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For-Profit College Stocks Soar, Indicating New Regulations Won't Hinder Industry Growth

First Posted: 06/02/2011 6:38 pm Updated: 08/02/2011 5:12 am

NEW YORK -- Amid dueling assessments of the impact of new federal rules aimed at cracking down on abuses by for-profit colleges, the stock market delivered a clear verdict: business as usual.

Shares for every publicly traded college corporation made gains on Wall Street Thursday, with share prices at many of the largest corporations, including Education Management Corp. and ITT Educational Services Inc., soaring more than 20 percent by the end of the day.

"The changes we saw this morning generally surpassed what most investors were considering likely," said Jarrel Price, an analyst who covers the for-profit education sector at Height Analytics LLC. "For the majority of the sector, programs are going to avoid what were potentially very severe restrictions on their enrollment growth."
But despite the indications from the market, there was still a geyser of rhetoric in Washington on after the Obama administration released a significantly weakened package of regulations meant to protect students from unsustainable debt burdens at for-profit colleges and career training schools.

Both industry lobbyists and student advocacy groups assailed the long-anticipated regulations from opposite ends, arguing either they were a broad government overreach or fell far short of protecting students from unscrupulous programs.
After months of delays and a multimillion-dollar lobbying campaign by well-financed higher education corporations, rules released by the Department of Education Thursday cut back on the severity of penalties that for-profit college and other career programs would face if students had poor outcomes in the marketplace.

The final rules still allow programs to remain eligible for federal student aid dollars as long as they maintain a 35 percent student loan repayment rate in one out of every three years.

The regulations have been hotly contested by the industry. And while student advocacy groups expressed major disappointment with the resulting rules, the industry's allies in Congress on Thursday continued to be highly critical of the weakened regulations.

Rep. John Kline (R-Minn.) the chairman of the House Education and Workforce Committee, said Thursday that it was "deeply troubling" that the administration would push forward with the rules. He vowed: "All options are on the table as we continue the fight to protect student choice in education."

Kline sponsored a budget amendment in February, later passed by the House, that would have prevented the administration from moving forward with the regulations this year. Others who voted in favor of that provision, including numerous House Democrats, issued statements criticizing the administration.

The rules have been in the works for two years as the Department of Education has sought to curb a rising wave of student loan defaults attributed to for-profit colleges and to protect students from programs that promise training for careers but instead lead to unmanageable debts.

Students at for-profit colleges represent 12 percent of students in higher education but are responsible for 46 percent of student loan defaults, according to Department of Education statistics.

Groups that have supported the Department of Education's push for accountability were disappointed with many of the provisions that gave programs more time to adjust.

"This is a regulation that the industry won at every turn. It's a sad day, it is a rout and it is an unconditional surrender by the administration," said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, which represents mostly non-profit colleges. "The industry is publicly continuing their lamentations and complaints. But I assure you plenty of Dom Perignon is flowing," he said.

The most notable change in Thursday's regulation as compared to a draft version released last year, is a three-strike rule that gives college programs an additional three years before they could be restricted from receiving federal student aid funds -- the lifeblood of the for-profit education industry.

Another major change eliminated provisions that would have restricted enrollment growth at institutions where students were unable to pay off their debts or had not attained a high enough salary to manage their resulting student loans. Under the draft version of the rule, programs where students were unable to pay down principal on student loans or had high debt burdens could have faced federal limitations on enrollment growth.

Consistent enrollment growth has been the linchpin of Wall Street success for most higher education companies, even though many schools have extremely high withdrawal rates. According to a 2010 Senate report, 14 out of 16 of the largest higher education companies recruited more new students for the 2009 academic year than they had for the entire 2008 year, even though net enrollment increased only 22 percent.

The final version of the rule replaces enrollment limitations with requirements that schools make certain disclosures to current and prospective students, including warnings that they could incur a high debt burden.

Education Secretary Arne Duncan said the rules were "an improvement" on the previous draft, and are aimed at giving schools time to improve.

Under the final rules, schools will not risk losing access to federal student aid dollars until 2015.

Student advocacy groups argued that three-year cushion will allow more time for legislative changes, with the Higher Education Act up for re-authorization before the rules take effect.

"The regulations allow a lot of opportunity and a lot of time," said Jose Cruz, vice president for higher education policy and practice at the Education Trust. "In a world driven by quarterly profits, three years is a lot of time to give these institutions ... to find ways to work around whatever protections have been put in place."

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