The Obama administration is stepping up regulation of for-profit career colleges, announcing rules that could cut off federal funding to institutions that leave students with massive debts they can't repay.
The U.S. Department of Education's effort, unveiled Thursday, is the latest sign that federal and state authorities are ramping up scrutiny of the for-profit college industry, which includes major brands such as ITT Technical Institute, the University of Phoenix and Everest College, owned by the troubled Corinthian Colleges Inc., based in Orange County.
Critics contend that many for-profit colleges target low-income consumers and charge hefty tuition, leaving students with massive loans and few job prospects. Several major players in the industry, including Corinthian and ITT, face lawsuits and investigations by the U.S. Consumer Financial Protection Bureau and more than a dozen state attorneys general.
The new rules from the Education Department are designed to penalize schools that leave students with 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 generator at for-profit colleges.
"The quality of these programs today varies tremendously," U.S. Education Secretary Arne Duncan said in a briefing with reporters. "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."
Duncan said the new rules, known as "gainful employment" regulations, are intended to weed out programs that rely heavily on taxpayer subsidies but don't follow through on promises of career training. 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, according to federal data.
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 and unfair.
In addition to the new rules, the department said it would create an interagency task force to regulate the industry, alongside agencies such as the Justice Department and the Consumer Financial Protection Bureau.
The for-profit college industry soared during the Great Recession as schools marketed heavily to growing ranks of unemployed workers seeking new skills. But the rapid growth attracted the attention of federal and state authorities, who noted poor graduation rates and ballooning student loan defaults at many of the schools.
Amid investigations and new regulations, enrollments slowed and stock prices have plummeted.
One of the largest corporations, Santa Ana-based Corinthian, said in July that it would sell the vast majority of its campuses. The announcement came after the Department of Education restricted access to federal student loans and grants and put the company on the brink of collapse.
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 company has denied the allegations.
The new Education Department 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 8% of total earnings, or less than 20% of discretionary earnings (based on a formula set by the federal government that factors in loan payments and the poverty level).
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 two out of three consecutive years.
The rules go into effect in July. That means that the earliest a program could be cut off from federal funding is late 2017.
The new regulations also require programs to prominently disclose information on graduation rates and loan debt to prospective students.
The department estimated that about 1,400 programs would fail the debt-to-income test, out of 5,500 covered by the regulations. Administration officials said the new policy would hold more programs accountable than the earlier version that was struck down.
Both the for-profit college industry and its critics took issue with the new rules.
An industry trade group, the Assn. of Private Sector Colleges and Universities, called it a "fundamentally flawed and misguided proposal."
"The regulation will hurt the very students it is intended to help by restricting educational access for millions of students and unfairly targeting certain institutions," Steve Gunderson, the group's president and chief executive, said in a statement.
Democratic members of Congress and student advocacy groups argued the rules were too weak. The administration dropped a provision, for example, that would have penalized programs with too many students defaulting on loans.
"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.
U.S. Sen. Tom Harkin (D-Iowa), who led a two-year investigation into the industry, argued that the current regulations focus only on graduates, letting schools with high dropout rates off the hook.
"This rule does nothing to stop schools from offering, and our most at-risk students from enrolling in, programs where most students fail and default," he said.