Stock prices of for-profit colleges plummeted and calls for stronger government regulations mounted as investors and consumer advocate groups alike reacted Monday to an Education Department report that showed nearly two-thirds of the schools’ students weren’t repaying their federal loans.
The government data, released after the market closed Friday, focused on the 2009 loan repayment rates for more than 8,000 colleges and universities in the U.S. Such rates are used to gauge the potential effect of the department’s proposed “gainful employment” rules, which would cut off federal aid to programs in which less than 45% of students are able to repay their loans.
Overall, the repayment rates at these for-profit schools was only 36% in fiscal 2009, according to an analysis of the data conducted by the Institute for College Access and Success, a student-advocacy group.
By comparison, the repayment rate at private nonprofit schools was 56%, the group found. At public state colleges and universities, the rate was 54%.
Losing federal aid would effectively put many programs out of business: Some for-profit colleges rely on such funding for nearly 90% of their revenue — the maximum percentage allowed by the federal government.
Although just 10% of college students attend for-profit schools, the schools collect nearly 25% of the $24 billion the government allocates each year to fund Pell grants and Stafford loans.
Students’ failure to repay federally backed loans has brought new scrutiny of the for-profit education world. The Obama administration last month proposed new rules that could cut off federal loan eligibility for for-profit degree programs that fail to adequately prepare students for “gainful employment.”
The rules proposed by the Education Department, among other things, use a complicated set of criteria to ferret out problems in the loan repayment process. If problems are found, schools can face government restrictions or funding cuts. The rules also would consider the students’ debt-to-income ratios, meaning those programs with low repayment rates could still qualify for federal aid if their graduates earned enough money.
The goal, according to a statement issued by federal education regulators, is to “seek to protect students from taking on unsustainable debt they cannot repay and to protect taxpayers from high loan default rates.”
In addition, Sen. Tom Harkin (D-Iowa) has been spearheading a probe of high-pressure sales tactics and other alleged abuses by for-profit schools. Since June 24, the day of the initial Senate hearings on the industry and its practices, an index of 12 major for-profit education stocks has plunged 28%, while the average New York Stock Exchange stock has risen 2.1% in the same period.
The Government Accountability Office announced two weeks ago that it ran an undercover operation that found deceptive or fraudulent practices at all 15 for-profit schools it visited. Democratic lawmakers say more government regulation of the sector is needed.
But some of the companies have protested the way the government has calculated loan repayment rates. DeVry Inc. said in a statement Monday that it would “work collaboratively with [the government] to gain clarity on its methodology and reach a resolution on inconsistencies in the data.”
Investors, however, remained spooked. Many of the stocks plunged Monday, continuing a deep decline that has wiped out much of shareholders’ value over the last two months. Some hit 52-week lows.
Some of the hardest hit included Santa Ana-based Corinthian Colleges Inc., which tumbled $1.44, or 22%, to $5.22; ITT Educational Services, which sank $9.40, or $14.6%, to $54.93; and Kaplan University parent Washington Post Co., which slid $27.83, or 8.1%, to $315.65. Also feeling the pain from the report’s aftermath was Strayer Education Inc., down $36.75, or 18.4%, to $163.26; and DeVry Inc., off $3.74, or 8.8%, to $38.97.
Universal Technical Institute Inc., Grand Canyon Education Inc., American Public Education Inc. and Bridgepoint Education Inc. performed the best, exceeding the department’s proposed thresholds to continue getting federal funds.
The department’s data showed that three publicly traded schools — Corinthian, Kaplan and ITT Educational Services — had among the lowest repayment rates.
Washington Post Co., whose Kaplan institutions had a weighted average repayment rate of about 28%, said a number of Kaplan programs could potentially lose their eligibility for federal student aid if the new rules were adopted. More stringent regulations “could have a materially adverse effect on the future results of the company’s higher education division,” the company said in a statement issued to shareholders Monday.
Kaplan accounted for 58% of Washington Post Co.'s revenue last year, with newspapers and magazines contributing 19%.
Kaplan spokeswoman Melissa Mack said the federal data offered only a partial picture of the situation. Last week’s data failed to include low-income students who were paying the interest on the loans but weren’t touching the principal; those who were deferring payment; and those who had consolidated their loans, she said.
“The Education Department says it wants to target programs whose students have trouble repaying loans, rather than reducing access to low-income students,” Mack said. “Unfortunately we’re seeing that the results are the same.”
Strayer Education had a repayment rate of 25%. In July, the company said none of its programs would be threatened by the proposed rules. Strayer Chief Executive Robert Silberman, who called the government’s data flawed, said the federal findings were much lower than the company’s internal figures.
Silberman said Monday that his company planned to file a request under the Freedom of Information Act to figure out how the Education Department made its calculations.
A spokesman for Corinthian declined to comment.
Terry Hartle, senior vice president at the American Council on Education, said Friday’s data and the GAO investigation present a strong case for more federal regulation.
“I don’t think this is a perfect indicator, but in terms of providing a snapshot, it’s a very good one,” he said. “I think the schools have some valid concerns, but the concerns are likely to be outweighed by the desire to protect consumers.”
Times staff writer Tom Petruno in Los Angeles contributed to this report.