Reps Issa/Foxx challenge Department of Education rule mired in economy

Posted: Jul 08, 2011 11:14 AM
With Congress thankfully derailing many of the President’s radical proposals, Obama has used regulatory agencies to implement the policies Congress rejected. Enter the Department of Education (DoEd). Under what one Senator is calling “criminal” circumstances, DoEd recently published the “gainful employment” rule—a blatant attack on America’s bustling for-profit schools.

Here’s how the new rule works. A student applies for and receives a federal loan. The student can use the federal loan to pay for a traditional public or private school—no questions asked. But, under the new DoEd rule, if the student wants to use their federal loan to pay for certain for-profit colleges, those schools must meet DoEd’s new arbitrary metrics. The term gainful employment comes from the rulemaking which states that a percentage of for-profit’s students must receive “gainful employment” by a certain date. With the federal government unfortunately dolling out billions in student loans annually, this puts for-profit colleges at a marked disadvantage and further skews America’s higher education sector.

Amongst conservatives, there is a near consensus that the DoEd’s education loan programs need to be eliminated or at least significantly scaled back. The DoEd will authorize $116 billion in direct loans this year and has backed $450 billion in loans issued with private capital through its Federal Family Education Loans program. The gainful employment rule, however, does nothing to limit the amount of money spent by the federal government, only who can receive it. All colleges should be able to compete for students with federal loans, not just the schools the DoEd likes.

While the gainful employment regulation itself is dreadful policy, the process surrounding the rulemaking has propelled the rule to infamy. There is a disconcerting amount of evidence showing that Wall Street investors may have worked with Department of Education officials to write the gainful employment rule and then profited from its implementation. At the fulcrum of these accusations is Steve Eisman, a hedge fund manager for FrontPoint Financial Services.

Eisman first became publically involved with the gainful employment issue when he testified before the Senate’s Health, Education, Labor, and Pensions committee in June of 2010. Although he had few qualifications and knew little about education policy, Senator Harkin (D-Iowa) invited Eisman to give scathing testimony about for-profit schools. A FOIA from Citizens for Responsible Ethics in Washington (CREW) later revealed that Eisman had been in contact with DoEd officials, meeting in person and via email, for months leading up to the Harkin hearing.

The more Eisman and other financial advisors decried for-profit schools, the more the value if their stocks decreased, and the more money Eisman and his compatriots made. Eisman and his investors engaged in a practice called short selling where they bet that the stock price of for-profit schools would decrease. Although for-profit schools’ stocks took a hit while Sen. Harkin was holding hearings advocating for the gainful employment rule, the for-profits’ stocks nosedived once DoEd announced they were writing the regulation. Furthermore, there is reason to believe that Eisman was afforded inappropriate information about the timing of DoEd’s rule. It is very possible that Eisman knew DoEd was going to issue the rule before they did, allowing him to cash in on this information.

Despite an internal investigation underway from DoEd’s Inspector General and calls by Senator Mike Enzi that the SEC investigate the process surrounding the rulemaking, the Office of Management and Budget issued the final version of the rule a month ago.

A dark cloud still looms over the DoEd. Attempting to shed light on the dreadful rulemaking and the forces that drove its implementation, Congressional watchdog Reps. Issa (R-Calif.) and Foxx (R-N.C) are holding a hearing Friday July 8 titled “The Gainful Employment Regulation: Limiting Job Growth and Student Choice.” DoEd officials have been dodging questions about the rulemaking and its effects for far too long. Students that attend for-profit schools and the teachers and staff that are employed by the industry deserve their day in court. Rep Issa has given them one.

Trending Townhall Video