center, Programmatic Volume 
Reports. http://federalstudentaid.ed.gov/datacenter/programmatic.html, 
accessed May 19, 2011.
    \60\ Calculations by TICAS on data from the U.S. Department of 
Education. ``Fiscal Year 2012 Budget Request: Student Loans Overview.'' 
http://www2.ed.gov/about/overview/budget/budget12/justifications/s-
loansoverview.pdf.
---------------------------------------------------------------------------
     In the first year of the Post-9/11 G.I. bill, 36 percent 
of tuition payments ($640 million) went to career colleges.\61\ Current 
and former recruiters report intense pressure to enroll veterans, whose 
Federal aid dollars from the G.I. bill do not count toward career 
colleges' 90 percent cap on revenue from the Federal Government. One 
former military admissions adviser said, ``[W]e knew that most of them 
would drop out after the first session. . . . Instead of helping 
people, too often I felt like we were almost tricking them.'' \62\
---------------------------------------------------------------------------
    \61\ Lipton, Eric. ``Profits and Scrutiny for Colleges Courting 
Veterans.'' The New York Times. December 8, 2010. http://
www.nytimes.com/2010/12/09/education/09colleges.html?ref=for
profitschools.
    \62\ Ibid.
---------------------------------------------------------------------------
     About 40 percent of the $580 million in tuition assistance 
for active-duty troops went to online career colleges in fiscal year 
2010.\63\ Online career colleges that market heavily to members of the 
military typically price their course credits at the maximum amount 
covered by G.I. bill benefits, $250, which can be five times more than 
the cost of community college credits offered on military bases.\64\
---------------------------------------------------------------------------
    \63\ Reed, Charlie. ``DOD to tighten scrutiny of for-profit, online 
colleges.'' Stars and Stripes. September 24, 2010. http://
www.stripes.com/news/dod-to-tighten-scrutiny-of-for-profit-online-
colleges-1.119391.
    \64\ Golden, Dan. ``Marine Can't Recall His Lessons at For-Profit 
College.'' Bloomberg. December 15, 2009. http://www.bloomberg.com/apps/
news?pid=newsarchive&sid=al8HttoCG.ps.
---------------------------------------------------------------------------
     In addition, some State grants can be used to attend 
career colleges. For example, in California, career college students 
received $94 million in State Cal Grants in 2009-10, much more than the 
$78 million awarded to community college students.\65\ By contrast, the 
State's community colleges enroll eight times as many students as 
career colleges in the State.\66\
---------------------------------------------------------------------------
    \65\ Morain, Dan. ``Cut waste? Start with for-profit colleges.'' 
The Sacramento Bee. February 17, 2011. http://www.sacbee.com/2011/02/
17/3409537/cut-waste-start-with-for-profit.html#story
link=misearch.
    \66\ Calculations by TICAS on data from U.S. Department of 
Education, NCES, IPEDS. http://nces.ed.gov.ipeds.

    The career college industry readily admits that their programs cost 
students much more than similar programs elsewhere. The best available 
estimate for the average, undiscounted cost of tuition and fees for 
career colleges in 2010-11 is nearly $14,000, which is almost twice the 
average undiscounted cost for in-state students at public 4-year 
colleges, and more than five times the cost at public 2-year 
colleges.\67\
---------------------------------------------------------------------------
    \67\ The College Board. Trends in College Pricing 2010. http://
trends.collegeboard.org/college_pricing/report_findings/indicator/
Tuition_and_Fee_and_Room_and_Board_
Charges_2010_11.
---------------------------------------------------------------------------
    Even after taking substantial State subsidies for public colleges 
into account, taxpayers and students combined can still end up paying 
less for career education programs at public colleges than at career 
colleges. This is what the Florida Office of Program Policy Analysis 
and Government Accountability (OPPAGA) found last year, when it 
compared five career education programs offered by both public and 
career colleges in the State.\68\
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    \68\ Florida Office of Program Policy Analysis and Government 
Accountability (OPPAGA), Public Career Education Programs Differ From 
Private Programs on Their Admission Requirements, Costs, Financial Aid 
Availability, and Student Outcomes. January 2010. http://www.oppaga
.state.fl.us/MonitorDocs/Reports/pdf/1018rpt.pdf.

     Three out of the five programs studied cost thousands of 
dollars less at public colleges than at career colleges after combining 
the student and State contributions. These programs were $2,250 to 
nearly $5,100 cheaper at public colleges. The two programs that cost 
less at career colleges were cheaper by much smaller amounts: $46 and 
$837.
     One career college program--massage therapy--had a per-
student cost more than double the public college program's cost, along 
with fewer completions and a lower pass rate on the licensure exam.
     The public programs also had much higher rates of 
accreditation and much higher pass rates on licensure and certification 
exams. For example, 95 percent of the public phlebotomy programs were 
accredited, compared to 26 percent of the career college programs.
                         deja vu all over again
    Sadly, this is not the first time that these kinds of problems have 
emerged in the career college sector. Following the creation of the 
G.I. bill in 1944, thousands of career colleges sprung up virtually 
overnight to enroll veterans.\69\ In response to well-founded concerns 
about waste, fraud and abuse, Congress established an important market 
mechanism for veteran education programs. It capped the percentage of a 
program's students that could receive veteran benefits at 85 percent. 
This ``85-15 Rule'' is intended to ensure that at least 15 percent of a 
program's students are willing to pay the sticker price without the 
Federal subsidy.\70\
---------------------------------------------------------------------------
    \69\ Altschuler, Glenn C. and Blumin, Stuart M. The G.I. bill: A 
New Deal for Veterans. Oxford University Press. 2009.
    \70\ Decision by the U.S. Supreme Court: 435 U.S. 213, 98 S.Ct. 
1024, 55 L.Ed.2d 225, Max CLELAND, Administrator of the Veterans 
Administration, et al. v. National College Of Business, No. 77-716. 
March 20, 1978.
---------------------------------------------------------------------------
    In 1972, amendments to the Higher Education Act allowed career 
colleges to participate in the Federal Title IV Student Financial 
Assistance programs for the first time. Problems arose almost 
immediately. Throughout the next two decades, there were congressional 
hearings, investigations and legislative attempts to uncover and thwart 
deceptive and fraudulent practices in the career college sector. The 
most notable investigation came in 1990, when the Senate Permanent 
Subcommittee on Investigations, led by Senator Sam Nunn, documented a 
wide range of pervasive problems plaguing virtually every part of 
career college administration and oversight.\71\
---------------------------------------------------------------------------
    \71\ The 1990 hearings culminated in Senate Report 102-58, Abuses 
in Federal Student Aid Programs, Report Made by the Permanent 
Subcommittee on Investigations of the Committee on Governmental 
Affairs, United States Senate, May 17, 1991.
---------------------------------------------------------------------------
    In response, Congress passed a series of reforms in 1992 with 
strong bipartisan support. These included establishing an 85-15 rule 
for title IV financial aid, modeled after the G.I. bill provision but 
focused on revenues rather than students. It required career colleges 
to get at least 15 percent of their revenues from sources other than 
title IV programs. A ``50 percent rule'' made schools ineligible for 
title IV funds if more than half their courses were provided through 
correspondence. The 1992 reforms also banned incentive compensation for 
college recruiters and personnel. The results were clear. In less than 
10 years, career college default rates fell from 29 percent in 1991 to 
9 percent in 2000.\72\
---------------------------------------------------------------------------
    \72\ Calculations by TICAS on U.S. Department of Education data on 
student loan defaults, for Federal fiscal years 1991 and 2000.
---------------------------------------------------------------------------
    However, it did not take long for the newly strengthened rules to 
get weakened under intense lobbying from the career college industry. 
In 1998, Congress reduced the percentage of revenue that schools had to 
obtain from non-title IV sources from 15 percent to 10 percent 
(changing the 85-15 rule to 90-10). This was just 1 year after a GAO 
report concluded that career colleges that relied more heavily on title 
IV funds tended to have poorer student outcomes: ``Our analysis showed 
that, on average, the higher a school's reliance on title IV, the lower 
its students' completion and placement rates, and the higher its 
students' default rates.'' \73\ The rules continued to be watered down 
through the 2000s, including:\74\
---------------------------------------------------------------------------
    \73\ GAO. Proprietary Schools: Poorer Student Outcomes at Schools 
That Rely More on Federal Student Aid, GAO/HEHS-97-103 Proprietary 
Schools and Student Aid. June 1997.
    \74\ Congressional Research Service Report RL-33909. Institutional 
Eligibility for Participation in Title IV Student Aid Programs Under 
the Higher Education Act: Background and Reauthorization Issues, by 
Rebecca R. Skinner.

     2002--The Department of Education added ``safe harbors'' 
to the ban on incentive compensation which, in direct contradiction to 
the statute, allowed forms of incentive compensation. These loopholes 
directly contributed to the growth of high-pressure recruiting tactics 
at some career colleges.\75\
---------------------------------------------------------------------------
    \75\ Testimony of David Hawkins, Director of Public Policy and 
Research, National Association for College Admission Counseling, before 
the Senate Health, Education, Labor, and Pensions Committee, Hearing on 
Marketing and Recruitment in For-Profit Education. August 4, 2010. 
http://help.senate.gov/imo/media/doc/Hawkins1.pdf.
---------------------------------------------------------------------------
     2005--The rule limiting ``correspondence'' courses to 50 
percent of a college's total enrollment was gutted by eliminating the 
requirement that telecommunications (i.e., online) courses be included 
in the count. Doing so allowed short-term, online programs to be 
eligible for Federal aid for the first time. This opened the door to 
100 percent online colleges, enabling colleges to double in size 
virtually overnight.
     2008--The Higher Education Opportunity Act (HEOA) 
substantially weakened the already weak 90-10 rule. It allowed career 
schools to immediately count institutional loans towards their 10 
percent of non-Federal revenues, rather than counting them as they are 
repaid; allowed schools to count some title IV aid towards the 10 
percent, rather than the 90 percent, side of the 90-10 calculation; and 
eased penalties for career colleges that fail to comply with the 90-10 
rule.

    Unfortunately and predictably, weakened regulation and reduced 
oversight, combined with a large potential revenue stream of Federal 
dollars, have led once again to an environment where the incentives for 
career colleges to game the system appear to exceed the risks. At the 
same time, the risks to students and taxpayers are much larger in scale 
and cost than ever before.
    The last time Congress cracked down on abuses at career colleges, 
the sector was a shadow of the size it is today. In 1991--the point at 
which the Permanent Subcommittee on Investigations found career 
colleges to be ``leaving hundreds of thousands of students with little 
or no training, no jobs, and significant debts that they cannot 
possibly repay''--there were fewer students enrolled in the entire 
career college sector than there are enrolled today in just the 
University of Phoenix. In 1991, the University of Phoenix enrolled just 
over 7,000 students.\76\ Today, it enrolls more than 400,000.\77\
---------------------------------------------------------------------------
    \76\ Calculations by TICAS on data from U.S. Department of 
Education, NCES, IPEDS, http://nces.ed.gov.ipeds.
    \77\ Apollo Group Q2 2011 earnings call transcript. March 29, 2011. 
http://seekingalpha.com/article/260792-apollo-group-s-ceo-discusses-
f2q11-results-earnings-call-transcript.
---------------------------------------------------------------------------
    The fact that career colleges are growing quickly is not inherently 
problematic, but the high stakes for both students and taxpayers 
suggest that the sector should be actively and carefully monitored.
    The Obama administration has taken some important steps in this 
direction. In 2009, the U.S. Department of Education convened a panel 
of negotiators to develop stronger rules for ensuring the integrity of 
the Federal financial aid programs. These rules apply to all types of 
colleges, but the problems they address are most frequently seen in 
career colleges, where the financial incentives for owners and 
investors to profit from Federal student aid can run counter to the 
best interests of students and taxpayers.
    Next month, on July 1, 2011, the first of these regulations will go 
into effect. For example, new incentive compensation rules eliminate 
the ``safe harbors'' created in 2002, bringing the regulation back in 
line with the Federal law banning payments to college employees and 
contractors based on how many students they enroll or how much Federal 
aid they bring in. Under the new rules on misrepresentation, schools 
are prohibited from misleading students about critical aspects of their 
programs, such as cost, subject matter, and graduates' ability to get 
jobs in their field. The new Ability-to-Benefit (ATB) rule removes 
harmful conflicts of interest from the administration of screening 
tests to students who lack a high school diploma or GED, reducing the 
odds that such students will be fraudulently classified as eligible for 
Federal grants and loans. The career college trade association has 
filed a lawsuit against the Department of Education seeking to block 
several of these common-sense rules, including the provisions on 
misrepresentation.\78\
---------------------------------------------------------------------------
    \78\ Career College Assn. d/b/a Assn. of Private Sector Colleges 
and Universities v. Duncan and U.S. Dept. of Ed., (Filed D.C. Cir., 11 
Jan. 2011). http://www.career.org/iMISPublic/AM/CM/
ContentDisplay.cfm?ContentFileID=12948&MicrositeID=0&FusePreview=Yes.
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    Last year, Congress wisely gave the new Consumer Financial Reform 
Bureau authority over private student loans, including supervisory and 
investigatory authority over private student lending by career colleges 
and other nonbank lenders. Thanks to an amendment by Senators Sherrod 
Brown, Bennet, Franken and Mikulski, the Bureau will include a Private 
Education Loan Ombudsman, which for the first time will give private 
loan borrowers a place to turn for help and give policymakers a clear 
view of what these consumers are experiencing.
    Recently, 11 State attorneys general from both parties launched a 
joint investigation of the career college industry's recruiting, 
financing and other practices, and the Justice Department and at least 
two State attorneys general joined a whistleblower lawsuit against one 
of the largest publicly traded career college corporations.\79\
---------------------------------------------------------------------------
    \79\ Wallack, Todd. ``Mass. investigating top for-profit college: 
AG demands University of Phoenix data on recruiting, finances.'' The 
Boston Globe, May 17, 2011. http://articles.boston.com/2011-05-17/
business/29552871_1_college-access-success-college-students-schools; 
Lewin, Tamar. ``Questions follow leader of for-profit colleges.'' The 
New York Times. May 26, 2011. http://www.nytimes.com/2011/05/27/
education/27edmc.html?_r=1.
---------------------------------------------------------------------------
    Last week, the Administration took a modest step toward preventing 
Federal taxpayer dollars from being wasted on those career education 
programs that leave students with little but insurmountable debt. The 
final gainful employment rule applies to all career education programs, 
whether offered by a public, non-profit or for-profit college. By 
defining gainful employment, the Department will be able to enforce the 
long-standing Federal law requiring all post-secondary career education 
programs that receive Federal financial aid to ``prepare students for 
gainful employment in a recognized occupation.''
    The final rule, by including private student loans in its debt 
measures, may help to discourage the types of subprime private student 
lending discussed earlier. And because the final rule is based in part 
on whether a program's former students are repaying their loans, it may 
also provide a disincentive for schools to simply delay defaults--
through deferments and forbearances--until after the period when 
schools are held accountable for them.
    Unfortunately, the final rule does not provide strong, immediate 
protections for students and taxpayers and will allow many programs 
that over-charge and under-deliver to continue to receive Federal 
student aid. A broad coalition of student, civil rights, consumer, 
higher education and college access organizations submitted a series of 
recommendations to strengthen the modest draft rule published last 
July, none of which were incorporated.\80\ Programs with debt levels 
well beyond what experts recommend, and where very few former students 
are repaying their loans, will continue to receive millions of taxpayer 
dollars. While the final rule is a step in the right direction for 
students, including veterans, and taxpayers, it is substantially weaker 
than the draft rule and it will take longer to protect students and 
taxpayers from the worst of the programs.
---------------------------------------------------------------------------
    \80\ ``Coalition Letter to the Honorable Arne Duncan, Secretary of 
Education.'' Protect Students and Taxpayers. August 12, 2010. http://
www.protectstudentsandtaxpayers.org/wp-content/uploads/2011/06/
Coalition-ltr-on-GE-NPRM-September-9.pdf.
---------------------------------------------------------------------------
    More needs to be done--by the Administration, Congress, States, 
schools and others. For example, the Department of Education already 
has authority to address some of the troubling practices uncovered by 
this committee's investigation and oversight hearings, and soon the 
Consumer Financial Protection Bureau will also. Where the 
Administration does not believe it has adequate authority, it should 
request it from Congress. The Department is initiating a new negotiated 
rulemaking process to address issues related to Federal student loans, 
which gives the Administration an important opportunity to tighten some 
regulations and provide needed relief to students, veterans and 
taxpayers who have been harmed by school practices. Congress also 
should do more to hold schools accountable for taxpayer funds and to 
more closely align the incentives for schools with the interests of 
students and taxpayers. Taxpayers should not be subsidizing worthless 
or overpriced programs, and students--and our economy--should not be 
saddled with unmanageable debt by unscrupulous schools.
    Thank you for holding today's hearing and for the opportunity to 
testify today. I look forward to answering your questions.

