By Josh Mitchell
Dec. 12, 2013
WASHINGTON—As many as 20% of programs at for-profit colleges would lose revenue from student aid under a draft proposal the Obama administration is developing to rein in tuitions.
The plan, which the Education Department has spent months drafting, targets for-profit schools whose students end up deep in debt or default on their student loans at exceptionally high rates. The rules would also apply to community colleges that offer career training, and technical schools. Public and nonprofit four-year colleges and universities wouldn't be affected.
The department is set to meet with representatives of schools and student advocates Friday in hopes of winning broad support for the proposal, which could still be modified in the coming months.
For-profit schools have already voiced alarm about the emerging plan. The proposal would threaten revenues at major education companies such as DeVry Education Group Inc., DV +0.31% Corinthian Colleges Inc., COCO -0.62% Education Management Corp. EDMC +0.83% , which runs the Art Institutes; and Apollo Education Group Inc., APOL +0.97% which owns the University of Phoenix. At most for-profit schools, so-called Title IV funds—generally Pell grants and federal student loans—are the biggest source of revenue. The funds are awarded to students who use them to cover tuitions at the schools.
The administration is expected to formally propose a "gainful employment" plan early next year and have the rules in place by 2015. Under a version released this week, programs would lose Title IV funds if they failed one of several standards. The student-debt payments of their former graduates, on average, couldn't exceed 12% of their annual income or 30% of their discretionary income several years after they leave school. Also, the share of students defaulting on federal loans within three years of leaving a program couldn't reach 30%.
The administration estimates that under its latest draft proposal, roughly 13% of programs at for-profit schools and community colleges would fail. An analysis by BMO Capital Markets said that at for-profits alone, 1,400 programs, or roughly 20%, would fail.
An Education Department spokesman said the agency couldn't comment because it was still in talks with schools on the plan. Student advocates have long called for more-stringent rules at for-profit schools, whose students generally have higher levels of debt and default at higher rates than those at public or nonprofit schools. The administration has been working since 2009 to put in place "gainful employment" rules, but an initial version of the rule was struck down by a federal judge who deemed they were designed in an arbitrary way.
For-profit schools say they are being unfairly targeted, given that some of the highest student-debt burdens fall on those who attend public and nonprofit graduate schools, such as law and medical school. They say they serve many students—such as single mothers and many low-income students who don't live near a community college—who otherwise would have few, if any, options for attending postsecondary school. The administration has said the rules are being written under a law that applies only to for-profit schools and community colleges and institutions that offer career training programs.
Sally Stroup, executive vice president of government affairs at the Association of Private Sector Colleges and Universities, the sector's main lobbying arm, called the proposal "sweeping" and indicated the industry would oppose the new plan. She said many schools would be forced to close programs if they lost federal funding, which she said in turn would deny many students educational opportunities.
"This is just bad policy, and it's just something that's not workable," Ms. Stroup said.
Ben Miller, a senior policy analyst at think tank New America Foundation and a former senior policy adviser for the Obama Education Department, said the latest plan is needed to ensure students aren't taking on huge debt with no returns in the form of higher wages.
"The problem you have is there is some subset of programs in the career space that are leaving students with too much debt compared to their economic return," Mr. Miller said. "This is an area where students are much more likely to borrow, they are much more likely to take on larger amounts of debt and they're much more likely to not repay that debt."
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