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Education Department gets stricter with for-profit colleges

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The U.S. Department of Education will introduce new regulations next year in its latest attempt to improve the job prospects of those graduating from for-profit colleges and universities.

Under the regulations unveiled on Thursday and effective July 1, for-profit colleges will be at risk of losing federal aid should a typical graduate’s annual loan repayments exceed 20 percent of discretionary income or 8 percent of total earnings.

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This is lower than the current threshold of 30 percent of discretionary income and 12 percent of total earnings.

“This rule is a first step, but much more needs to be done to ensure that colleges put the interest of students above shareholders,” Iowa Senator Tom Harkin, who led an earlier investigation into for-profit schools, said in a statement.

The department, however, said it would not take into account the number of students defaulting on their loan repayments, called the cohort default rate, to determine access to federal aid, cheering some investors.

A previous proposal in March had taken into consideration the cohort default rate.

“They dropped the cohort default (provision) so people say it’s less bad than it was three months ago,” Steve Gunderson, chief executive of the Association of Private Sector Colleges and Universities, told Reuters.

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Shares of for-profit education providers Apollo Education Group Inc, Career Education Corp, DeVry Education Group Inc and Corinthian Colleges Inc all rose between 1 and 6 percent on Thursday.

The U.S. for-profit education sector has faced tougher regulation ever since a series of government investigations in 2010 revealed high student debt, low graduation rates and poor job prospects for graduates.

For-profit institutions, including Apollo, Corinthian and DeVry have been struggling to attract new students.

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“These regulations are a necessary step to ensure that colleges accepting federal funds protect students, cut costs and improve outcomes,” U.S. Secretary of Education Arne Duncan said in a statement.

The education department said it estimates about 1,400 programs serving 840,000 students, of whom 99 percent study at for-profit institutions, would not pass the new accountability standards.

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“All programs will have the opportunity to make immediate changes that could help them avoid sanctions,” the department said in the statement, “but if these programs do not improve, they will ultimately become ineligible for federal student aid.”

Although the regulations kick in next year, for-profit institutions will have several years to make sure their programs conform to the rules before they lose access to federal aid.

“ITT Tech supports responsible regulation — one that does not discriminate against any one sector of higher education but instead takes a holistic approach to issues in order to ensure quality, higher education for all,” ITT Educational Services Inc spokeswoman Nicole Elam wrote in an emailed statement to Reuters.

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Officials at Apollo, Corinthian, Career Education and DeVry did not respond to requests for comment.

(Editing by Robin Paxton and Savio D’Souza)


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