    The Chairman. Ms. Abernathy, thank you for your testimony 
and thank you very much for the Institute and all the great 
work that you've done. As you can probably tell, some of the 
things that we use are from the analysis that you have provided 
through your institute.
    We will begin a round of 7-minute questions now. I want to 
start with Mr. Schmitt, and again to thank you for 
personalizing this and bringing it to a personal basis. I thank 
you for writing me that letter, otherwise we never would have 
known you.
    Mr. Schmitt. You are welcome.
    The Chairman. Mr. Schmitt attended Kaplan, which he said 
has a strong presence in Iowa, but I don't think it is unique 
to Kaplan. I also want to make it very clear, that Kaplan 
stands alone amongst the large, for-profit education companies 
for having taken what are, in my opinion, real and significant 
steps to reduce high withdrawal rates and high default rates by 
implementing the Kaplan Commitment Program. I have followed 
this over the last year, the program allows a student to attend 
actual classes for a 5-week period at which time Kaplan or the 
student may decide that the student should not continue, but 
with no cost to the student and no Federal loans or grants 
being taken out.
    I would also like to note that Kaplan Higher Education and 
its CEO, Andrew Rosen, have been standouts for the level of 
cooperation that they have offered to the committee through the 
course of this investigation. So again, I want to compliment 
Kaplan for taking these very, very significant steps.
    However, that is not to lessen what has happened to Mr. 
Schmitt and so many others who attended Kaplan and other career 
colleges around the United States.
    One question, you said you had an externship and they had 
you placed, Kaplan counted you as successfully placed. Why 
didn't that work out?
    Mr. Schmitt. That externship was in a law office that was, 
to put it mildly, in a State of chaos that eventually that 
lawyer was suspended indefinitely.
    The Chairman. Disbarred?
    Mr. Schmitt. No, just suspended indefinitely.
    The Chairman. I see.
    Mr. Schmitt. I really didn't want to count that against 
Kaplan, because there is no way they could control that lawyer, 
but I figured out fairly early on that that employment 
relationship was not going anywhere.
    The Chairman. Your written testimony made reference, and I 
think you made a slight reference in your testimony to the dean 
encouraging you to go to Kaplan's law school.
    Mr. Schmitt. Yes.
    The Chairman. How did that factor into your education and 
what did you discover? You discovered that you couldn't take 
the Iowa Bar?
    Mr. Schmitt. Yes. During the conversation with the dean 
about adding the later classes for my associates graduation it 
came out that I was interested in going to law school. He told 
me about Concord University and that they offered a law school 
online. It never came up during that conversation that Concord 
Law does not allow you to sit for the bar in Iowa.
    So I continued back for my bachelors. And the only way I 
ended up finding out is a one-term adjunct instructor came in, 
about three-quarters into my bachelors degree and when I was 
just talking to her about my plans, she said, you can't sit for 
the bar in Iowa with a degree from Concord. By that point it 
was too late, what was I supposed to do, drop out?
    The Chairman. Mr. Henderson, let me turn to you. I would 
like to have the chart, Document No. 1 put up, if I could, 
please.
    It is a recruiting training manual produced by Corinthian. 
You should have that, I hope you have that in front of you. Do 
you have that or not? Can you see the chart there, Wade?
    Mr. Henderson. Yes.
    The Chairman. There's a section called ``Common Objections 
and Responses,'' from the recruiting training manual. The first 
reads, ``How much does it cost?'' The proposed training 
response is, ``John, the cost of the program will vary. Is your 
question really how much is it going to cost in out-of-pocket 
dollars?''
    The second objection is, ``Can you tell me the cost of your 
course?'' To which the proposed response is, ``If you are like 
most people I talk to, you are probably more concerned with how 
you can pay for school than how much it costs.''
    This document goes on to other subjects such as 
transferability of credits. I would urge all members of the 
committee to read the entire document, but what I am getting at 
here is recruiting.
    You pointed out in your testimony, let me find it here, 
that in some of the documents--we have one company's training 
manual, that was Vatterott Training Manual for Recruiting 
Staff, identified the following quote, ``Student Profiles for 
Recruitment.'' This is in your testimony. Here is who they want 
to go after, welfare mom with kids, pregnant ladies, they need 
an update on that.
    [Laughter.]
    Recent divorce, low self-esteem, vocational rehabilitation, 
experienced a recent death, physically, mentally abused, drug 
rehabilitation, fired, laid off. And so it just seems to me 
that many times what they are doing is they are targeting, I 
think as Miss Abernathy pointed out, they are actually 
targeting low-income people for getting them recruited into the 
schools.
    Do you suppose this has anything to do with the fact that 
the poorer the student--here is the kind of a business model, 
the poorer the person you can go after, the more they qualify 
for higher Pell Grants and higher student loans, obviously.
    Mr. Henderson. Absolutely.
    The Chairman. If you are not poor you don't quality for 
either.
    Mr. Henderson. Absolutely.
    The Chairman. So the poorer you are the more you get and 
the more you then turn over to the school. So it seemed to me 
that these schools would be targeted, very low-income minority 
students, and I think you pointed out or Miss Abernathy, 
sometimes your testimonies overlapped a little bit on the 
proportion of African-American and Hispanics that are recruited 
by these schools.
    Mr. Henderson. Absolutely.
    The Chairman [continuing]. So, address yourself to that and 
those types of recruiting. Because a lot of people say, ``well 
why do these kids go to these schools? Why do they go if they 
are so expensive? Why do these kids do this?''
    Mr. Henderson. Chairman Harkin, I think your question, your 
perceptive question goes to the very heart of the business 
model of many of the for-profit institutions that we have 
investigated.
    Let me say at the outset, that for-profit colleges have an 
important role to play in the overall scheme of educational 
opportunities. I think most of the witnesses this morning have 
confirmed that. However, you pointed out correctly that there 
does seem to be, at least in some instances, and the one you 
cited from my testimony, where some schools actually target 
individuals who are clearly vulnerable to an overstatement of 
the promises that the school can deliver. It is the most 
graphic case of let the buyer beware, you know, caveat emptor, 
that we have seen in terms of how educational opportunities are 
provided.
    Not to take us too far afield, many of the problems that we 
are addressing today have their genesis in the lack of quality 
public education available to students in schools around the 
country. That is obviously something that we in the civil 
rights community have focused on for generations and are trying 
mightily to challenge. The lack of investment in early 
childhood education often leave kids with a quarter of a 
million vocabulary deficit at the start of school and that 
achievement gap is never overcome.
    Having said that, these programs that we are talking about 
today offer the last clear chance of the promise of educational 
opportunity and what it can bring to students. When Mr. Schmitt 
said today that ``look, it may be too late for me, having now 
saddled myself with $45,000 in nondischargeable debt and 
dealing with the struggles of keeping a family together,'' it 
broke my heart because there are many individuals like Mr. 
Schmitt who believed the overstated promises that these schools 
often use as inducements for registration and enrollment. And 
without some sort of guard, some regulation to limit what 
schools can say and promises, victims like Mr. Schmitt abound.
    So who among us hasn't seen the television ad of the young 
woman in pajamas, shortie pajamas, talking about how wonderful 
it would be to sit before the computer all day doing my school 
work. What an attractive inducement that is to take advantage 
of the opportunity she promises. And yet behind that you see 
the very kinds of rampant techniques, which are indeed borne 
from rapacious greed.
    I do understand there is a fiduciary responsibility in the 
private market to address the interests of your shareholders. 
But there has to be a concomitant balance in favor of the 
public interest that says that modest regulation, that prevents 
the exploitation of individuals who, because of their lack of 
formal educational attainment, do need to have someone who is 
sitting in place or in judgment of the quality of the 
advertising that is out there. I think the evidence that Miss 
Abernathy has unearthed and her organization has identified and 
that we presented in our testimony confirms that very point.
    One last point, Mr. Chairman. The Consumer Financial 
Protection Bureau that you and others fought so hard to create, 
is designed to prevent precisely the kind of exploitation that 
we see in an unregulated or loosely regulated market that 
purports to offer opportunity when, in fact, it is debt 
designed as opportunity that can't be overcome. I think it is a 
huge problem.
    The Chairman. Mr. Henderson, thank you very much. I have 
followup questions for Miss Baum and Miss Abernathy, but we 
will now go around. I have, in order of appearance, Senator 
Blumenthal, Senator Whitehouse, Senator Merkley, Senator 
Franken, Senator Hagan.
    Senator Blumenthal.

                    Statement of Senator Blumenthal

    Senator Blumenthal. Thank you, Senator Harkin. I want to 
join Mr. Chairman in thanking you for your profoundly important 
and historic work on this topic which I think provides a model 
for not only what oversight can and should be, but also to 
really provide improvement for countless people who are 
depending on this body to fulfill their hopes and dreams.
    Mr. Henderson, I was very moved by the statement you just 
made about those hopes and dreams and it seems to me we are 
dealing here with a situation that is fundamentally different 
from the subprime housing market where there are objective 
indicia, the value of the house, somebody's income, that lead 
to clearly objective ways to assess whether or not someone can 
afford a particular house. And the liar's loans and the no doc 
loans and so forth, were in some ways, a different kind of 
problem. What strikes me as different here is that we are 
dealing with hopes and dreams, someone is trying to better 
himself and increase opportunity.
    You have very rightly said that some of these for-profit 
colleges fill a void that we all have a responsibility for 
having created. Maybe we wish that there were no need for 
colleges to make a profit by providing this education, but that 
reality exists and for better or worse, it is a reality for 
lower income students and students of color.
    So I come to my question which is to all of you, how do we 
improve on the consumer protections that are available? How do 
we make sure that the promises are accurate, going beyond the 
gainful employment regulations, how do we make sure that the 
expectations created by the marketing and the promotion are not 
false expectations?
    And in particular, and I want to join in saying, that 
Kaplan has taken significant steps, how do we encourage others 
to do the same? How do we encourage more of this to happen?
    Mr. Henderson. Senator Blumenthal, thank you. And I will 
start the discussion but I think you have invited all to 
address it.
    Let me say that I agree with you completely with regard to 
the distinctions between predatory lending in the housing 
market where there are certain objective measures that can be 
used and predatory lending in the for-profit student loan 
industry where there are not quite the same objective measures 
to be examined. Having said that, they do share, however, a 
common characteristic in that we have an unregulated or largely 
under-regulated industry that is enormously profitable where 
institutions are engaging in 
exotic lending instruments, for example, schools creating their 
own subprime loans, as well as a market of students who are 
eligible for a panoply of financial support but who are largely 
under-educated with respect to the consequences of using those 
financial supports to their own detriment. And I am referring 
now to the inability to discharge those debts.
    It does seem to me that where the Federal Government or 
State government have failed to provide the kind of quality 
education that would at least minimally prepare individuals to 
respond to these challenges, then it is a doubly harsh 
consequence to deny individuals the right to discharge those 
loans in bankruptcy. I am not suggesting that bankruptcy laws 
be amended to be more generous with respect to students who 
have borrowed money from for-profit schools, but I do think it 
imposes an additional duty on the Congress to examine the 
issue, as Chairman Harkin and your committee are now doing, and 
to come up with reasonable standards that help move the market 
in places where, for example, Kaplan has chosen to go, but are 
not being adopted by others who are in that industry.
    I know that there has been great criticism, at least on the 
part of some in the civil and human rights community, of the 
Department of Education's new gainful employment regulations. 
But the truth is, it appears that the Department, by taking a 
modest step, sought to insulate its rule from attack by those 
members who would argue over regulation and would seek a 
legislative override of that rule.
    I think it is important that the rule be established, that 
it generate support as a minimal first step. I think the CFPB, 
the Consumer Financial Protection Bureau, be charged with the 
responsibility of examining this area of work and produce a set 
of proposed rules that, in addition to gainful employment would 
help regulate the manner in which some of these outlandish, 
outlandish statements of what--and deceptive, not just 
outlandish, outlandish and deceptive statements that are now 
used to induce students into taking out loans and enrolling of 
these schools be curbed. And that would be a first 
recommendation.
    Senator Blumenthal. I would encourage others to respond as 
well. Are there other good guys that should be encouraged? 
Should the regulations be strengthened? How do we stop the over 
promises and the excess expectations that are purposefully 
created?
    Ms. Baum. I think we have to be sure to think about this 
both from the side of the students, the consumers in the 
market, and from the institutions, the producers in the market, 
because on neither side are the decisions being made 
appropriate.
    For students, as I said in my testimony, the only students 
who are choosing these institutions are students who do not 
have good information, who do not have good guidance, they 
don't have parents who have a college education, they don't 
have good high school counselors. So obviously if they were 
given the kinds of information that would allow them to wisely 
choose opportunities in the way that other students do, they 
would make different choices. We are absolutely right to 
subsidize these students and to subsidize students who actually 
are very much at risk of failure, but that doesn't mean that we 
should subsidize them to make whatever educational choice might 
tempt them. They need more guidance than that, we need more 
control over our funds.
    Institutions obviously also have to be restricted. There is 
no reason why we should be subsidizing these institutions so 
extremely. We need some--to provide incentives for these 
institutions. The fact of what Kaplan is doing now is an 
indication that institutions, I am not sure that what they are 
doing is enough, but that the institutions will respond to 
incentives, they won't do it out of the goodness of their heart 
or out of social generosity, they will do it if that is what 
they know they have to do in order to survive. And we have to 
make sure that we provide those appropriate incentives.
    I would also say that income-based repayment, that program 
needs to be strengthened, but if it works well these students 
won't default. So we have to be careful about using default as 
the only indicator because while it is good for students to be 
on an income-based repayment, that doesn't solve the taxpayer's 
problem.
    Senator Blumenthal. Ms. Abernathy.
    Ms. Abernathy. Yes, I would echo what my colleagues just 
said. There is no one single solution. There are a whole range 
of things that need to be done and need to be done urgently, 
given the scale and scope of this problem. Clearly the Consumer 
Financial Protection Bureau, as Mr. Henderson just said, as 
soon as it has the power to do so needs to be investigating and 
supervising this kind of institution loan lending with the 
kinds of write-off rates and interest rates that your documents 
have revealed.
    The Department of Education currently has authority, we 
believe, to do much more to help the students who have been 
saddled with debt because of the practices that have been done 
and particularly where they have been, with the case of a 
program that is unaccredited, again, take the example of 
Yasmine Issa who testified last year. That program does not 
prepare anyone for employment in that profession, because it is 
unaccredited and you can't sit for the exam and no one will 
hire you unless you have passed that exam. So that is a false 
certification and those loans should be discharged for the 
students who attended those programs and taxpayers should not 
have to pay for those loans, the corporations should have to 
pay for those loans. We believe the Department currently has 
the authority to do that.
    If there is a negotiated rulemaking process that is just 
starting up, that would be one avenue to address that. If the 
Department doesn't believe they can do that then they should be 
requesting, in our opinion, authority from Congress to make 
sure that we're not just stopping these kinds of practices 
going forward, but we're doing something for the thousands of 
students who are now saddled with debt for the rest of their 
lives as a result of these practices.
    There are a host of other things that clearly need to be 
done. We need to do something about the schools who have 
purchased their accreditation. And not just stop it going 
forward, but do something about those that have it now. 
Likewise, we need to make sure that there are not perverse 
incentives for colleges to aggressively recruit veterans and 
active duty military, because of the way we have structured our 
laws.
    So there is just a whole host of things that we stand 
ready, along with a whole host of other organizations, to work 
with you and the administration to move swiftly to address 
this.
    Senator Blumenthal. My time has expired, but I really want 
to thank you and the Chairman for this very, very useful 
testimony and just say, as I was listening to you, especially 
Mr. Henderson, I was struck that home ownership is commonly 
called The American Dream, but American education is the 
American Dream. Some of the worst practices here have turned 
that dream into a nightmare. What we want to do is really 
encourage the best practices and make sure that they become 
common practice.
    I would be interested in following up with you, all of you. 
And again, thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Merkley.

