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For-Profit Colleges Surge as U.S. Student Aid Rules Eased

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June 2 (Bloomberg) -- For-profit colleges surged the most in six years in U.S. trading after the Obama administration eased rules that would cut off federal aid to schools whose students struggle the most to repay their government loans.

Under the rules published today, companies including University of Phoenix owner Apollo Group Inc., won’t risk losing their federal funding until 2015, three years later than under a previous draft, the Education Department said. Phoenix-based Apollo, the largest for-profit college company, rose $4.71, or 11 percent, to $46.90 at 4 p.m. in Nasdaq Stock Market trading. The Bloomberg U.S. For-Profit College Index of 13 stocks rose 12 percent, the most since January 2005.

Calling the proposed rules a threat to their existence, for-profit colleges spent $6.6 million last year on lobbying and generated thousands of letters to the government in protest. The final version was delayed seven months, and some provisions were deleted or altered to favor the industry, said Jarrel Price, an analyst at Height Analytics in Washington.

“This is good for certain schools, and it’s a home run for certain schools,” he said today in a telephone interview. “Apollo is a clear winner.”

Under the earlier proposal, loan-repayment rates at Corinthian Colleges Inc., Strayer Education Inc., Washington Post Co.’s Kaplan education business, DeVry Inc. and ITT Educational Services Inc. would have put them at risk of losing eligibility, according to Price.

Stocks Rally

Corinthian, of Santa Ana, California, jumped $1.07, or 27 percent, to $5.06. Strayer, in Herndon, Virginia, advanced $23.08, or 19 percent, to $144.95. Washington Post gained $20.46, or 5 percent, to $426.42 in New York Stock Exchange composite trading. DeVry, based in Downers Grove, Illinois, rose $7.87, or 15 percent, to $61.86. ITT Educational, based in Carmel, Indiana, rose $14.94, or 21 percent, to $85.67.

Congress and state attorneys general are investigating the education companies’ recruitment practices and use of government aid, which totaled $30 billion last year. The Education Department developed the rules to try to curb loan default rates at for-profit colleges that are twice as high as at public institutions, and three times as high as private non-profit colleges.

Not ‘Off the Hook’

Known as “gainful employment,” the regulations seek to ensure that for-profit college graduates get jobs that allow them to repay their student loans. While the harshest measures are being delayed, the regulations protect students from “exploitative” college programs that leave them with government-backed debt they can’t repay, the Education Department said.

The rules “reflect input from the industry, and they’re designed to give for-profit colleges every opportunity to reform without letting them off the hook,” Education Secretary Arne Duncan said late yesterday in a briefing with reporters.

U.S. Representative John Kline of Minnesota, a Republican and chairman of the House education committee, unsuccessfully tried during February’s budget negotiations to block the rules.

“I remain concerned this regulation could undermine an entire sector of colleges in the name of rooting out a few bad actors,” Kline said in a statement late yesterday.

Harris Miller, president of the Association of Private Sector Colleges and Universities, a Washington-based trade group of for-profit colleges, said the Education Department is exceeding its authority, and the group may file a lawsuit to block the rule.

Eligibility Requirements

“We want to acknowledge that the department did make changes” in the rules, Miller said yesterday on a call with reporters. “Without analysis done by our outside researchers, I can’t say whether it’s a victory or a defeat.”

The gainful employment rule sets benchmarks that the companies’ educational programs must meet to remain eligible for government grants and loans, which can constitute up to 90 percent of their revenue. The rules also apply to state and private nonprofit colleges that offer career-training certificates. No more than 1 percent of those programs are expected to lose eligibility, according to the government.

Under the rules, 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 the their discretionary income.

Vulnerable Students

Programs would have to fail all three tests in the same year for three out of four years before losing aid eligibility. The earlier draft would have cut aid to failing programs beginning next year.

The three-year delay “does leave students and taxpayers vulnerable over the next four years, while programs will continue to be subsidized by the government without improving,” said Pauline Abernathy, vice president of The Institute for College Access & Success, a consumer advocacy group in Oakland, California.

The department also made it easier for colleges to show that students were repaying loans and removed provisions that would have stopped some poorly performing education programs from increasing in size. Such changes led to a “watered-down” final rule, said Jose Cruz, vice president of the Education Trust, a nonprofit advocacy organization in Washington.

‘Meager’ Protections

“It provides students and taxpayers with only the most meager of protections against an aggressive industry bent on exponential growth and ever-escalating profits,” he said today in an e-mailed statement.

The final rules don’t go far enough to protect students, said U.S. Senator Richard Durbin of Illinois, the Senate’s second-ranking Democrat.

The measure “may stop the worst violators among the predatory for-profit schools but it will not protect thousands of young students who are being burdened with debt by many worthless diploma mills,” Durbin said today in an e-mailed statement.

About 5 percent of for-profit college programs are expected to lose eligibility, compared with 16 percent under the previous proposal, which gave colleges less time to comply.

Colleges can also face lesser sanctions. If a program fails all the debt and income tests twice within three years, the college must tell students their debts may be unaffordable and that the program could lose aid eligibility. The schools would also need to explain students’ transfer options. After failing for one year, the institution must disclose information about its performance and establish a three-day waiting period before students can enroll.

‘Decisive Victory’

The final rule is “materially less severe than both the original draft version and investor expectations,” said Robert Wetenhall, an analyst at RBC Capital Markets in New York, in a note to clients today. The result is a “decisive victory by the for-profit industry.”

While for-profit colleges enroll about 12 percent of U.S. higher-education students, they use about one-quarter of federal student grants and loans and account for 46 percent of student loan dollars in default, the Education Department said yesterday, in justifying the new rules.

Most for-profit colleges offer career-training programs, and many, including the University of Phoenix, also have two-and four-year degrees, and master’s and Ph.D. programs. The median loan debt of a student earning an associate’s degree at a for-profit college is $14,000, while most students at community colleges don’t borrow, the Education Department said.

June 7 Hearing

“The plain fact is that millions of low-income students are borrowing heavily to attend for-profit colleges and too many are dropping out, defaulting on loans, failing to get a good job and leaving taxpayers to pay the bill,” Duncan said yesterday.

Iowa Democratic Senator Tom Harkin, chairman of the Senate education committee, has held four hearings in Washington examining for-profit college recruitment, accreditation and use of funds from the Education Department and military sources. Harkin has scheduled a fifth hearing for June 7 focusing on student debt. Harkin and Durbin have said they will propose legislation to put additional safeguards on the industry.

The new rules are “a modest and important first step to protect students and taxpayers from subprime academic programs that have a demonstrated track record of failure,” Harkin said in a statement late yesterday.

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

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