UPDATE: Sen Harkin To Propose Legislative Changes To For-Profit Colleges

Sen. Tom Harkin (D., Iowa) said he will propose legislative changes to curb abuses at for-profit colleges, though he won't introduce anything to the Senate Committee on Health, Education, Labor and Pensions until after the mid-term election.

That timeline, along with vocal Republican opposition to the tenor of the committee's hearings on the industry, eased worries among for-profit school backers that harsh legislation is a sure thing. Though Harkin said he will propose legislation next year, any shift in the party makeup of Congress could hurt his chances of pushing it through.

Schools' stocks rallied as a HELP committee hearing entitled, "The Federal Investment in For-Profit Education: Are Students Succeeding?" came to a close Thursday.

Shares of ITT Educational Services Inc. (ESI) recently were up 7% to $70.41 and Corinthian Colleges Inc. (COCO) gained 8.4% to $7.09, while Education Management Corp. (EDMC) was up 13.8% to $13.42. Those three companies are considered among the most vulnerable in case of legislative change, with high student debt loads and loan default rates.

"There was more evidence that there was greater Republican pushback," said Stifel, Nicolaus & Co. analyst Jerry Herman, adding that the elections will help determine where the discussion can go. Sen. Mike Enzi (R., Wy.) walked out in protest after issuing his opening statement, saying the hearings should include criticism of student outcomes at non-profit and public schools, too. Sen. John McCain (R,. Ariz.) only appeared in order to read his prepared remarks and said he hoped the hearings would have a different tenor in January. The only other Republican present, Sen. Richard Burr (R., N.C.), asked why an Education Management employee, who alleged at the hearing the company encouraged staff to over-report job placement figures, wouldn't help the company with an internal investigation.

Still, Sen. Harkin said he doesn't intend to stop investigating for-profit colleges. "There is irrefutable evidence that something has gone wrong with this industry," Harkin said, outlining a system in which schools take money from taxpayers via federal loans and grants and funnel it through "poor kids" on which they prey with aggressive marketing campaigns, ultimately pocketing the profits.

Harkin released a report Thursday morning showing that for-profit schools have high dropout rates and their students take out loans at rates higher than their counterparts in non-profit and public schools. He had commissioned data from 30 for-profit schools after the U.S. Government Accountability Office last month released the results of an undercover investigation showing representatives at all 15 schools that agency visited had offered misleading or even fraudulent information to boost enrollment.

Harkin seemed "emboldened" by the numbers in his report, said William Blair & Co. analyst Brandon Dobell, though he added that the data points aren't new.

Even if Republicans on the HELP committee do pull support for further hearings, for-profit colleges aren't yet in the clear. The U.S. Department of Education this summer proposed a series of new rules governing a number of topics in higher education, including recruiter compensation and the definition of a credit hour. The department is also planning to issue a rule that would penalize programs for graduating students with high debt loads, an attempt to measure how well programs prepare students for gainful employment in a recognized occupation. The department will issue final rules for 13 of the 14 topics before the November election, waiting until early 2011 to publish the "gainful employment" rule. A number of programs could lose access to federal student aid, from which they derive much of their revenue, if the rule is implemented as proposed.

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

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