Obama Cracks Down on For-Profit Colleges, Links Loans to Income

The Obama administration released a proposal that would tighten for-profit colleges’ access to federal student aid, threatening growth in the industry that received $26.5 billion in U.S. funds last year.

The proposed rules released today by the U.S. Department of Education would link U.S. student aid eligibility at Apollo Group Inc., ITT Educational Services Inc., Career Education Corp. and other education companies to former students’ salaries and debt repayment rates. The rules may cut off access to federal student grants and loans at about 5 percent of all for- profit education programs, Secretary Arne Duncan said in a telephone call with reporters yesterday.

Students earning two-year associates’ degrees at for-profit colleges had an average student-loan debt of $14,000 in 2007- 2008, about twice that of students at nonprofit colleges, the department said in a statement. While most education companies provide valuable training and skills, high-cost education programs that lead to low-wage jobs are harming students, leaving them with hard-to-pay debts, Duncan said.

“We want to hit the ones at the bottom, those that simply aren’t working for students,” Duncan said in the press briefing. “The 5 percent would frankly be the bottom of the barrel.”

Stocks Decline

Education companies have been hurt as investors have waited for the Education Department to write its regulations. The Standard & Poor’s 1500 Education Services Sub-Industry Index, which tracks nine education companies, fell 13 percent over the past 12 months as of yesterday’s close.

Apollo, the Phoenix-based operator of the University of Phoenix and the biggest U.S. education company, fell 32 percent over the past 12 months in Nasdaq Stock Market composite trading. ITT Educational slid 20 percent.

If the rules were in effect today, programs enrolling about 8 percent of the students at for-profit colleges nationwide would lose eligibility, the Education Department said. There were about 1.8 million students enrolled in education companies’ programs in 2008, according to a June 24 report from Iowa Democratic Senator Tom Harkin, chairman of the Senate Health, Education, Labor and Pensions Committee.

Tuition Impact

The rules may hurt Carmel, Indiana-based ITT Educational, Hoffman Estates, Illinois-based Career Education and Santa Ana, California-based Corinthian Colleges Inc., because they may not meet the repayment standard and they offer high-priced programs, said Trace Urdan, an analyst with Signal Hill Capital Group in San Francisco. Expensive courses of study that lead to relatively low-paying careers, such as those in criminal justice, may begin to disappear, he said yesterday in a telephone interview.

“You will see some programs being terminated,” Urdan said. “No one’s going to be kicked out into the street, but programs that are no longer profitable at contemplated prices will be ended.”

Under the proposed rules, the Education Department would monitor loan repayments and starting salaries among graduates of for-profit colleges. To remain fully eligible for student loans, education companies would have to show the agency that at least 45 percent of their former students are paying off their student loans, or that graduates pay less than 8 percent of their total income or less than a fifth of their “discretionary income” on student loan payments.

Lose Eligibility

When a program’s repayment levels and debt-to-income ratios both miss those targets, its access to federal student aid may be restricted, the statement said. That may mean that the program would have to limit enrollment growth or warn applicants that the program’s graduates have high debt levels. About 55 percent of for-profit college programs would have to issue such warnings if the proposed regulations were now in effect, the statement said.

Companies would lose their eligibility for aid if less than 35 percent of former students are repaying and their educational debt is at least 12 percent of their annual total income or 30 percent of discretionary income, the statement said. No more than 5 percent of programs nationally will lose U.S. aid access under the regulations during their first year, the department said.

Average annual tuition at for-profit colleges was $14,000 in 2009, compared with $2,500 at community colleges, Harkin’s report said.

Industry Reaction

Congressional staffers who were briefed on the proposed rules said they expected the education industry to fight them. The Career College Association, a Washington-based industry group, didn’t respond to telephone calls and e-mails requesting comment. Apollo company officials declined to comment because they hadn’t seen the new regulations. “Apollo cautions against policy with the potential for unintended consequences that could restrict educational access, limit students’ choices or unfairly disadvantage hundreds of thousands of historically underserved students,” Manny Rivera, a spokesman, said in an e- mail.

Robert Jaffe, a spokesman for Corinthian, Lauren Littlefield, a spokesman for ITT Educational and Jeff Leshay, a spokesman for Career Education, didn’t immediately return telephone calls seeking comment.

While the proposed rules are a step in the right direction that may eliminate many abuses of the student financial aid system, the government may have set the standard for loan repayment too low, said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars & Admissions Officers in Washington.

‘Rampant Waste’

“I defy anyone to say that an institution with a 45 percent loan-repayment rate represents the gold standard,” he said in a telephone interview. “This says something about how rampant waste and fraud and abuse are in this sector.”

While the expectations for repayment appear low, the rules appear to have some “real teeth” in them, said Pauline Abernathy, who oversees policy and advocacy for the Institute for College Access and Success in Washington. Her group will urge the administration to strengthen the regulations in the 45- day comment period that starts today.

“This regulation is plain common sense,” Harkin said in a statement. “If a school can’t show that its students are repaying their college debt and not defaulting, this is a sure sign that the school is failing to prepare its students for gainful employment, as the law requires.”

An earlier draft of the proposal said that starting salaries would be estimated using data from the U.S. Bureau of Labor Statistics. The proposed rules instead call for the salary data to come directly from graduating students’ Internal Revenue Service filings, the Education Department said.

‘Actual Wages’

“Therein lies the problem for the sector given that actual wages are generally lower than the Bureau of Labor Statistics data,” said Jarrell Price, an analyst with Height Analytics in Washington who follows the for-profit education sector. “There’s a lot of uncertainty about the income levels of graduates of 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. About 96 percent of students who graduated from for- profit colleges in 2008 had taken out student loans, and 24 percent of that graduating class had more than $40,000 in U.S. student loan debt, according to the June report from Harkin.

Taxpayers’ Right

“These schools -- and their investors -- benefit from billions of dollars in subsidies from taxpayers, and in return, taxpayers have a right to know that these programs are providing solid preparation for a job,” Duncan said in the statement. “The rules we’ve proposed today will help ensure that career college and training programs use federal student aid to prepare students for success.”

The government has been determining for-profit programs’ eligibility for student grants and loans in part by monitoring default rates. Those rates underestimate the proportion of students who don’t pay back loans on time, because many receive postponements known as forbearances or deferments. The new rules link a program’s eligibility for federal aid to the percentage of former students who are repaying principal on their loans three years after leaving school, the department said.

To contact the reporter on this story: John Lauerman in Boston at jlauerman@bloomberg.net.

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