                      Statement of Senator Merkley

    Senator Merkley. Thank you very much.
    Ms. Abernathy, I wanted to understand one piece in your 
testimony when you referred to institutional loans. I gather 
that the key was that the institutional loans could count as 
non-Federal funding. So for example, if I had a program and I 
am the institution and I raise the cost by 10 percent, I then 
lend that 10 percent back to the student. You mentioned that 
some of these loans are done in a predatory fashion or a 
subprime fashion. I would, as the institution have met, 
essentially, the requirement for the non-Federal 10 percent, 
even though I am doing so in a fashion that perhaps is further 
exploiting the student. Is that the right analysis of what 
sometimes happen?
    Ms. Abernathy. Yes, you are absolutely correct. It is 
happening in large part because of a change in the law that the 
industry lobbied for, successfully, in 2008 which allowed them 
to count all of that loan amount as soon as the loan is made, 
rather than only counting the payments by the students, if and 
when they repay those loans toward the 10 percent, if you will. 
So that change in the 2008 law, which is a temporary change 
that is due to expire next year, and in our opinion should 
expire immediately and not wait another year, it is what has 
created this incentive for schools to do this as a way to work 
around the requirement that they not be fully federally funded.
    Senator Merkley. I didn't see it in your testimony, though 
perhaps I missed it. I would like to follow up and get a better 
sense of whether the bulk of those loans are fair and decent 
loans or whether the bulk of them are predatory and if so, in 
what kind of fashion. Do they have exploding interest rates? Do 
they have variable rates with huge spreads? Also, whether those 
loans are disposable upon bankruptcy.
    Ms. Abernathy. Just briefly right now.
    Senator Merkley. Very briefly, because I want to ask some 
other questions as well.
    Ms. Abernathy. Right. The loans absolutely are not 
dischargeable in bankruptcy, again because of a change in the 
law that was sought in 2005 that treats them like Federal 
loans. I will just say that from--the only information that is 
publicly available until today about these loans is what is 
given to the SEC and to investors by these companies. And all 
that was clear from that is that they were writing off 40, 50 
percent or more of these loans. The terms of the loans have not 
been public until today, with this new batch of documents.
    Senator Merkley. Mr. Schmitt, are some of your loans 
institutional loans?
    Mr. Schmitt. No, they are not.
    Senator Merkley. OK. Mr. Schmitt, I wanted to turn to some 
other pieces of your testimony and thank you for sharing your 
story. Were you anticipating that when you entered the 
bachelors program that was through the law school, but it was a 
bachelors program?
    Mr. Schmitt. No. The bachelors program was still through 
Kaplan. The Concord School of Law is owned by Kaplan, but it is 
marketed as a separate school.
    Senator Merkley. I see. And were you expecting to be able 
to sit for the bar exam, if you went to the Concord Law school, 
and that is partly why you were getting your bachelors so you 
were qualified to be able to go to the Concord Law school?
    Mr. Schmitt. Yes.
    Senator Merkley. I see. OK, that is helpful.
    Going back to when you were told that there was 100 percent 
placement, I think the Chair's question clarified this, but I 
wanted to make sure. The externship counted towards placement 
statistics?
    Mr. Schmitt. I have been told since that Kaplan has counted 
me as successfully placed. Why specifically I cannot say. I 
would assume it is the externship, but----
    Senator Merkley. I would like to explore a little bit more, 
we will submit some questions for the record to try to 
understand that.
    Certainly it sounded like that was a factor in your 
excitement over joining the paralegal program was that people 
finished the program and they were getting jobs. And as you had 
dialogue with other students going through the program, were 
they getting jobs? Were there a lot of paralegals that went 
through the program, that you know of, able to get jobs as 
paralegals?
    Mr. Schmitt. Of the students that graduated with me--with 
their degrees--I know of, to date, only four students, of more 
than two dozen that I knew personally, that have gotten jobs as 
paralegals.
    Senator Merkley. OK. Four out of?
    Mr. Schmitt. Two dozen, three dozen.
    Senator Merkley. So it would have been more appropriate to 
tell you the placement rate was 20 percent or something of that 
fashion, based on your experience?
    Mr. Schmitt. Yes.
    Senator Merkley. Were there community college options in 
your area where you could get the same paralegal training?
    Mr. Schmitt. The only community college that offers the 
paralegal training that I know of is in Des Moines, IA, DMACC. 
I lived in Waterloo at the time so that was not possible for 
me.
    Kirkwood College, which I believe is in Cedar Rapids did 
offer it, but we were told that our program was so much better 
than Kirkwood, which I find interesting, since the Kirkwood 
program is actually ABA accredited and Kaplan's is not.
    Senator Merkley. And that lack of accreditation of the 
particular program was a key factor in whether or not you were 
able to get placed?
    Mr. Schmitt. I would have to assume so.
    Senator Merkley. OK. This is an issue that I have had a lot 
of concern about, an institution being accredited but not a 
program. I think it really is a key to this puzzle.
    We had a student, Yasmine Issa, who testified at the June 
24th hearing about her sonogram training, and she said she 
couldn't get a job because her program was not accredited. The 
institution, Sanford-Brown, was, but the program wasn't. This 
seems like a key point where it is very confusing because you 
may be told, as an applicant, that the school is accredited and 
you are assuming that the program is accredited.
    At what point in your experience did you realize that the 
program wasn't accredited and that it was going to be a 
problem? Was it not until you started applying for jobs?
    Mr. Schmitt. About 2 weeks ago, talking to the Senate HELP 
Committee. There is no accreditation requirement by law in 
Iowa, however--for the paralegal programs. However, it seems 
there is industrial accreditation to get these higher level 
paralegal jobs, which obviously I am not qualified for.
    Senator Merkley. Thank you.
    Mr. Schmitt. You are welcome.
    The Chairman. Senator Franken.

                      Statement of Senator Franken

    Senator Franken. I am concerned here for a number of 
reasons, they are all pretty apparent. One thing I am concerned 
about is that we do not have our colleagues, our Republican 
colleagues here. Because I know that there are for-profit, and 
I think every witness has acknowledged this, it would have been 
nice to have had a witness from the other, I don't know, to 
represent the for-profit schools, because there are for-profit 
schools in Minnesota that do a great job. There are others 
around the country that do a great job. And I think you have 
all acknowledged that.
    This is all very, very sad because we have two victims 
here. One is the taxpayers and I would love to know how much 
the taxpayers eat because of for-profits. But the victims are 
also the students and students like Mr. Schmitt.
    We are talking here about trying to be fiscally 
responsible. My wife's father died when she was 17 months old, 
leaving her mom widowed at age 29 with five kids, four 
daughters, every daughter went to college. They went on 
combinations of Pell Grants and scholarships. So there is no 
bigger champion of Pell Grants than me. So I want our Pell 
Grants to be used properly. And I want to be a good fiscal 
steward. So this actually enrages me.
    At the same time I wish the for-profit industry was here. I 
don't understand why good players in this business don't want 
to weed out the bad actors. The bad actors who are saying, 
let's recruit--here is the list of qualities to look for, low 
self esteem, being abused, that is who we are trying to 
recruit? That is a recruiting document. Why aren't the good 
actors working here helping us weed out the bad actors and help 
the industry improve itself?
    Does anyone know how much the taxpayers eat because of for-
profits? Does anyone have some kind of estimate? How much is it 
costing--I mean we are trying to balance the budget here, we 
are trying to reduce our deficit.
    Ms. Abernathy. We know how much Federal student loans and 
Pell Grants go to students attending for-profits and we know 
the default rates, but we don't necessarily know then what 
share of the Pell Grant dollars are being wasted. One in four 
Pell Grant dollars now go to students attending for-profit 
colleges. Some of those Pell Grants are creating opportunity, 
but clearly many are not.
    One statistic that career colleges, for-profit colleges--
with default rates over 40 percent--received $217 million in 
Pell Grants in 2009 and I am sure more last year. So that gives 
you some indication. And certainly before we start cutting Pell 
Grants more--we just reduced Pell Grants by $4 billion in the 
budget agreement last year--for students who need it to get to 
college, like your wife did, we should be going after those 
kinds of wasted dollars that are going to schools that are 
clearly, systematically failing students.
    Ms. Baum. One reason we don't have a good answer to that 
question is that calculating the cost of student loan defaults 
is complicated and depends on what kind of--which accounting 
you use, how you account for that. There was a recent report 
written by the for-profit sector that tried to compare the cost 
to taxpayers, of public institutions and for-profit 
institutions and you should read that with caution because 
there the cost of defaulted loans is zero and there is some 
over counting of some of the taxpayer subsidizes to public 
institutions.
    So I think having a good answer to your question would be 
an important task.
    Senator Franken. OK. But, then there is the cost to people 
like Mr. Schmitt. That is the cost, too. Because here is 
someone that has this hanging over him and I suppose the 
government is probably very good at getting you to pay it, 
ultimately.
    So here you are. Kirkwood, how far away was Kirkwood from 
your home?
    Mr. Schmitt. I think it is in Cedar Rapids. I am assuming 
Cedar Rapids is--well Cedar Rapids was 45 minutes away.
    Senator Franken. So in retrospect you would have----
    Mr. Schmitt. In retrospect, yes.
    Senator Franken [continuing]. You would have gone to 
Kirkwood?
    Mr. Schmitt. Yes.
    Senator Franken. OK. You were 27 years old, so this is 
why--see someone made the point that you don't have parents who 
went to college or you don't have good counselors, well a 27-
year-old--you are a father too, right?
    Mr. Schmitt. Yes.
    Senator Franken. Two boys. Two kids.
    Mr. Schmitt. Two kids.
    Senator Franken. So you are not going to have access to a 
counselor and you have people telling you, this is a good 
choice for you. This is a really good choice for you. Right? 
That is how----
    Mr. Schmitt. Yes.
    Senator Franken. Go to the law school here, go to our law 
school. So you figure, OK, I will get the 4-year degree because 
that will get me into the law school and then I will go to the 
law school and then I will take the bar, except that you can't 
take the bar in Iowa if you go to that law school. And no one 
tells you? No one tells you that you can't take the bar at the 
school?
    Mr. Schmitt. Not until the adjunct instructor told me in 
the third term when we were just talking about it.
    Senator Franken. Just as a happenstance it happened?
    Mr. Schmitt. Yes.
    Senator Franken. Boy, that is just awful.
    Mr. Henderson, very quickly because I am running out of my 
time. Some people argue that if you are going to crack down on 
these for-profits which spend $3,000 a year on education as 
opposed to a public nonprofit, 7,500 as opposed to a private 
nonprofit $15,000 a year on education, that if you crack down 
on this it is bad for racial minorities and etc. Can you speak 
to that?
    And first say the reasoning that they use and then answer 
it, if you would.
    Mr. Henderson. Yes, there is a very cynical hypocrisy that 
goes into a statement made by some for-profit institutions that 
by supporting even modest regulation you are somehow curbing 
opportunities for racial minorities.
    As I exchanged with Chairman Harkin, the most effective way 
of addressing the core problem is to provide a quality 
education for every student. We are striving to accomplish that 
goal. But it has been an elusive goal and even almost six 
decades after the U.S. Supreme Court decided, in Brown vs. The 
Board of Education, to dismantle largely racially segregated 
schools, we still have pockets of racial isolation, poor 
quality public education, poor instruction and a lack of 
resources to achieve the kind of quality education we are 
talking about.
    The students who are themselves attempting to use the 
opportunities that they see available to them, by way of 
attending for-profit schools, are attempting to make the great 
leap forward, to overcome the difficulties of the past and to 
try to achieve something meaningful in their lives. And yet, 
the deceptive practices which many of these institutions 
employ, the emphasis on recruiting among the most vulnerable 
and emotionally ill-prepared of students to address these 
issues, results in the kinds of problems that you and Mr. 
Schmitt just exchanged.
    This is nothing short of, nothing less than the hijacking 
of the American Dream and in doing so, by offering promises 
that can't possibly be met and by not providing even the 
minimum of adequate information necessary to make an informed 
judgment. As a law professor recognizing the importance of the 
American Bar Association accreditation, for every student who 
seeks to take a bar, not just in Iowa but in other States, it 
borders on the criminal to withhold essential information that 
would have allowed Mr. Schmitt to make that judgment.
    With respect to students of color, I think that it is 
really an unfortunate use of a commitment to provide an equal 
opportunity, turned on its head, because the truth is the 
students who these institutions purport to be most concerned by 
are the very students who are carrying the highest debt load 
and who are less likely and the least likely to be able to 
address the problems that we have talked about.
    It is cruel, it is unjust and ultimately it is immoral. I 
mean I don't use that term lightly and very often. But when you 
have that kind of exploitation without the minimal level of 
regulation necessary to protect the public, it borders on the 
immoral.
    Senator Franken. Yes, I am far over my time, I just want to 
again say there are for-profits that do a good job. And I think 
they have every reason to want to crack down on the ones who 
don't.
    The Chairman. And my friend from Minnesota, I had said this 
before, that one of those that came to us was Regency Beauty 
Schools, headquartered in Minneapolis, they were very 
supportive of a strong gainful employment rule, very active in 
trying to clean up the industry and from all of the indications 
they have, they are doing a very good job. So there are some 
good ones out there. One happens to be the Regency Beauty 
Schools in Minneapolis.
    Senator Hagan.

