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Investors pleased by new rules for for-profit schools

| Friday, June 3, 2011

NEW YORK -- The government is moving forward with its crackdown on the country's for-profit schools, aiming to protect students from taking on too much debt to attend schools that do nothing for their job prospects.

Student advocates protest that the final version of the Department of Education's "gainful employment" rule, released on Thursday, is way too soft, but investors appeared happy with the outcome yesterday. Shares of for-profit school companies soared as investors viewed the scope of the DOE's new regulations as having a much less dire impact on the sector than they had feared. Analysts say the rule is more lenient than they and most shareholders had expected -- "meaningfully watered down," said R.W. Baird's Amy Junker.

Corinthian Colleges Inc., one of the schools considered most at risk of having to shut down programs or make a significant overhaul to its business to comply with the rule, jumped nearly 27 percent. Shares of the nation's largest chain, Apollo Group Inc., which owns the University of Phoenix, rose 11 percent. DeVry gained nearly 15 percent and the Washington Post Co., which owns the Kaplan school chain, rose more than 5 percent. Pittsburgh-based Education Management Corp. rose 22 percent.

Most students at career colleges and vocational schools pay tuition with federal financial aid dollars. But that leaves taxpayers on the hook if students can't find good jobs and default on their loans. And they are defaulting in large numbers. Students at for-profit institutions such as technical programs and culinary schools represent just 12 percent of all higher education students but 46 percent of all student loan dollars in default. The average student earning an associate degree at a for-profit school carries $14,000 in federal loan debt versus the $0 debt burden of most community college students.

So the DOE has set criteria that for-profit schools must meet in order to maintain access to federal financial aid dollars, which can represent up to 90 percent of a school's revenue. If graduates owe too much relative to their income or too few former students are paying back their tuition loans on time, schools stand to lose access to Pell grants and federal student aid. Such a loss would seriously crimp schools' ability to attract students and make money.

Under final terms of the law, schools will only be able to receive federal-paid tuition if at least 35 percent of its former students are repaying their loans. Or, the estimated annual loan payment of a typical graduate must not be bigger than 30 percent of his or her discretionary income, or 12 percent of his or her total earnings.

The finalized rule gives schools multiple chances over a four-year period to improve their stats. That means no school will be in danger of losing funding for a program until 2015, rather than next year. After "three strikes," a school will lose eligibility for three years.

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