The Education Department proposed much-anticipated regulations Friday that would cut off federal aid to for-profit college programs if too many of their students default on loans or don't earn enough after graduation to repay them.
"Some proprietary schools have profited and prospered, but their students haven't, and this is a disservice to students and to taxpayers," Education Secretary Arne Duncan said in a briefing with reporters. To qualify for federal student aid programs, career college programs must prepare students for "gainful employment."
The Obama administration, amid intense lobbying from both for-profit college officials and consumer and student advocates, is proposing a complicated formula that would weigh both the debt-to-income ratio of recent graduates and whether all enrolled students repay their loans on time, regardless of whether they finish their studies.
Early reaction was mixed, with a Republican senator and a for-profit college lobbying group panning it and advocates for tougher regulation questioning whether it does enough to protect students and taxpayers.
For-profit colleges have faced increased scrutiny in recent months for some questionable recruiting tactics, high loan-default rates, and low graduation and job placement rates. The government is taking notice because for-profit colleges are bringing in record amounts of federal aid money -- $26.5 billion last year, up from $4.6 billion in 2000.
Under the Obama administration proposal, vocational programs would fall into one of three categories:
SBlt Programs fully eligible for aid will either have at least 45 percent of their former students paying down the principal on their federal loans -- or their graduates will have a debt-to-earnings ratio of less than 20 percent of discretionary income or 8 percent of total income.
* Ineligible programs will have less than 35 percent of their former students paying down the principal on their federal loans -- and their graduates will have a debt-to-earnings ratio above 30 percent of discretionary income and 12 percent of total income.
* Those programs that don't fit either definition would be restricted -- meaning they would be subject to limits on enrollment growth and schools would be required, among other things, to warn of their high debt levels.
Duncan said the department estimates that if schools make no changes, 5 percent of for-profit college programs would be ineligible for aid in 2012 -- affecting 8 percent of all students in the fast- growing sector.
If the rules went into effect now, 55 percent of for-profit schools would be required to disclose unflattering loan data in their promotional materials, making for a strong consumer protection tool, the agency said.
To give schools time to improve and to target "the bottom of the barrel," Duncan said the administration would cap the number of programs it would strip of aid eligibility at 5 percent in fall 2012, when that penalty would first be assessed.