WASHINGTON -- Federal officials on Thursday issued new regulations ordering for-profit schools do a better job of ensuring their programs help students earn a living, not just a degree.
Failure could cost underperforming schools access to federal financial aid for their students, a crushing blow to most programs.
Adopted after a bitter, expensive lobbying effort by the for-profit education industry opposing the new rules, the standards announced Thursday were actually less stringent than some had expected. That reassured nervous investors and sent the stocks of many school companies, including Minnesota-based Capella University, soaring.
The so-called gainful employment rules will require students to meet certain debt-to-income ratios in order for the program to receive federal student aid.
But the final rules give schools years to clean up their acts and raise student debt-to-income ratios, making it easier for schools to meet the standards. Under the new rules, 5 percent of for-profit schools would lose their federal loan eligibility, compared with more than 12 percent under the stricter draft proposal, according to the Department of Education.
The rules come as for-profit colleges are expanding in Minnesota, taking advantage of cheap office space and students heading back to school in the stagnant economy. More than 130 for-profit career schools operate in the state, according the Minnesota Office of Higher Education. Besides Capella, which has nearly 40,000 students that take courses online, they include Aveda Institute, Le Cordon Bleu cooking school and Rasmussen College.
The new regulations are in reaction to reports of high tuition charges, high-pressure sales tactics, high dropout rates and poor job placements for students of for-profit colleges. On average, students of for-profit institutions have higher debt levels and are more likely to not repay their loans than students at public or private colleges. In Minnesota, most for-profit colleges have three-year default rates in the double digits. Capella's default rate is 7.5 percent.
When students default on government loans, taxpayers pick up the tab.
"While for-profit schools have profited and prospered thanks to federal dollars, some of their students have not," U.S. Education Secretary Arne Duncan said in a statement. "This is a disservice to students and taxpayers, and undermines the valuable work being done by the for-profit education industry as a whole."
For-profit schools function as businesses; many sell stock and answer to shareholders, despite receiving the majority of their revenue in the form of federally backed student aid.
However, the new rules also apply to certificate programs at public universities such as the University of Minnesota and private colleges such as St. Catherine University.
Under the new regulations, colleges will have to meet one of three criteria in three out of four consecutive years:
• At least 35 percent of former students repaying loans.
• The estimated annual loan payment of a typical graduate can't exceed 30 percent of discretionary income.
• The estimated annual loan payment of a typical graduate can't exceed 12 percent of total earnings.
After two failures, the school must tell students in the under-performing program that their debts may be unaffordable and provide information about transferring to another school.
Schools have until 2015 to fix their issues, a victory for for-profit schools, which had feared funding could be cut as soon as next year.
Capella, which has not been linked to any of the bad practices that sparked the new rules, said it's too early to comment extensively on the final rules, but it believes financials should not be the only lens through which to judge higher education.
"The first and most important step in measuring the return on investment for students and taxpayers begins with measuring academic quality, not just debt," the company said in a statement.
Jeanne Herrmann, chief operating officer for Woodbury-based Globe University, testified in Washington against the regulations. While she's glad some concessions were made, she believes the rules focus too much on the price tag of higher education. "It's about having a better life and a better self and that shouldn't be tied to a loan," she said, adding that she didn't expect Globe to be affected much by the new rules.
Some advocates of reform praised the new rules. Others said they didn't go far enough.
"Given the overwhelming evidence that the worst for-profit colleges are abusing students and taxpayers, the rule isn't strong enough, but it's still an important reform that could over time help millions of students," David Halperin, director of the progressive student group Campus Progress, said in a statement.
Minnesota Republican Rep. John Kline, chairman of the House Education Committee, tried to amend the House budget resolution to outlaw gainful employment rules. The amendment failed. On Thursday, Kline would not say whether he will reintroduce such legislation.
"We all want to ensure institutions of higher learning provide a quality education," Kline said. "However, I remain concerned this regulation could undermine an entire sector of colleges in the name of rooting out a few bad actors."
Kline received more than $100,000 in campaign and political action committee contributions from for-profit colleges and their advocacy groups in the 2010 campaign cycle. The for-profit college industry has contributed to more than 100 campaigns and political action committees.
Wall Street responded favorably to the rules. The stock of Corinthian College, which runs the Everest Institute chain of for-profits, including a location in Eagan, was up 27 percent. The Apollo Group, parent company of the University of Phoenix, was up 11 percent. Capella watched its stock climb more than 3 percent to $49.58.