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Obama Said to Delay For-Profit College Loan Rule

The Obama administration is delaying the release of a proposed rule that would cut federal financial aid flowing to for-profit colleges, Congressional aides said today. Analysts said the move means the government may back away from a regulation the industry is fighting.

The proposed rule, known as gainful employment, would disqualify Apollo Group Inc., ITT Educational Services Inc., Career Education Corp. and other for-profit colleges from receiving grants and loans if their graduates spend more than 8 percent of their starting salaries repaying student loans. Analysts said they had expected the rule to be released next week. The aides declined to be named because they said weren’t authorized to release the information.

The U.S. Department of Education is seeking to protect taxpayers from loan defaults and to stop students from taking on debt for degrees that don’t pay off with higher incomes. For- profit colleges can receive up to 90 percent of their revenue from federal grants and loans. The industry lobbied against the proposed rule, arguing that minority and low-income students would lose access to college.

“We continue to pick up comments that suggest gainful employment may be reconsidered or watered down,” Paul Ginocchio, an analyst with Deutsche Bank said in a research note.

Education stocks rallied on analysts’ reports citing the potential delay. Apollo, based in Phoenix, rose as much as $2.05, or 4.1 percent, to $52.31 in Nasdaq Stock Market composite trading, closing at $51.10 at 4 p.m. Career Education, based in Hoffman Estates, Illinois, gained as much as $1.55, or 5.9 percent, to $27.72 and later fell to $26.98. ITT, based in Carmel, Indiana, gained as much as $4.44, or 4.6 percent, to $100.81 in New York Stock Exchange Composite trading and closed at $97.92.

Recruiting Practices

The Education Department is postponing the regulation to have time to pull more data together in support of the proposal, one of the Congressional aides said. Education Department spokesman Justin Hamilton declined to comment. The Education Department is still expected to release other rules related to for-profits next week, Ginocchio said. A preliminary version of the rules released in January would tighten regulation by restricting recruiting practices.

Senator Tom Harkin, chairman of the Health, Education, Labor and Pensions Committee, said yesterday he plans to hold hearings to examine the surge in federal grants and loans flowing to for-profit colleges.

Federal aid to for-profit colleges jumped to $26.5 billion last year from $4.6 billion in 2000, according to the Education Department. Students attending for-profit schools are defaulting on their federal loans at a higher rate than those at traditional schools, according to the department.

Cooking School

Under the proposed gainful employment rule, a student projected to earn $18,000 a year as a starting cook would be able to borrow about $10,000 in 10-year-loans for a cooking school, according to Matt Snowling, an analyst with FBR Capital Markets in Arlington, Virginia. Culinary schools can now leave students with three or four times that level of debt, Snowling said.

Eighteen percent of for-profit programs would be out of compliance under the gainful employment rule, meaning they would have to shut down or cut tuition, according to a study commissioned by the Washington-based Career College Association, which represents more than 1,400 for-profit colleges. Those programs enroll 300,000 students, a third of those attending career colleges, the study found.

To contact the reporter on this story: John Hechinger in Boston at jhechinger@bloomberg.net;

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