For-profit colleges face tough new rules

Schools may face cuts in federal aid

By John Hechinger and Daniel Golden
Bloomberg News / May 5, 2010

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WASHINGTON — The Obama administration is preparing to produce tougher regulations that could reduce the amount of federal financial aid flowing to for-profit colleges, cutting the companies’ annual revenue growth by as much as a third.

In response, the $29 billion industry and its supporters have enlisted top Washington lobbyists and are courting black and Hispanic legislators to fight the proposed rules, which could be released as early as this month. The companies draw students from low-income and minority communities.

Federal aid to for-profit colleges has become an issue because it jumped from $4.6 billion in 2000 to $26.5 billion in 2009, according to the Education Department, prompting concern that these students are taking on too much debt.

The tougher rules would require ITT Educational Services, Career Education, and Apollo Group’s University of Phoenix to show that their graduates earn enough money to pay off their student loans. If for-profit colleges can’t meet the standard, they could lose federal financial aid, which typically makes up three-quarters of their revenue.

The proposed rules may disqualify for-profits from receiving federal financial aid if their graduates must spend more than 8 percent of their starting salaries on repaying student loans.

The regulations may slow or even halt tuition increases at ITT, Education Management Corp., Lincoln Educational Services, Universal Technical Institute, and Career Education because many graduates take low-paying jobs in criminal justice, cooking, and medical office work, Trace Urdan, an analyst at Signal Hill Capital Group in San Francisco, said.

Education companies have increased revenue by as much as 15 percent and enrollment by 8 percent to 10 percent on an annual basis, while raising tuition about 4 percent to 6 percent a year, Urdan said. The new rules may slow their revenue growth by one-third by limiting their ability to raise tuition.

The Education Department plans to issue the regulations without congressional approval, unlike the student-loan legislation that passed in March. Several Republicans in Congress objected to the changes.

Senator Lamar Alexander, a Tennessee Republican who chairs the Senate Republican Conference, is trying to persuade Education Secretary Arne Duncan to reconsider the regulations, said a Republican aide on the Education Committee.

The new regulations would shut 300,000 students out of classes and eliminate 2,000 educational programs, according to a study commissioned by the Washington-based Career College Association, which represents for-profit colleges.

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