Presentation to the Office of Information and Regulatory Affairs (OIRA) within the Office of Management and Budget, October 20, 2014

SUBJECT: Financial Impact on States of the Proposed Gainful Employment Regulations: State-by-State Estimates of How Much Proprietary Colleges and Universities Save State Taxpayers

PRESENTATION: By Jorge Klor de Alva
President, Nexus Research and Policy Center

What is Nexus?

Nexus is a non-profit, non-partisan research and advocacy center focused on improving higher education institutions, in all sectors, that serve primarily non-traditional and undeserved students.

What is the purpose of this presentation?

I’m not here to speak about proprietary institutions, I’m here because I care about non-traditional students and how best to serve them.

You have already heard from others about the consequences of the proposed Gainful Employment Rule on proprietary institutions, today I am here to briefly present  the consequences of the proposed GE regulations on state finances and, consequently, on the students in our 50 states and D.C. This presentation summarizes peer reviewed research, the full text of which is featured on the Nexus Research Website.

What is the focus of our study?

Our study focuses on important economic data the Department of Education did not analyze, but we did: Can states handle the financial liability the proposed GE Rule will likely impose on them and the nation’s capital?

What is the relevance of our data to OIRA?

The data is meant to help assess how consistent the proposed GE regulations are with the Administration’s policies promoting higher education access, affordability, and 2020 degree completion goals.

How is the study best summarized?

The study, using primarily ED data and, specifically, the data provided in the proposed GE Rule, can be summarized as follows:

The proprietary sector saves states billions of dollars annually. If the students in proprietary institutions are displaced by the gainful employment regulations, states will face a potential liability that either must be covered through additional state appropriations OR a reduction in services to students, with the accompanying increase in dropout and default rates, OR with increases in tuition making higher  education even less affordable than it is today. The alternative is that these students do not enroll in a postsecondary institution, making the President’s 2020 completion goal impossible to meet.

How is it possible for the proprietary sector to provide savings to states when tuition is frequently higher there than at public institutions?

As students shift from proprietary to public institutions the added demand will call for increased public appropriations OR higher tuition OR reduced services. Adverse effects on completion and affordability follow from all these options.

 What did our research uncover?

In a report published earlier this year we showed that by enrolling almost 1.4 million full-time equivalent students, students who would likely otherwise be enrolled in public institutions, proprietary colleges and universities in California, New York, Ohio and Texas made possible savings to their taxpayers of as much as $1.7 billion per year in state appropriations.

Since the release of that report, much has taken place at the U.S. Department of Education, particularly ED’s release in March of its Gainful Employment Notice of Proposed Rulemaking. In response, we extended our four state study to all 50 states and the District of Columbia.

According to ED’s press release accompanying the publication of the proposed regulations, the new Gainful Employment Rule will affect “about 1 million students [who] are enrolled in programs that would either fail or fall in the zone for improvement under the accountability metrics.”  If the regulations are adopted as published, almost all the programs in which these students are enrolled will eventually be closed, displacing around 1 million students who will need to find alternative routes to postsecondary credentials.

The federal government and the states, therefore, need to be aware of the financial burdens likely to result from ED policies that restrict or even eliminate a large slice of the proprietary higher education sector. This study aims to provide data needed by federal agencies and states to better understand the extent of that potential financial liability.

On the basis of the data provided in March by ED, we calculate (as explained in detail in the study) that currently there are approximately 231,000 bachelor’s and 391,000 associate’s degreed graduates annually from programs identified by ED as at-risk. Based on these numbers of graduates, we estimate that the associated appropriations needed to educate in public institutions the students enrolled in the at-risk programs will be almost $1.17 billion for those in bachelor’s and over $3 billion for those in associate’s programs. That is, the states and D.C. could face a financial liability of up to $4.2 billion to educate the 622,000 degree-seeking students.

This amount is for one year only. An assessment of the impact of the additional potential costs to state taxpayers, for example over five or ten years, would increase the estimated liability at the high end to somewhere between $20 and $43 billion.

In the second part of the report we estimate how much proprietary institutions as a whole (across the nation) save state taxpayers and in so doing we project the potential costs to states if the sector were to be curtailed or eliminated.

During the five-year period we studied (we use five years to avoid relying on a potentially non-representative year), the proprietary sector enrolled nearly 4.7 million FTE students in the 50 states plus D.C. at an estimated saving to the states and the nation’s capital of nearly $28 billion. In the sector’s absence that saving would be converted into a $28 billion liability had the states enrolled the displaced students in their public institutions. 

None of this is meant as an argument for loosening regulations—on Gainful Employment or other matters—that are reasonably aimed at improving the performance of proprietary, independent, and public institutions. After all, higher education is no place to store bad apples.

However, our data should caution state legislators, public officials, policy makers, college administrators, and taxpayers who believe that it is in the best financial interest of taxpayers to shift responsibility for the education of hundreds of thousands of students from the proprietary to the public sector—a sector that, as you heard from others who preceded me here, is too frequently ill equipped and undercapitalized to handle such an influx.

 Finally, this study serves as a reminder to policy makers that when comparing costs between public and proprietary institutions, it is important to consider not just the direct cost to students and their families represented by the tuition charged by each institution, but also the per-student public subsidy that supports the real cost of education and is ultimately also borne by those same families and students.

 I now want to point out several important details on the methods used in our study:

 We calculate the financial costs of enrollment shifts at two- and four-year public institutions separately. Because financial aid, such as Pell grants, goes to students, not to the institutions, the students in the at-risk programs in the proprietary schools would likely be eligible for the same level of federal financial aid if they attended public institution; therefore, we do not look at the federal taxes used to support these students. Further, in a few states, proprietary institutions already receive some appropriations for the benefit of specific students. We take these existing funds into account, subtracting them from our calculations of “additional appropriations” needed to accommodate in public institutions students in the at-risk programs at proprietary colleges. This prevents any “double billing” against state appropriations.

 Additionally, we take the projected number of students in at-risk bachelor’s and associate’s programs and multiply that number by the average state appropriation per full-time equivalent (FTE) student. For bachelor’s students we use state appropriations for broad-access four-year public institutions in the state (i.e., we don’t compare apples to oranges by using state appropriations made to selective colleges), for associate’s students we use the average state and local appropriation per FTE student for community colleges.

 Lastly, it is important to note that these are current expenditures and do not include the construction of additional buildings or the expansion of technology platforms required to accommodate fully online instruction for the thousands of new students who would potentially enroll in public institutions. In effect, we are extrapolating the level of current resources used for teaching without estimates of infrastructure expansion required to serve additional students.

 Thank you.

Dr. Jorge Klor de Alva
President, Nexus Research and Policy Center

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