The Obama administration on Thursday will publish new regulations intended to target for-profit career colleges that leave students with debts they cannot repay.
The U.S. Department of Education rules will sanction schools with students who carry too much debt compared with their earnings after graduation. Programs that fail to meet debt-to-income requirements for two out of three consecutive years would lose eligibility for federal student loans and grants -- the primary revenue stream at for-profit colleges.
The for-profit college industry includes schools such as the University of Phoenix, ITT Technical Institute and Everest College, owned by Corinthian Colleges Inc., based in Orange County. Corinthian has been in the crosshairs of more than a dozen state and federal regulators for more than a year amid allegations that the company falsified student job placement rates and steered students into high-interest loans.
The Santa Ana-based company announced in July that it would sell the vast majority of its campuses, after the Department of Education restricted access to federal student loans and grants.
U.S. Education Secretary Arne Duncan said the new regulations are intended to weed out programs that rely heavily on taxpayer subsidies but don’t follow through on promises of career training.
“The quality of these programs today varies tremendously,” Duncan said in a briefing with reporters Wednesday. “While some are strong, today too many of these programs fail to provide the training [students] need, while burying them in debt they cannot repay.”
Some for-profit schools receive up to 90% of their revenue from federal loans and grants.
Students at for-profit schools default on federal loans at a much higher rate than those at traditional public colleges -- more than 19% after three years, compared with less than 13% at public institutions. For-profit schools enroll about 11% of all college students, but the sector is responsible for 44% of student loan defaults.
The move by the Education Department is a second attempt at regulating career colleges, after a federal judge struck down an earlier version of the rules in 2012. An industry trade group successfully sued to halt the regulations, calling them "arbitrary."
The rules apply to for-profit colleges and certificate programs at community colleges and private nonprofit schools. The regulations apply to each college's specific programs, such as criminal justice or nursing, meaning some could be disqualified while others remain eligible.
The Education Department will judge schools by tracking their graduates’ finances, using Social Security Administration data. To pass the test, graduates must have annual loan payments that are less than 20% of discretionary earnings (based on a complex formula set by the federal government that compares income to certain poverty levels) or 8% of total earnings.
Programs with higher debt-to-income burdens for several years in a row would be disqualified. For example, programs would lose eligibility if graduates have loan payments that are more than 12% of total income and 30% of discretionary income in 2 out of 3 consecutive years.
The new regulations also require programs to prominently disclose information on graduation rates and loan debt to prospective students.
The department estimated that approximately 1,400 programs would fail the debt-to-income test out of 5,500 covered by the regulations.
Both the for-profit college industry and its critics took issue with the new regulations.
An industry trade group, the Assn. of Private Sector Colleges and Universities, called it a “fundamentally flawed and misguided proposal.”
"While the administration deserves praise for issuing a final rule despite relentless lobbying by the for-profit college industry, it can and must do much more to protect students and taxpayers from well-documented abuses," said Pauline Abernathy, vice president of the Institute for College Access & Success, an Oakland group that focuses on student debt issues.