* Education Dept gives colleges more time to comply
* Denies tuition aid if high pct of prior students default
* First programs to be declared ineligible in 2015
* