DeVry Settled With the Feds, but More Trouble Looms

Thursday's limited settlement with the Education Department doesn't resolve the biggest problems for the company.

The U.S. Department of Education and DeVry Education Group struck a narrow agreement Thursday to dismiss allegations that the giant for-profit college chain couldn't back up yearslong marketing claims about its graduates' career success.

Investors initially cheered the announcement, causing the company's stock to soar 8.6 percent, to $25 per share, but the rally was short-lived. DeVry shares closed up 1.3 percent on Thursday at $23.34.

But the company is still on the hook over potentially costlier accusations. 

Rather than ending government scrutiny, the settlement could be a sign that the feds intend to take broader action, higher education analysts said. DeVry has denied any wrongdoing.

For years, the company's DeVry University boasted to prospective students that 90 percent of its graduates who sought employment landed jobs in their fields within six months of graduating and that one year after graduation, its alums had earnings 15 percent higher than graduates of other colleges, according to the Federal Trade Commission. The regulator sued DeVry in January, alleging the claims—which the FTC described as "central" to the school's advertising and marketing efforts—were false and deceptive.

The settlement agreement doesn't resolve the pending FTC lawsuit or a related pending investigation by the Education Department into whether the company duped students into enrolling and taking out federal student loans with misleading employment-related statistics. Borrowers with federal student loans can petition the Education Department to cancel their debt on account of being misled into borrowing, and the feds can force deceptive colleges to cover the cost of loan cancellations.

About 66,000 students collectively received some $684 million in federal student aid to pay for classes at DeVry University during the 2014-15 academic year, the Education Department said.

DeVry said the settlement "in no way hinders DeVry University’s ability to serve current or future students," adding that it continues to cooperate with the Education Department's pending investigation. Kelly Leon, an Education Department spokeswoman, declined to make anyone available for an interview. 

Trace Urdan, an analyst at Credit Suisse Group AG, said investors should view the settlement announcement as "discouraging."

"The regulatory pressure from [the Education Department] may be only beginning," Urdan said in a note to clients. Publicly traded for-profit college companies, including DeVry, are likely to reduce share repurchases and dividends in the wake of the settlement, he cautioned.

The Education Department said it is working closely with the FTC and that it will "continue to support" the regulator's ongoing lawsuit. "Today’s agreement settles only the issue of a single, unsubstantiated claim and does not prohibit the department from imposing future enforcement actions against DeVry in the event of additional findings," the Education Department said.

"It's a step in the right direction," said David Halperin, a Washington-based attorney and former aide to President Bill Clinton who has since become a prominent critic of for-profit colleges and the Education Department's oversight of the sector.

As part of the settlement, DeVry agreed to stop marketing the 90 percent job-placement rate and to post a message on its website that states the company couldn't substantiate its claim following queries from the department. The company had already ceased publicizing the statistic about a year ago, the department acknowledged in January. The settlement mirrors the department’s January demands.

DeVry neither admitted nor denied any wrongdoing as part of the settlement.

The company also agreed to post a surety of $68.4 million—equivalent to 10 percent of its previous year's federal student aid receipts, the minimum allowed under federal law—to cover potential costs incurred by the Education Department if the company violated federal rules or abruptly shuts down. The Education Department will slightly delay federal student aid disbursements to the company's eponymous university, and it downgraded DeVry's status in federal aid programs, limiting its ability to challenge future department actions, according to Robert Shireman, formerly a top official at the Education Department who now is a senior fellow at the Manhattan-based Century Foundation.

"The department got more than they asked for," said Pauline Abernathy, a former official in Bill Clinton's White House who works for the Oakland, Calif.-based Institute for College Access & Success. She said the settlement was a "striking contrast" to past agreements the Education Department struck with alleged wrongdoers.

(Corrects the intraday high for company stock on Thursday in second paragraph.)
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