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For-Profit Colleges Now Have One Foot In the Grave

As if for-profit colleges like ITT Educational Services (ESI), Apollo Education Group (APOL) and DeVry Education Group (DV) didn’t have enough to worry about these days, the White House and President Barack Obama just poured salt in their wounds.

For-Profit Colleges Now Have One Foot In the GraveOn Tuesday, federal district court Judge John Bates ruled against the Association of Private Sector Colleges and Universities by ruling in favor of the proposed (and Obama-supported) gainful employment rule — a rule that will require a program’s graduates to earn above certain thresholds for that school to remain eligible for federal financial aid.

It’s not a slam-dunk matter just yet, however. For-profit colleges still have one more card left to play, though it’s a long shot at this point. Congress could still introduce and approve a law that would ultimately block the gainful employment rule from going into effect. Obama could still veto that provision, however, and likely would.

The curious part? The GOP still seems and sounds adamant that the gainful employment rule reaches too far.

The bigger-picture question is, will the new law be the end of for-profit colleges as we know them?

Defining ‘Gainful Employment’

Kudos to the Department of Education for simplifying what could have been (and at one time was) a complicated issue.

In order for a graduate of for-profit colleges to be considered as gainfully employed, his/her estimated loan payment cannot exceed 20% of discretionary income or be greater than 8% of his/her total income. If the loan payment exceeds those levels, a graduate may be employed, but not gainfully. The standard is clearly aimed at schools that don’t provide enough of a marketable credential or skill set to justify the cost of all those classes.

The standard isn’t looking for a minimum portion of a program’s graduates to meet the standard. Rather, a school must show the average graduate from a program meets or exceeds the minimum earnings threshold. Schools that don’t offer programs that pass this test will most likely lose access to all federal student loan funding.

That’s a considerable problem, as many for-profit colleges generate up to 90% of their income from federal student loan programs.

Still Not a Sure Thing

While the federal court ruling technically makes the rule a law that’s fully enforceable by the Department of Education, the fight isn’t over yet. DeVry Education Group, ITT Educational Services, Apollo Education Group and most other for-profit colleges have one last hope.

That hope comes in the form of a bill introduced by the House Appropriations Committee just last week.

As it’s worded right now, the proposal would take away the DOE’s authority to enforce the new rules. How so? The bill suggests that the Department of Education only be funded for the coming fiscal year for actions other than to “implement, administer, or enforce the final regulations” regarding the new gainful employment standard.

In other words, while this proposed bill wouldn’t repeal the law, it would make it illegal for the department to do anything about it. Presumably no other federal agency would be authorized to enforce the rules either, meaning for-profit colleges would be off the hook in practice, even if not on paper.

The impasse is Congress — the bill would need to get the majority approval of the GOP-controlled legislative body.

While Republicans at one point were closely allied with for-profit colleges, lawmakers on both sides of the aisle have largely distanced themselves from these schools over the past couple of years as the voting public has expressed disgust with the questionable recruitment tactics and poor educational value associated with the industry. Never say never, but even a GOP-controlled Congress will likely choose to steer clear of supporting these institutions this time around.

Even if the bill does become a law, however, Obama could (and likely would) veto the bill. At that point it would take a two-thirds vote of Congress to override the veto, which is an even less likely possibility.

Bottom Line For For-Profit Colleges

At this point it’s irrelevant whether or not for-profit colleges get a last-minute reprieve in the form of a law that undercuts the DOE’s authority to enforce laws.

Though the House Appropriations Committee’s bill is unlikely to be approved, even if the Department of Education is financially and legally declawed the White House continues to move closer to crimping the lifeblood — student loan funding — for the for-profit college industry. If not this time around, it will happen next time. The industry simply doesn’t have enough friends left, and doesn’t have the wherewithal (or time) it needs to make ensure its programs lead to gainful employment.

These schools as we know them were just dragged up to the gallows.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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