The Washington Times - May 5, 2011, 02:11AM

U.S. Education Department’s new regulations on for profit schools has become enshrined in what could very well be a huge pay-off for hedge fund short sellers and publicly funded universities like Iowa State, a school that recently named a new public policy institute after Senator Tom Harkin, Iowa Democrat.

Despite being probed by it’s own Office of the Inspector General, the  Department of Education
 sent it’s new “gainful employment” rules imposed on for-profit schools to the Office of Management and Budget. The IG is currently examining if short-sellers, who make financial gains as a result of stock prices dropping, were made aware of the department’s rules before the regulation went public.


The proposed rules by DOE would require these educational institutions to “prepare students for gainful employment in a recognized occupation,” or risk losing federal funding for student aid.

An October 2010 Forbes piece discusses how the new regulation will financially hurt the for profit school industry:

According to a recent study by the Government Accountability Office, enrollment in for-profit colleges has grown from 365,000 students to almost 1.8 million in recent years. These institutions are quite diverse, ranging from small, privately owned colleges to publicly traded corporations. In 2009 students at for-profit colleges received more than $4 billion in Pell Grants and more than $20 billion in federal loans provided by the Department of Education. Because nearly 90% of the revenue from for-profit institutions comes from federal grants and loans, losing access to these funds would lead to a substantial decrease in profit for the institution.

Given the fight for federal funding, state schools have less funding  to compete for if for profit schools are moved out of the picture. The new DOE rules are sure to financially cripple the for-profit school industry and lead to stock prices falling of publicly traded educational institutions, benefiting short-sellers’ bank accounts. Mark Kantrowitz, publisher of FinAid writes: (bolding is mine)

The Higher Education Act of 1965 requires for-profit colleges to provide “an eligible program of training to prepare students for gainful employment in a recognized occupation” but does not currently define gainful employment. (bolding is mine)

During negotiated rulemaking for Higher Education 2009-10, the US Department of Education proposed defining gainful employment by establishing an 8% debt-service-to-income threshold based on median student debt for recent college graduates with income based either on Bureau of Labor Statistics 25th percentile wage data or actual earnings of the college’s graduates. Loan payments would be based on the standard 10-year repayment plan for the unsubsidized Stafford loan program. For programs that failed to satisfy this standard, the US Department of Education proposed an alternative that requires a loan repayment rate for recent college graduates of 90%. The loan repayment rate measures the percentage of borrowers actively repaying their loans. It is a dual to the default rate, but includes borrowers who are delinquent, in an economic hardship deferment or in forbearance along with borrowers who are in default.

The DOE’s IG office is investigating if short sellers like Steve Eisman, a principal at the New York based hedge fund FrontPoint Partners, either influenced the rule making or received leaked information about the rules prior the DOE’s public announcement. The Dow Jones Adviser reports:

In November, Sen. Richard Burr (R., N.C.) and Sen. Tom Coburn (R., Okla.) sent a letter asking the OIG to look into possible ties between the department and investors who were selling short the stock of various for-profit education companies. Correspondence between the parties, which include FrontPoint Partners’s Steve Eisman, had been released by the department after Citizens for Responsibility and Ethics in Washington, a watchdog group known as CREW, filed requests under the Freedom of Information Act.

It should be noted that an insider trading scandal erupted at FrontPoint this year when a now former FrontPoint healthcare portfolio manager Chip Skowron was charged and arrested for conspiracy, securities fraud and obstruction last month. The SEC also accused Dr. Skowron of insider trading. However, FrontPoint’s insider trading scandal has not kept Mr. Eisman from putting himself in the spotlight. 

