The Capitol Forum February 25, 2014

Education Policy: While Middle-of-the-Road GE Rule Remains Probable, A Tough, Effective Rule Appears More Likely Following High-level Shifts in Priority, Key Players; Proposal with Alternatives an Option for ED

Conclusion

Currently, the Office of Management and Budget (OMB) is conducting meetings with the public in advance of the Department of Education (ED) publishing a proposed rule on Gainful Employment (GE). The political circumstances and key personnel around ED’s GE rule are different during this round of rulemaking than the last.

For this report, we interviewed a former senior White House official about the new set of key players involved. We also interviewed education experts who have met with OMB in recent days to discuss both those meetings and the new set of key players. The takeaways from our interview shed light on the current landscape of top officials at the White House who are likely to be involved in final decisions around GE and also provide insight into the types of questions being asked at OMB. To view the OMB meeting records, please click here (note: there are several errors on the OMB’s website in terms of matching documents to the correct meetings).

Key Points

Next Steps, GE Timeline. As for next steps, OMB’s Office of Information and Regulatory Affairs (OIRA) continues to conduct meetings about the proposed GE rule that is pending to be published in the near term. While OMB staff attempted to finish their meetings last week, one source mentioned that meetings continue through this week. From a procedural standpoint, important steps in the process include:

 ED sends proposed rule to OMB (completed).  OMB reviews rule (in progress).  ED publishes proposed rule in the federal register (March 2014).  ED receives comments (45-60 days from publication).  ED sends final rule to OMB (Summer/Fall of 2014).  OMB reviews rule (Summer/Fall of 2014).  ED publishes rule in the federal register (By November 1, 2014).  Final rule goes into effect (July 1, 2015)

Current Questions from OMB. While the experts we spoke with—including two consumer advocates and one for-profit college lobbyist, who met on different days with OMB—cautioned us not to read too much into comments from OMB (given that the agency is known for not tipping its hand) we learned that OMB and other government policymakers asked questions around several different topics, including:

 Each interest groups’ preferred debt-to-earnings (DTE) metric  Job placement rates  The case for having a “middle zone”  Data about how individual private schools would have problems meeting the most recently proposed metrics

1 You are currently a subscriber to The Capitol Forum. The Capitol Forum is a subscription news service that provides comprehensive news coverage of competition policy as well as in-depth market and political analysis of specific transactions and investigations. Please contact 202-601-2300 for sales or editorial questions.  Formal studies that include data on outcomes  Arguments about whether or not the rule will curb student access

Differences in Presidential Priorities. The President is not up for re-election as he was the last time GE went through the rulemaking process. At the same time, Congress’ ability to pass legislation to address concerns about for-profit colleges seems, at least temporarily, to have evaporated. The President has, unsurprisingly, put executive action on key middle class pocketbook issues as a top priority for the rest of his second term. To the extent that GE becomes one of those key pocketbook issues, as it is one of the boldest ways the President could address student debt, it becomes a higher priority to ensure that the policy achieves its intended goals.

Takeaways from Interviews on Key Players. Perhaps the most important battles will come down to those key players focused on aggressive policy outcomes—including John Podesta, Dennis McDonough, and ED staff—versus those who are more sensitive to political pressure from outside groups and more interested in compromise than arriving at a desired policy outcome—including the President, OMB leadership and staff, and ED Secretary Arne Duncan. In the middle of these debates is the new head of OIRA, Howard Shelanski, who takes the place of Cass Sunstein. Mr. Sunstein often took a stance sympathetic to industry arguments about the costs of regulations, whereas Mr. Shelanski, an antitrust economist, is more likely to take a broader view of how regulations affect market competition.

Personnel Differences. Key differences in personnel versus last time around are that Mr. Podesta and Mr. McDonough were not at the White House during the previous GE negotiations, whereas both Larry Summers and Gene Sperling were influential in the negotiations but are now no longer on the inside. Mr. Summers and Mr. Sperling both seemed particularly interested in policy that took into account “political realities” whereas Mr. Podesta was brought in to maximize the ability to effect good policy outcomes without passing legislation through Congress. Additionally, the shift from Mr. Sunstein to Mr. Shelanski at OMB’s OIRA likely means that someone more open to industry arguments about cost and more interested in altering regulations has been replaced by someone who is likely more thoughtful about how regulations affect the competitive landscape and who is also less interested in upsetting the apple cart.

A Savvy Option for ED: Proposal with Alternatives. One option, as suggested by our source, for the proposed rule could be what is known as a “proposal with alternatives”, which would offer up two or more options for regulatory action and receive public comments on those options so as not to limit what ED could do with a final rule. The rationale for a proposal with alternatives for ED would be that, because ED continues to worry that it might lose in court, and because ED continues to lack conviction in the best policy with which to move ahead (judging by the dramatic shifts in policy options proposed during the negotiated rulemaking period), ED could both keep flexibility during rulemaking and also receive robust comments on a variety of options that would serve as arguments in favor of a rule when a rule ultimately is challenged again in court.

