For-profit schools hit back as ED finalizes regulations

Shares of for-profit education companies, beaten down earlier this year, had moved higher in the past few weeks. Rumors of a delay in the gainful employment rule’s publication had raised investor hopes that the government was considering a softer approach, said Sterne Agee analyst Arvind Bhatia.

Those investors were disappointed by ED’s Sept. 24 statement, he said. Shares mostly turned lower or trimmed their gains after the announcement.

For-profit education companies have argued the rule would disproportionately hurt low-income and minority students and undermine the Obama administration’s college completion goals. The industry also has questioned the methodology behind the rule.

Student and consumer advocacy groups counter that the proposal is too weak, saying programs could continue to profit from federal aid when more than half their students can’t afford to pay down the principal on their loans.

The rule would help, not hurt, consumers if it forces career colleges to reduce tuition and improve their programs, they say.

The impact of the proposed rule is in dispute. ED estimates that if schools make no changes, 5 percent of for-profit college programs would be ineligible for federal aid in 2012—affecting 8 percent of all for-profit college students. For-profit colleges say that underestimates the impact.

For-profit college industry leaders are fighting proposed regulations after a federal government report revealed dishonest tactics in some of the most popular private-sector schools.

Investigators from the Government Accountability Office (GAO) posed as college students and found that four out of 15 institutions they examined “encouraged fraudulent practices” to secure federal student loans, and representatives from all 15 colleges “made deceptive or otherwise questionable statements” to the undercover students, according to a report published in August on the GAO’s web site.

The extensive report is the latest in a string of negative publicity for for-profit schools, which include industry giants such as the University of Phoenix, Kaplan University, and DeVry University.

Four of the GAO investigators who went undercover and applied to for-profit schools were encouraged by college personnel “to falsify their financial aid forms to qualify for federal aid,” according to the report. In one case, a college recruiter encouraged the undercover applicant to hide $250,000 in savings so he would be eligible for federal student aid.

In an undercover video posted alongside the GAO report, a recruiter in Texas tells a pretend applicant that the government doesn’t “need to know how much cash you have” after the applicant said he received a $250,000 inheritance from a deceased aunt.

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