Wednesday, September 22, 2010

Preying on the American Dream

Have you seen those full page ads decrying the Department of Education’s proposed "gainful employment" rule? This rule will require for-profit educational institutions receiving income from Federal student aid programs to document that their programs meet statutory requirements for preparing students for gainful employment. The ads, provided by Corinthian Colleges, Inc., one of the largest for-profit education institutions, claims the proposed rule will result in up to 100,000 working Americans losing their jobs and urge readers to “Get the facts at My Career Counts.”

A better source of information would be a report entitled Are you Gainfully Employed? Setting Standards for For-Profit Degrees by Education Sector, an independent, non-profit organization. According to this report many for-profit institutions derive most of their income from Federal government with the five largest, including Corinthian, receiving more than 77% from student financial aid programs. Little wonder that Corinthian and other institutions of its ilk are concerned that greater scrutiny on how their students fare after incurring large debt obligations to enroll in their programs might constrain the flow of government money into their coffers.

The Education Sector report opines that “The proposed standards for institutions participating in the title V, HEA programs are necessary to protect taxpayers against wasteful spending on educational programs of little or no value that also lead to high indebtedness for students. The proposed standards will also protect students who often lack the necessary information to evaluate their postsecondary education options and may be misled by skillful marketing, resulting in significant student loan debts without meaningful career opportunities.”

Doesn’t this sound like a replay of the sub-prime mortgage debacle where ill-equip low income borrowers were enticed to take out loans they didn’t understand and were ill-suited for their circumstances? Now both education and home ownership, two key components of the American Dream, are under assault by profit seeking private enterprises cashing in on government programs designed to aid low income Americans. This is more evidence that greed may do more harm than good to social ventures (see my post Is Greed Good for Microfinance?).

What I find most interesting is that the Gainful Employment rule proposes to measure the effectiveness of education programs using market data, not complex, artificial standards promulgated by Department of Education bureaucrats. There are two simple tests. One is based on the debt-to-income ratio of program graduates; the second is based on student loan repayment rates. If education institutions demonstrate that their graduates get jobs paying enough for them to comfortably repay their loans, the institutions will have continuing access to the Federal student aid funding. Only programs with poor histories placing students in adequately paying jobs will find their access to the Federal student aid programs constrained.

Contrary to the splashy ads provided by Corinthian Colleges, Inc., nothing in the Gainful Employment rule threatens the jobs of those already employed. The only educational opportunities that low income students would lose would be those shown to be ineffective in qualifying them for jobs that would enable them to repay their loan obligations and adequately support themselves. Far from thinking that these students and their careers “don’t count,” as the ad claims, the Department of Education is appropriately looking after the interests of students by promulgating this new regulation.

In my work helping low income people better manage their financial affairs I have seen cases where debt incurred to pay for education programs that failed to deliver on the promise of a good paying job has become an enormous millstone, crushing any hope for living a better life. The proposed Gainful Employment rule seems a small, reasonable step to prevent unscrupulous promoters of ineffective education programs from preying on the aspirations of low income Americans for attaining the American Dream.


  1. I used to take the bus in Los Angeles and it's incredible the amount of ads for - at best questionable educational program - targeted at a very poor population. They exploit their very human desire to get ahead in the world providing training that not always translates to jobs.

    Another group that I have observed aggressively preying on poor Latinos in the U.S. are multi-level marketing schemes like Herbalife and Amway. The former in particular exploits the entrepreneurial drive of poor latinos, who religiously buy over-priced products sustaining a dream of financial independence. One acquaintance who worked as a customer service representative there told me that at the end of the month (when paychecks come in) he used to field hundreds of calls of people who could clearly not afford to keep up with their quotas - but used most of their paycheck anyway trying to stay at a certain "level of sales" -- the underlying aspiration being exploited - was the need of having a better life.

    Imagine if the creativity and entrepreneurial spirit of this group were put to better use!