Obama Approves Rules Restricting Growth at For-Profit Colleges

The Obama administration approved regulations restricting incentive-based sales practices at for- profit colleges. The release of a draft in June slowed enrollment growth at Apollo Group Inc.’s University of Phoenix.

The rules, which will be published today, ban colleges from paying recruiters based on the number of students they sign up, establish guidelines for course credits and require schools to notify the government of new job-training courses, the U.S. Department of Education said yesterday in a statement. The package affects for-profit and nonprofit universities, and is scheduled to take effect in July.

For-profit colleges changed recruiting practices after the draft rules were published. Apollo, whose University of Phoenix is the largest U.S. for-profit college with an enrollment of 470,800, said it eliminated enrollment targets as a component of recruiters’ pay, often called “incentive compensation.”

“These new rules will help ensure that students are getting from schools what they pay for: solid preparation for a good job,” Education Secretary Arne Duncan said in a statement.

After Apollo said Oct. 13 that new student enrollment will fall in the coming year in the changing regulatory environment, its shares dropped 23 percent and an index of 13 education companies fell 18 percent.

Apollo Gains

Apollo gained 62 cents, or 1.67 percent, to $37.55 yesterday in NASDAQ Stock Market composite trading. The shares lost 49 percent in the 12 months ending yesterday.

An index of 13 education stocks rose 1.6 percent yesterday. DeVry Inc., based in Downers Grove, Illinois, was the biggest gainer with its shares rising 7 percent to $45.75 after the company reported that quarterly net income increased 34 percent.

The department also is telling states to strengthen their regulations for higher education. The rules call for states to ensure they have a list of all schools authorized to operate within their borders and to designate an office where students can lodge complaints about colleges.

For-profit colleges received $26.5 billion in government student aid last year, according to the Education Department. Students at for-profit colleges represent about 11 percent of all U.S. higher education students, yet they account for 26 percent of all government student loans and 43 percent of loan defaults, the department said.

‘Boiler-Room’ Tactics

Officials developed the rules to protect students from being lured into low-quality programs and burdened with education debt, Duncan said. Paying recruiters based on the number of students they enroll encouraged for-profit colleges to use “boiler-room” pressure tactics on potential applicants, said Lauren Asher, president of the Institute for College Access & Success, an advocacy group in Oakland, California.

The Bush administration softened an earlier ban on incentive compensation by giving for-profit colleges 12 exceptions, or “safe harbors,” that will be eliminated by the new rules.

When pay is based on sales, recruiters “pressure students to sign on the dotted line,” Asher said.

Education companies will need guidance about how to pay their employees, said Harris Miller, president of the Association of Private Sector Colleges and Universities, a Washington-based industry group.

Misleading Investigators

“It leaves all of higher education in a vacuum,” he said. “We get that no one can be compensated solely on the basis of admissions. The question is how do we get to a workable common ground here without using the courts as a place to decide.”

The U.S. Government Accountability Office found that recruiters at 15 schools, including those owned by Apollo, Washington Post Co.’s Kaplan education unit, and Education Management Corp., misled undercover investigators about the costs and quality of programs. Apollo and Kaplan are instituting free programs allowing applicants to sample classes and degree programs for a limited time.

Apollo, based in Phoenix, said the number of new students signing up for degree programs might drop more than 40 percent this quarter from the year-earlier period as the company institutes new recruitment practices.

Manny Rivera, a spokesman for Apollo, didn’t immediately return a call seeking comment on the regulations.

Gainful Employment

Capella Education Inc., based in Minneapolis, said Oct. 26 that enrollment growth will fall as the college toughens admissions standards with entrance exams.

For-profit colleges lobbied successfully for the Education Department to delay publication of one rule, called gainful employment, that ties eligibility for government student aid to student-loan repayment rates and graduates’ incomes.

The department received more than 90,000 letters regarding the gainful employment rule, the most ever on a proposed regulation. Many came from students, staff and teachers at for- profit colleges.

The agency will hold hearings on the gainful employment rule Nov. 4 and 5 and plans to issue a final version early next year for implementation in July 2012, Duncan said.

For-profit and community colleges alike fought a rule that will require them to gain federal approval for new programs that offer job-training certificates.

Credit Hours

Community colleges, which offer two-year degrees, already get extensive guidance on course offerings from their boards and local businesses, said David Baime, senior vice president for government relations and research at the American Association of Community Colleges, a Washington-based advocacy group.

The final rule says colleges must notify the department 90 days before instituting new programs and can assume the department has approved them if they don’t hear back. The rule also won’t contain a proposal that would have required schools to project enrollment for new courses over five years.

The new rules include the definition of a credit hour, which the government will use to determine how much financial aid students are eligible for. The definition is based on a measurement known as a Carnegie Unit, and calls for a credit hour to represent at least one hour of class time and two hours of homework a week.

The department is using the measurement solely for financial aid purposes and institutions can set their own credit-hour standards for academic purposes, James Kvaal, deputy undersecretary of education, said in a telephone call with reporters.

The rules will be formally published tomorrow in the Federal Register.

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

To contact the editor responsible for this story: Jonathan Kaufman at jkaufman17@bloomberg.net.

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