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Why Are Conservatives Fighting for Tax-Eating Colleges?

President Ronald Reagan got a letter from a congressman in 1981 asking for a meeting to discuss the future of the Department of Education.

"I hope it doesn't have one," Reagan wrote in the margin.

Reagan's fiscal 1986 budget proposal called for a $2.3 billion reduction in federal financial aid to college students. He consistently reminded lawmakers and the public that the resources available for federal student aid were not an unlimited well from which government could draw.

Now, as Department of Education regulators propose new rules to cut-off the worst-performing colleges from federal aid, an unusual alliance has sprung up to fend off the regulations. Advocacy groups such as Americans for Tax Reform and the Alliance for Worker Freedom, an anti-union organization, have joined Tom Matzzie, MoveOn's former Washington director, and Lanny Davis, former special counsel to Bill Clinton, as champions of so-called for-profit colleges.

"The Office of Management and Budget (OMB) today published the now infamous 'gainful employment' rule, written by the Department of Education. This new rule, which emerged amidst a cloud of scandal and controversy, places incredible and unfair burdens on the nation's bustling for-profit higher education sector," according to an article published on the websites of both the ATR and the Alliance for Worker Freedom last week.

Now ATR chief Grover Norquist has written a letter to the head of the enforcement division of the Securities and Exchange Commission calling for an investigation into the role of FrontPoint Partners hedge fund manager Steve Eisman in shaping the rules. (Hat Tip: AR Magazine.)

"There is reason to believe that [working with the Department of Education] afforded Mr. Eisman and other investors intimate, inappropriate knowledge about the forthcoming gainful employment rule.

Traders were then able to monetize this information by short-selling for-profit institutions' stocks,” Norquist wrote in his letter.

I’m confused why ATR or the Alliance for Worker Freedom have become involved in this fight. If anything, it seems that folks like Norquist should be fighting to stop the growth of these largely government-funded colleges.

The term "for-profit colleges" might make it sound like these are market-driven institutions, but that’s far from the truth. Up to 90% of the revenues of for-profit colleges comes from either direct government aid or government-backed loans. These are creatures of government—which is why they are fighting so hard to resist regulations that could cut them off from the government bread line.

Graduates of these schools default on student loans at much higher rates than those of other federally-backed loans. The schools enroll just 10 percent of all college students, but those students account for as much as 40 percent of defaults.

What the government backing means is that the profits of the schools are privatized, while the losses are socialized. That’s not free-market capitalism.

The growth of for-profit schools is frightening. Enrollment has skyrocketed nearly 418 percent since 2000. But instead of warning about the rapid, bubble-like growth of these tax-eating educational rackets, Norquist's folks are celebrating it.

When it comes to Department of Education funding for for-profit colleges, shouldn’t the heirs of Reagan be hoping that it doesn’t have a future?

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