Are For-Profit Colleges a Rip-off?

New federal regulations raise an important question: Are for-profit colleges a bad deal?

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A federal judge recently overturned federal regulations that would have denied federally backed loans to students attending colleges that graduated students with substantial debt and no job. The regulations, declared by the Department of Education, were intended to lower costs and increase educational value for students. But more than that, they raise an important question: Are for-profit colleges a bad deal?

Students are paying for college more.
Many students agree that borrowing is a better option than forgoing college.

A college education is a big investment of both time and money. But like any investment, there are risks. Perhaps one of the biggest risks is that a student will fail to graduate, even after spending a substantial amount of time in school. But that’s not the only risk. Another significant risk is a student’s failure to obtain meaningful employment after graduation.

The regulations mentioned above sought to address this second risk. Specifically, the regulations provided that career training programs would continue to qualify for federal student aid, but only if they meet one of the following three metrics in at least three out of four consecutive years:

• Loan Repayment Rate: At least 35 percent of the program's former students are repaying their loans;

• Debt-to-Earnings Annual Ratio: The estimated annual loan payment of a typical graduate does not exceed 12 percent of his or her total earnings;

• Debt-to-Discretionary-Earnings Ratio: The estimated annual loan payment of a typical graduate does not exceed 30 percent of his or her discretionary income.

At first glance these regulations seem reasonable. But there was a big problem lurking below the surface. Many for-profit colleges couldn’t meet these standards. Even some of the most recognized online schools were graduating students who couldn’t find work. Yet a judge recently threw out the regulations, holding that they were “arbitrary and capricious,” a legal standard that is very difficult to meet.

While the regulations may be out, they raise important questions for prospective students considering a for-profit institution. First, do for-profit schools lack the credentials sought by prospective employers? The answer certainly varies from school to school. And the degree program sought may also affect employment opportunities. For example, for-profit degrees in business or computer technology may offer better employment opportunities than a liberal arts degree. But the question still remains whether a degree from a for-profit school is as valuable as a degree from a public or private institution.

Second, do for-profit schools cost more? According to a 2008 study, of students who received bachelor's degrees, 53 percent at for-profit schools owed $30,500 or more. At private schools, only 24 percent owed $30,500 or more. And at public schools, the percentage falls to 12 percent.

Given this data, why do for-profit schools flourish? One answer may be convenience. Many of these schools offer online programs designed for working adults. For some, these programs are the only practical way to advance their education and careers. While public and private institutions are embracing online education, the transition has been slow.

For prospective students, the key is to thoroughly research any potential schools. Recognize that data on graduation rates and costs can be manipulated. As a result, data from third-party sources is always preferred over information directly from the schools. And recognize that employment rates not only vary by school, but also by program. As a result, seek to obtain data specific to your planned program of study.

DR is the founder of the popular personal finance blog The Dough Roller, and the credit card review site Credit Card Offers IQ.