Obama Proposal Targets For-Profit College Recruiters

The Obama administration proposed banning for-profit colleges from tying recruiters’ pay to the number of people they enroll, saying high-pressure sales tactics induced students to take out government loans they can’t afford.

The rules would prohibit paying sales incentives at Apollo Group Inc., ITT Educational Services Inc., Career Education Corp. and other for-profit colleges, according to a copy of the proposal by the U.S. Department of Education to be made public today. At for-profit colleges, recruiters contact potential students, often after they express interest over the Internet.

U.S. Secretary of Education Arne Duncan is seeking to protect taxpayers from loan defaults and to stop students from taking on debt for programs that don’t lead to higher incomes. For-profit colleges can receive up to 90 percent of their revenue from federal grants and loans. Federal aid to for-profit colleges jumped to $26.5 billion last year from $4.6 billion in 2000, according to the Education Department.

“This is about accountability and protecting students,” Duncan said in a statement.

The Obama administration delayed the release of a proposed rule that would disqualify for-profit colleges from receiving federal aid if their graduates spend more than 8 percent of their starting salaries repaying student loans.

The Education Department is still analyzing the proposal and expects to release the rule, known as gainful employment, between now and August, the agency said in a statement.

Industry Opposition

For-profit colleges lobbied against the gainful-employment rule, which could disqualify programs enrolling 300,000 students, according to an April study commissioned by the Washington-based Career College Association, which represents more than 1,400 for-profit colleges.

Education stocks last week rallied on analysts’ reports citing the potential delay of the gainful employment rule. Apollo, based in Phoenix, rose $1.44, or 3 percent, to $49.74 at 9:47 a.m. today in Nasdaq Stock Market composite trading . Career Education, based in Hoffman Estates, Illinois, rose 32 cents, or 1.2 percent, to $27.23. ITT, based in Carmel, Indiana, rose 34 cents, or less than 1 percent, to $97.52 in New York Stock Exchange composite trading.

Colleges would no longer be allowed to tie recruiters’ pay to enrollment under any circumstances, according to the new rules. The current regulations prohibit the practice while allowing exceptions, or “safe harbors.”

‘Unscrupulous Actors’

“Unscrupulous actors routinely rely on these safe harbors” to get around the law, the Education Department said. While the proposed rules apply to all colleges, they are designed to target abuses among for-profits, the department said.

The Education Department’s description of recruiting violations among for-profits amounts to “a lot of hyperbole,” Harris Miller, the Career College Association’s president, said in an interview. Colleges should be allowed to continue taking enrollment into account among other factors in compensating recruiters, Miller said.

The new rule on recruiter pay could have a broad impact on the industry, Matt Snowling, an analyst with FBR Capital Markets in Arlington, Virginia, said in a phone interview.

“The incentive compensation rule is probably a bigger threat to the industry than gainful employment,” Snowling said. “By limiting the schools ability to market themselves, it takes away some of their ability to grow.”

Apollo Settlements

Apollo’s University of Phoenix last December agreed to pay $67.5 million to the U.S. and $11 million in legal fees to plaintiffs to settle a whistleblower suit arising from allegations from former employees that that company improperly paid recruiters based on enrollment numbers. Apollo admitted no wrongdoing. The company, without admitting fault, paid $9.8 million in 2004 to the Department of Education to settle similar claims.

Apollo started reviewing recruiter compensation 18 months ago, with a focus on “enhancing student satisfaction and student experience,” spokeswoman Sara Jones said in an e-mail.

“We anticipate that our new compensation will be in compliance with the forthcoming regulations by the U.S. Department of Education but cannot confirm until the rules are finalized,” Jones said.

Today’s proposed rules also would require colleges to disclose information about employment prospects to students and strengthen the Education Department’s authority to take action against institutions engaging in “deceptive, marketing and sales practices,” the department said in a statement. The proposed rules, being issued for public comment, could be made final November 1 and take effect in July 2011.

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

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