The Obama administration Thursday released its highly anticipated regulation for tougher oversight of private, for-profit colleges, saying the new rules were needed to protect students who were running up big tuition bills but getting few practical job skills.
The so-called "gainful employment" test immediately came under fire from a top congressional Republican and from minority groups, but share prices for some for-profit colleges jumped as investors concluded that the final rule was not nearly as punitive as some had feared.
The rule would impose three tests on for-profit institutions, which critics say have enrolled huge numbers of students receiving federal aid without delivering real results. Repeated failures to meet the tests would mean a college could no longer accept students paying with federal money, a restriction that could force some nontraditional institutions to close their doors.
"While for-profit schools have profited and prospered thanks to federal dollars, some of their students have not. This is a disservice to students and taxpayers, and [it] undermines the valuable work being done by the for-profit education industry as a whole," Education Secretary Arne Duncan said.
"We're asking companies that get up to 90 percent of their profits from taxpayer dollars to be at least 35 percent effective," Mr. Duncan added. "We're also giving poor performing for-profit programs every chance to improve. But if you get three strikes in four years, you're out."
The rules don't go into effect until July 1, 2012, meaning programs can't be deemed ineligible until 2015.
But the resistance was immediate on an issue that has scrambled ideological and partisan lines on Capitol Hill.
House Majority Leader Eric Cantor, Virginia Republican, said the new regulation clashed with President Obama's recent promise to rein in "regulatory overreach" and would prove particularly onerous for low-income students.
"This misguided regulation will hinder job creation and could prevent hundreds of thousands of individuals from bringing new skills into the workforce each year," he said.
The National Black Chamber of Commerce and the Hispanic Leadership Fund also put out statements slamming the Education Department rule. NBCC President Harry Alford called the modified rule "unfair, unwise and illegal."
The first reaction among investors was positive for for-profit stocks such as Corinthian Colleges Inc. and ITT Education Services Inc., reflecting what analysts said was relief that the rule was not tougher and that the earliest date that programs could be cut off from federal dollars was at least four years away.
The first draft of the rule would have prohibited for-profit programs from accepting students getting government aid money if fewer than 35 percent of former students had begun to repay their loans within three years.
That regulation remains in the final rule, but the Education Department has added two more metrics.
A for-profit program will be considered to lead to gainful employment if the estimated loan payment of a typical graduate does not exceed 30 percent of discretionary income; or if the estimated loan payment of an average graduate does not exceed 12 percent of total earnings.
A program must fall short on all three counts for three consecutive years before being cut off from the federal checkbook.
About 12 percent of college students nationwide attend for-profit schools. The Education Department estimates that 26 percent of all student loan money and 46 percent of all student loan dollars in default come from students in for-profit programs. Some of those institutions receive more than 80 percent of their revenue from taxpayers, the department said.
Since the rule does not go into effect for 13 months, Congress will have ample time to review it and offer changes or enact legislation to blunt its impact. Mr. Cantor said the GOP-controlled House would bring legislation to the floor to do just that.
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