The rule could face a legal challenge in courts and is likely to draw close scrutiny from Congress. Republican lawmakers and some Democrats have voiced support for the industry.
The rule effectively would shut down for-profit programs that repeatedly fail to show, through certain measures, that graduates are earning enough to pay down the loans taken out to attend those programs. Advocates say it addresses the chief complaint against for-profit schools, that students emerge from them with too much debt and too little earning power.
“The quality here has been very uneven,” Education Secretary Arne Duncan said of the industry Wednesday in a conference call with reporters. “There have been some absolute superstars. And there have been some players whose intentions, quite frankly, we doubt.”
The 3 million students in for-profit schools have already felt an impact. In anticipation of the rule, large for-profit providers have slowed enrollment, tightened entry standards and warned students against excessive debt.
Leaders of the for-profit sector say they serve a population of nontraditional students who might not otherwise secure a higher education. In general, they have contended that a gainful-employment rule will hurt students by shuttering programs and setting off an industry contraction.
Late Wednesday, some leaders in the for-profit sector had a cautious response to the rule.
“I want to acknowledge that the department did make changes,” said Harris Miller, president of the Association of Private Sector Colleges and Universities. “But we really don’t know the bottom-line impact on students and programs.”
Kent Jenkins Jr., a spokesman for Corinthian Colleges, said the changes in the final rule illustrate that “implementing a complex and far-reaching proposal takes time and that schools need a ‘longer runway’ to put effective programs in place.” The Washington Post Co., which owns Kaplan for-profit colleges, also owns 8 percent of Corinthian.
Representatives of several other for-profit schools could not be reached or declined to comment, for lack of information about the new rule.
The new regulation takes effect in July 2012. It denies federal aid to programs that fail three “tests” of gainful employment three times in a four-year span:
l Are at least 35 percent of former students actively paying down their loans? In other words, roughly a third of ex-students must make payments that lower the loan balance by at least a dollar in a given year.
l Are graduates spending 30 percent or less of their discretionary income on loan payments? This test seeks to ensure that loan payments are not eating up too much of the money left after graduates pay for basic needs.
l Are graduates spending 12 percent or less of their total income on loan payments? This standard, related to the previous test, establishes that loan bills should not consume more than about an eighth of total earnings.
Programs that pass any of the three tests would retain eligibility to participate in federal aid initiatives, enabling qualified students to secure federal grants or loans.
The gainful-employment rule was among more than a dozen Duncan proposed to target perceived abuses in a sector where, critics say, regulation had gone lax. The others, including one that restricted commission payments to student recruiters, were approved last year. Gainful employment was the most contentious by far. Pushback against a draft version last year delayed release of the rule.
In draft form, the rule would have yanked federal aid the first time a program failed the three tests.
With the new grace period, the final rule moves back the date when deficient programs could lose funding, to 2015.
“This should be a perfectly reasonable bar and one that every for-profit program should be able to reach,” Duncan said. “. . . But if you get three strikes over four years, then you’re out.”
Federal officials estimated that the draft version would have shuttered 16 percent of for-profit programs. (Each school can have many programs, such as culinary arts, nursing or graphic design.) They now predict that 5 percent will shut down.
Regulators also removed a draft provision that would have placed a wide swath of programs under “restricted” status even if they passed one or more of the gainful-employment tests. The final rule instead places mounting restrictions on programs only after they fail the three tests. A program that fails once must disclose that fact to students. After two failures, the institution must warn students about excessive debt and the potential for closure and give them transfer options.
Supporters of the rule say anyone displaced from a program that fails the federal tests is probably better off. Opponents say that they support the idea of monitoring earnings and debt but that details in the rule unfairly penalize some types of for-profit programs, especially longer ones that lead to bachelor’s or professional degrees and generate more student debt.
Schools that operate for profit — running the gamut from cosmetology institutes to universities offering medical and legal degrees — have grown from 4 percent to 10 percent of full-time college enrollment since 2000, according to the College Board. Several factors have driven their rise, including a loosening of regulation under the George W. Bush administration and growing acceptance of colleges that operate primarily online.
The gainful-employment regulation also covers most non-
degree programs in public and private nonprofit colleges.