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For-Profit Colleges Face Federal-Aid Ax

As the Obama administration targets student debt in one of its executive orders, it once again is locking horns with private for-profit colleges over federal funding. Some of these subsidized institutions are publicly traded.

The Department of Education's "gainful employment" rule, if finalized, would end federal financial aid to schools whose graduates have high student-loan debt relative to their incomes. It would apply to virtually all programs offered by for-profits as well as any non-degree program for public and private nonprofit universities.

It's the administration's second try. A federal judge in 2012 shot down its first attempt to limit financial aid to post-secondary schools. The public comment period on the latest proposal ended last month.

Critics say that for-profit college administrators are scam artists who game the system, padding their pockets at taxpayer expense, leaving low-income students buried in debt and saddled with worthless degrees.

"The profit motive is very powerful. It can result in dangerous and irrational decisions based on short-term gain," said Barmak Nassirian, director of federal regulations and policy analysis at the American Association of State Colleges and Universities.

Supporters say that for-profit schools offer a valuable service to underserved people, providing better education, career contacts and services than community colleges or state universities.

Community Colleges Full

For-profit schools provide training in some programs, such as nursing or medical assistance, where waiting lists at community colleges may stretch for years. Other programs, such as tech or accounting, also tend to place students quickly in growing fields where the jobs pay good salaries.

"You can't just stick all these people in community colleges, because the states won't pay for it," said Trace Urdan, a senior analyst at Wells Fargo Securities. "They can't afford it.

The newest Obama administration proposal has been blasted as being too weak by some and unduly draconian by others. It has also drawn criticism from both Republicans and Democrats on Capitol Hill who say that it is unfair to low-income students.

Critics also cite separation-of-powers grounds for their views. "(Obama is) placing pressures on for-profit schools that (he) couldn't in a million years get through Congress," Urdan said.

The scrutiny of lawyers, regulators, politicians and the press hasn't been kind to for-profits.

Corinthian Collapse

Corinthian Colleges (COCO) shares plunged 67% to 28 cents Thursday after reporting that possible funding delays from a skeptical Department of Education could cause it to go out of business. Corinthian rose 5 cents to 33 cents on Friday.

A 2012 lawsuit accused Education Management (EDMC) of defrauding taxpayers by using boiler-room tactics to get millions of dollars in federal financial aid for the homeless and mentally ill.

Career Education (CECO) last year agreed to pay $10 million to settle allegations by New York's attorney general that it misrepresented the data about its graduates' job placements. Corinthian, which questioned its ability to continue as a "going concern" Thursday, and ITT Educational Services (ESI) were the subjects of a broad inquiry by the Consumer Financial Protection Bureau (CFPB). Corinthian disclosed in January that the CFPB was considering taking legal action against it.

Current law doesn't require private non-profit and public universities to track their graduates' earnings relative to debt.

"I think higher ed has a debt-addiction problem that should be very seriously reviewed," Nassirian said. "I think that's not an un reasonable conversation, but let's start with low-hanging fruit.

The graduation, debt and default rates haven't been kind, either. Students seeking bachelor's degrees from private for-profit colleges had a 31.5% graduation rate in 2012, compared with 57.2% for public universities and 65.5% for private non-profit colleges, according to the Department of Education.

In 2012, 66% of public four-year university students graduated in debt, with average student loans at $25,500, the DOE said. Three-fourths of nonprofit four-year college students graduated in debt, with an average of $32,300 in outstanding loans. At for-profit colleges, 88% of graduates had debt, with an average of $39,950.

For-profit colleges have the highest post-secondary education default rates: a three-year default rate of 21.8% vs. 13% for public universities and 8.2% for private nonprofit schools, the DOE said last year.

Critics have accused for-profits of using aggressive marketing to enroll marginal students.

The recovering economy, which makes going back to school less attractive, is having an effect. So is bad press, including a 2012 Senate committee report describing overpriced tuition, predatory recruiting practices, sky-high dropout rates, billions of taxpayer dollars spent on aggressive marketing and advertising, and companies gaming regulations to maximize profits.

Enrollment Falling After peaking with more than 2 million students in 2010, for-profit college enrollment fell 10.4% by 2012, according to the DOE. For public universities, enrollment fell 1.7% to 14.9 million over that time. Private nonprofit universities' enrollment rose 2.6% to 3.95 million.

The Senate committee said that taxpayers are investing more than $30 billion annually into companies that operate for-profit colleges. Among 15 publicly traded for-profit college companies, taxpayer money accounts for 86% of revenues, including Pell grants, student loans, VA benefits and the like.

Nonetheless, Corinthian Colleges' stock fell, and ITT's stock has dropped 49% this year — 63% off its 52-week high on Jan. 21.

But it's not all gloom and doom for shareholders. DeVry University (DV) shares are up 22% so far this year. Apollo Group (APOL), which runs the University of Phoenix, is up 9%. Grand Canyon Education (LOPE) is up 6%.

Some for-profits are doing more to curb programs such as art or cooking and push students toward accounting, tech or medical assistance, Urdan said. But ultimately, success depends on the students.

"It's really difficult to screen for the people who are going to be successful," he said.