UPDATE: US To Watch Students' Loan Debt At For-Profit Schools

The U.S. Department of Education on Friday proposed a measure to penalize for-profit career colleges for graduating students with high debt-to-income ratios.

The proposal, which will undergo a 45-day comment period and is expected to face opposition from industry lobbyists, is an effort to ensure schools are training students for gainful employment in a recognized occupation. It comes as for-profits are under heightened scrutiny as they capture a growing share of federal student-aid dollars.

"Some proprietary schools have profited and prospered, but their students haven't," Secretary of Education Arne Duncan said. "While career colleges play a vital role in training our work force to be globally competitive, some of them are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use."

Under the proposal, training programs at for-profit schools would be judged on whether former students are repaying the principal on federal loans, and the relationship between total student-loan debt and average earnings upon graduation. The recommendation sets up three tiers of eligibility, with those in the middle tier facing enrollment restrictions and debt-to-income disclosure requirements, and the weakest tier losing access to federal student aid for new students.

According to the Education Department, if career colleges made no changes, 5% of all programs would no longer be eligible for federal aid and 55% would be required to warn students about high debt-to-income ratios. Many publicly traded school operations, including University of Phoenix parent Apollo Group Inc. (APOL), Corinthian Colleges Inc. (COCO) and ITT Educational Services Inc. (ESI), derive close to 90% of their revenue from federal aid.

The recommendation, known as a Notice of Proposed Rulemaking, has been a long time coming, with federal officials and industry representatives meeting for a year to discuss new higher-education regulations. The government put forth its first proposal in late January, and the stocks of for-profit colleges have soared and swooned since, propelled by rumors of how programs could gain exemption from the regulation.

The Education Department said this version is "thoughtful," with income calculations based on actual graduate earnings rather than Bureau of Labor Statistics figures. To give time for program improvement, the agency proposed that the 2012-2013 academic year be the earliest that programs could be found ineligible for federal aid.

Still, that may not be enough. The main lobbyist for trade schools, the Career College Association, lashed out in a press release late Thursday, calling the proposed metrics "unwise, unnecessary, [and] unproven." The group also said it may be unlawful, alleging the Education Department doesn't have the authority to impose the measure.

Analysts say that Career Education Corp. (CECO) and Education Management Corp. (EDMC), with their culinary and art-and-design programs, and ITT, with relatively high tuition, could be most exposed under the new proposal. American Public Education Inc. (APEI), known for its inexpensive classes, and Capella Education Co. (CPLA), which has higher-end graduate programs, are considered safer.

The Education Department had released 13 other proposals in June but said it needed more time for this one. The earlier recommendations included proposals on incentive compensation for student recruiters, a clearer definition of a credit hour and a new metrics by which students must show academic progress in order to continue receiving federal aid.

-By Melissa Korn, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com

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