                       Statement of Senator Hagan

    Senator Hagan. Thank you, Mr. Chairman and thank you very 
much for having this hearing today.
    I wanted to talk to the panel about the GI bill and how 
this impacts for-profit institutions. My husband went to law 
school on the GI bill and I am a strong, strong supporter of 
it. Especially during a time when all of our soldiers are 
returning from Iraq and Afghanistan. In North Carolina, we are 
the most military-friendly State in the Nation, with about a 
third of our population either in the military, a veteran, or 
related to the military. So it is very important, that the 
educational benefits that we provide to our returning veterans 
are used wisely.
    I am also concerned because last month in the unemployment 
numbers, about 12.5 percent of our Iraq and Afghanistan 
veterans were unemployed. I think education is key in matching 
skill sets with the employers.
    But with the generous post-9/11 benefit package and given 
the high tuition at many of the for-profit schools, a veteran 
can easily exhaust their benefits pursuing a degree at a for-
profit institution. And to the dismay of the veteran, in many 
cases their accumulated credits are not recognized, if they 
attempt to transfer, in some cases, to a public institution.
    Do you believe the GI bill should be counted as Federal 
financial aid for the purposes of enforcing the 90/10 rule? And 
do you believe that the gainful employment regulation provides 
sufficient incentive for the for-profit schools to keep the 
tuition growth to more reasonable levels than what we have seen 
in recent years? I welcome any of you to comment on these two 
questions.
    Ms. Baum. I think it is hard to understand why any Federal 
funds should not be counted as Federal funds. So if the goal is 
to limit Federal funds, of course that should be counted. And 
the idea is, will people pay out of their own resources for 
this? So, yes.
    In terms of gainful employment, I think that we really need 
to look at what the impact is going to be. It is pretty clear 
that the teeth have been taken out of the rules that were 
proposed. I think we need to be careful about bureaucracy and 
about how schools will get around the rules, and it is not 
clear that just strengthening the numbers is going to solve the 
problem. But as written, it is highly unlikely that this is the 
solution to the problem.
    Mr. Henderson. But Senator, I think you put your finger on 
one of the most vulnerable populations in this entire 
discussion and one that Congress and the American people, quite 
frankly, should be more concerned about than almost any. I mean 
these are people who have risked their lives in the national 
interest. These are people who have served their country by 
volunteering to serve in the military. They come out, they seek 
to better their lives and they enroll in for-profit 
institutions, and again, no slur intended for for-profit 
institutions in their entirety. But many of our returning 
veterans enroll in schools and are shamelessly exploited.
    First and foremost, the Pentagon has a responsibility to 
educate every veteran about to be discharged, on the options 
and risks that currently exist, regardless of what we would 
like to change, to make sure that these individuals are better 
prepared to meet the challenges of discharge. And certainly 
knowing more about the education systems which are making a 
decided effort to recruit among our veterans, is a necessary 
protection.
    Senator Hagan. Do you have any recommendations as to what 
needs to be done?
    Mr. Henderson. I certainly think, with respect to ensuring 
that students understand the risks that exist currently, the 
fact that they can't discharge these debts, the fact that the 
schools in which they seek to enroll should be accredited by 
the bodies that would allow them, for example, to take the bar 
or to pursue careers. I think public education from the 
Pentagon is among the first things that I would try to 
emphasize, in addition to changes on the regulations.
    And I would only leave you with this one reality. The truth 
is that these are for-profit institutions. They are 
participating in the capitalistic system, which we all support. 
But they also bring to bear disproportionate pressure to curb 
even modest regulation in an area where regulation does not 
exist. If you think it is going to be possible to create the 
bipartisan support necessary to regulate this institution, you 
have got to show me where the bipartisan support exists. I 
don't see it today. And I think that it is going to be very 
hard to generate it without a stronger public reaction.
    Senator Hagan. The Education Trust which is a research and 
advocacy group recently released a report titled ``Priced Out: 
How the Wrong Financial Aid Policies Hurt Low Income 
Students.'' And this report examined cost and graduation rates 
of nearly 1,200 4-year colleges and out of these 1,200 
institutions only 5 were determined to be serving low-income 
students well. And I am proud to say that one of these five 
schools was the University of North Carolina at Greensboro. I 
think it is notable that there were not any for-profit colleges 
represented on this list, the very schools, in many instances 
that claim to serve our most high-need, low-income students.
    How do we change the mentality of all institutions of 
higher education to ensure that college is a realistic option 
for the lowest income Americans and not just a select few?
    Miss Abernathy.
    Ms. Abernathy. There is no one single solution, but clearly 
we need to ensure that there are great incentives and rewards 
for enrolling low-income and disadvantaged students. And not 
just enrolling them, but successfully enrolling them and 
producing the kind of outcomes we want. The schools documented 
in that report demonstrate that it is possible and it doesn't 
necessarily require--the colleges that do it well are not 
inherently different than some of the other colleges that are 
not. They have made a decision, they have prioritized, they 
have made leadership and we need to make more of them.
    Mr. Henderson. I mean Senator again, not to belabor the 
point, I think that low-income students have special challenges 
that are borne out of the poverty and isolation that many of 
them have grown up with. And it certainly has affected the 
quality of education they have had in K through 12. Every 
student, whether from low-income or from upper income, is not 
ready for college, some students have to have additional 
preparation.
    Community colleges play a vitally important role in helping 
to prepare students for the rigors of college. They do a 
terrific job in providing, relatively speaking, low cost, high 
quality programs. And to the extent that students are induced 
or encouraged to pursue a particular course of action, 
community colleges, it seems to me, represent a very important 
and effective model to be used in this process.
    Senator Hagan. I agree with you totally. In North Carolina 
we have 58 community colleges, most of them within a 30-minute 
drive of any place.
    Mr. Henderson. They are extraordinary institutions. They, 
in many instances, are under-utilized and under-valued. And 
they can certainly play an important role in helping to prepare 
students from disadvantaged, low-income backgrounds into the 
rigors of quality public education.
    I would also say it is important to ensure that there are 
objective standards that are applied both to for-profit and 
nonprofit educational institutions to avoid student 
exploitation.
    And to the degree that there is a recognized fiduciary 
responsibility for those in the private sector, so too should 
there be a community standard that is used to evaluate the 
quality of institutions for the betterment of the national 
interest. And until the regulators who are involved in this 
area, whether it is the Department of Education, the Consumer 
Financial Protection Bureau or others help to establish that 
standard, we are still going to have a system with a patchwork 
of regulation which is dictated largely at the State level, 
with virtually no regulation at the Federal level of response 
to the problems we have talked about today.
    Senator Hagan. Thank you, Mr. Chairman.
    The Chairman. Senator, as I think I said earlier, you may 
not have been present when I said that, I said that I think 
that maybe this committee really ought to be looking at ways to 
assist and to promote community colleges to fill a niche, more 
than they are doing. Rather than to continue to provide 
unlimited amounts of money through the loan program or through 
Pell Grants for the for-profit schools, maybe more of that 
ought to be focused on the community colleges.
    Senator Hagan. Our community colleges in North Carolina are 
the place to go for workforce training, to get that 2-year 
degree. And all the colleges have agreements with the public 
university system that all of the class work will transfer to a 
4-year degree program.
    The Chairman. Could the Senator tell me, how many of those 
really have vigorous, comprehensive, online programs? It seems 
to me that is where the community colleges are not filling a 
niche, where they could be having online programs at 
substantially less cost, and probably better quality, because 
they would connect it through the university systems in the 
various States.
    Senator Hagan. I know some of them do and I could certainly 
get that information.
    The Chairman. I would like to work with you on that.
    Senator Hagan. OK.
    The Chairman. Because I think that this committee ought to 
be looking at how----
    Senator Hagan. I know our universities, our public 
universities have a host of online courses for the 4-year 
degree program, quite a few, and very reputable, very good, 
high quality.
    The Chairman. I am looking for----
    Senator Hagan. My son has actually taken some.
    The Chairman. I am looking for suggestions on how we do 
this with the community colleges around the country. Thank you, 
Senator Hagan.
    We will start another round. I wanted to again get to the 
issue I think that was raised by Senator Merkley and that is we 
always look at the 2- to 3-year default rates, but what are the 
lifetime--because he asked the question, what does this mean 
for the taxpayers of this country. I discussed that in my 
opening statement. Right now our best measure is that over 22 
percent of for-profit students default within 3 years, but we 
don't really know, overall, what happens after that.
    Let me just share some internal estimates by two separate 
schools. I think you have these in front of you, I especially 
say Miss Abernathy and Miss Baum, I believe you have these in 
front of you. This would be Document 11, Chart 8. There is no 
way you can see what that says there. But I believe you have 
that with you, if you look at Document 11. I tried to make sure 
we prepared all that for you. Some of it has been redacted, but 
it starts out, the first sentence says, ``Brian, per your 
request we have summarized below the default dollars by closed 
cohort year. Do you have that now? ''
    Ms. Abernathy. I am not sure that I do, but I appreciate--
oh, I do have it. Thank you.
    The Chairman. OK. All right. Thanks.
    Here is what it says, this is a document that was produced 
by Apollo. That is the parent company of the University of 
Phoenix. The document is an internal analysis of the lifetime 
default rates of the University of Phoenix and Western 
International University, WIU, where most of the students in 
the Axia associate degree program are enrolled.
    The document begins by explaining that the estimates are 
based on logic developed by the Texas Guarantee Agency that 
47.5 percent of defaults will occur in the first 3 years. It 
then goes on to estimate that the 10-year default rate, or what 
we might call the lifetime default rate, for WIU will 
potentially be 60.4 percent for 2005, 77.5 percent for 2006, 
55.8 percent for 2007.
    That is from the documents from Apollo. If you look at 
2005, 2006, 2007, at the last line there is a 10-year estimated 
default rate. That is what they are saying they are estimating. 
So it is not just 20-some percent, 55 to 77 percent for a 
lifetime default rate.
    If you will look at the next document, Document 12, there 
was a 2010 Kaplan estimate of the lifetime default rates for 
the students at Kaplan University, entering repayment in 2007 
is 64.4 percent. This includes the campus that Mr. Schmitt 
attended. Kaplan, as a whole, had an internal estimated default 
rate of 76.5 percent for that same period.

    [The information referred to can be found at 
www.harkin.senate.gov; click on: Issues & Agenda; then For-
Profit College Investigation; Hearings; hearing title; charts 
and/or documents.]

    The Chairman. So I guess what I would ask is what does this 
tell us about the effectiveness of a 2- or even 3-year cohort 
window at judging the real default rates? What does this mean 
for the 2 million students currently enrolled in for-profit 
institutions? In other words, there are too many of these 
students enrolled, if the lifetime default rate is 55 to 70 
percent or somewhere in that neighborhood, what does that mean 
for them and what does it mean for the taxpayers, to get to Mr. 
Merkley's question? Is the current practice of looking at only 
a 2- to 3-year window of default for Federal loans adequate to 
protect taxpayers?
    If you have default rates that high, it costs money to go 
after those to pay it. So some collection agency is making 
money, maybe you don't get 100 cents on the dollar, maybe you 
get 50 cents or 40 cents, but the collection agency gets a 
large share of that. And so that is a loss to the taxpayer. It 
is hard to estimate, but I just ask you, if you are looking at 
these 10-year default rates, what does that mean 10 years from 
now for that cohort that is in these schools right now and how 
much of a loss will that be on the taxpayers and shouldn't we 
be looking at longer window default rates than just 2 or 3 
years?
    Miss Abernathy.
    Ms. Abernathy. I mean a 76.5 percent default rate is 
astounding. Clearly our 2-year and even our 3-year cohort 
default rates are inadequate and these numbers demonstrate 
that. The Department of Education has released lifetime default 
rates for sectors, not for individual colleges, but for 
sectors. And for the for-profit career college sector they 
estimate that for this cohort that you are citing here, the 
lifetime default rate is 47 percent. So 50 percent of the 
students----
    The Chairman. That is all of the schools?
    Ms. Abernathy. All of the career colleges. Clearly at the 
college that Mr. Schmitt attended, the school itself knew that 
their rate was much, much higher. And how they continued to 
justify enrolling students knowing that 76 percent, three out 
of four students, were going to default, I am not certain. It 
seems unconscionable.
    It clearly indicates that we are not doing enough with our 
2-year and 3-year cohort default rates. And even our 3-year 
cohort default rates, which we know are a much better 
indicator, are not going to start to be enforced until 2014. 
That is 3 years from now, while schools will continue to 
receive money.
    From a taxpayer's perspective, many of the Federal loans 
will be collected, at great cost to the students and to the 
taxpayers, because of the collection costs, as you say. But, 
they will receive them, because the government has the power to 
garnish wages, seize tax refunds, actually even take social 
security payments if you still haven't paid off at that point. 
What it doesn't do though is recoup the Pell Grant dollars and 
the damage done to people's lives.
    And so the cost is really--it just seems unconscionable. So 
clearly more needs to be done to hold schools accountable. And 
the documents here that really clearly demonstrate that schools 
are delaying defaults until after the school is no longer held 
accountable for them, rather than preventing the defaults from 
occurring.
    Ms. Baum. I think it is clear that we need to look at 
default rates for longer periods of time. And I agree with 
everything that Miss Abernathy said. We also can't forget about 
the short-term default rates, because we need to do something 
quickly when we see these things happening. So you wouldn't 
want to have to wait until 10 years after students had 
graduated to do something about it.
    I would also like to reiterate the point that I made 
before, which is that there are ways, as we see, to manage 
default rates, income-based repayment will increasingly be one 
of those ways. So looking at loan repayment and not just 
default is terrifically important.
    The Chairman. Also, I just want to add, but my time is 
running over, I will yield, that we also have internal 
documents that show that a high percentage of these lifetime 
defaults are students who did not complete the program. They 
took courses and then they dropped out. So they don't have a 
diploma, they have a debt and they have used Pell Grants to go 
to these institutions. And yet they have no degree whatsoever, 
they have nothing to show for it. But the for-profit school, 
they have the Pell Grants and they have the guaranteed loans. 
The school doesn't have to give any of that money back, they 
have the money.
    I think something that needs to be looked at is how many of 
these are students--it gets back to something that we uncovered 
a long time ago in our investigations, that is the churning of 
students, the churning of students that takes place in these 
for-profit schools. If they just come in, they take a few 
courses--and I really do think that this is what led--and 
again, I compliment Kaplan for this, publicly, for instituting 
that 5-week thing where they can come in and test it out 
without any Pell Grants, without any student loans. I think 
that is a big step in the right direction. I think looking at 
that probably compelled them to start looking at instituting 
that kind of a reform.
    Ms. Baum. I think that is right. I would also like to point 
out one thing that I don't think has been mentioned yet today, 
which is that one of the dangers is not just the risk, the 
terrible risk to the taxpayers and the students, that we have 
discussed, but also this whole student loan program and student 
debt is getting a bad name, because of these terrible problems 
people face. Students need to borrow to finance their education 
and many students are being deprived of the opportunity of an 
education because they are terrified to borrow because they 
hear these stories. It is another reason to prevent these 
stories from occurring.
    The Chairman. Yes, thank you.
    Senator Blumenthal.
    Senator Blumenthal. Yes, thank you, Mr. Chairman. I would 
like to join you in the effort to provide more support for 
community colleges that you and Senator Hagan were discussing 
earlier. I went on Friday to the graduation ceremony for one of 
our community colleges in the State of Connecticut, Asnuntuck, 
and 92 percent of their graduates have jobs coming out of 
school, 92 percent. So the contrast here is very vivid and 
striking. And I would like to join you in that initiative.
    And second, Senator Franken's mention that there are a lot 
of good guys, as I said earlier, in the for-profit college 
industry and we need to encourage and support them as well and 
commend schools like Kaplan when they improve their services.
    But I would like to come back to the issue that we have 
talked about a little bit which is the veterans. And Mr. 
Henderson, not only the Department of Defense but also the 
Veterans Administration has an obligation here. And very often 
the transition from active duty to veterans status is not 
accompanied by the kind of education that is necessary.
    I introduced a bill a couple of weeks ago, Honoring all 
Veterans Act, which provides for more transitional services. 
And the Consumer Financial Protection Board actually has a 
unit, headed by Holly Petraeus, related to General Petraeus by 
marriage, and they are beginning this kind of work. So I think 
the more ideas we can get from you to improve protection of 
veterans, particularly because they are an especially 
vulnerable population. So any ideas you have now or going 
forward--Ms. Abernathy also mentioned that issue, alluded to it 
in her last answer to me. I would welcome them now or in the 
future.
    Mr. Henderson. Senator Blumenthal, thank you for your 
question. Just as an aside, Mrs. Petraeus is someone that I 
have worked with in the context of attempting to resolve the 
foreclosure crisis that is affecting many homeowners in the 
country today and most especially there are concerns about the 
status of veterans who often, through no fault of their own, 
find that they are--and those in active duty, through no fault 
of their own, find that they are holding notes to homes that 
are, as the realtors say, ``under water,'' meaning that they 
owe more on their note than the home is worth.
    In the case of active duty service people, they sometimes 
will get orders of reassignment which will then force them to 
make a stark choice about their home, either to abandon the 
home because they certainly can't sell it, the bank won't take 
it back, they can't rent it because they can't make enough on 
the home. And were they to foreclose they would compromise 
their security clearance, for those that have them.
    Mrs. Petraeus has been, I thought, a terrific help in 
trying to advance, very quickly, efforts by banks and service 
lenders to respond to that significant problem. And she has, in 
the effort, tremendous support from the civil and human rights 
committee.
    Senator Blumenthal. I wholeheartedly agree with you, by the 
way.
    Mr. Henderson. Yes, I think she is doing a terrific job.
    I think that as a country we owe a higher standard of care 
to the men and women who have served their country and who now 
seek to integrate themselves back into our society and 
education options like those that are being discussed today are 
being presented to them as among the more attractive ways of 
using their GI benefits and the other resources that they have 
available to them.
    I think it is unconscionable that they do not get the 
advice and counseling, as a community, that they need and 
deserve. So just as now we are turning our attention to the 
problem of homeless veterans, which is a significant issue in 
many communities that has largely gone unrecognized, even 
though it is right before our very eyes, do we have a 
responsibility to supervise this area of our work with respect 
to returning veterans. I think we can do better without 
necessarily having to enact new laws. I think more vigorous 
enforcement, a greater willingness to use the education 
networks that we have available to us and a commitment to 
prevent the exploitation of returning veterans, because simply 
as a moral standard we should not permit that to happen and I 
think if we made that declaration we could do better with the 
existing system now. So that is what I hope comes out of this 
hearing.
    Ms. Abernathy. I certainly agree. We need to provide much 
more information to our veterans and active duty service 
members. On the other hand, currently the DOD and Veterans 
Administration aren't even collecting some of the data that 
would need to be provided to them. So we need to collect it and 
we need to provide it.
    Having said that, information alone is not enough. We don't 
just provide information about salmonella and eggs, we take 
them off the market. Likewise, we don't tell people there is 
lead in some toys, we take them off the market. So if there is 
evidence that a program is this bad, we should not be 
subsidizing. In this case it is not even a market where a 
product is being offered, we as taxpayers are subsidizing and 
providing the funding for these programs.
    So there is an even higher bar, both because of who is 
consuming them, our veterans, but also because we as taxpayers 
are funding these services. And so we have every right to say 
there is a minimum level of quality that we expect and draw the 
line. And then provide information about those programs that 
are all above that line. But there is no reason why we should 
be subsidizing programs we know are damaging and harmful.
    Senator Blumenthal. I think you make a good point, which is 
to distinguish a truly unacceptably, substandard educational 
institution from a worthwhile institution that may be providing 
loans to students that can't be repaid because of factors that 
can be controlled. In other words, if the education is 
substandard, if it fails to meet minimum quality criteria, it 
shouldn't be in business. And that is the function of the 
accreditation process, and you alluded to it earlier and that 
applies no matter how students are financed to go there.
    But I do want to conclude because my time has expired, just 
by saying that the statements that you all have made, 
particularly so far as they concern veterans, are really very 
important and pertinent and they really require solutions that 
should be bipartisan solutions. And so to come back to sort of 
what is the elephant in the room, I hope that our Republican 
colleagues will join us in seeking those kinds of solutions, 
because they truly have to be bipartisan and should be.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    I just have one other thing I wanted to go over with the 
panel before we bring up our second panel. And that had to do 
with the management of cohort default rates. Do you have the 
second chart that I had up before? Yes, that one. I don't know 
if you have another one down there or not.
    But basically, I had mentioned in my opening statement that 
schools manage its cohort default rates, or CDR's as they are 
called, and sometimes they hire outside contractors to do that. 
This chart here shows what default management means for 
students--there are four schools represented there.
    Ashford, DeVry, ITT and Strayer, all four employed GRC, it 
is a subsidiary of Sallie Mae, to contact students who are late 
making payments and try to fix that before they default. But 
this chart shows that the vast majority of the students that 
are cured, as they call it, by GRC, don't actually start making 
loan payments but are instead entered into deferment or 
forbearance.
    We know that is a good thing from the perspective of the 
schools. What does it mean for the students? Miss Abernathy, 
could you address yourself to that? What does that mean when 
they go into forbearance? What does that mean for the schools 
and the students?
    Ms. Abernathy. For the schools it means they are avoiding 
default. For the borrower it means their balance is increasing.
    The Chairman. And that is important because the law says 
that they cannot have a, what, a 3-year running average of over 
25 percent?
    Ms. Abernathy. Currently 25 percent. It will go up to 30 
percent.
    The Chairman. So when they go up to 25 percent, they get 
near that, they want to get more students into----
    Ms. Abernathy. Out of default.
    The Chairman. Out.
    Ms. Abernathy. Not in default.
    The Chairman. Right. And that is forbearance?
    Ms. Abernathy. That is one form. Repayment is another. And 
ideally we want students repaying their loans, not in 
forbearance where their loan balances are increasing. And 
putting students willy-nilly into forbearance when it is not in 
their interest to be in forbearance, just increases the 
likelihood of default, because the balance is increasing during 
the time that they are in forbearance.
    The Chairman. That is happening to Mr. Schmitt, right? Yes, 
OK.
    Mr. Schmitt. That is correct.
    Ms. Abernathy. And I want to follow up on the comment on 
income-based repayment, because my organization was one of the 
champions of income-based repayment and we strongly believe 
that more needs to be done to let borrowers know that it is 
available and will allow them to repay their loans as a share 
of their income so that their Federal loan payments at least 
will be manageable.
    Having said that, income-based repayment is intended to be 
a benefit for borrowers, not a shelter for schools. Just in the 
same way that mortgage or homeowner's insurance is intended to 
be a benefit for homeowners not an excuse for builders to build 
substandard homes. It is there for borrowers and so again what 
we are seeing here is an interest just in putting students into 
forbearance and not into helping them ensure that they can 
repay or that they are in repayment.
    The gainful employment regulation that was just finalized 
may help address this to some extent, because one of the 
factors it looks at is the share of students who are in 
repayment. So if schools are putting all of their students into 
forbearance, that will affect their repayment rate. Having said 
that, the measure doesn't go into full effect until 2015 and 
the standards are so modest that even a school will still be 
able to do this kind of tactic as a way to manage their cohort 
default rates, which simply delays defaults rather than 
prevents them. And that the gainful employment regulation in 
and of itself won't cure this.
    What these documents tell me or suggest to me is that we do 
need to re-look at our forbearance policies to change our 
policies to prevent the abuse of forbearance where it is used 
to--as a shelter for schools rather than a benefit for 
borrowers.
    The Chairman. Miss Baum, did you have anything to add to 
that at all, on this whole issue? These companies really are 
hiring outside agencies to contact students to put them in 
forbearance because they are managing that CDR. You know?
    Ms. Baum. It is a very complicated question, because of 
course designing a program that will help students by relieving 
their obligation to pay, by definition prevents them from 
defaulting and helps the schools. So I think that--I mean we 
want loan counseling, we would rather, for an individual who 
cannot pay, to go into one of these programs. But I think it 
requires looking at who is actually going into these programs 
and how are these programs designed.
    So income-based repayment, for example, for too many 
students their balances will also continue to increase. If 
students really can't pay, if they really are in a situation 
where they are not going to be able to pay long-term, then we 
need to prevent those balances from increasing so that we 
protect students who are put into these programs. Obviously, we 
need to get measures that cannot be so easily manipulated by 
the institutions.
    The Chairman. All right. Miss Abernathy, you had something 
to add to that?
    Ms. Abernathy. Yes. It is just my understanding that some 
of the documents that you are releasing indicate that the 
schools have been paying people up to a thousand dollars a 
student to get the students into forbearance. And forbearance 
is the only option those people are being paid to put the 
students in----
    The Chairman. Why?
    Ms. Abernathy [continuing]. So they are not counseling the 
student on what is in their best interest, they are simply paid 
a thousand dollars a head, they really are bounty hunters, 
which Senator Mikulski, at a previous hearing referred to them 
as bounty hunters and she was more right than I think anyone 
realized, but the sole direction they are being given is put 
them in forbearance, which only increases their loan balance 
and increases their chances of default.
    The Chairman. Why is the school paying that kind of money 
to do that?
    Ms. Abernathy. Clearly they are making enough profit off of 
these loans and grants and students that they can afford to 
spend a thousand dollars putting students into forbearance.
    The Chairman. So that they don't go over the 25 percent? Is 
that----
    Ms. Abernathy. Correct.
    The Chairman. That is? Yes. Interesting.
    This has been most helpful. I thank you all very, very much 
and for being here and for your testimonies and for helping us 
to think this thing through.
    I would close this panel by just saying that, yes, we do 
need better regulations, I think. We need better structures in 
place. I am not certain that regulations can do it all, 
regulations can come and go. I am just thinking that there must 
be some legislative type of an approach to this that is longer 
lasting, more enduring that people know will last more than 
just one administration to the next or something like that. And 
of course this committee is going to be consulting with members 
of the committee and others to develop that type of legislation 
that will build on the gainful employment modest step that the 
Administration has taken.
    But I agree with you, Mr. Henderson, the most I have looked 
at this over the last year and I say again publicly, when we 
started on this I had no idea what was going on. I had thought 
for-profit schools were fine, what is the problem? Until we got 
into it and began to see what was happening.
    When someone can start a school from scratch in 2005 with 
300 students and today they have over 80,000 students and the 
profit went from $3 million to $216 million and the CEO is 
making $20.5 million a year, and they have a huge default rate, 
you have got to start asking questions. I hate to paint it with 
a broad brush. Because there are some for-profit schools--and 
you know what we have looked at, I would say this also that it 
tends to be--the for-profit schools that tend to be doing, at 
least from my vantage point, from what I have seen, doing a 
good job, being really supportive of their students, are--well 
you might call the mom and pops--the ones that are kind of 
smaller in nature, they have been around for some time, they 
usually have a course of study for students, it is usually one, 
you can't go there to get a degree in accounting or pre-law or 
something like that, they are usually geared toward some 
occupation, and by and large they have been pretty darn good. 
Not to say they are all good, but they happen. That strikes me 
as interesting.
    And that what Sam Nunn did in 1992 with the hearings he 
held and the legislation we passed, which was then subsequently 
overcome by rules and regulations, I think was pointed in the 
right direction. And at that time it was 85/15. Then it went to 
90/10 and the industry wanted to push for 95/5. And now we have 
the situation with the military where that is counted on the 10 
side, not on the 90 side, but it is still the same taxpayers' 
money. And Mr. Henderson, you are absolutely right, it is 
just--what they are doing to the GI's--and I think Senator 
Carper brought out in his hearing the fact that the Department 
of Defense isn't even tracking this. They have no idea.
    It seems to me they have a responsibility to these young 
GI's, men and women, to give them good guidance and good 
counseling on what they are going to use their GI bill benefits 
for, because you only get it one time, you get it once. And to 
follow and track them, to know what is happening to these young 
GI's. That is another thing I think that we are going to be 
looking at. That is something that I will be working with 
Senator Carper on in that regard.
    Thank you all very, very much. You have added greatly to 
this deliberation. Appreciate you being here. Thank you.
    Now we will call our second panel.
    The second panel we have the Honorable Martha Kanter, Under 
Secretary at the U.S. Department of Education. Secretary Kanter 
oversees the Administration's goal to have the highest 
proportion of college graduates in the world over the next 
decade, by focusing on ways to provide students more access to 
quality postsecondary educational opportunities and help them 
complete it.
    Before being confirmed by the U.S. Senate in June 2009, 
Under Secretary Kanter was chancellor of the Foothill-De Anza 
Community College District, and we just talked a lot about 
community colleges, in Los Altos Hills, CA, one of the largest 
community college districts in the country.
    She also served as president of De Anza College, vice 
president of instruction and student services at San Jose City 
College where she also established the first program for 
students with learning disabilities. And as an alternative high 
school teacher in Massachusetts and New York. Dr. Kanter is the 
first community college leader to serve as under secretary.
    We have your testimony. It will be made a part of the 
record in its entirety, Ms. Kanter. And if you could sum up 
your testimony in 5 to 7 minutes, we would appreciate it.

