The Education Department will propose much-anticipated regulations Friday that would cut off federal aid to for-profit college programs if too many of their students default on loans or don't earn enough after graduation to repay them.
"Some proprietary schools have profited and prospered but their students haven't, and this is a disservice to students and to taxpayers," Education Secretary Arne Duncan said Thursday in a briefing with reporters. "And it undermines the valuable work, the extraordinarily important work, being done by the for-profit industry as a whole."
To qualify for federal student aid programs, career college programs must prepare students for "gainful employment."
The Obama administration, amid intense lobbying from both for-profit college officials and consumer and student advocates, is proposing a complicated formula that would weigh both the debt-to-income ratio of recent graduates and whether all enrolled students repay their loans on time, regardless of whether they finish their studies.
Although the rules would provide schools more roads to compliance than an earlier proposal, a senator and for-profit colleges' chief lobbying group warned that it would make college less accessible.
Republican Sen. Lamar Alexander of Tennessee, a former Education secretary, ridiculed it as "a surprisingly wacky proposal from one of the president's best cabinet members." The government could in effect "institute price controls on certificate and degree programs at thousands of institutions of higher education," Alexander said in a statement.
Underscoring the partisan divide on the issue, Sen. Tom Harkin of Iowa, a Democrat who is holding oversight hearings on for-profit colleges, praised the proposed regulations as "plain common sense."
For-profit colleges have faced increased scrutiny in recent months for some questionable recruiting tactics, high loan default rates, and low graduation and job placement rates. The government is taking notice because for-profit colleges are bringing in record amounts of federal aid money – $26.5 billion last year, up from $4.6 billion in 2000.
Under the Obama administration proposal, vocational programs would fall into one of three categories:
_ Programs fully eligible for aid will either have at least 45 percent of their former students paying down the principal on their federal loans – or their graduates will have a debt-to-earnings ratio of less than 20 percent of discretionary income or 8 percent of total income.
_ Ineligible programs will have less than 35 percent of their former students paying down the principal on their federal loans – and their graduates will have a debt-to-earnings ratio above 30 percent of discretionary income and 12 percent of total income.
_ Those programs that don't fit either definition would be restricted – meaning they would be subject to limits on enrollment growth and schools would be required, among other things, to warn of their high debt levels.
Duncan said the department estimates that if schools make no changes, 5 percent of for-profit college programs would be ineligible for aid in 2012 – affecting 8 percent of all students in the fast-growing sector.
If the rules went into effect now, 55 percent of for-profit schools would be required to disclose unflattering loan data in their promotional materials, making for a strong consumer protection tool, the agency said.
To give schools time to improve and to target "the bottom of the barrel," Duncan said the administration would cap the number of programs it would strip of aid eligibility at 5 percent in fall 2012, when that penalty would first be available.
The Career College Association, the for-profit college sector's main lobbying group, said establishing a ratio between student debt and anticipated graduate earnings is unwise, unnecessary and unproven.
"Amounts borrowed today do not indicate what you will be able to repay in five years, ten years or over a working lifetime," the association's president, Harris Miller, said Thursday in a statement.
Others who were hoping for tougher rules were disappointed, as well.
Pauline Abernathy, vice president of the Institute for College Access & Success, said while the proposal is significant and has teeth, programs could continue to profit from federal aid when more than half their students can't afford to pay down the principal on their loans.
"It is not as strong as it should be to protect students and taxpayers from getting ripped off by career education programs that over-promise and under-deliver," she said.
The proposed rules will be published Friday in the Federal Register and a 45-day public comment period will follow. The final rules are scheduled to be announced in November and would take effect next year, although enforcement action that would strip schools of aid eligibility would not begin until the 2012-2013 school year.