Obama Plans New Rules Cutting Aid to For-Profit Colleges

Photographer: Joshua Lott/Bloomberg

Signage for the University of Phoenix, part of Apollo Group Inc., is displayed on a building at their campus in Tucson, Arizona. Close

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Photographer: Joshua Lott/Bloomberg

Signage for the University of Phoenix, part of Apollo Group Inc., is displayed on a building at their campus in Tucson, Arizona.

The Obama Administration is gearing up to produce tougher regulations that may reduce the amount of federal financial aid flowing to for-profit colleges, cutting the companies’ annual revenue growth by as much as a third.

In response, the $29 billion industry and its supporters including Republican Senators have enlisted top Washington lobbyists and are courting black and Hispanic legislators to fight the proposed rules scheduled to be released as early as this month. The companies draw students from low-income and minority communities.

Federal aid to for-profit colleges has become an issue as it has jumped to $26.5 billion in 2009 from $4.6 billion in 2000, according to the Education Department, prompting concern that these students are taking on too much debt. Twelve higher- education stocks fell an average of 7.4 percent for the week ended April 30, according to Bloomberg data, following an April 28 speech by an Education Department official critical of for- profit colleges. In the same period, the Standard & Poor’s 500 Index dropped 1.7 percent.

“There’s an attempt to manage” for-profit colleges by the Obama administration, Robert Wetenhall, an analyst with BMO Capital Markets in New York, said in a telephone interview. The education companies’ influence in Washington has “radically changed,” from the years of the Bush administration, he said.

The tougher rules, which are expected to be released for public comment in the next several weeks, would require ITT Educational Services Inc., Career Education Corp. and Apollo Group Inc.’s University of Phoenix to show that their graduates earn enough money to pay off their student loans. If for-profit colleges can’t meet the standard, they could lose federal financial aid, which typically makes up three-quarters of their revenue.

Tuition Increases

The proposed rules may disqualify for-profits from receiving federal financial aid if their graduates must spend more than 8 percent of their starting salaries on repaying student loans. The regulations may slow or even halt tuition increases at ITT, Education Management Corp., Lincoln Educational Services, Universal Technical Institute, and Career Education because many graduates take low-paying jobs in criminal justice, cooking and medical office work, Trace Urdan, an analyst at Signal Hill Capital Group in San Francisco, said in an interview.

Education companies have increased revenue by as much as 15 percent and enrollment by 8 to 10 percent on an annual basis, while raising tuition about 4 to 6 percent a year, Urdan said. The new rules may slow their revenue growth by one third by limiting their ability to raise tuition.

Pricing Power

“The days of 4 to 6 percent annual tuition price increases are over,” Urdan said. “The new proposed rules will bring some school’s power to increase prices down to zero.”

Apollo closed at $58.32, up 91 cents, or 1.6 percent, in New York Stock Exchange composite trading yesterday. ITT closed at $104.22, up $3.09, or 3.1 percent. Career Education rose $97 cents or 3.3 percent to $30.24.

The Education Department plans to issue the regulations without Congressional approval, unlike student-loan legislation which passed in March.

“Congress has not held a single hearing on these new enforcement mechanisms,” Alexa Marrero, spokeswoman for John Kline, the ranking Republican on the House education committee, said in an e-mail. “No research has been offered by the department to justify the controversial proposal.”

U.S. Senator Lamar Alexander, who chairs the Senate Republican Conference, is trying to persuade U.S. Education Secretary Arne Duncan to reconsider the regulations, said a Republican aide on the education committee. If that doesn’t work, Alexander, who is on the education and appropriation committees, would try to kill the regulations by cutting off funding, the aide said.

Enrollment in for-profit colleges increased to 1.8 million in 2008 from 673,000 in 2000. Industry revenue will rise to $29.2 billion this year from $9 billion in 2000, said Jeffrey Silber, an analyst for BMO Capital Markets in New York. The industry has grown in part by marketing to low-income students, including the homeless, who qualify for federal grants and loans.

Regulations’ Impact

The new regulations would shut 300,000 students out of classes and eliminate 2,000 educational programs, according to a study commissioned by the Washington-based Career College Association, which represents more than 1,400 for-profit colleges.

The proposal would reduce opportunities for women and racial minorities who want to go to college, the group said. For-profit colleges have proposed alternative regulations that would require companies to disclose more information about students’ debt and job prospects.

The Career College Association has retained the Podesta Group, a Washington lobbying firm headed by Anthony Podesta, whose brother, John, was President Bill Clinton’s chief of staff, according to federal filings. Clinton will be a keynote speaker at the association’s annual meeting in June. Podesta’s Paul Brathwaite, former executive director of the Congressional Black Caucus, is also lobbying on the association’s behalf, records show.

Phoenix Scholarships

The University of Phoenix, the largest for-profit college in the U.S. by enrollment, awarded 25 full-tuition scholarships worth $1.25 million in the fiscal year ended August 31 to the Congressional Black Caucus Foundation, which selects the recipients, Apollo spokeswoman Sara Jones said in an e-mail. More minority students earn degrees from Phoenix than from any other U.S. university, she said.

In March, several members of the Congressional Black Caucus sent a letter to Duncan, saying the regulations would reduce educational opportunity.

Regulators need more tools to oversee publicly-traded education companies receiving increasing amounts of federal money, Robert Shireman, deputy undersecretary of the education department, said in a speech on April 28.

“I don’t think we have the firepower that we need,” he said, according to a transcript of his remarks.

The speech was “highly negative” and was “drawing inappropriate and unwarranted parallels between developments in higher education and the causes of the recent financial crisis,” Harris Miller, president of the Career College Association wrote in an April 29 letter to Duncan.

To contact the reporters on this story: John Hechinger in Boston at jhechinger@bloomberg.net; Daniel Golden in Boston at dlgolden@bloomberg.net; John Lauerman in Boston at jlauerman@bloomberg.net.

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