Recent Clarity into Regulatory Activism in Education

Author

Phil Hill
March 31, 2022

We all knew that the US Department of Education (ED) would change its regulatory approach with the new administration, and it has been virtually axiomatic that they would directly target the for-profit sector. But recently it is becoming more clear the approach and scope of the ED regulations, and it can best be described as regulatory activism, by which I mean using the regulatory processes to achieve pre-defined end goals. And those goals seem to have a common “protect students from the bad actors” theme, usually based on the involvement of for-profit companies – and not just in the for-profit sector. Some people applaud the changes as overdue corrections to the system, and others decry the changes as overly broad and likely to have unintended consequences, but either way, I think those involved in online education and alternative models should take notice and avoid assuming that only the for-profit sector will face aggressive regulations.

In the past two weeks I have seen three stories that shed light on the nature of these changes.

Charter Schools

While most of my analysis focuses on higher education, the proposed changes for K-12 charter schools announced with the federal budget release are worth considering in terms of insight into the ED approach. As described on March 21st by the Washington Post:

As a presidential candidate, Joe Biden proposed eliminating federal funding to support for-profit charter schools, and the proposed new rules go a long way to fulfilling that vow.

The Post describes the administration keeping overall funding for charter schools level while specifically going after ownership.

The biggest proposed change would affect the for-profit management companies that often run charter schools. To qualify for grants, charter schools must, by law, be run by nonprofit groups. Many, however, outsource the operation to for-profit companies, and those arrangements have been eligible for the federal start-up money.

Beyond the aggressive targeting of charter ownership, as well as strong limitations on ability to apply for grants, the process itself is worth noting.

The notice of proposed requirements and selection criteria for the Charter Schools Program grants was published last week. The proposal is open for public comment until April 14.

That one month period for public comment is unusally short – about half the time typically allowed for these types of changes, but I doubt that the comments will make much of a difference. The strategy to use this particular funding rule change to make life much harder for many charter schools has been set.

State Authorization

The concept of state authorization reciprocity impacts online education programs that allow the enrollment of students from many locations (that is, almost all of them), and state authorization means that the school has to comply with regulations in the student’s home state, and not just the state where the institution resides. States are the primary political entities to offer consumer protection for students, but if a school has students living in 30 states, that means it has to apply for authorization in each state and comply with 30 different, conflicting sets of regulations. The State Authorization Reciprocity Agreement (SARA) can be thought of in terms of how we handle driver licenses – if you have an Arizona license, thanks to reciprocity you can drive in Nebraska or any other state without having to get a separate license following different rules in that state. The SARA has been agreed to and signed by 49 of the 50 states, with California as the outlier. Or model.

WCET has been active in federal negotiated rulemaking efforts, particularly around online education and state authorization. In a March 21st blog post they described some surprising changes arising through the latest round of rulemaking, the biggest one based on state authorization.

An update to the terms of any “state authorization reciprocity agreement” was not in the original notice for the rulemaking and it was not part of the first session of negotiations. The language was introduced between the first and second sessions and was raised only in passing in the second session, as we noted in our blog post update on that session. Therefore, we were surprised to see that the Department of Education accepted the proposed language in its recommendations (Issue Paper 6: Certification Procedures) prior to the third, and final, session.

Again, the short notice and deliberate changes designed for minimum public debate.

The details are complex, and I recommend reading the WCET post for the details, but the net effect is that SARA will be neutered in terms of providing a common level of consumer protections among the participating states. From WCET:

The future benefits of an institution participating in SARA will likely be more limited than what they now enjoy. The intent is to limit those benefits to the act of applying for authorization and the associated fees. Since “consumer protection laws” is not defined, the decision as to which rules apply and which do not will fall to each state.

The reason I believe this last-minute change was thrown in is to essentially export the California model where individual state rules can be used as part of the broader regulatory approach to go after bad actors, regardless of unintended consequences. This cynical view was justified in 2019 when out-of-state students at public and nonprofit online programs temporarily lost access to federal financial aid.

Liability for For-Profit Owners

In the for-profit sector, the rules of interest are new requirements to hold corporate owners accountable for student financial aid losses, as announced in this March 23rd ED press release.

The U.S. Department of Education (Department) today announced updated steps to ensure that companies that own institutions are held responsible for funds owed to the federal government, including liabilities arising from closed school loan discharges and borrower defense to repayment claims. This will ensure that even if a school closes, the Department can recover funds from entities that had a direct or indirect ownership interest in the school instead of leaving the bill to taxpayers. These new procedures will protect taxpayers, students, and borrowers through incentivizing better performance by the schools and allowing the Department to recover liabilities from corporate owners.

“If a company owns, controls, or profits from a college, it should also be on the hook if the institution fails students,” said Under Secretary of Education James Kvaal. “Today’s steps will ensure taxpayers aren’t held liable for colleges that fail their students or close their doors, especially without the opportunity for students to finish their courses of study.”

Under this policy, any organization or entity with at least a 50 percent interest in a non-public college that meets certain other conditions will generally join that institution’s leadership in signing the school’s Program Participation Agreement (PPA).

Higher Ed Dive correctly pointed out that the recent regulatory moves against for-profit insitutions goes well beyond the ED.

Several federal agencies have signaled a crackdown on proprietary institutions. In October, the Federal Trade Commission notified the 70 largest for-profit colleges in the U.S. that it has authority to seek civil penalties against companies that engage in deceptive or unfair practices.

And in January, the Consumer Financial Protection Bureau said it will examine private student lending at colleges, citing practices at two shuttered for-profits.

As noted, no one is surprised that additional regulations and investigations are targeting the for-profit sector, but it is interesting to see the apparently coordinated approach between multiple agencies and the broad rule changes being made with short notice.

Emerging Trend

Put these together and I see what appears to be a common approach.

  • Use regulatory processes not just as safeguards but also to enable predefined end goals, usually around ‘reining in for-profit’ entities;

  • Minimize the amount of time allowed for public comment and debate;

  • Informally work through multiple agencies, both federal and state, to set new rules; and

  • Worry about the unintended consequences later.

And the impacts will be felt well beyond the for-profit sector. I didn’t include anecdotes here, but I believe we’ll see similar actions relating to OPMs and nonprofit conversions. Regulatory actions will be a big story in 2022 for various forms of online education and alternative educational models.

It will be interesting to see how much (if any) talk at ASU+GSV next week will center on this regulatory activism and trying to figure out potential impacts. Stay tuned.