To Pursue Federal Aid or Not

The Trump administration wants to spur more innovation in higher education. But some question whether pursuing federal student aid is worth it for alternative providers.

December 3, 2018
 
Students at the Flatiron School, a coding boot camp

The Trump administration in January will begin a new round of deregulation targeting some of the most fundamental rules that govern higher education. The hope, according to officials at the U.S. Department of Education, is that loosening current rules for accreditors can spur new innovation.

Yet as the regulatory overhaul draws near, some operators of alternative postsecondary programs are facing deliberations over whether to pursue federal financial aid if the department loosens current restrictions.

Observers of the sector -- which includes coding boot camps, online professional programs and other skills-based training -- don’t necessarily expect a rush for those federal funds, especially student loans.

“I don’t see a lot of evidence the market wants what the department is offering,” said Trace Urdan, managing director at Tyton Partners.

That reluctance stems partly from the government scrutiny that comes with access to Title IV of the Higher Education Act, the law that governs federal aid. Eligible institutions first must open their books to get approval from an accreditor. They then may face scrutiny over student results like loan repayment rates (although colleges rarely are booted from federal student aid programs over poor outcomes).

Alternative providers also tend to favor market-based financing options, such as private student loans or income-share agreements. Unlike with federal student loans, which critics say distort the higher ed market because students can get money to attend a program no matter the payoff, supporters of ISAs say the private market will support worthwhile programs.

Several observers, including some involved in funding skills-based training, say those programs are doing just fine without extra help from the government. And while Betsy DeVos, the education secretary, has named innovation as a top goal, many conservative policy makers have argued that the higher ed sector doesn't need more public money and should function more like the private market -- exactly what boosters of income-share agreements say those products accomplish.

Those calculations could be complicated when it comes to Pell Grants. Grant aid is targeted to low-income students by definition, and most people attending coding boot camps or other kinds of postdegree career training program won't qualify for Pell. So some ISA supporters, who don't have concerns about grant aid changing higher ed incentives, say they'd be open to taking grant money but not loans.

Revenue generated from either grants or loans could be a boon to alternative providers if they decide it’s worth significant changes to their existing programs to join the roughly 7,000 colleges and universities that participate in Title IV. David Bergeron, a senior fellow for postsecondary education at the Center for American Progress, said federal data indicates that 9,000 institutions take in revenue from GI Bill benefits or other federal programs, a potentially large pool of providers that could seek out new federal funds if restrictions on accreditation are lifted.

"Our goal is to enable otherwise accredited institutions to innovate and serve students based on what today’s students want and need," Diane Auer Jones, the principal deputy under secretary for postsecondary education, who has been the point person for the upcoming package of regulatory changes, said in a written statement. "We are also interested in exploring ways in which institutions could partner substantively with businesses so that work-based learning can be credit-yielding or so that institutions could better utilize the facilities and expertise of businesses rather than trying to keep up with the latest technologies in the traditional classroom environment."

Sustainable Emerging Market or Fad?

In recent years, advocates have promoted ISAs as a solution to anxieties over growing student debt. The agreements require graduates to pay back a certain percentage of their income for a set number of years. That offers a certain amount of security to students who earn less than expected.

ISAs to some extent operate like income-based repayment on student loans. But the provider who offers the plans, rather than students or the government, would be on the hook if a program doesn’t pay off. And unlike federal loans, income-share agreements allow for underwriting, where investors assess whether a particular program will pay off.

“Whether it’s a coding boot camp or a specific skill in health care, all these programs should have a return on investment that is supported by the market,” said Daniel Pianko, co-founder and managing director at University Ventures. “Why else would we be doing skills-based training?”

Pianko said ISAs compete primarily with private student loans. He argues that federal loans remove market incentives and allow programs to survive that wouldn’t otherwise.

“The answer folks are looking for is not Title IV funding, it’s to increase the legality around income-share agreements,” he said of skills-based programs.

Purdue University rolled out an income-share agreement in the 2016-17 academic year. But most institutions that offer the agreements are private sector skills-training programs, many of which focus on older students who already have a bachelor's degree. For example, General Assembly, one of the largest and most respected coding and skills boot camp providers, announced this summer that it would offer an ISA to students.

