5% of For-Profit Colleges Will Fail on New Regulations

Career Education Corp. (CECO) and Corinthian Colleges Inc. (COCO) have been ranked among the worst schools on a US Education Department list that assesses which career training programs will meet new loan-repayment regulations.

There has been considerable concern of late about for profit colleges encouraging students to take on debt for degrees that don’t lead to a commensurate increase in income. The Obama administration say the new rules are in place to protect taxpayers form loan defaults of students mis-sold these courses by profiteering colleges.

These colleges have higher student loan default rates than traditional schools and garnered $32 billion in US student aid for the 2009-10 school year. Federal funding can account for up to 90% of their revenue and there are concerns that their marketing and job placement claims are misleading and exaggerated; each additional student who doesn’t earn enough after graduation to repay the loans become a burden on the US taxpayer.

“Career colleges have a responsibility to prepare people for jobs at a price they can afford,” Education Secretary Arne Duncan said in a statement. “Schools that cannot meet these very reasonable standards are on notice: invest in your students’ success, or taxpayers can no longer invest in you.”

The new federal regulations give colleges until 2015 to improve their student outcomes before losing federal funding. The new rules seem fairly relaxed. There are three tests:

At least 35 percent of former students are repaying their loan balance; yearly educational- debt payments of typical graduates account for a maximum of 12 percent of their total income; and those payments account for no more than 30 percent of their discretionary income.

To lose funding a college would have to fail all three tests in a year for three out of four years. However more than 190 programs at 93 colleges failed all three measures. This represents 5% of for profit programs. The original requirements, relaxed to give concerned colleges more time to apply, would have seen the failing programs figure at 16%.

The under fire colleges claim that the accusations are unfair and don’t portray the full picture:

Steve Gunderson, president of the Association of Private Sector Colleges and Universities, called the data underlying the new regulations “a faulty metric that does not accurately reflect the services provided by career colleges and universities.” In July 2011, the organization filed a lawsuit to block it.

COCO, which had 45 programs fail the new standards, plans to eliminate 13 of them address compliance issues with 11 others. A spokesman said the remaining 21 programs would be able to comply with the regulations using an alternative standard.

06 30, 2012
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