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Sen. Harkin concerned new rules not tough enough on for-profit schools

By Sally Holland, CNN Senior Producer
  • Iowa senator says stocks "soared" despite new student loan regulations
  • He thinks for-profit colleges, universities should meet stiffer standards
  • Rules focus on how many students are able to pay back at least part of their loans

(CNN) -- Sen. Tom Harkin criticized the business goals of for-profit schools at a hearing on the student loan industry Tuesday.

Stocks for larger for-profit schools "soared" when the Obama administration released its new criteria for higher education institutions to qualify for federal student aid last week, he said.

"When you have a business model out there that says you'll make more profit by getting the poorest people in, obviously because they get the most Pell grants and the most student loans, and so you target vulnerable people, and you bring them in because that's how you increase your profit and if they default after three years, who cares? It's no skin off their teeth. They keep the loans, they keep the Pell grants, and we've seen the profit structure of some of these schools -- tremendous," Harkin, D-Iowa, said.

"We want the sector to succeed," Education Undersecretary Martha Kanter said at the hearing. "I think that was one of the fundamental tenets of the (new) rule. We've got 11% of our students in this (type of) program. We've got to create a model that is going to help them improve and actually target the worst-performing programs and either have them improve or eliminate their eligibility for federal student aid."

Last week, the Department of Education put out the long-awaited rules under which colleges must operate to qualify for federal student aid programs. Known as "gainful employment," the regulations require that colleges meet one of three criteria: 35% of their former students are repaying their loans, a typical graduate's loan payments is not more than 30% of their discretionary income, or the typical graduate's annual loan payment is no more than 12% of his or her total earnings.

If colleges don't meet these criteria three times over a four-year period, they will lose their eligibility to take part in federal student loan aid programs.

The rules are targeted at the for-profit sector. Students at those colleges make up about 11% of the higher education group, yet they account for 46% of the student loan dollars in default.

Democrats at the hearing were careful to point out that not all for-profit colleges and certificate programs use this business model.

"I considered the gainful employment rule modest," said Harkin, expressing concern that the new regulations -- aimed at making sure that new graduates can get jobs that pay enough so they can afford to pay back their student loans -- were not hard enough on the for-profit sector.

There were no Republican senators at the Health, Education, Labor and Pensions hearing.

The regulations also require that higher education institutions make public other consumer information that may be helpful to prospective students including the total program costs, loan repayment rates, and the school's graduates' debt-to-earnings ratio.