Another boot camp focused on coding, Make School, offers an income-share agreement that requires graduates to pay back 20 percent of their income for five years as long as they make a minimum of $60,000. At lower salaries, the payments would be deferred.

Ashu Desai, the co-founder of Make School, said those terms -- 20 percent is high compared to most ISAs -- reflects the younger demographic of the school’s student body.

“Initially it was an experiment and a way to get off the ground. We ended up continuing with the model because we felt there was a big challenge with the student debt crisis,” Desai said. “It ensures the school is responsible for getting a good outcome for students.”

ISA providers like Make School operate in a largely unregulated market. (Legislation introduced by Representative Luke Messer, an Indiana Republican, would clarify the rules for income-share agreements, but it hasn’t gone anywhere in Congress.) Mark Kantrowitz, a financial aid expert and publisher of savingforcollege.com, said the regulatory environment gives ISA operators a pass on consumer protections.

“ISAs are just a different type of loan, and they should be subject to all the same rules,” he said.

The agreements face skepticism even within the skills-based training sector. Rick O’Donnell, founder and CEO of the Skills Fund, which makes loans to coding boot camps as well as some other career-training programs, said the agreements are at best a small innovation that won’t get wide-scale traction, or possibly just a marketing gimmick. Skills Fund makes loans for students to attend short-term skills training programs, many of them online, creating another postsecondary pathway without federal aid.

The company acts as both the lender and an accreditor by using its own quality-assurance process to determine which programs are eligible. Alternative providers likely won't pursue Title IV money if it requires them to substantially change their offerings to match the standards of traditional programs, O'Donnell said.

“That money comes with strings attached,” he said. “And the private sector is already responding to the needs of students.”

Some liberal advocates of a more tightly regulated higher education system say they’re fine with options like ISAs as long as students don’t take them out on top of federal loans. The roughly $100 billion the federal government disburses through the federal student loan program each year is a much bigger worry, they say.

“There’s just not as much money on the table. It’s a different scope of risk,” said Clare McCann, deputy director for federal higher education policy at New America. “Federal aid is my concern. That’s when the fraud and abuse kicks up. It’s easy access to money.”

And McCann noted it’s almost impossible to get kicked out of the Title IV program once you’re in -- it’s extraordinarily rare for the Education Department to cut off federal student aid to even the worst-performing colleges. ISAs at least provide accountability to investors, she said.

Barmak Nassirian, director of federal relations and policy analysis at the American Association of State Colleges and Universities, said he was skeptical that many non-Title IV programs would turn down federal money if it became available.

“They’re making a virtue out of necessity,” he said of the ISA model.

Nassirian predicted that more alternative programs may seek partnerships with existing federal aid-eligible institutions to provide courses -- a model along the lines of the EQUIP experiment launched by the Obama administration. That experiment is ongoing but has struggled to attract participants, and several colleges have already dropped out.

“The minute the spigot is turned on, they will all be in line to get theirs,” Nassirian said. “It’s really hard to compete with free money.”

Many of alternative providers DeVos has praised already have formed partnerships with traditional Title IV programs. StraighterLine, an operator of online college courses, which does not offer degrees or credentials, has guaranteed credit-transfer agreements with 130 colleges. And the provider has relationships with other colleges that refer students directly to StraighterLine for courses. The company charges a subscription price of $99 a month, a fairly inexpensive proposition for students who wouldn't qualify for federal aid.

Burck Smith, StraighterLine's CEO and founder, said whether the company pursues Title IV funds would depend on how much the program would have to change its offerings to qualify. StraighterLine has looked at ISAs, he said, but concluded they didn’t make sense because the company offers only individual classes, not degrees or credentials.

"We're a piece of the program as opposed to the whole thing," he said. "Our ability to control outcomes for students after the degree is limited."

Some ISA operators like Make School, meanwhile, are already making plans to get accredited -- a first step toward access to Title IV. But the company’s not planning to seek access to federal student loans, said Desai. Instead, it wants to offer the kind of broader college education that both students and employers are asking for, he said.

“We’ll have a foot in both worlds,” Desai said.

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