ITT Educational’s stock price leaps as feds ease crackdown

ITT Educational Services Inc.’s stock price soared more than 27 percent Thursday morning after the Obama administration gave for-profit colleges more time to comply with rules that will cut off federal aid to institutions whose students struggle the most to repay their government loans.

Under rules to be published Thursday, for-profit colleges including Indianapolis-based ITT and University of Phoenix owner Apollo Group Inc., won’t risk losing their federal funding until 2015, the U.S. Education Department said Wednesday. Under an earlier proposal, companies could have lost aid as soon as next year.

ITT Educational stock was up $19.28 per share in early trading, above $90 per share, before slipping to about $82 by noon.

While their harshest measures are being delayed, the regulations will protect students from “exploitative” college programs that leave them with government-backed debt they can’t repay, the Education Department said in a statement. Congress and state attorneys general are investigating the education companies’ recruitment practices, loan-default rates and use of government aid, which totaled $30 billion last year.

The rules “reflect input from the industry, and they’re designed to give for-profit colleges every opportunity to reform without letting them off the hook,” Education Secretary Arne Duncan said late Wednesday in a briefing with reporters.

The rules are known as “gainful employment” because they seek to ensure that for-profit college graduates get jobs that allow them to repay their student loans. After a draft version was released in July 2010, an industry campaign generated thousands of comments, resulting in a delay since November of the final rules.

For-profit colleges, attended by about 3 million students annually, spent at least $6.6 million in 2010 to lobby against the regulations. Trade groups said the rules will cut off educational access for their low-income and minority students.

U.S. Representative John Kline of Minnesota, a Republican and chairman of the House education committee, unsuccessfully tried during February’s budget negotiations to block the rules.

“I remain concerned this regulation could undermine an entire sector of colleges in the name of rooting out a few bad actors,” Kline said in a statement.

Harris Miller, president of the Association of Private Sector Colleges and Universities, a Washington, D.C.-based trade group of for-profit colleges, said the Education Department is exceeding its authority, and the group may file a lawsuit to block the rule.

 “We want to acknowledge that the department did make changes” in the rules, Miller said Wednesday on a call with reporters. “Without analysis done by our outside researchers, I can’t say whether it’s a victory or a defeat.”

The rules published Thursday set benchmarks that the companies’ educational programs must meet to remain eligible for government grants and loans, which can constitute up to 90 percent of their revenue. The rules also apply to state and private not-for-profit colleges that offer career-training certificates. No more than 1 percent of those programs are expected to lose eligibility, according to the Education Department.

Under the rules, programs would remain eligible for federal aid if they meet at least one of three tests in a given year: at least 35 percent of former students are repaying their loan balance; yearly educational-debt payments of typical graduates account for a maximum of 12 percent of their total income; and those payments account for no more than 30 percent of the their discretionary income.

Programs would have to fail all three tests in the same year for three out of four years before losing aid eligibility. The first year that programs could lose eligibility by that measure would be in 2015.

“Unfortunately, the final rule will allow many programs that overcharge and underdeliver to continue to receive federal student aid,” said Pauline Abernathy, vice president of The Institute for College Access & Success, a consumer advocacy group in Oakland, Calif.

About 5 percent of for-profit college programs are expected to lose eligibility, compared with 16 percent under the previous proposal, which gave colleges less time to comply.

“This reduces exposure for the vast majority of for- profit programs and targets only the worst performers who are unable to adjust their business over four years,” Jarrel Price, an analyst at Height Analytics in Washington, said. “The industry can grow again.”

Under an earlier proposal, loan-repayment rates at Corinthian Colleges, Strayer, Washington Post Co.’s Kaplan education business, DeVry Inc. and ITT Educational would have put them at risk of losing eligibility, according to Price.

Colleges can also face lesser sanctions. If the programs fail all the debt and income tests twice within three years, the college must tell students their debts may be unaffordable and that the program could lose aid eligibility. They would also need to explain their transfer options. After failing for one year, the institution must disclose information about its performance and establish a three-day waiting period before students can enroll.

While for-profit colleges enroll about 12 percent of U.S. higher-education students, they use about one-quarter of federal student grants and loans and account for 46 percent of student-loan dollars in default, the Education Department said Thursday, in justifying the new rules.

Most for-profit colleges offer career-training programs, and many, including the University of Phoenix, also have two-and four-year degrees, and master’s and Ph.D. programs. The median loan debt of a student earning an associate’s degree at a for-profit college is $14,000, while most students at community colleges don’t borrow, the Education Department said.

“The plain fact is that millions of low-income students are borrowing heavily to attend for-profit colleges and too many are dropping out, defaulting on loans, failing to get a good job and leaving taxpayers to pay the bill,” Duncan said.

Iowa Democratic Senator Tom Harkin, chairman of the Senate education committee, has held four hearings in Washington examining for-profit college recruitment, accreditation and use of funds from the Education Department and military sources. Harkin has scheduled a fifth hearing for June 7 focusing on student debt. Harkin and Democratic Sen. Richard Durbin of Illinois have said they will propose legislation to put additional safeguards on the industry.

The new rules are “a modest and important first step to protect students and taxpayers from subprime academic programs that have a demonstrated track record of failure,” Harkin said in a prepared statement.