For-profit college rules not as strict as proposed
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For-profit college systems such as Downtown-based EDMC will lose federal aid if they do not meet new standards on student loans and post-college income, according to long-awaited rules issued Thursday by the U.S. Department of Education.
Students at for-profit institutions such as the Art Institute, culinary and nursing schools make up 12 percent of those in college nationwide but represent almost half of those who default on student loans. To address that issue, the federal government has been in talks, and facing intense lobbying, for more than a year while writing regulations to ensure what is called "gainful employment" by ex-students.
The rules were softer than they could have been, which led to soaring stock prices for Education Management Corp. and others in the industry.
To hold onto their ability to dispense federal aid, schools such as the EDMC-owned Art Institutes will have to show that their former students meet one of three criteria: at least 35 percent are repaying loans, or that loan repayments do not exceed 30 percent of their discretionary income or 12 percent of their total earnings.
The department estimated 18 percent of for-profit programs will not reach those benchmarks at some point, and 5 percent ultimately will lose their student aid rights, all but ensuring they will close.
"We're asking companies that get up to 90 percent of their profits from taxpayer dollars to be at least 35 percent effective," Education Secretary Arne Duncan stated. "This is a perfectly reasonable bar, and one that every for-profit program should be able to reach."
The rules go into place in July 2012, and the first time a school could be ruled ineligible is 2015. A draft proposal had been tougher, calling for a 45 percent repayment rate, a debt-to-income ratio of 20 percent and earnings ratio of 8 percent. Stocks for the for-profit schools zoomed up Thursday upon news of the softer regulations, with those for EDMC gaining almost 22 percent on the day.
The Obama administration and its allies claim the most severe abuses in the industry must be reined in, and the initiative is about protecting taxpayer dollars that flow into these colleges. In the Senate, Iowa Democrat Tom Harkin has focused efforts in his committee, which oversees education, on the problems at for-profit colleges -- often to the strenuous objection of his Republican colleagues.
In a statement, he called the rules "a modest and important first step to protect students and taxpayers from subprime academic programs that have a demonstrated track record of failure."
For-profit colleges have lobbied publicly and privately against the regulations, from television ads to congressional hearings. The U.S. House voted by a wide margin to block the implementation of the rules in February as an amendment to a spending bill, but the effort didn't make it through bipartisan negotiations on the spending package and never came up in the Senate.
The colleges claim that they are being unfairly targeted when high dropout rates and loan debt are problems elsewhere in higher education. Also, their nontraditional and low-income clientele are more prone to these problems, they say.
EDMC spokeswoman Jacquelyn Muller said Thursday the company, headquartered on Sixth Avenue, was still studying the impact of the rules, which total 436 pages. An industry group applauded the department for making changes to the original rules but still worried about negative effects on the schools and their students.
"Our concern is that the regulation will still penalize programs with great outcomes while allowing underperforming programs to continue. We need to trust but verify the impact of the new regulation," said a statement from the Association of Private Sector Colleges and Universities.
Critics welcomed the federal announcement -- noting it was just one piece of the ongoing scrutiny of the institutions -- while being less than enthusiastic about the new regulations.
David Halperin, director of the left-leaning group Campus Progress, said "given the overwhelming evidence that the worst for-profit colleges are abusing students and taxpayers, the rule isn't strong enough."
First Published June 3, 2011 12:00 am