The College Debt Crisis: A CNBC SPECIAL REPORT

Dec. 20, 2010

The College Debt Crisis: A CNBC SPECIAL REPORT

Rewriting of Regulations May Spell Trouble for Some Schools

By: Karina Frayter
Producer, CNBC

The for-profit education industry is in the fight of its life.

The Education Department early next year is expected to impose a new regulation—dubbed the gainful employment rule— that is likely to dramatically alter how the industry does its business and in some cases mean the end of some program altogether.

At stake for the $29 billion industry is eligibility for federal student loans, which accounts for almost 90 percent of all revenue.

New Play Book

The proposed regulation would require career schools and training programs to prove that they prepare students for “gainful employment in the recognized occupation”, or that their graduates earn enough to pay back student loans.

The federal government will use two separate metrics: debt-to-income ratio of the program and loan repayment rates.

Programs with unsatisfactory results would be required to disclose them to current and prospective students. They also could lose eligibility for federal student aid.

The Education Department estimates that, if existing debt thresholds remain unchanged, 5 percent of programs that are subject to the requirement would no longer be eligible for aid, while 55 percent would have to inform students of high debt-to-income ratios.

The issue of gainful employment continues to weigh heavily on the industry. An index of 13 for-profit education companies is down more than 30 percent this year. Corinthian Colleges has lost 76 percent over the last twelve months. Shares of Apollo Group, [APOL 38.80 --- UNCH ] are down 36 percent,Strayer [STRA 164.24 --- UNCH ] down 23 percent, ITT Education Services [ESI 64.58 --- UNCH ] down 34 percent, and Education Management [EDMC 14.68 --- UNCH ] down 33 percent through middday December 20.

Debt-Laden Diplomas

For-profit schools have enjoyed an impressive growth over the last decade. But high default rates among students and a questionable job placement record have rasied concerns that these institutions leave students with big debts and educations of little worth.

For-profit programs are pricey—though costs vary they are usually more expensive than public schools—and enroll high numbers of non-traditional low-income students. That places them among the biggest beneficiaries of federal student aid. University of Phoenix, a unit of Apollo, DeVry [DV 47.32 --- UNCH ] and Kaplan University, a unit of the Washington Post Company [WPO 432.06 --- UNCH ] are top recipients of federal financial aid.

And more students at for-profit programs graduate with debt. At the associate-degree level, 98.2 percent of students at for-profits graduated with debt in 2008, according to BMO Capital Markets. That compared to 38.2 percent for public nonprofit schools. Cumulative debt at graduation was $20,188 and $10,329, respectively.

A two-year program at a for-profit college on average cost $27,488 last year, according to BMO Capital Markets. The average price for a similar program at a private not-for-profit institution was $24,859, and $15,109 at a public school.

The average price for a four-year program was $31,322 at a for-profit, just marginally lower than $31,708 at a private not-for-profit, and significantly higher than $19,906 at a public school.

Students at for-profit colleges also default on their loans in higher numbers—three times the rate of graduates at private nonprofit institutions. According to one estimate from critics of the industry, without tighter regulation students at for-profit colleges will default on $276 billion of student loans over the next decade. Taxpayers would be left to foot the bill.

No Consensus on Remedy

The administration believes the gainful employment regulation will remedy the situation.

“These new rules will help ensure that students are getting from schools what they pay for: solid preparation for a good job,” said Secretary of Education Arne Duncan in a statement last October.

The industry argues that the rules are based on incomplete data and flimsy policy rationales. With traditional schools unable to meet the growing demand for higher education, for-profit programs are the best bet for people seeking vocational training or college diploma.

The Association of Private Sector Colleges and Universities says the proposed regulation is “a bad deal for all concerned”. The rules “would severely limit choice in higher education, and yet would do nothing to prevent “bad actors”.

The U.S. Chamber of Commerce says the regulation is “ill-conceived” and “will work against job creation."

Big Game Changer

Apollo Group warned investors in a recent SEC filing that compliance with the regulation “could reduce our enrollment, increase our cost of doing business, and have a material adverse effect on our business, financial condition, results of operations and cash flows.”

Similarly, Corinthian, another large operator of for-profit career colleges,said in a recent filing that the regulation would lead them to “further limit enrollment”.

The industry is waging an intense lobbying campaign. Representatives of the industry flooded Capitol Hill and federal agencies with critical letters and personal visits, stepped up donations to members of Congress, and spent millions on media advertisements.

“We are urging the Department to put the brakes on this proposal before its unintended consequences take a human toll,” said Peter Waller, former CEO of Corinthian Colleges. The Education Department received over 90,000 comments.

The Department already put out a portion of new rules surrounding gainful employment that cover incentive compensation for recruiters, deceptive advertising and the need to get state authorization for online schools. They go in effect on July 1, 2011.

The final metrics that would define “gainful employment” in terms of repayment rates and debt-to-income ratios are slated for release early next year. This part of the regulation takes effect in July of 2012.

Republicans to the Rescue?

The industry has turned its hopes to the Republican Party, which will have a large House mahority in ther new Congress. The GOP has been more sympathetic to for-profits, arguing in part that the issue of student debt should be applied to all postsecondary schools.

The incoming Republican chairman of the House Education Committee, John Kline of Minnesota, said he hopes the Education Department would ease the final version of the gainful employment rule.

“The Republicans taking over the House makes it more likely that there will be some sort of Congressional action to try and block the implementation of the regulation," says John Bailey, an industry analyst and director at the lobbying firm Dutko Worldwide.

A recent survey conducted by the firm found that 82 percent of key Washington insiders expect the Republican House to try and stop the gainful employment regulation.

There are several options available. First, they could attach a rider to an appropriations bill that prohibits the Education Department from issuing regulation on gainful employment. Or, the House appropriations committee could deny the Secretary the funds he requests to conduct the program reviews. Republicans could also request additional investigations. Just last month, two Republican senators asked for a probe into alleged leaks of the proposal.

“The challenge is that it would still need to pass the Democratic majority in the Senate and also not be vetoed by the President”, says Bailey. “ So the bar is pretty high to enact either of these strategies.”



Watch the premiere of "Price of Admission: America's College Debt Crisis," a CNBC Original documentary, Tuesday, December 21 at 9pm ET.