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Democrats Call for U.S. Probe of For-Profit Colleges

Democratic lawmakers called on the U.S. Government Accountability Office to examine the quality of for-profit colleges and their funding from federal grants and loans.

U.S. Rep. George Miller, who chairs the House Education and Labor Committee, U.S. Senator Tom Harkin, his Senate counterpart, and other lawmakers urged the probe by Congress’s investigative arm, according to a letter they released today to Acting Comptroller General Gene L. Dodaro.

For-profit, or proprietary, colleges are coming under increasing federal scrutiny. Harkin, an Iowa Democrat, is holding hearings, starting June 24, to examine the surge in federal grants and loans flowing to Apollo Group Inc.’s University of Phoenix, Career Education Corp., Corinthian Colleges Inc. and other for-profit higher-education companies.

“Recent press reports have raised questions about the quality of proprietary institutions,” the Democratic lawmakers wrote in their letter. “These questions stem from the rapid growth of this industry over the last few years, reported aggressive recruitment of students by such institutions, increased variety in the delivery methods used to provide education to students, and the value of the education provided by such institutions.”

Closing Prices

Apollo, based in Phoenix, dropped 38 cents, or less than one percent, to $48.01 at 4 p.m. New York time in Nasdaq Stock Market composite trading. Career Education, based in Hoffman Estates, Illinois, fell 26 cents, or less than 1 percent, to $26.74. Corinthian declined 34 cents, or 2.9 percent to $11.21.

Steven Eisman, one of the hedge-fund managers featured in in Michael Lewis’s best-selling book, “The Big Short: Inside the Doomsday Machine” (Norton, 2010), will testify before the U.S. Senate on June 24 after saying for-profit colleges are pushing students to take on government loans they can’t repay.

Without new government regulation, students at for-profit colleges will default on $275 billion of federal student loans in the next decade, Eisman said at a May 26 investment presentation. Eisman is shorting, or betting against, shares of higher-education companies because of parallels he sees to subprime borrowers in the housing market. In both mortgages and educational loans, customers take on debts they can’t repay, Eisman said at the May conference.

Rising Attendance

The number of students attending for-profit colleges in the U.S. rose to 1.8 million in 2008, from 550,000 in 1998, according to Harkin. One in five students who left a for-profit college with educational debt in 2007 defaulted on the loan within three years, Harkin said, citing U.S. Department of Education data. President Barack Obama’s administration proposed rules on June 16 to tighten regulation of the industry.

Harris Miller, president of the Career College Association, which represents more than 1,400 for-profit colleges, said the industry welcomed the GAO examination and that the U.S. Department of Education should delay proposed regulations until the probe is complete.

“It is time for analysis by anecdote to end,” Miller said in a statement today. “Elitist Wall Street stock manipulators, rather than higher education experts, have been driving hyperbolic media coverage, creating the impression that outliers are the norm, and insulting millions of hardworking students and graduates in the process.”

More Witnesses

Margaret Reiter, former supervising California deputy attorney general, is also scheduled to testify at the hearing. In 2007, Reiter’s agency reached an agreement with Corinthian in which the company consented to pay $6.5 million, resolving prosecutors’ allegations that it misled students about graduates’ salary and employment prospects, according to the attorney general’s office. Corinthian, based in Santa Ana, California, didn’t admit fault.

Another witness will be U.S. Department of Education Inspector General Kathleen S. Tighe, whose office has criticized the way accrediting agencies police for-profit colleges, Harkin’s office said.

In a December report, the inspector general said Career Education’s American Intercontinental University shouldn’t have been accredited. Career Education, in a statement at the time, disputed the inspector general’s findings.

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