For-profit colleges have come under fire lately, as the U.S. Department of Education is throwing the book at the nation’s educational mills — which have left so many students with massive loans and so few job prospects, and honestly, it’s about time. For-profit schools, including ITT Technical Institute and University of Phoenix, offer many classes online and account for about 12 percent of our nation’s students enrolled in college.

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Never have the penalties, announced on Oct. 30 and which will go into effect next July, been so warranted. They will go a long way in stopping the fleecing of students and the bilking of U.S. taxpayers who have been picking up the tab for these for-profit schools whose only real mission seems to have been to put “assess in classes” for the sole purpose of enriching investors. In effect, the for-profit colleges will finally be forced to pay the toll for prioritizing their financial success over student success.

Essentially, the new rules act as a much-needed financial stress-test for these for-profit colleges. To pass the test, their graduates must have annual loan payments that are less than 8 percent of their total earnings, or less than 20 percent of their discretionary earnings (based on a formula set by the federal government that factors in loan payments and poverty levels). If these for-profit programs can’t meet these standards (working to ensure their students have “gainful employment” so they can successfully pay back their student loans), the government will pull its funding, which accounts for about 90 percent of the schools’ budgets. For example, the nation’s leading chain of profit colleges collected $3 billion from the government in 2008.

Predictably, the Obama administration’s new rules have drawn the ire of the Assn. of Private Sector Colleges and Universities, the for-profit trade group whose president and chief executive Steve Gunderson said, “The regulation will hurt the very students it is intended to help by restricting educational access for millions of students and unfairly targeted certain institutions.”

Here’s why that’s not so.

The story behind University of Pheonix

John Sperling, the founder of University of Phoenix, saw the need for educational courses for non-traditional students — police and fire fighters and working moms — who wanted to advance their careers so they wouldn’t have to live paycheck to paycheck. While teaching at San Jose State, he won a government contract to develop coursework for police officers, whose schedules didn’t conform to a mainstream college setting. When San Jose State balked at institutionalizing his program, he took it to the University of San Francisco. Soon, his adult education program, which became known as the Institute for Professional Development (IPD), had enrolled 2,500 students and was showing a profit. In 1976, he renamed it the University of Phoenix after its new Arizona home. Interestingly, Sperling said he located it there because the state had few rules.

Sperling, who died this year at 93, had become an educational pioneer, clearly establishing a need for people who hungered for education and career advancement outside education’s traditional ivy-strewn path. His idea made him a billionaire.

If only the story had ended there.

For-profit school become very profitable, but at a cost

In 1994, Sperling formed the Apollo Group, the parent company of the University of Phoenix, which joined the Nasdaq Stock Market as a publicly traded company. Sperling spawned envy and imitators, like Corinthian and ITT Tech, and essentially changed the focus from serving students to serving shareholders.

To fill seats (putting asses in classes), Apollo and its competitors began preying on all kinds of students, ill-prepared for college life. For example, an investigation in 2012 by the United States Senate Committee on Health, Education, Labor and Pensions showed that 60 per cent of Apollo students dropped out within two years; while of those who completed their courses, 21 per cent defaulted on paying back their loans within three years of finishing. It also revealed that 89 per cent of Apollo’s revenue came from federal student loans and, that it spent twice as much on marketing as on teaching.

The same investigation noted that an online degree from the University of Phoenix cost six times more than a comparable degree from the Maricopa Community College system, where the University of Phoenix is headquartered, and that Sperling was paid $8.6 million in 2009, 13 times more than the president of the University of Arizona.

As for whom these schools focused their recruiting efforts on, they weren’t targeting potential Phi Beta Kappas, that’s for sure. In a lawsuit against Santa Ana, Calif.-based Corinthian College, which has since been ordered to close its doors, the California Attorney General stated that it targeted impoverished single parents, a segment that the college’s internal documents described as “composed of ‘isolated’ and ‘impatient,’ individuals with ‘low self-esteem,’ who have ‘few people in their lives who care about them’ and who are ‘stuck’ and ‘unable to see and plan well for the future.’”

TV ads recruiting their ideal student model-match appeared ad nauseam on daytime shows like “Jerry Springer” and “The Maury [Povich] Show.”

We’ve seen this act before in a different guise

The way these for-profit schools have been operating reminds one of how lenders not so long ago were making loans to anyone with a pulse. Lenders made the loans, fully assured that the government-sponsored enterprises such as Fannie Mae and Freddie Mac would buy everything they could sell them, regardless of quality. We know the outcome of that story, and our nation, seven years after the housing bubble burst, is still feeling the hangover.

The for-profit colleges have followed the lenders’ same formula for fortune, with equally disastrous results for the nation. For example, more than 19 percent of students at for-profit schools have defaulted on federal loans after three years compared with less than 13 percent at public institutions. For-profit schools enroll about 12 percent of all college students, but the sector is responsible for 44 percent of student loan defaults, according to federal data.

But again, this anemic of record of repayment has been of little concern to the for-profit universities because they keep getting paid, regardless, as lenders once were. Find ‘em, fund ‘em and forget about ‘em, because they are the government’s problem now.

Not anymore!

Let the great shake-out begin

Under the new rules, it’s estimated that about 1,400 of the for-profit college programs, out of a possible 5,500, won’t meet the new stress tests. That’s about 840,000 students enrolled in programs that probably will violate debt-to-income rules.

“These regulations are a necessary step to ensure that colleges accepting federal funds protect students, cut costs and improve outcomes,” said Arne Duncan, Secretary of Education.

The new rules have personally impacted me as well, not just as a concerned taxpayer who cares about the quality of education in this country. My wife once took a job at a for-profit culinary institute, naive and uneducated about how it churned a profit at students’ and taxpayers’  expense. Often, over dinner, she shared how her company’s pay-for-performance sale staff were pressured to meet targets and encouraged to sign up anyone they could. The recruits were good kids with GI Bill money to burn or people who learned via those mid-afternoon or late-night commercials that they qualified for government grants and loans dollars due to their impoverished condition. It was one big gravy train for the school’s operators. For those who did graduate, nearly all with crippling student loans, they were more likely to be working at minimum wage jobs than as chefs at five-star hotels. My wife quit a few weeks later after learning how the scam worked.

Then, I think of my niece, who unlike her two sisters who graduated from the University of Santa Barbara, put off school for a few years before finally deciding to attend the University of Phoenix, where she earned a business degree while working a full-time job. I attended the graduation and was proud of her accomplishment.

She had a positive educational outcome, but there haven’t been enough of them. That’s what the new rules are about. These rules and regulations have been absent for far too long in an educational system that has operated with impunity. Now the bill has come do. Pay it or close your business.

Now my only remaining wish is that the same rules that apply to for-profit colleges also be applied to our public educational institutions. They should be held equally accountable for the quality of the graduates they are producing and the unconscionable debt they are saddling their graduates with relative to the wages they’ll be earning.

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