Mr. Eisman is well known for making a windfall profit as a result of shorting subprime mortgages. He is now betting against for profit education institutions and is publicly railing against these schools the way he excoriated sub-prime mortgage loans as predatory lending to the poor: (h/t Mother Jones)

None of the activity at the DOE has gone unnoticed by Capitol Hill lawmakers on both sides of the aisle. A group of 113 Congressmen sent a bipartisan letter to President Barack Obama asking him to request that the DOE withdraw the proposed “gainful” employment regulation. During a Senate Homeland Security and Governmental Affairs Committee hearing on private sector education, Senator Tom Coburn, Oklahoma Republican, noted: (bolding is mine)

“…very significant and inappropriate behavior at the Department of Education in tipping hedge funds on short-selling public — private education.”Mr. Coburn finally remarked, “the issue in terms of the lack of proper utilization of facts in the Department of Education and managing investors in one segment to make significant dollars over something the government is thinking about doing is highly unethical and if proven to be the case, some people ought to be going to jail in the Department of Education. And this is not a light statement, I recognize that but it’s a serious statement. And I promise you, if we don’t get on at this committee, the Permanent Subcommittee on Investigations will in fact do that.”

Sen. Joseph Lieberman, Connecticut Independent, sent a letter to Education Secretary Arne Duncan regarding concerns about short sellers’ influence over DOE’s gainful employment rulemaking process.  Mr. Lieberman writes: “I hope the revised gainful employment regulations will be well targeted to protect our students, and not unduly restrict career education programs.”

However, Senator Harkin, Chairman of the Senate Health, Education, Labor and Pensions Committee (HELP) is determined to see DOE’s new rules become a reality, so further regulation can be imposed on for profit schools. Interestingly, though, Mr. Harkin has much to benefit himself from seeing for profit educational institutions financially fail.

The Des Moines Register reported last week that the Iowa Board of Regents, whom Mr. Harkin’s wife serves on, approved naming an Iowa State University Institue after Senator Harkin. Publicly funded State universities stand to lose out financially if for-profit schools continue to grow their student recruitment. The Des Moines Register writes: (bolding is mine)

Lang said he had ethical problems with establishing a public policy center named after someone who holds a position so central to shaping public policy.

“I believe it is absolutely wrong to consider this institute at this time,” Lang said.

Gov. Terry Branstad, a Republican, weighed in on the controversy Monday. He asked the regents to wait to consider the proposal until three of his appointees take positions on the board in May.

On Tuesday, 59 of 60 House Republicans and all 24 GOP senators sent letters to the board asking the regents to postpone their vote.

Bruce Rastetter, one of the Branstad appointees, called the vote an example of politics clouding the board’s actions. He said establishing an institute named after an elected official, whether Republican or Democrat, represents a conflict of interest and raises serious ethical issues.

When all GOP’ers on Chairman Harkin’s committee threatened to not attend a scheduled hearing on May 10 pertaining to for profit colleges, Mr. Harkin canceled the hearing a week later but did not do so publicly at the urging of Republican HELP members. 

In the meantime, Senate HELP Ranking Member Mike Enzi, Wyoming Republican, wrote letters to both Secretary Duncan and the Securities Exchange Commission early this week. Mr. Enzi called on Sec. Duncan to release all the documentation regarding the rulemaking process of the proposed gainful employment rules and urged the  SEC along with the U.S. Attorney in New York to review rulemaking documents on the drafted gainful employment regulations proposed by the U.S. Department of Education.  

Mr. Enzi pointed out the documents raise red flags about the legal nature regarding the correspondence between DOE officials and parties with a potential financial interest in the regulations sought to be placed on for-profit colleges.

While DOE continues to thumb it’s nose at the opposition to the proposed DOE regulations, CREW asked the Education Department on Tuesday to put off finalizing the gainful employment rules until the IG investigation is finished:

“Given the ongoing IG investigation, the potential for an SEC investigation, and the significant congressional concern, why rush the regulation out? What if the IG investigation reveals the regulation was, as it appears, improperly promulgated? Would it then be revoked? Public confidence in Education’s regulatory process has been shaken. The Department would do well to wait for the results of the IG investigation before deciding whether and when to publish the gainful employment regulation.”