For-Profit Colleges May Lose Tax Money Under New Rules

For-profit colleges training security guards, medical assistants and law enforcement officers risk losing federal money because they leave students with debts they struggle to repay, the U.S. Education Department said.

More than 190, or 5 percent, of the career-training programs failed to meet new loan-repayment regulations, the government said. Career Education Corp. (CECO) and Corinthian Colleges Inc. (COCO) ranked among the worst schools on the agency’s list.

The Obama administration is seeking to protect taxpayers from loan defaults and stop students from taking on debt for degrees that don’t pay off with higher incomes. The industry lobbied against the proposed rules and said yesterday that it will reduce access for working adults and military veterans.

“Career colleges have a responsibility to prepare people for jobs at a price they can afford,” Education Secretary Arne Duncan said in a statement. “Schools that cannot meet these very reasonable standards are on notice: invest in your students’ success, or taxpayers can no longer invest in you.”

More than 90 percent of programs training security guards and medical assistants could become ineligible for funding. So could more than 80 percent of criminal justice programs.

Career Education, based in Schaumburg, Illinois, rose 0.9 percent to $6 at 10:22 a.m. in New York. Corinthian, based in Santa Ana, California, fell 5.4 percent to $2.63. A Bloomberg index of 13 for-profit education companies gained 3.2 percent.

Federal Deadline

The Education Department regulations give colleges until 2015 to improve their outcomes before they lose federal funding. Responding to the industry, the administration had delayed its implementation and eased the regulations. About 16 percent of programs could have lost eligibility under a previous proposal, which gave colleges less time to comply.

Steve Gunderson, president of the Association of Private Sector Colleges and Universities, called the data underlying the new regulations “a faulty metric that does not accurately reflect the services provided by career colleges and universities.” In July 2011, the organization filed a lawsuit to block it.

Congress and state attorneys general are investigating the marketing and job-placement claims of for-profit colleges, which can receive as much as 90 percent of their revenue from federal grants and loans that students use to pay tuition and have higher student-loan default rates than traditional schools. For- profit colleges got almost $32 billion in U.S. student aid in the 2009-2010 school year.

Three Tests

Under the rules, known as “gainful employment,” programs would remain eligible for federal aid if they meet at least one of three tests in a given year: at least 35 percent of former students are repaying their loan balance; yearly educational- debt payments of typical graduates account for a maximum of 12 percent of their total income; and those payments account for no more than 30 percent of their discretionary income.

Programs would have to fail all three tests in the same year for three out of four years before losing aid eligibility. More than 190 programs at 93 colleges failed all three measures.

Among the publicly traded corporations with the most programs failing all three tests: Corinthian’s Everest, Bryman and Heald chains; Career Education’s Sanford-Brown, Le Cordon Bleu, American InterContinental University and International Academy of Design & Technology; and Education Management Corp. (EDMC)’s Art Institutes, Brown Mackie and South University.

Washington Post Co. (WPO)’s Kaplan unit had three programs, one in medical assistance and two in criminal justice. Apollo Group Inc. (APOL), owner of the University of Phoenix, the largest for-profit chain, had one: a teacher’s assistant program in Tempe, Arizona.

Cutting Programs

Of 45 Corinthian programs violating the new standards, the company has moved to eliminate 13 and will address compliance issues at 11 others, said Kent Jenkins, a company spokesman. The rest will be able to comply using an alternative standard, he said.

The Education Department information has errors that may result in “misleading conclusions,” Education Management said yesterday in a filing with the U.S. Securities and Exchange Commission.

Less than half of 1 percent of Kaplan students are enrolled in programs that failed to pass the government test, Mark Harrad, a spokesman, said in an e-mail.

Career Education officials are analyzing the department’s information, said Mark Spencer, a company spokesman. Rick Castellano, a spokesman for Phoenix-based Apollo Group, didn’t return a phone call.

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

To contact the editor responsible for this story: Lisa Wolfson at lwolfson@bloomberg.net

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