Obama Offers Revised For-Profit College Rules After Court Block

The Obama administration revised
its regulatory package for for-profit colleges, rewriting a
proposal that the education industry blocked in court almost two
years ago.

The agency redrafted a key provision of the regulations
that a U.S. district judge cited in striking down the rule in
July 2012, White House Domestic Policy Council Deputy Director
James Kvaal said late yesterday in a conference call with
reporters. The rule, called gainful employment, links education
companies’ eligibility for federal grants and loans to former
students’ debt loads and income.

Slated by the administration to go into effect in June
2015, the rule would oversee about 8,000 career-training
programs at for-profit colleges and traditional schools that
offer certificate training, administration officials said. While
the administration made some concessions to the industry,
benchmarks that schools must meet to receive aid were stiffened,
Jeff Silber, an analyst with BMO Capital Markets Corp. in New
York
, said.

“We believe these rules are more onerous than the original
version first proposed in 2009, as the bar for compliance is set
higher,” he said today in a note to clients.

Protecting Students

While students can improve their job prospects with for-profit college programs, too many of them are left with debt and
no degree, Education Secretary Arne Duncan said on the call.

“Protecting students is at the core of this rule,” Duncan
said. “We want to ensure that students have the information
they need to make choices on what career training program is
best for them.”

Shares of for-profit education companies have flagged over
the past four years amid investigations by Congress, the
Education Department and state attorneys general. A Bloomberg
index of 13 for-profit colleges slid 46 percent in that period
before today and dropped 0.7 percent at 11:58 a.m. in New York.
ITT Educational Services Inc. (ESI), the education company sued last
month for predatory lending practices by the Consumer Financial
Protection Bureau, fell 2.3 percent to $28.64.

For-profit education companies and their trade group, the
Association of Private Sector Colleges and Universities, have
fought the regulations, which would restrict their access to
federal funds that are the source of as much as 90 percent of
their annual revenue.

Repayment Rate

The previous proposal included a metric called repayment
rate that was created by the agency specifically for the gainful
employment rule, Kvaal said. The judge who struck down the rule
said that standard hadn’t been shown to demonstrate whether a
program had prepared its students for the workforce. The new
version uses student-loan default rates to determine whether a
program’s students are burdened with unpaid debt, he said.

“The cohort default rate has been in place for more than
two decades,” Kvaal said. “We feel much more comfortable with
it.”

Students at for-profit colleges represent about 13 percent
of the total higher education population and account for about
31 percent of all student loans and almost half of defaults on
those loans, according to the Education Department.

The public will have 60 days to comment on the draft
regulations after they’re published in the Federal Register,
according to an Education Department statement.

‘Financial Discrimination’

The regulations will shut down thousands of educational
programs and jeopardize employer access to job-ready graduates,
the APSCU industry group said today in an e-mailed statement.
The rules harm students and single out for-profit colleges for
restrictions, said Steve Gunderson, the association’s president
and chief executive officer, in a letter to Duncan.

“Due to the demographics of the students we serve and the
narrowly targeted regulation put forth by the Department, the
result is nothing short of financial discrimination that will
deny access and opportunity to the very students who stand to
benefit the most from postsecondary education,” he said.

In September, the Education Department said that 22 percent
of former for-profit college students who were required to make
payments on their loans during the three years that ended Sept.
30, 2012 had defaulted. That compared with an overall cohort
default rate on federal loans for the same period of 14.7
percent, and rates of 13 percent for public colleges and 8.2 for
nonprofit private schools.

Stiffer Requirements

Under the new regulations, programs with cohort default
rates higher than 30 percent for three consecutive years will
risk losing access to federal funds, according to the statement.
Training programs would also risk losing aid eligibility if the
annual education-debt payments of typical graduates exceed 20
percent of their discretionary earnings or 8 percent of their
total income.

Those are stiffer requirements compared with the package
that was struck down in 2011, which stipulated that yearly loan
payments not exceed 30 percent of discretionary earnings or 12
percent of total income. Under the former rules, schools would
have lost eligibility for federal aid if they failed to comply
with the debt restrictions in three out of four years. Under the
revisions, schools that fail to comply in two out of three years
would lose eligibility.

Schools will also be required to make public disclosures on
the performance and outcomes of their gainful employment
programs, including information on costs, earnings, debt,
default rates and completion rates.

‘Rapid Improvement’

While the department can’t estimate how many programs might
lose their eligibility for federal funds, a one-year “snapshot
in our rearview mirror” suggests that about 20 percent of
programs are at risk, Duncan said.

“We think that when it’s in place we’ll see rapid
improvement,” he said.

For-profit colleges are facing investigations by state
attorneys general and the CFPB. The agency, created three years
ago to oversee financial products, has said it is scrutinizing
student debt, which stands at about $1.2 trillion.

Education Management Co. (EDMC), the for-profit college chain
partly owned by Goldman Sachs Group Inc.; Corinthian Colleges
Inc. (COCO)
; ITT Educational; and Career Education Corp. (CECO) have said
they’ve received demands for information from a network of at
least 12 attorneys general.

DeVry Education Group Inc. (DV) , based in Downers Grove,
Illinois, said last month that the Federal Trade Commission had
requested documents and information for the past five years
relating to “advertising, marketing, or sale of secondary or
postsecondary educational products or services or educational
accreditation products or services.”

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

To contact the editors responsible for this story:
Lisa Wolfson at
lwolfson@bloomberg.net
Chris Staiti, John Lear

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