Bloomberg News

Obama Revises For-Profit College Proposal After Court Block (1)

March 14, 2014

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

DeVry Education Group Inc. (DV:US) , 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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Companies Mentioned

  • ESI
    (ITT Educational Services Inc)
    • $8.89 USD
    • 0.07
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  • EDMC
    (Education Management Corp)
    • $1.6 USD
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