Analysis: For-profit schools attack reform rule by lobbying

WASHINGTON Wed Jan 12, 2011 3:57pm EST

WASHINGTON (Reuters) - For-profit schools, under fire for programs that fail to graduate students and help them find jobs, are lobbying Congress to undermine rules that would cost them dearly if too many of their students default on government loans.

The U.S. Education Department has proposed a rule that would strip programs of financial aid if more than 65 percent of their students fail to pay back their loans and if graduates get buried in debt. Losing the aid would cripple many schools.

The "gainful employment" rule is supposed to make sure that these schools provide an education that will prepare students for "gainful employment," which in turn could help them pay back their loans. The schools want the rule scrapped, or at least weakened before a final version comes out.

That may happen any time between now and the spring, according to several participants in the debate.

The department is concerned about poor outcomes at many of the schools. Just 22 percent of freshmen who enroll in for-profit colleges graduate within six years, compared with 57 percent at non-profit schools, according to the non-profit advocacy group Education Trust, which focuses on education for poor students.

Students at for-profit schools, including the University of Phoenix and DeVry schools, make up 26 percent of federal student loans for 2008-2009, but 43 percent of defaults, according to Education Department figures. (See the Reuters graphic here: r.reuters.com/gev75r )

The schools' lobbying campaigns have been aggressive. They increased their donations to lawmakers and ran television, radio and newspaper ads accusing the government of interfering with students' choice of schools.

The schools hope that donations will get them audiences with lawmakers to convince them that the proposed regulations will deny Americans education opportunities.

They also want to kill legislation that Democratic Senator Tom Harkin, chairman of the education committee, has proposed to make the gainful employment rule tougher.

"There's no question that they've gone to the big guns at the 11th hour," said Signal Hill analyst Trace Urdan, who has criticized the proposed rules, about recent lobbying efforts.

Lobbying will not derail the rule, which will result in lower enrollments and lower profits, said BMO Capital Markets analyst Jeff Silber.

But the investment still could pay off, he said. "Those regulations may be a little less onerous than they were proposed. The grace period may be extended a bit."

The companies' share prices have been hit during the battle. The S&P Education Services index year high was $105.37 in April, but closed Tuesday at $81.04.

Shares of University of Phoenix operator Apollo Group were $66.69 in April and closed at $40.74 on Tuesday while Corinthian Colleges shares were $19.31 in April and closed Tuesday at $4.65.

INVESTING IN INACTION

An explanation for the schools' default rates is they serve more poor students whose parents did not go to college, so they have lower graduation rates, says Harris Miller, head of the Association of Private Sector Colleges and Universities.

"Students who graduate have a very low default rate," said Miller, who urged the government to look at who is being served by any particular school and consider variables like class and family education history when looking at default rates.

Some schools have cut the most at-risk students, which lowers revenue.

The schools, through political action committees, executives and lobbyists, gave money to more than 200 lawmakers during the 2010 election cycle, according to data from the Center for Responsive Politics.

Education Management Corp spent $490,000 in 2010, up from $110,000 in 2009. DeVry Inc spent very little, about $60,000 per year, until 2009 when it spent $335,000 and another $330,000 in 2010. Career Education Corp spent $460,000 on lobbying in 2010, up from $270,000 in 2009, according to the data.

The top recipients in the House of Representatives were longtime industry supporter Howard McKeon at $80,500; George Miller, the former education committee chairman, at $75,261; John Kline, the new committee chairman, got $61,000; and Robert Andrews, another school supporter, got $56,450, according to the Center for Responsive Politics.

There are signs that these lawmakers could be allies for the schools.

Kline, the new chief of the Education and the Workforce Committee, told Reuters in an interview last month that he was considering blocking implementation of the rule and may scrutinize other steps the department is taking.

"Clearly one of the things that we're going to do is we'll have oversight hearings into a lot of things the Education Department is doing," Kline said.

He declined to be more specific.

One of Kline's major donors was Corinthian Colleges, which owns more than a dozen schools with default rates above 20 percent and two above 30 percent, according to Education Department data. Corinthian gave Kline $15,250 for his 2010 campaign and leadership PAC, according to CRP data.

The Career College Association, a trade group of the schools, gave Kline $15,000.

FAMILY BUSINESS

The battle has created an interesting sideshow in Washington's rough-and-tumble lobbying world, with the for-profit industry's lobbying even affecting some prominent families in Washington.

Power couple Tony and Heather Podesta's lobby firms represent for-profit schools. The Center for American Progress, headed by Tony Podesta's brother, former Clinton chief of staff John Podesta, publishes reports critical of the schools.

"They don't talk business, (or) disagree on many things, but have friendly family dinners on the weekend," a CAP spokesperson said.

Also, the schools gave George Miller, the top Democrat on the House education committee, $75,261 for his 2010 campaign. His son, George Miller IV is the "Miller" in lobby firm Lang Hansen O'Malley Miller, which lists Education Management as a client.

Education Management was subpoenaed by the Kentucky attorney general's office last year with questions about business practices. George Miller IV did not return telephone calls seeking comment.

Miller won praise from for-profit schools in early 2008 for a law that made the 90/10 rule more flexible.

The rule says that no more than 90 percent of the funding to for-profit schools can come from the Education Department. The 2008 change scrapped a "sudden death" ban on students using federal loans to attend programs that didn't comply with the rule in favor of more incremental punishments.

Miller's office said the contributions had no role in decision making.

"Rep. Miller recognizes the important role these schools play in our education system but he does not believe any sector of our education system, public or private, is above scrutiny," said spokesman Aaron Albright. "The congressman and his son do not work together."

Harris Miller, who represents the schools, said the donations to Miller and others were in hopes of getting fair treatment. "I wouldn't say that George Miller is an enthusiastic supporter but he always gives us a fair shake."

(Editing by Robert MacMillan)

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