Proposed Federal Rules Target For-Profit Colleges: Education Department's Rules Would Cut off Federal Aid to For-Profit College Programs If Too Many Students Default on Loans or Don't Earn Enough after Graduation to Repay Them

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The Education Department proposed much-anticipated regulations last month that would cut off federal aid to for-profit college programs 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 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 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 may need to make big changes if the proposal is adopted, analysts said.

Mark Kantrowitz, publisher of the FinAid.org website, 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. …