In other words, if ED doesn’t receive comments and wants to change policy between the proposed and final rule, it would be more difficult than if ED moves ahead with a proposal with alternatives. While one expert we interviewed said it would be surprising, given the facts surrounding GE, that ED would not use a proposal with alternatives, another expert said this approach was unlikely because ED has not moved ahead with a proposal with alternatives in the past. Stakeholders should note that moving ahead with a proposal with alternatives would signal a savvy ED policy proposal with the potential to take an aggressive stance, whereas a proposed

2 You are currently a subscriber to The Capitol Forum. The Capitol Forum is a subscription news service that provides comprehensive news coverage of competition policy as well as in-depth market and political analysis of specific transactions and investigations. Please contact 202-601-2300 for sales or editorial questions. rule without alternatives is likely to serve as the toughest proposal we will see, with OMB and a round of rulemaking likely to weaken any proposal as it moves ahead.

In-depth Key Players Analysis

Below, we break down the key players into three categories: Likely pro-enforcement of program integrity rules, likely neutral, and likely sympathetic to industry arguments.

Key players who are likely pro-enforcement include:

 John Podesta, Counselor to the President. In December of 2013, Mr. Podesta agreed to serve as counselor for one year to President Obama. Previously, he served as head of President Obama’s transition team and before that as chief of staff to President Clinton. When out of office, Mr. Podesta launched and served as the head of the Center for American Progress (CAP), an influential, progressive Washington think-tank. He has been brought in to ensure that the President is able to effect meaningful progressive policy even as the legislative process has ground to a halt in Congress. Mr. Podesta’s likely view on GE, once it is elevated to the point of interest for the White House, is that it is an opportunity to boldly address the U.S.’ escalating student debt crisis that is otherwise difficult to respond to via executive authority. CAP education staffers told us that while there has been argument within CAP in the past about how best to address for-profit college regulation, Mr. Podesta never clearly intervened on this issue. At one point, he did directly support efforts to combat clear fraudulent statements by the industry, but he never stepped into this education issue in a holistic way. That said, given his record as a staunch progressive policymaker, and given that his goal was to show strength from the office of the President on regulatory matters in a way that would promote middle class goals, GE seems like a policy issue that Mr. Podesta would embrace as an opportunity to enact significant reform rather than as a political hot-potato to avoid. Further, David Bergeron, who served as the architect of the GE rule at the Department after Bob Shireman departed, now works at CAP as Vice President, Postsecondary Education.

 Dennis McDonough, White House Chief of Staff. Mr. McDonough was once a senior fellow at CAP, but more recently has been the #2 at the National Security Council and before that was a foreign policy advisor to former Senate Majority Leader Tom Daschle. Our source described him as the type of person that would not be subject to political pressure from for-profit college lobbyists and would likely side with Mr. Podesta’s more progressive instincts on the issue.

 President Barack Obama. Our source cautioned that one should not read too much into President Obama’s recent outbursts against the for-profit colleges. Mr. Obama has developed a reputation for thinking that something is bad but not necessarily deciding that regulation is the appropriate way to solve the problem. Where Mr. Obama ultimately falls in the spectrum of support for GE could be determinative of how tough and effective a GE rule is upon final publication. In the end, while it may be wise not to read too much into Mr. Obama’s comments about for-profit colleges, it is hard to ignore them (click here for an example) as an indication of which side of the fence he will come down on if confronted with a decision.

3 You are currently a subscriber to The Capitol Forum. The Capitol Forum is a subscription news service that provides comprehensive news coverage of competition policy as well as in-depth market and political analysis of specific transactions and investigations. Please contact 202-601-2300 for sales or editorial questions.  Jeff Appel, Deputy Undersecretary, ED. In June of 2013, Mr. Appel finally stepped in as deputy undersecretary to attempt to fill the void left by Mr. Shireman’s departure. Previously, he was a special assistant in ED’s planning and policy department. Before that, he was a staffer to Congressman George Miller, who at the times was Chairman of the House Committee on Education and the Workforce. Mr. Appel has a pro-consumer bent and is known as being a staunch defender of the goals laid out by supporters of the GE rule.

 James Kvaal, Deputy Director, Domestic Policy Council, The White House. Mr. Kvaal has been a leader on higher education issues, particularly GE, throughout the Obama administration. He is well- respected and he attempted to push through a tough GE rule despite concerns raised by the White House and other political appointees that the rule should be watered down in acknowledgment of the high level of opposition lobbying and claims that the White House was “anti-business.” Following publication of the final GE rule in 2011, Mr. Kvaal attempted to argue that even the final GE rule would be effective, but in retrospect it was clear that Mr. Kvaal was forced to make concessions to Mr. Summers and other political appointees that weighed in against the rule.