STATEMENT OF THE HONORABLE MARTHA KANTER, UNDER SECRETARY U.S. 
            DEPARTMENT OF EDUCATION, WASHINGTON, DC

    Ms. Kanter. Thank you, Mr. Chairman. Mr. Chairman and 
Senator Bennet, I am here on behalf of Education Secretary Arne 
Duncan who was unable to come this morning because he is 
recuperating from a back injury.
    We are here to talk about student loans, loans that enable 
access to higher education. Without them, as we heard this 
morning, millions of Americans would not be able to afford a 
college education. College is an investment that yields 
significant returns over a lifetime for individuals, for the 
tax base of our Nation and most importantly for our Nation's 
social and economic vitality and security.
    Census data shows that workers with bachelors degrees earn 
70 percent more than a person with only a high school diploma. 
College graduates are half as likely to be unemployed than 
those with only a high school diploma. And more than two-thirds 
of our Nation's jobs are going to require a postsecondary 
education.
    Education is at the heart of the American promise for a 
nation built by immigrants and sustained by the energy and 
ideas of people from all across the world. Education remains 
the gateway to citizenship, civic engagement and prosperity.
    Our goal in the Administration is to have, as you said, the 
highest percentage of college-educated workers in the world by 
the end of the decade. A generation ago we were first in the 
world, today we are ninth. To achieve the 2020 goal, thereby 
increasing our global competitiveness, we need every segment of 
the educational sector to boost productivity and achievement 
from early learning through higher education.
    Today one in four young people don't graduate from high 
school. Of those that do, about two-thirds enroll in college 
and large numbers, as we heard, never finish. Depending on 
whether you look at private, public or for-profit 4-year or 2-
year institutions. We believe it is a national crisis that on 
average half of America's undergraduates fail to graduate in 6 
years. This is the reason why our college access, quality and 
completion agenda is such a high priority for the department.
    Meanwhile, tuitions keep rising as fiscally challenged 
States cut back on education spending and as institutions 
struggle to cover the cost of a quality education. Two-thirds 
of American college students today graduate with student loan 
debt, averaging about $23,000, a more than 25 percent increase 
since 2004. Simply stated, too many students and their families 
are challenged to repay their loans, default rates are climbing 
and are now in the range of 15 percent for all schools and 45 
percent for for-profit schools.
    As a former community college instructor, dean and 
president, I did everything over the years to help students 
land part-time jobs, get Pell Grants, scholarships and work 
study to minimize the impact of the loans that they would have 
to take. I didn't want to see as many as we could get that loan 
indebtedness that you heard about this morning.
    But I knew that eventually many of them would have to take 
out loans as they continued their education and training 
throughout their lives. Student loans are a powerful tool for 
bringing higher education within reach, but like any tool, they 
can be misused, leaving students and taxpayers with few 
options.
    To address these challenges our department published the 
gainful employment and 13 other program integrity rules this 
year, challenging career college programs, both for-profit and 
nonprofit, to meet new standards over the next 4 years to lower 
default rates and ensure that the education they are providing 
leads to real jobs. The rules were enacted to respond to the 
escalating default rates and poor graduation rates of too many 
Americans and the marketing, lending and compensation practices 
that became increasingly prevalent in the career college 
programs, especially in the for-profit sector.
    Our research showed that 92 percent of students at for-
profit institutions borrowed to finance their education in 
2007-8. By contrast, the sector with the next highest borrowing 
rate was at 4-year private, nonprofit institutions where 59 
percent of students borrowed. At public 2- and 4-year 
institutions, just 13 percent and 46 percent respectively, of 
students, borrowed. On balance the gainful employment 
regulations require each particular to demonstrate that at 
least 35 percent of its students pay their loans and the debt 
burdens for typical students don't far exceed the 
recommendations we receive from our experts.
    A number of the for-profit colleges have already accepted 
the challenge and have begun taking steps to improve their 
programs. Some are offering, as we heard, tuition-free trial 
periods to give students an opportunity to decide if they 
really want to enroll before taking on the debt. And toward 
this end, today we are releasing a guidance letter to encourage 
these trial periods in more institutions and announcing a new 
pilot program inviting applications that will give institutions 
new tools to reduce student debt.
    The Department is committed to striking a balance that is 
going to draw upon the strengths of the sector, the for-profit 
sector specifically, while avoiding its pitfalls, protecting 
students and ensuring that Federal dollars are well spent.
    But let me be perfectly clear about one thing. Our gainful 
employment rule will do nothing to hurt the educational 
opportunities for low-income students and students of color, 
just the opposite is true. In the years ahead, the 
disadvantaged students that are disproportionately likely to 
enroll in these programs are going to see higher graduation 
rates, lower default rates and programs that provide better 
value in the labor market. We shouldn't be saddling any 
students with debt they won't be able to repay and that is no 
less true when students come from disadvantaged backgrounds. 
Only 1 percent of the variation in repayment rates is explained 
by the percent of the student body who are racial or ethnic 
minorities.
    Our written testimony reviewed all of our efforts to keep 
colleges cost affordable for young people, for working 
Americans, for displaced workers and for adults who never had 
the chance, so I won't go through them in detail right now, but 
I will be available to answer your questions.
    Let me close by saying that America faces a stark choice in 
this era of growing Federal deficit and shrinking State and 
local revenues. Either we come together as a nation and meet 
this challenge collectively, to educate our way to a better, 
stronger and more productive economy, or we watch our 
competitive advantage in the global economy slowly erode.
    We are grateful to have a strong partner in Congress, 
thanks to your generosity and your vision and commitment of 
leaders here and on both sides of the aisle, we have to have an 
American system that will remain strong and vibrant. And at 
this point we are still the envy of the world and we want to 
keep it that way.
    So let me thank you for the opportunity and I am available 
to answer your questions.
    [The prepared statement of Ms. Kanter follows:]
                Prepared Statement of Hon. Martha Kanter
    Mr. Chairman, Ranking Member Enzi and members of the committee, 
thank you for the opportunity to appear before you today to discuss the 
issue of student loan debt.
    The President and I believe that postsecondary education should be 
within the reach of every American. As you know, this belief transpired 
into a goal for America to once again have the highest proportion of 
college graduates in the world by 2020. To be clear, this goal is 
founded on more than a belief. Rather, it is a strategy for 
competitiveness, growth, and shared prosperity that is deeply rooted in 
the economic well-being of our country.
    For students, too, college remains an excellent investment. College 
graduates with an associate's degree earn at least 30 percent more than 
those who attended only high school, and they are half as likely to be 
unemployed. In June 2010 Georgetown University's Center on Education 
and the Workforce released a report titled ``Projections of Jobs and 
Education Requirements Through 2018.'' The report says that nearly two-
thirds of the job vacancies between 2008-18 will require some 
postsecondary education.
    And, of course, education has important civic benefits, helping 
students broaden their horizons and engage in their communities and our 
democracy.
    Student loans are a powerful tool for bringing higher education 
within reach. Like any tool, they can be misused or even risky, and 
some students are struggling to repay their loans. Yet it holds true 
that for most students, borrowing to pay for college will be one of the 
best investments of a lifetime. As such, the Federal student loan 
program continues to be a pillar of our college affordability efforts.
    There remains concern, however, that students are taking on debt 
they cannot afford in order to attend education programs that leave 
them with poor employment prospects. Student loan defaults are on the 
rise, particularly in the for-profit sector and particularly for 
students who have not completed certificate or degree programs. We have 
a responsibility to make sure that all students have the critical 
information and appropriate protections to make smart financial 
decisions about postsecondary education.
    The Administration has made a landmark investment in postsecondary 
education and is taking new steps to make student loans more affordable 
and strengthen the American system of higher education. I would like to 
describe those efforts before addressing for-profit colleges 
specifically.
                               background
    A little more than a year ago, with the leadership of this 
committee, Congress enacted the most significant changes to the student 
aid programs since their creation four decades ago. Due to student loan 
reform, all new Federal student loans are made through the Direct Loan 
program--using low-cost capital from the Treasury and delivered and 
serviced through student loan companies under performance-based 
contracts. These reforms are estimated to save taxpayers over $60 
billion over the next decade, allowing for increased investments in 
Pell Grants and community colleges, and making student loans more 
affordable, while still reducing the deficit.
    The student loan programs have grown significantly in recent years. 
Currently, 36.1 million Americans hold over $740 billion in outstanding 
Federal student loans. When combined with outstanding private education 
loans, student loan debt is now greater than the total volume of credit 
card debt. This year, the Department expects to make $116 billion in 
new student loans. The program's growth is due to the down-turned 
economy coupled with growing student enrollment, changes Congress made 
to expand student loan eligibility, and increased prices of 
postsecondary education--particularly outside of the community college 
sector.
    There remains a robust market in private student loans--including 
loans made by schools themselves--outside of the government system of 
student lending. Private loans totaled $8.5 billion this year, 
according to the College Board. While these loans are necessary for 
some students to afford the high cost of tuition--such as students in 
very expensive programs or those students who are not eligible for 
Federal loans--they typically carry much higher, interest rates and 
lack important borrower protections available under Federal student 
loan programs such as discharge for disability of death, and affordable 
repayment options such as income-based repayment.
    The most recent data from the Department's National Postsecondary 
Student Aid Study (NPSAS) shows that in 2008, two-thirds of students 
graduating from 4-year colleges and universities had student loan debt. 
At the same time, average debt levels for graduating seniors with 
student loans rose to $23,100 in 2008--a 24 percent increase from 2004. 
Still, over half of all associate degree recipients and one-third of 
all bachelor's degree recipients did not have any educational debt.
    In most cases, loans are excellent investments. Workers with a 4-
year college degree earn 70 percent more than those with only a high 
school diploma, and are typically only half as likely to be unemployed. 
Workers with 2-year degrees earn 30 percent more.
    But there is evidence that, for a fraction of students, student 
loan debts are not affordable. A recent survey conducted by the Pew 
Research Center and the Chronicle of Higher Education shows that an 
overwhelming majority of college graduates say that college was a good 
investment for them personally. But about a quarter of students 
surveyed said their loans have affected their career choices adversely, 
and a quarter also said that college loans have made it harder to buy a 
home.
    Default rates are climbing as well. The projected 2009 2-year 
cohort default rate is now 8.9 percent, up 27 percent from only 2 years 
ago. Among former students at for-profit colleges, the projected 2009 
data indicates 15.2 percent are defaulting within 2 years of their 
first scheduled payment. (see ``Attachment A'')
    The Department works very hard to protect taxpayers from the costs 
of defaulted student loans, and appropriately so. We eventually collect 
about 85 cents for every dollar that enters default, on a present-value 
basis, including anticipated collections from charges to students for 
costs of collecting defaulted student loans.
    But for students, the consequences of default can be severe. 
Collection costs can be added to the size of the loan. In addition, 
third-party debt collectors, tax and Federal benefit offsets, and a 
variety of other tools can be used to collect the loan. Only very 
rarely can defaulted student loans be discharged in bankruptcy. As a 
result, we need to be careful to make sure that students are borrowing 
appropriate amounts and using the tools that are available to help 
students better manage their educational debts.
           striking the right balance on for-profit colleges
    As indicated by the fact that Chairman Harkin is holding this 
hearing, student debt is a particular concern for students at for-
profit institutions.
    For-profit career colleges can be helpful partners in reaching the 
President's goal of once again leading the world with the highest 
proportion of college graduates. Many of them do a great job preparing 
students for work. As a sector, for-profit institutions have done a lot 
to introduce important technological innovations, increase access to 
higher education, and create new career opportunities for millions of 
Americans--especially for low income and working adults.
    At the same time, student debt is particularly prevalent at for-
profit schools. According to NPSAS, 92 percent of students at for-
profit institutions borrowed to finance their education in 2007-8. By 
contrast, the sector with the next highest borrowing rate was at 4-year 
private nonprofit institutions, where 59 percent of students borrowed. 
At public 2- and 4-year institutions, just 13 percent and 46 percent, 
respectively, of students borrowed.
    Not only do students at for-profit institutions borrow at a greater 
rate than their peers, on average, the amount they borrow is greater 
than all but one sector. Students at for-profit institutions on average 
borrowed $8,100, compared to $6,600 for students at public 4-year 
institutions and $4,100 for students at public 2-year institutions. 
Students attending private nonprofit 4-year institutions borrowed 
$9,100 for programs that are typically much longer than proprietary 
programs.
    Burdened with higher borrowing rates and larger debt levels, 
borrowers at for-profit institutions have worse repayment outcomes than 
their peers at other institutions. In the 2008 cohort, students at for-
profit institutions represented just 12 percent of students, but they 
accounted for 26 percent of borrowers and over 46 percent of students 
who defaulted within 3 years of leaving school. In fact, for-profit 
institutions produced a larger share of students who defaulted on their 
loans than the entire public sector of higher education combined.
    The Department is committed to striking a balance that will draw 
upon the strengths of the for-profit sector while avoiding its 
pitfalls, protecting students, and ensuring that Federal dollars are 
well spent. As you may know, over the past 2 years the Department has 
taken a series of efforts to strengthen program rules, such as 
prohibiting recruiters from being paid based upon the number of 
students they recruit.
    With the help of over 90,000 public comments, last week we released 
final regulations defining the term ``gainful employment,'' setting 
requirements for eligibility for occupational training programs. While 
the regulations apply to programs at all types of institutions, for-
profit programs are most likely to leave their students with 
unaffordable debts and poor employment prospects.
    Our final regulations require each program to demonstrate that at 
least 35 percent of its students are paying their loans and that debt 
burdens for typical students do not far exceed expert recommendations. 
By setting a minimum standard of expectation, we hope to improve the 
lowest performing programs; those who can't or won't improve will lose 
access to Federal loans.
    I want to be perfectly clear about one thing: This rule will do 
nothing to hurt the educational opportunities for low-income students 
and students of color. Just the opposite is true. The disadvantaged 
students that are disproportionately likely to enroll in these programs 
will see higher graduation rates, lower default rates, and programs 
that provide better value in the labor market. They will also be able 
to make more informed choices. Our final rule equips students and their 
families with critical information about gainful employment programs by 
requiring disclosure of program costs, completion, placement, and loan 
repayment rates. Disclosures are important, but do not erase the need 
for minimum safeguards to ensure that students are well served by their 
educational institutions and taxpayers are protected from abuse of the 
student aid programs.
    I reject the premise that we need to lower our standards for 
programs that enroll large numbers of disadvantaged students. We should 
not be saddling any students with debts they won't be able to repay, 
and that's no less true when students come from disadvantaged 
backgrounds. Nor is it true that some types of students won't repay 
their loans. We found that only 1 percent of the variation in repayment 
rates is explained by the percentage of the student body who are racial 
or ethnic minorities.
    At the end of the day, we believe that because industry will 
quickly adapt to the regulations and clean its own house, very few 
programs will lose title IV funds. In fact it is already happening, 
with some segments of the career college industry taking meaningful 
steps by closing down low performing programs, reducing student debt, 
offering free trial periods, and reforming recruiting practices.
    Today, I am directing my staff to take two new steps to help 
institutions rise to these new standards. First, we will release 
guidance providing a blueprint for institutions that want to offer free 
trial periods for new students mirroring approaches that some in the 
for-profit industry have already pioneered. And in the coming days, we 
will invite applications for a pilot project giving institutions new 
tools to reduce student debt. We will let institutions reduce the size 
of student loans, while carefully measuring the impact on students' 
access and success, to see if it's possible to design lower cost 
programs.
    Together with our new regulations, these steps will help ensure 
that students at these schools are getting what they pay for: solid 
preparation for a good job. We're giving career colleges every 
opportunity to reform themselves but we're not letting them off the 
hook, because too many vulnerable students are being hurt.
    This is a significant step forward, but only one example of how we 
are working tirelessly to ensure that students of every age and 
background succeed in college and career.
                  improving access to need-based funds
    In the past 2 years, Congress and the Administration have worked 
together to make more aid available to college students. First, we have 
significantly expanded our investment in Pell Grants. Since 2008, the 
maximum award has grown by $819 and the number of recipients has grown 
by 50 percent, from 6.2 million to 9.4 million. These investments were 
made possible, in part, by reforming the student loan programs and 
eliminating unnecessary bank subsidies in the guaranteed student loan 
program. As you know, the Pell grant program is in peril due to rising 
program costs and because, in past years, one-time funding was used as 
a temporary solution and shortfalls have accumulated. In order to 
continue investments in higher education that are critical to America's 
future, while also choosing to maintain fiscal discipline, the 
Administration remains committed to an approach that will maintain the 
maximum award at $5,550 and put Pell Grants on a sound financial 
footing for future years.
    There is also evidence that the complexity of the student aid 
application--known as the FAFSA--and lack of awareness of aid 
eligibility have been obstacles to students entering college and 
receiving aid. In 2008, more than 2 million students who were eligible 
for Pell Grants failed to apply for Federal student aid, of which over 
60 percent said they didn't think they were eligible. One pilot program 
found that providing modest assistance in filling out the FAFSA boosted 
college enrollment among low-income high school graduates by 7 
percentage points.
    Over the past 2 years, the Department has also used online 
technology to enable students and parents to automatically skip 
unnecessary questions and to electronically retrieve their tax 
information directly from the IRS, making the FAFSA both easier to 
complete and more accurate. We have proposed legislation to eliminate 
20 questions that require the applicant to obtain information that is 
unavailable from the IRS, so that a student could apply for aid on our 
Web site with only basic information such as his or her address and 
college choices. We are also working to provide FAFSA assistance to 
potential college students by working with school systems, high 
schools, and Volunteer Income Tax Assistance (VITA) sites across the 
country. In addition to its support for investments in Pell Grants, the 
Administration worked with Congress to reauthorize the American 
Opportunity Tax Credit to help offset higher education costs for 
students and families. For the first time, the credit is now refundable 
to families who earn too little to pay income taxes. The credit is now 
worth $10,000 for 4 years of college.
    All told, Federal funds available through Pell Grants and the 
American Opportunity Tax Credit have grown by approximately $25 billion 
a year. Last year, the College Board released a study that revealed 
that the net price of tuition--the cost after grant aid and tax 
benefits--is actually lower than it was 5 years ago. We are 
tremendously proud of our role in that accomplishment.
                       student loan affordability
    With your help, Mr. Chairman, we have also expanded the loan 
repayment options that are available for borrowers to help ensure that 
students are able to pursue careers about which they are truly 
passionate, without taking on an unmanageable student loan debt. 
Towards this end, the income-based repayment plan is available for all 
eligible student loan borrowers. This plan ensures that payments on 
Federal student loans are never more than 15 percent of a borrower's 
income after a basic living allowance is taken into consideration. In 
addition, under the Public Service Loan Forgiveness Program, the 
Federal Government will now forgive a borrower's outstanding loan 
balance after 10 years of successful repayment if the borrower serves 
as a teacher, nurse, or other public service professional, and 25 years 
for all others. This is a good deal for students today and will be a 
better deal in 2014 when the income cap will be lowered to 10 percent 
of a borrower's income and remaining debt will be forgiven in 10 years 
for those in public service and 20 years for all others.
    To illustrate just how important income-based repayment is for 
borrowers, consider the following example. Imagine an out-of-school 
borrower making $30,000 a year, but saddled with $40,000 in Federal 
student loan debt. Payments for that borrower would be:

