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Government crackdown on for-profit colleges is toned down

NEW YORK — The government is moving forward with its crackdown on the country's for-profit schools, aiming to protect students from taking on too much debt to attend schools that do nothing for their job prospects.

But the final version of the Department of Education's rules, released Thursday, is much softer than its original incarnation. It gives schools more time to correct deficiencies and makes it likely that fewer will lose access to federal student aid dollars. The news sent education stocks soaring, including the stocks of companies that analysts had considered most at risk of having to shut down programs or change them significantly.

The nation's largest chain is Apollo Group, which owns the University of Phoenix. Other major for-profit colleges include DeVry and Kaplan, which is owned by the Washington Post Co.

The "previously proposed onerous rules have been relaxed," said UBS analyst Ariel Sokol.

Nearly 18 months after negotiations began on how to define "gainful employment," the Department of Education has released conditions that for-profit schools must meet in order to access federal financial aid dollars. If graduates owe too much relative to their incomes, or if too few former students are paying back their tuition loans on time, the schools stand to lose access to Pell grants and federal student aid. Such a loss would seriously crimp schools' ability to attract students.

"These new regulations will help ensure that students at these schools are getting what they pay for: solid preparation for a good job," Secretary of Education Arne Duncan said Thursday. "We're giving career colleges every opportunity to reform themselves, but we're not letting them off the hook because too many vulnerable students are being hurt."

Most students at career colleges and vocational schools pay tuition with federal financial aid dollars — as much as 90 percent of a school's revenue can come from government aid. But that leaves taxpayers on the hook if students can't find good jobs and then default on their loans.

And they are defaulting in large numbers.

Students at for-profit institutions such as technical programs and culinary schools represent just 12 percent of all higher education students but 46 percent of all student loan dollars in default. The average student earning an associate degree at a for-profit school carries $14,000 in federal loan debt, compared with the $0 debt burden of most community college students.

Under final terms of the law, announced Thursday, a school will be able to receive federal-paid tuition only if at least 35 percent of its former students are repaying their loans. Or the estimated annual loan payment of a typical graduate must not be more than 30 percent of his or her discretionary income, or 12 percent of his or her total earnings.

Many maintain that the law will protect students from toxic programs.

"The Department of Education's gainful employment rule is a modest and important first step to protect students and taxpayers from subprime academic programs that have a demonstrated track record of failure," said Sen. Tom Harkin, D-Iowa, who has chaired a series of hearings critical of the for-profit sector.

"The only programs that would lose funding would be programs that are consistently failing to provide students with gainful employment and are providing them with insurmountable debt," said Pauline Abernathy of the Institute for College Access & Success, an education advocacy group that favors more industry regulation.

Government crackdown on for-profit colleges is toned down 06/02/11 [Last modified: Thursday, June 2, 2011 9:36pm]
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