The Education Department proposed much-anticipated regulations July 23 that would cut off federal aid to for-profit college programs—including many of the nation’s largest online schools— if too many of their students default on loans or don’t earn enough after graduation to repay them.
“Some proprietary schools have profited and prospered but their students haven’t, and this is a disservice to students and to taxpayers,” Education Secretary Arne Duncan said in a briefing with reporters. “And it undermines the valuable work, the extraordinarily important work, being done by the for-profit industry as a whole.”
To qualify for federal student aid programs, career college programs must prepare students for “gainful employment.”
The Obama administration, amid intense lobbying from both for-profit college officials and consumer and student advocates, is proposing a complicated formula that would weigh both the debt-to-income ratio of recent graduates and whether all enrolled students repay their loans on time, regardless of whether they finish their studies.
Early reaction was mixed, with a Republican senator and a for-profit college lobbying group panning it and advocates for tougher regulation questioning whether it does enough to protect students and taxpayers.
On Wall Street, shares of several for-profit education companies jumped July 23 at the news. DeVry Inc., which is among the companies analysts predicted would be least affected by the proposal, climbed 13 percent in afternoon trading and was one of the biggest gainers in the Standard & Poor’s 500 index July 23.
But shares were mixed among companies such as ITT Educational Services Inc., Corinthian Colleges Inc., Education Management Corp., and Career Education Corp. Those companies operate career colleges focusing more on two-year programs or lower-income students and might need to make big changes if the proposal is adopted, analysts said.
Mark Kantrowitz, publisher of the FinAid.org web site, said the government’s proposal “appears to represent a reasonable compromise that separates the wheat from the chaff without discarding too much wheat.”
For-profit colleges have faced increased scrutiny in recent months for some questionable recruiting tactics, high loan default rates, and low graduation and job placement rates. The government is taking notice because for-profit colleges are bringing in record amounts of federal aid money — $26.5 billion last year, up from $4.6 billion in 2000.
Under the Obama administration proposal, vocational programs would fall into one of three categories:
• Programs fully eligible for aid will either have at least 45 percent of their former students paying down the principal on their federal loans — or their graduates will have a debt-to-earnings ratio of less than 20 percent of discretionary income or 8 percent of total income.
• Ineligible programs will have less than 35 percent of their former students paying down the principal on their federal loans — and their graduates will have a debt-to-earnings ratio above 30 percent of discretionary income and 12 percent of total income.
• Those programs that don’t fit either definition would be restricted — meaning they would be subject to limits on enrollment growth and schools would be required, among other things, to warn of their high debt levels.