Key players who are likely neutral include:

 Howard Shelanski, OIRA Administrator, OMB, The White House. Mr. Shelanski, while he is difficult to pinpoint as likely to support or oppose a tough GE rule, more than anything is known as a reasonable straight-shooter who is thoughtful about market competition. Mr. Shelanski was previously the Director of the Bureau of Economics at the FTC and he has also served as Chief Economist of the FCC and as a Senior Economist for the President’s Council of Economic Advisors. As an antitrust expert, Mr. Shelanski is expected to bring a more competition policy-focused angle to OIRA, whereas the previous administrator, Cass Sunstein, was more focused on behavioral economics. Mr. Shelanski could very well view a GE rule as a necessary regulation that would improve the competitive landscape in the for-profit college sector in that the rule, if effective, would improve accountability and set better rules for competition over students’ and taxpayers’ education dollars. Perhaps most importantly, Mr. Shelanski, even if he proves neutral on GE, would be a step towards enforcement when compared to Mr. Sunstein, who, according to sources, was receptive to industry claims about the high cost of regulation and was focused on how rules would affect consumers.

 Arne Duncan, Secretary of Education. Mr. Duncan is clearly more focused on K-12 issues and has not, according to sources, ever taken ownership of the President’s Higher Education agenda, and additionally has never weighed in significantly on the GE issue. According to sources, Mr. Duncan has shown an instinct to compromise in the face of political opposition. However, Mr. Duncan has stood behind GE and supported his staff throughout the entire process, and only upon White House intervention was the rule substantially watered down in the final version.

Key players who are likely sympathetic to industry arguments and political pressure include:

 Sylvia Mathews Burwell, Director, OMB. While Mr. Shelanski is head of the group that directly oversees the regulatory review process at OMB, Ms. Burwell is his boss and would have influence if the GE issue does not have the same level of controversy that it did the first time around. Ms. Burwell previously worked as deputy chief of staff in the Clinton White House and before that for Treasury

4 You are currently a subscriber to The Capitol Forum. The Capitol Forum is a subscription news service that provides comprehensive news coverage of competition policy as well as in-depth market and political analysis of specific transactions and investigations. Please contact 202-601-2300 for sales or editorial questions. Secretary Robert Rubin as his chief of staff. She has a reputation as being sympathetic to industry arguments and as not having a pro-enforcement bent.

 Ted Mitchell, Undersecretary for ED. Whereas Mr. Appel has a strong pro-consumer resume, Mr. Mitchell has a strong business resume. Lee Fang of The Nation recently wrote a thorough article on Mr. Mitchell’s ties to education corporations and the privatization movement. Before being nominated for his ED position, he served as an advisor to Salmon River Capital, a VC firm that held in its portfolio of investments the for-profit school, Capella University. Pro-consumer advocates have expressed concern that GE will ultimately need the signature of Mr. Mitchell in order to be finalized.

Running List of Stakeholders Who Have Attended Recent OMB Meetings

OMB  Tom Downey, DMG, on behalf of Monroe  Alex Hunt, OIRA College  Shafufta (Shagufta) Ahmed, OIRA  John Olinger, DMG, (Monroe College)  Abigail (Abby) Norris, Education Branch  Kelly Noto, Monroe College  Andrei Greenawalt, OIRA  Marc Jerome, Monroe College  Amanda Thomas  Jennifer Blum, Laureate Education  Dom Mancini  Andy Rosen, Kaplan  Don Graham, Graham Holdings WH Domestic Policy Council (DPC)  Becky Campoveroe, Kaplan  Ajita Talwalker (Ajita Menon)  Michael Locke, Rasmussen College  James Kvaal  Roberto Rodriguez Pro-consumer Lobbyists/Experts  Ethan Senack, US PIRG CEA  Pauline Abernathy, TICAS  Jordan Mastudaira  Debbie Cochrane, TICAS  Lynn Jennings  Joseph Mais, TICAS  Kalwis Lo, US Student Association ED  Rory O’Sullivan, Young Invincibles  Melanie Muenzer  Jennifer Wang, Young Invincibles  Elizabether McFadden  Sarah Audelo, Generation Progress, CAP  Jeff Appel  David Halperin, Huffington Post, Republic  Aaron Ameut Report  Tushar Sheth  Ben Miller, New America Foundation  Melanie Muenzar  Stephen Burd, New America Foundation  Paheadra Robinson, Mississippi Center for Pro-industry Lobbyists/Experts Justice  Noah Black, APSCU  Whitley Bay, Mississippi Center for Justice  Sally Stroup, APSCU  Barmak Nassirian, AASW  Steve Gunderson, APSCU  Emily Parker, AASW  Alex Nock, Pennhill Group, on behalf of  Linda Sherry, Consumer Action Rocky Vista University  Barbara Hobiltzell, University of California  Cheryll Lovell, Rocky Vista University  Carolyn Henrich, University of California

5 You are currently a subscriber to The Capitol Forum. The Capitol Forum is a subscription news service that provides comprehensive news coverage of competition policy as well as in-depth market and political analysis of specific transactions and investigations. Please contact 202-601-2300 for sales or editorial questions.