     $460.32 per month under the standard 10-year repayment 
plan; or
     $277.63 per month under an extended 25-year repayment 
plan; or
     $174.94 per month under our income-based repayment plan.

    Beginning in 2014, a new borrower with similar income and debt 
would pay only $114.63 per month. Income-Based Repayment is the 
equivalent to a very sizable monthly tax cut for borrowers, again paid 
for by reducing unnecessary bank subsidies that had been present in our 
Federal student loan system. The fiscal year 2012 Budget Resolution 
passed by the House (H. Con. Res. 34) proposes to repeal the provision 
of last year's student loan reform including funding for the income-
based repayment plan. We must work together to protect this important 
safeguard for student loan borrowers, and ensure that student loan 
borrowers, especially those committed to careers in public service, 
benefit from a stronger plan in 2014. The Administration also has 
proposed that the debt forgiven through Income-Based Repayment should 
not be taxed.
    In addition to ensuring that loans are affordable, we need to make 
sure that they are sufficiently and appropriately available. While 
there are well-founded concerns about the increasing debt levels among 
some borrowers, it is also true that current annual loan limits in the 
Federal student loan programs are inadequate for certain students. The 
existing Perkins Loan Program provides students with additional low-
interest loans, but the program is too small, inefficient, and 
inequitably structured to help many students. For these reasons, this 
Administration supports creating an expanded, modernized Perkins Loan 
program that will provide $8.5 billion in new loan volume annually--
8\1/2\ times the current Perkins volume--and, when fully implemented, 
would reach over a total of 3 million students at as many as 2,700 
additional post-secondary education institutions.
    As important as grants, tax benefits, and loans are, it is 
important to keep in mind there are two sides to the college 
affordability ledger. There is financial aid on one side and college 
costs on the other. States and colleges themselves have a 
responsibility to keep cost growth down. We know that declining State 
spending is a major driver of tuition increases at public universities. 
Colleges themselves need to keep an eye on their mission of providing a 
quality education at an affordable cost. Public institutions like the 
University of Maryland and some private institutions like Cornell are 
finding ways to combat rising tuition without compromising on quality. 
We know that there are ways to improve learning at a lower cost. Carol 
Twigg's work at the National Center for Academic Transformation is 
encouraging the thoughtful use of technology to drive down 
instructional costs while simultaneously improving student outcomes is 
heartening. I want to join President Obama in challenging every 
university and college president to do more of the same to get a handle 
on spiraling costs.
    Given the varying prices, the likely payoffs of different post-
secondary education programs, and the significant consequences for 
getting into trouble with debt, it is important for students and 
families to make informed decisions about which college to choose and 
how to pay for it. We need to make sure that they have the information 
they need to evaluate schools based on price, quality, and fit. Just as 
it should be easy for Americans to compare mortgage or credit card 
offers, it should be easy to compare colleges and financial aid 
packages. We are implementing a number of new provisions in the Higher 
Education Act to empower them to make those comparisons so that 
students and families have the information they need to vote with their 
feet.
    The College Navigator Web site maintained by our National Center 
for Education Statistics includes average net price tuition amounts, 
which gives students and their families a more accurate picture of 
information on college costs than just a school's ``sticker price.'' By 
October, all institutions of higher education will have their own net 
price calculators on their Web sites. The Department has given schools 
a template to use for the net price calculator, or they can design 
their own.
    Later this month, we will unveil a new College Affordability and 
Transparency Center to provide information on postsecondary 
institutions' published tuition and net prices, ranked from high to 
low, and indicating which institutions' prices are climbing fastest. 
And we are developing a model financial aid award letter that, if 
adopted, would make it easier for students to compare financial aid 
offers across schools.
    We're proud of these efforts, but they will help only if students 
use them. That is why we created the Financial Education for College 
Access and Success program last year. This initiative provides funds 
for State-led efforts to, among other things, improve student financial 
literacy. For example, the Tennessee Department of Education will 
develop and evaluate new instructional materials--which will be 
available at no cost to States--that help middle school and high school 
teachers prepare their students for financial decisions related to 
investing in postsecondary education. We also established a partnership 
with the Federal Deposit Insurance Corporation and the National Credit 
Union Administration to provide students with safe, affordable deposit 
accounts so they can learn about finances while managing and saving 
their own money. If we wait until students are taking out a loan before 
providing relevant and effective financial education and counseling 
then we are too late.
    Just last week, our Federal Student Aid office invited guaranty 
agencies to propose innovative business models that we expect will 
include new, outcomes-focused approaches to provide financial 
counseling, debt management, and default prevention without additional 
costs to taxpayers.
              helping make postsecondary education pay off
    We are also working hard to encourage efforts by institutions to 
improve the quality of instruction at an affordable cost. An example of 
this is our effort, we are collaborating with the Department of Labor 
on a program they administer, to support and enhance education and 
training programs that can be completed in 2 years or less through the 
$2 billion investment in the Trade Adjustment Assistance Community 
College Career Training Grant program that was funded as part of last 
years' legislation that included student loan reforms.
    As you may know, this program's application period for the first 
$500 million dollar investment closed earlier this spring, with award 
notifications scheduled to take place later this year. Our hope is that 
every community college in the country; indeed, every school in the 
country, will have access to all of the high-quality materials created 
with these funds.
    I am also calling on States and colleges to boost completion rates, 
because we know that students who fail to graduate often struggle to 
repay their loans. Currently, only about 60 percent of students at 4-
year colleges earn a degree within 6 years of initial enrollment. At 4-
year for-profit institutions the completion rate is only about half 
that. At 2-year institutions, students in for-profit programs earn 
credentials at rates slightly above their peers at public programs, but 
nonetheless only one student graduates from these programs at these 
institutions for every two who leaves with no degree to show for the 
time and investment.
    Our fiscal year 2012 budget request includes investments that are 
targeted to help disadvantaged students enroll in and complete college. 
Our request includes a new national innovation fund to support programs 
that explore innovative practices to accelerate learning, boost 
completion rates, and hold down tuition costs. We are also proposing to 
reward States and colleges that produce more college graduates. We have 
also released a ``College Completion Tool Kit'' of low cost and no cost 
strategies that States can pursue to boost attainment and associated 
Federal revenue streams to draw upon these strategies. The best jobs 
and fastest growing firms will gravitate to communities, counties, and 
States with a highly educated workforce, and we are committed to 
helping each State educate its way to a better economy.
                               conclusion
    Ensuring that every qualified American has the opportunity to 
pursue his or her college goals is among the most critical priorities 
for this Administration.
    Equipping our citizens with the skills and knowledge offered by our 
higher education system will ensure that all Americans can contribute 
to our shared goal to out-build, out-innovate, and out-educate the rest 
of the world. The Administration will continue to work tirelessly to 
ensure that students and families have the resources to pay for college 
and the tools they need to make the best decisions for themselves about 
pursuing postsecondary education.
    The value of a college degree remains much higher than its price--
and higher education, in general, is certainly still a worthwhile 
investment. But, we need to continue to ensure that students can afford 
to enroll in and complete college and that they have the protections in 
place if by chance, their college choices do not pay off. 



