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The U.S. Department of Education on Thursday will release the final version of its much-awaited "gainful employment" rule that punishes career-training programs for graduating students with heavy debt loads.
The rule, one of the most controversial to come out of that office in years, is an effort to ensure the programs are preparing students for legitimate jobs. This final version is less severe than a draft released last summer, giving programs more opportunities to right themselves if they run afoul of the measure.
To qualify to receive federal student aid, a program now must pass one of three tests: at least 35% of former students are paying down their loan balances by at least $1, or a typical graduate's loan payment doesn't exceed 30% of his or her discretionary income or 12% of total earnings. The rule applies to most for-profit programs and certificate programs at non-profit and public institutions.
Previously, the department proposed a three-tier system. Programs were safe with a repayment rate above 45%. They fell into a danger zone with rates between 35% and 45%, and either graduate debt burdens above 8% of total income or above 20% of discretionary income. They would lose eligibility entirely if they had repayment rates below 35%, graduate debt payments above 12% of total income and above 30% of discretionary income.
The new criteria will go into effect July 1, 2012. Programs must fail the debt measures three times in four years before losing access to the funds, meaning no programs would lose eligibility before 2015.
"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," Education Secretary Arne Duncan said.
The final rule is being released after a months-long delay, amid strong opposition from the for-profit college industry. The Education Department received more than 90,000 comments on last year's draft proposal.
Many for-profit college companies, such as University of Phoenix operator Apollo Group Inc. (APOL) and ITT Educational Services Inc. (ESI), derive upwards of 80% of their revenue from students' federally guaranteed financial aid. Programs with low tuition, such as those offered by American Public Education Inc. (APEI) are expected to fare better than those that require students to take on significant debt. Schools that offer programs in subjects like culinary arts and design, many of which lead to low-paying jobs, may also suffer.
"We're asking companies that get up to 90% of their profits from taxpayer dollars to be at least 35% effective," Duncan said.
For-profit colleges have faced heightened criticism in the past year regarding their academic value, as program graduates default on their loans at alarming rates. While 12% of all students attend for-profit colleges, their graduates contribute more than 40% of all defaulted federal loans.
According to Department of Education calculations, 18% of for-profit programs are expected to fail the debt tests at some point, with 5% ultimately losing eligibility. Across all institutions, those figures are 8% and 2%, respectively.
Though scheduled to take effect next summer, the rule likely won't be instituted without a fight. Schools have aggressively opposed the measure, with lobbyists alleging the Education Department was unjustly swayed by short-sellers with a financial interest in seeing the publicly traded school operators suffer. They also say the rule will limit access to higher education, particularly for minorities. A handful of lawsuits are currently pending on issues related to the rule.
The Education Department in October released the majority of a rules package governing higher education, addressing issues such as the measure of a credit hour and incentive compensation for recruiters. Those rules take effect July 1. Parts of the gainful employment rule, related to the disclosure of graduation rates and information about student debt loads, will go into effect then as well.
Stocks of some for-profit colleges rose late yesterday in anticipation of the new rule, which, if not softer than the earlier proposal, was expected at least to give some certainty to the sector. Shares of Career Education Corp. (CECO) closed up 6.4%, to $22.87, while Apollo Group rose 2.6%, to $42.19.
-By Melissa Korn, Dow Jones Newswires; 212-416-2271; email@example.com