    The Chairman. Thank you very much, Secretary Kanter.
    We will begin with 7-minute rounds. I know Senator Bennet 
had some questions, too.
    First of all, we often hear that the gainful employment 
rule only affects for-profit schools. Is that correct?
    Ms. Kanter. The gainful employment rule actually protects 
all students, public, for-profit, nonprofit, wherever programs 
reside that lead to gainful employment.
    The Chairman. Can you explain how the Department of 
Education expects the gainful employment rule to influence the 
behavior of institutions?
    Ms. Kanter. Yes. One thing we are doing is disclosure. It 
is a very important tool for providing students and families 
with the information they need to make good decisions. Our 
final rule will give them more disclosure information.
    On July 1st we will be publishing completion rates, 
placement rates, total debt, total tuition charges at 
institutions, so that is going to help families make better 
choices. In terms of the for-profit sector, we have an 
improvement process. The gainful employment regulations are 
going to protect all students, that is the purpose of this, but 
what we wanted is a rule that will go after the bad actors, as 
Secretary Duncan has said, and create an improvement model so 
that more of the sector can educate students for the quality 
that they came to the schools to get.
    The Chairman. We have presented evidence that some for-
profit colleges are making institutional loans to students at 
interest rates as high as 18 percent, I presented that earlier. 
And the expected default rates exceed 50 percent, the schools 
themselves expected default rates to be over 50 percent, yet 
they make these loans with high interest rates.
    I pointed out, Secretary Kanter, where that money comes 
from. It doesn't come from Wall Street, that money comes from 
the taxpayers. So they take the money that comes through with 
student loans and Pell Grants and then they can turn around and 
make institutional loans to students to keep on that 90/10 
split. And yet they expect half of their students to default.
    You have run an institution of higher education. Haven't 
you?
    Ms. Kanter. Yes.
    The Chairman. What do you think about a school's decision 
to make those kinds of loans? Would your school make those 
kinds of loans, if you knew that half of them were going to 
default?
    Ms. Kanter. No, we wouldn't.
    The Chairman. Then why do you think these schools--and what 
in the gainful employment rule is ever going to do to make that 
change?
    Ms. Kanter. Right now we have a situation where career 
colleges are measured by a 2-year cohort default rate, meaning 
that we track the borrowers who enter repayment within a 2 year 
window. In 2008, the latest year for which we have official 
data, the students defaulted at a rate of 11.6 percent compared 
to 4 percent of students at privates and 6 percent of students 
at publics.
    So we have looked at recent changes in the law. And the 
reasoning behind the changes were due to concerns that colleges 
weren't managing their default rates, as you said.
    The Chairman. That is right.
    Ms. Kanter. The 3-year rate is going to give us a better 
picture of how many borrowers are going to be able to repay 
their student loans. And we have been giving these rates to 
colleges, for informational purposes, over the last couple of 
years to help them better track their progress and work to fix 
those programs before sanctions would apply.
    In the case of for-profit institutions, we want them to use 
these tools to better manage the kind of debt that students are 
taking, far beyond students signing up for loans. Particularly 
we have released lifetime default rates, as you heard this 
morning, to also be an area that we want some change in the 
sector.
    The Chairman. Is the Department going to take into account 
10-year default or lifetime default rates, which I showed this 
morning sometimes are as high as 70 percent, by their own 
internal documents of the for-profit schools.
    Ms. Kanter. Right. I mean that is something we will have to 
look at, absolutely. But frankly, we want to get students right 
at the beginning, in the first year--before they take a loan. 
That is really where the interaction has to take place. And 
then once they get a loan how to best manage it and where they 
can get the best value.
    The Chairman. Madame Secretary, I understand that and as I 
said earlier, I considered the gainful employment rule modest, 
it certainly was a step back from what the proposed rule was 
and I thought the proposed rule was modest and now we have this 
new thing. Is it better than nothing? Yes. Better than nothing. 
But I must say to you that I looked and what does it say to 
you, Madame Secretary, that after this rule was published last 
week, stock prices of these larger for-profit schools soared? 
What does that say?
    Ms. Kanter. Right. We don't control the markets.
    The Chairman.  I am not saying the market out there--they 
saw the gainful employment rule and the stocks boomed.
    Ms. Kanter. We want the sector to succeed, I think that was 
one of the fundamental tenets of the rule. We have 11 percent 
of students in these programs, we have to create a model that 
is going to help them improve and actually target the worst 
performing programs and either have them improve or eliminate 
its eligibility for Federal aid.
    The Chairman. So you are saying it is fine for them to make 
even more profits than what they are making?
    Ms. Kanter. I can't judge----
    The Chairman. Is that what you are saying?
    Ms. Kanter [continuing]. How much profit an institution or 
a corporation----
    The Chairman. That doesn't----
    Ms. Kanter [continuing]. Wants to build, but I do think 
their business models ought to be based on consumer protection, 
what is best for students. I think the goals ought to be to 
lower the default rates, that was one strong part of our 
proposal. To increase the graduate rates which is a second 
part. And to actually do the front-end services so students 
don't have to take loans at higher interest rates than the 
average. I mean that is a real concern for us.
    The Chairman. What it said to me was that the investors and 
Wall Street looked at this and said, ``you know, for the next 3 
or 4 years, at least, things are going to be pretty good, 
because this doesn't go into effect until 2015.''
    Ms. Kanter. We publish 14 rules including gainful 
employment. So we think the package of program integrity rules, 
when taken together, will really provide the kind of direction, 
and I think that many have said this is a positive first step. 
It is not the be-all and the end-all, but we had to make some 
progress and I think we have done our best to create a good 
starting point for this.
    The Chairman. I read your background, Secretary Kanter, you 
spent your career working with low-income students. If you were 
here for the first panel, I don't know when you arrived, but 
see when you have a business model out there that says you will 
make more profit, you will make more profit by getting the 
poorest people in, obviously because they get the most Pell 
Grants and the most student loans, and so you target, as we 
heard, vulnerable people and you bring them in, because that is 
how you increase your profit. And if they default after 3 
years, who cares? It is no skin off their teeth. They keep the 
loans, they keep the Pell Grants.
    We have seen the profit structure of some of these schools, 
tremendous. I am not against profit but when it comes only from 
taxpayers, I mean this is not something--they aren't making 
something that is competing with somebody else, a device or 
something that they have patented, some new invention, this is 
education. And it is coming from the taxpayers. And I just 
wonder how they can say it is for-profit when over 90 percent 
of their money is coming from the taxpayers. How can that be 
for-profit?
    Ms. Kanter. Right.
    The Chairman. People said there is a role for for-profit's, 
as I have said before, there are some that are doing a great 
job out there. But, it looks to me that in the last, 15 years I 
would say, perhaps--well, I go back to when it was increased 
from 85/15 to 90/10, in 1998, I believe and when the rule was 
promulgated in 2001 on paying recruiters to recruit, the so-
called Safe Harbor Provisions of 2001, and then the final blow 
was in 2005 when the final thing was that 50 percent of our 
students had to be on campus was taken out, so everybody could 
be online. And you have seen a sector here that, whereas I 
pointed out before in many of our hearings, many of these large 
schools are owned by Wall Street investors and investment 
houses, private equity companies.
    We have listened in, our staff has, I didn't, listened in 
on the investor's call and the investor's call for the schools 
that they listen in on, not one word was said about how are the 
students are doing, it was all, how much money are you making. 
The last quarter you made great profits, and that was 
wonderful. That is the investor's call, because it is geared 
toward making more profits.
    As I said, I am not against profits but when it is coming 
from the taxpayers of the country and it is going after the 
poorest people in our society, and they are being put at risk 
through aggressive recruiting, and I have put this out on the 
floor of the Senate, I have read the different kinds of ways 
that they go after students or people, like Mr. Schmitt and 
others that are vulnerable, maybe don't have any family 
background of people going to college to try to guide and 
direct them, I think it is what Miss Abernathy said, you have a 
toxic mix. A toxic mix. And I believe it is going to take more 
than those rules.
    I think it is a first step. It is a modest first step, 
granted. But to really bring this, I think into line and to 
make the commitment of these schools to the success of their 
students, both in school and after school, to make that 
equivalent, equal to their commitment to the profit side, then 
you are getting somewhere. That is not where it is. Their 
commitment is not to those students. The commitment is to the 
profit side and somehow that has to be righted and I think it 
is going to take a much more aggressive policy than what we 
have done in the past.
    I didn't mean to take so long. But I didn't know if you had 
a response to that. You don't have to respond to it if you 
don't care to.
    Ms. Kanter. I can say that it is totally unacceptable to 
prey on students. Students are going to all institutions to get 
a quality education. Accreditation has got to do a better job. 
We are doing a lot of work in that arena. We have an advisory 
commission to look at high impact strategies that the secretary 
can think about the AGA reauthorization in the future.
    In my personal experience, we can help poor students 
succeed without sending them into debt. And that is why our 
rules are looking at practices like incentive compensation, the 
misrepresentation and the certain thresholds that the 
institutions have to meet. I mean we are looking at a whole 
package of reforms to help that particular sector do a much 
better job so that students can be first, students must be 
first in this equation. That is why students are coming to 
college.
    I am concerned. The 90/10 rule was based upon a market 
principle that said, 10 percent would at least be devoted to 
the value that an individual would pay to go to those 
institutions. So there are other ways that are being accounted 
for that 10 percent, that can certainly be revisited, but that 
is a great concern as well.
    The Chairman. I am just concerned about the students who 
have been there and the students who are there now, but also 
for the next 3 or 4 years. And you know, we are up to what, $37 
billion now? How much?
    Ms. Kanter. Thirty?
    The Chairman. Thirty billion. We are up to $30 billion a 
year now going to the for-profit sector and that has been 
increasing and increasing. I am going to be here and I am going 
to see next year if it increases more and it increases more and 
increases more, that is why I am alarmed that we aren't doing 
more to look ahead and say, ``wait a minute, we have to do some 
things now or we are going to be either further in the hole and 
we are even going to have even more students with more debt, 
not having diplomas, not having succeeded in these for-profit 
schools. And we will be back here 3 years from now with the 
same kind of problems we have now.'' That is my big concern.
    I would like to thank each of our witnesses for being with 
us today. We will leave the record open for 10 days and 
witnesses may submit statements for the record, or supplemental 
statements.
    I think we have heard today how for-profit colleges target 
low-income students as sources of revenue, much like the 
subprime lenders did in the mortgage crisis. The difference, 
though, as we have seen, between a mortgage crisis and the for-
profit colleges, is that students are left with debt that stays 
with them for the rest of their lives. People who lost their 
houses can walk away from their house, students can't walk away 
from this.
    Why should the taxpayers be expected to invest in these 
schools when even the companies themselves write off up to 80 
percent of their institutional loans? If they think it is a bad 
investment why should the taxpayers think it is a good 
investment?
    The Department of Education I think, has taken some good 
first steps. This hearing, I think, has made the case that we 
need to take additional action to protect students and 
taxpayers from subprime colleges. These schools need to be held 
responsible for their students being unable to repay the loans.
    And with that, this hearing of the HELP Committee will 
stand adjourned.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

                         The Leadership Conference,
                                                  February 3, 2011.
Hon. Arne Duncan,
Secretary of Education,
U.S. Department of Education,
400 Maryland Avenue, SW,
Washington, DC 20202.

Re: Proposed ``Gainful Employment'' Rule, Docket ID ED-2010-OPE-0012

    Dear Secretary Duncan: On behalf of The Leadership Conference on 
Civil and Human Rights, a coalition charged by its diverse membership 
of more than 200 national organizations to promote and protect the 
rights of all persons in the United States, along with the undersigned 
organizations, we write to express our collective support for a strong 
``gainful employment'' rule.
    The Department's proposed regulation to define gainful employment 
under Title IV of the Higher Education Act of 1965 and to protect 
students from programs that do not deliver on their marketed promises 
of a better future falls within our mission and has generated 
significant support from our members. In fact, many of our members--
including the American Association of University Women, the American 
Federation of Teachers, the Mexican American Legal Defense and 
Educational Fund, the National Council of La Raza, the National 
Education Association, and the United States Student Association--
submitted comments in response to the Federal Register notice published 
on July 26, 2010. Accordingly, we urge the prompt adoption of a strong 
final gainful employment rule, one that will protect students and 
taxpayers no later than the 2012 academic year.
    In order to be eligible to receive student financial aid grants and 
loans under title IV, current Federal law requires all post-secondary 
career education programs, including all public and nonprofit college 
programs of less than 2 years and nearly all for-profit college 
programs, to ``prepare students for gainful employment in a recognized 
occupation.'' What constitutes ``gainful employment,'' however, has yet 
to be defined. The proposed rule, if finalized, would fill this void 
and enable long overdue Federal enforcement, protecting students and 
taxpayers alike from millions of dollars in wasted Pell Grants and 
defaulted student loans.
    The need for the rule is particularly urgent for students enrolled 
in the for-profit school sector. The American Prospect recently noted 
that,

        ``[f]or-profit schools have little incentive [now] to care 
        whether their students land well-paying jobs; if graduates 
        can't pay back their loans, taxpayers will, because the Federal 
        Government guarantees the loans.''

    Students enrolled in for-profit schools represent just 10 percent 
of all postsecondary students in the United States but account for 44 
percent of all student loan defaults. The proposed rule would provide 
significant protection to students, by sparing them entry into a proven 
dead-end educational track, while also sparing taxpayers otherwise on 
the hook for their Federal student loans.
    We support the approach in the proposed rule, which makes program 
eligibility under title IV contingent on median student debt-to-income 
ratios and repayment rates. Such markers are sound proxies for 
meaningful preparation for employment and ensuring that students are 
not incurring unmanageable levels of student loan debt. Those programs 
that serve their students well will easily pass this review, narrowing 
the Department's focus to those that fall short on delivering the 
American Dream.
    These proposed protections are particularly important for (1) 
students of color, who represent about half of the undergraduate 
students in for-profit programs; (2) low-income students, who make up 6 
in 10 for-profit college students; (3) women, who comprise nearly two-
thirds of for-profit college undergraduates; and (4) armed-service 
members and veterans, a growing target student body for many of for-
profit colleges since the passage of the Post-9/11 G.I. bill:

     Minorities: While most (66 percent) underrepresented 
minority students attend public colleges, they are disproportionately 
represented at for-profit colleges. African-American and Hispanic 
students make up 28 percent of all undergraduates, but they represent 
nearly half (46 percent) of undergraduates at for-profit colleges.--
Source: National Postsecondary Student Aid Study 2008.
     Low-Income: While most (70 percent) low-income students 
attend public colleges, they are disproportionately represented at for-
profit colleges. Sixty-four percent of students attending for-profit 
colleges have incomes below the median for all students.--Source: 
National Postsecondary Student Aid Study 2008.
     Intersection of Minority and Low-Income Groupings: At for-
profit colleges, low-income and minority undergraduates are about three 
times more likely to borrow Federal student loans, and four times more 
likely to borrow private student loans, as their counterparts at public 
or private nonprofit colleges. Eighty-eight percent of students with 
below-median incomes attending for-profit colleges borrowed Federal 
student loans in 2007-8, compared to 33 percent of those attending 
public and private nonprofit colleges. Forty-one percent of students 
with below-median incomes attending for-profit colleges borrowed 
private (non-Federal) student loans in 2007-8, compared to 12 percent 
of those attending public and private nonprofit colleges. Eighty-six 
percent of African-American undergraduates attending for-profit 
colleges borrowed Federal student loans in 2007-8, compared to 29 
percent of those attending public and private nonprofit colleges.--
Source: National Postsecondary Student Aid Study 2008.

     Women: Women make up almost two-thirds (64 percent) of the 
undergraduates attending for-profit colleges. The gender imbalance is 
especially stark at private for-profit colleges of less than 2 years, 
where women comprise three out of four (75 percent) of undergraduates. 
To put this in context, women make up 55 percent of those attending 
public colleges of all levels and 58 percent of those attending private 
nonprofit colleges.--Source: 2008-9 data from the Federal Integrated 
Postsecondary Education Data System.

     Armed-Service Members and Veterans: The Senate Health, 
Education, Labor, and Pensions Committee found that 20 for-profit 
colleges pulled in $521 million in taxpayer-funded military and 
veterans tuition assistance in 2010, nearly eight times more than in 
2006.--Source: John Lauerman, For-Profit Colleges Scam Military for 
$521 Million, Report Says, Bloomberg Newswire, Dec. 9. 2010.

    To be clear, the civil and human rights community supports policies 
that maximize meaningful postsecondary educational and equitable 
employment opportunities. Unfortunately, too many for-profit college 
recruitment practices targeted at vulnerable students appear to 
sacrifice ``quality'' college opportunities in favor of ``quantity'' 
profits for the institutions. It is worth noting, however, that we do 
not believe all for-profit colleges are bad actors. The way to separate 
the wheat from the chaff is to finalize and enforce a vigorous gainful 
employment rule.
    We understand the final comment period has closed. Given that 
opponents of the rule have asked the Department to retract, delay or 
weaken the regulation, however, we feel a strong need to communicate 
our members' support for a strong regulation. In addition, on behalf of 
our members that did weigh in with the Department during the public 
comment process, we respectfully request a meeting with you to discuss 
the benefits of the proposed rule and to reply to claims by opponents.
    Finally, as raised by some of our members during the comment 
period, many stakeholders believe the final rule should be stronger 
than the draft rule. For example, a number of organizations believe 
that students--and in particular the more vulnerable and 
underrepresented students who disproportionately attend for-profit 
colleges--deserve career education programs that are held to even 
higher standards than those that the Department has proposed. Given 
that student indebtedness and default rates are on the rise, we believe 
this is an important first step for the Department to take and one that 
should be taken immediately.
    In closing, we agree with your recent observation that ``some bad 
actors are saddling students with debt they cannot afford in exchange 
for degrees and certificates they cannot use.'' To that end, we applaud 
the Department for proposing these regulations, which will provide 
much-needed oversight for career education programs that leave students 
with little other than burdensome debt and dashed dreams. We encourage 
the Department to act quickly and decisively and issue a final 
regulation.
    We look forward to hearing back from your office regarding a 
meeting with members of The Leadership Conference. In order to schedule 
the meeting, or to discuss any of the points raised in this letter, 
please contact Dianne Piche, Leadership Conference Senior Counsel, at 
202-466-3311.
    Thank you for your consideration.

            Sincerely,
                                            Wade Henderson,
                                                   President & CEO.

                                              Nancy Zirkin,
                                          Executive Vice President.

American Association of University Women
American Federation of Teachers
AFL-CIO
Center for Media and Democracy
Consumers Union
Gay Lesbian and Straight Education Network
Hip Hop Caucus
Mexican American Legal Defense and Educational Fund
National Association for the Advancement of Colored People
National Council of La Raza
National Education Association
National Partnership for Women and Families
National Women's Law Center
Southeast Asia Resource Action Center
Southern Poverty Law Center
United States Student Association
                                 ______
                                 
              Law Offices, Williams & Connolly LLP,
                                 Washington, DC 20005-5901,
                                                     June 16, 2011.
Hon. Tom Harkin, Chairman,
Committee on Health, Education, Labor, and Pensions,
U.S. Senate,
Hart Senate Office Building,
Washington, DC 20510.
    Dear Chairman Harkin: I am writing on behalf of Kaplan Higher 
Education Corporation to set the record straight on a number of matters 
touched upon in the testimony of a former Kaplan student at the hearing 
before the Senate Committee on Health, Education, Labor, and Pensions 
on June 7, 2011. I ask that this letter be made part of the record of 
that hearing.
    The faculty, staff and administrators at Kaplan care about each one 
of its graduates and sympathize with the difficulties this student has 
faced in finding employment. At the same time, this student's testimony 
did not paint a complete and accurate picture of his experiences at 
Kaplan, the placement rate of the program in which he participated, or 
the possible reasons for his current unemployment.
    First, in his written statement to the committee the student 
characterized his Kaplan-arranged 2004 externship experience as a 
``less than rewarding experience.'' That contrasts quite sharply with 
what this student wrote on a student survey at the time of his 
externship, a copy of which was provided to your staff in advance of 
the hearing. Asked at that time, ``What portion of your externship 
experience was most beneficial to you?'' he answered: ``The most 
beneficial experience was seeing what a paralegal really does.'' Asked 
``What portion of your externship experience was least beneficial to 
you?'' he answered: ``Can't help you. I have found it all very 
beneficial.'' (Emphasis added). Asked ``What changes would you 
recommend to the externship program at the College?'' he answered: 
``None. The externship program works reasonably well as is.'' (Emphasis 
added). In short, the student felt that the externship experience was 
in fact a rewarding one at the time.
    Second, the student failed to acknowledge anywhere in his written 
or oral testimony that upon completion of his Associate's degree 
program he did, in fact, receive and accept a permanent offer of 
employment from the firm with which he had his externship. He went to 
work at the firm and only 5 months later informed Kaplan that he had 
left the firm. While there is no question that he left the firm for 
good reasons, it was misleading for the student to omit this placement 
from his testimony and then to express surprise to the committee that 
Kaplan regarded him as having been placed when he graduated. The 
student was, in fact, placed in a permanent position, and the committee 
should be aware of that fact.
    Third, the student testified that he knew of no more than four 
students out of the dozens in his class who secured permanent 
employment after receiving their Associate's degrees. In fact, as 
Kaplan informed your staff before the hearing, there were 22 students 
in the paralegal graduating class in 2004 at Cedar Falls. Of those who 
did not continue their education beyond the Associate's degree, 14 of 
17 were placed. In fact, the latest overall job placement rate for all 
programs at the Cedar Falls, IA campus is 94 percent.
    Fourth, the student testified that the Dean at the Cedar Falls 
campus mentioned that Kaplan had a law school (Concord Law School in 
California) but failed to mention that graduates of Concord cannot take 
the Iowa Bar exam. As the student's written statement makes clear, the 
Dean's alleged comment about Kaplan's law school was made in the course 
of a conversation about courses in the second year of the Associate's 
degree program. At that time, as the student told me and your staff 
members in a joint telephone interview conducted the week before the 
hearing, law school was no more than a distant thought on the horizon. 
Associate's degree recipients are not eligible to apply for law school. 
This student didn't even begin his studies toward a Bachelor's degree, 
which would be required for admission to law school, until 4 years 
after this passing conversation with the Dean, and even then there is 
no indication that law school was part of his plan. His written 
statement says simply:

          ``In early 2006 I enrolled [in the Bachelor's degree program 
        at Kaplan University], eager to continue my education since I 
        assumed it had to have been my fault that I never received an 
        interview. I also wanted desperately to leave the customer 
        service industry and I thought that a 4-year degree would 
        better help me do that.''

    In short, he enrolled for further education at Kaplan University 
because he was seeking a Bachelor's degree, not because he intended to 
go to law school.
    This former student never, in fact, applied to Concord or any other 
law school and, apparently, never even visited the Concord Law School 
Web site. To our knowledge, he never took the Law School Admission 
Test. If he had contacted Concord Law School or visited the Web site, 
he would have learned immediately what he learned from his instructor 
in the Kaplan University Bachelor's degree program--that he would not 
be eligible to sit for the Iowa bar with a Concord degree. In short, 
this student was never misled about the effect of a Concord degree, and 
he did not enroll in any Kaplan program because of any misunderstanding 
on that subject.
    Fifth, the student told me and your staff in our joint interview 
with him that he could only recall five paralegal vacancies for which 
he has applied since receiving his Bachelor's degree in paralegal 
studies in 2008. A survey published on Careerbuilder.com, however, 
indicates that there have been 152 paralegal vacancies that have 
existed in Iowa during the last 6 months, with only 1.7 job seekers per 
opening. This student lives in a town of 4,200, where paralegal jobs 
are not likely to exist, but many of the 152 vacancies have been within 
commuting distance from his home. Yet he seems to have applied for only 
five. And he has affirmatively not considered positions in Des Moines, 
where the largest number of paralegal jobs exists, because he is not 
interested in moving to Des Moines.
    Nor has this student availed himself of the services of the Kaplan 
Cedar Falls Career Services office at any time since he received his 
Bachelor's degree from Kaplan University. As a graduate of the Cedar 
Falls campus, he is entitled to seek the assistance of the Cedar Falls 
Career Services office at any time during his career. Career Services 
remains available to assist him at this time.
    Sixth, I should note that this student was mistaken when he 
testified that he now owes $45,000 in student loans. The National 
Student Loan Data System indicates that he owes approximately $38,000. 
The average Kaplan University graduate leaves with about $28,000 in 
debt. This compares favorably to the average debt loads of the 
graduates of the public and private colleges in Iowa, according to the 
Project on Student Debt:\1\ $31,000 at Iowa State University; $22,684 
at the University of Iowa; $34,386 at Clark College; and $34,919 at 
Drake University.
---------------------------------------------------------------------------
    \1\ http://projectonstudentdebt.org/state_by_state-
view2010.php?area=IA.
---------------------------------------------------------------------------
    Finally, Mr. Chairman, I know that the testimony of this student 
was offered merely as an example of the burdens that one student has 
faced. As noted above, the experience of this student was not typical 
of the students in the paralegal program at Cedar Falls. Nor is it 
typical of Kaplan University students. To provide a different 
perspective, I would like to tell you of the story of Maria Zeno, a 
2008 graduate of Kaplan University's paralegal program who has 
authorized us to recount the following:
    Ms. Zeno has been employed by the same lawyer for 9 years. During 
one of her early years with this lawyer, she was going through 
materials with a lawyer from a different firm, when she caught 
something in that attorney's paperwork that was not accurate. The 
lawyer refused to take Maria seriously because of her lack of formal 
postsecondary training. Shocked by his reaction, Maria enrolled in 
Kaplan University the same day. Maria explains that it was not easy to 
complete her studies: ``I was juggling school, work and a personal life 
that required me to care for my three children and a husband. It was a 
rocky road, but I got through it.'' Maria received her Bachelor's 
degree in paralegal studies in 2008 and was immediately granted a 
$3,000 pay increase by her employer. Maria continues to work for the 
same attorney today, and her future is looking bright. She paid back 
her student loans of approximately $38,000 in 5 years, and she is now 
enrolled in law school. ``Because of my hard work at Kaplan,'' she 
says, ``I was top of my class in the first year of law school and I was 
able to get scholarship money.'' Maria is looking forward to completing 
her law degree in 2013. Her boss, a sole practitioner, plans to make 
Maria his partner once she passes the bar. She aspires someday to argue 
before the Supreme Court. She says that she will never forget the 
attention she received when she was a student at Kaplan University.
    Mr. Chairman, Kaplan very much appreciates your remarks at the last 
committee hearing, when you stated that:

          ``Kaplan stands alone among the large, for-profit education 
        companies for having taken what are, in my opinion, real and 
        significant steps to reduce high withdrawal rates and high 
        default rates by implementing the Kaplan Commitment program.''

    Andrew Rosen, Kaplan's CEO, is grateful in particular for your 
complimenting him and Kaplan as ``stand-outs for the level of 
cooperation that they have offered to the committee through the course 
of this investigation.'' Kaplan has taken these matters very seriously, 
and believe me when I say that it is truly encouraging to everyone at 
Kaplan to know that their efforts have not gone unnoticed.
            Sincerely,
                                            Kevin T. Baine.
                                 ______
                                 
 Letter Regarding Kaplan's Statement in Response to Testimony at U.S. 
Senate Health, Education, Labor, and Pensions Committee Hearing June 7, 
                                  2011
    Kaplan recently released a statement calling into question the 
accuracy of my testimony at the U.S. Senate Health, Education, Labor, 
and Pensions Committee Hearing regarding for-profit colleges. I feel it 
necessary to address the points that Kaplan has made, not in the spirit 
of revenge, but in the spirit of holding the for-profit education 
industry accountable to their students. There is no amount of criticism 
I can give Kaplan that will make me feel better, or my future brighter. 
I want to put my days at Kaplan and my degree behind me in order to try 
to salvage a viable future. Fortunately, Kaplan has recently taken 
positive steps to put students first through the program, ``The Kaplan 
Commitment,'' which allows students to attend for 5 weeks with no 
commitment. While this is a step in the right direction, I did work 
hard for a degree that has ultimately done nothing to improve my life. 
I understand that Kaplan had to make a statement about my testimony 
from the recent hearing in order to preserve their reputation, and I 
now feel that it is necessary for me to clarify what was written.
                  adding context to the student survey
    Kaplan wrote:

          ``First, the student today characterized his Kaplan-arranged 
        2004 externship experience as a `less than rewarding 
        experience.' '' That contrasts quite sharply with what this 
        student wrote on a student survey at the time of his 
        externship. At that time, when asked ``What portion of your 
        externship experience was most beneficial to you? '' he 
        answered: ``The most beneficial experience was seeing what a 
        paralegal really does.'' Asked ``What portion of your 
        externship experience was least beneficial to you?'' he 
        answered: ``Can't help you. I have found it all very 
        beneficial.'' Asked ``What changes would you recommend to the 
        externship program at the College?'' he answered: ``None. The 
        externship program works reasonably well as is.''

    I did find that the experience of observing what a paralegal does 
in a solo practitioner office as beneficial because it allowed me to 
discover in practical terms what I did and did not like about my chosen 
field. However, while the externship allowed me to learn about the 
different roles in a law office, I soon realized that these were roles 
that Kaplan's programs did not prepare me for. Additionally, while I 
did indicate on the survey that I would not recommend any changes, at 
this time I was more interested in a positive reference letter and felt 
that anything negative I said would have been held against me. I was 
approaching graduation and was excited at the thought of putting my 
education to work in the real world. However, I have now had my degree 
for some time now and have sadly realized that it is likely that I may 
never find a job relating to my degree.
                accepting a job in a corrupt environment
    Kaplan wrote:

          ``In today's testimony, this student fails to acknowledge 
        that, in fact, he received and accepted a permanent offer of 
        employment from the firm with which he had his externship. This 
        student then resigned from this job.''

    While Kaplan is correct that I did accept an offer of employment 
for the firm with which I had my externship, Kaplan is incorrect to 
leave out information regarding the corrupt environment that led me to 
leave shortly after. I interned at Hall law firm from February 2004 to 
early April 2004, working for free past the normal end of the 
externship in hopes of securing employment. I was not hired at that 
time and thereafter left the unpaid externship and began to seek paid 
work in the area. Upon stopping at the office to pick up a few personal 
items from my externship, the attorney then offered me a job that I 
accepted. I worked at the law firm for less than a month due to the 
increasingly erratic and fraudulent behavior of the attorney. I 
received one payment of $200. After I left the office, I later learned 
that he had been suspended indefinitely. Although I do think Kaplan 
could do a better job in placing students in externships, I do not 
blame Kaplan or myself for how the events unfolded. I later learned 
that Kaplan counted me as employed for their statistics and therefore a 
``success story.'' However, I do not consider this short experience as 
employment and definitely not a success story.
                     kaplan's definition of success
    Kaplan wrote:

          ``Putting the student's own experience aside, the experience 
        of other students in his class was decidedly different. Of the 
        others who did not continue their education beyond the 
        Associates degree, 13 of 16 were placed. In fact, the latest 
        overall job placement rate for all programs at the Cedar Falls, 
        IA campus is 94 percent.''

    Kaplan claims to have a placement rate of 94 percent, but does not 
provide any information as to how this number is calculated. I 
personally know of one IT graduate told by potential employers that 
Kaplan programs do not teach the skills needed in order for students to 
succeed in the workforce. I remember that Kaplan also pushed him to 
sign a waiver releasing Kaplan of any job placement responsibilities in 
order to get his diploma. If I am considered a successfully placed 
graduate to Kaplan, how many other Kaplan graduates have negative 
similar stories to mine, yet are considered a success?
                          diligent job search
    Kaplan wrote:

          ``Second, unfortunately this student has not availed himself 
        of the services of the Kaplan University Cedar Falls career 
        services office during this period. Had he done so the office 
        could have directed him to the roughly 150 paralegal jobs 
        posted on multiple job boards in Iowa during the last 6 
        months--many within commuting distance of his home. The career 
        services office at Kaplan Cedar Falls is available to all 
        graduates throughout their careers, and it remains prepared at 
        any time to assist this witness in finding employment should he 
        wish to avail himself of that assistance.''

    If this number of job postings is correct on Kaplan's Career 
Services department job board, then I congratulate Kaplan for improving 
their Career Services since I attended. However, when I was using 
Kaplan's Career Services in 2006, career services had considerably less 
opportunities for paralegals. Most of the job opportunities were for 
wait staff or retail clerks, which are not the type of jobs that I went 
back to school and worked hard to obtain a degree for. I soon developed 
my own diligent job search process without any help by Kaplan, and 
continued this search even when I moved 80 miles away.
           setting the record straight on concord law school
    Kaplan wrote:

          ``In his testimony, Mr. Schmitt said that a dean mentioned 
        Concord Law School, but did not say that students can only sit 
        for the bar in the State of California. According to Schmitt's 
        written testimony, this was a casual encounter he had while he 
        was in his associate's degree program, not an official 
        conversation with a Concord admissions advisor. At that time, 
        Mr. Schmitt was not eligible to apply to Concord, but had he 
        looked at Concord's Web site or reviewed any Concord materials, 
        he would have seen that Concord's accreditation was very 
        clearly articulated.''

    This was a conversation I had with a Kaplan education professional. 
As such, he should have known that a certain amount of weight would be 
given to his words. While I am sure I could have eventually found the 
status of Concord School of Law had I gone to the Web site, I assumed, 
naively it turns out, that I could also obtain information like this by 
a representative of the school. When talking to a dean employed by 
Kaplan about my future plans involving law school, information about 
the restrictive limits on where I could actually use that degree seems 
to be an important piece of information that should most definitely be 
talked about. I feel that withholding this type of information is very 
misleading.
    Upon reading my clarifications and explanations of the statements 
made by Kaplan I hope the members of this committee and the public who 
read this statement have a better context upon which to judge my 
testimony. My hope and reason in testifying is that fewer students will 
have to go through the hard work I did only to find that none of it 
leads to a better future. My battle is not with Kaplan in particular, 
but to try and ensure that all for-profit education institutions begin 
to put students first. The failure to provide a proper and fair 
regulatory and legislative framework for the for-profit sector is an 
important issue that I hope gets the attention it deserves.

            Sincerely,
                                              Eric Schmitt.

    [Whereupon, at 12:44 p.m., the hearing was adjourned.]

                                   

      
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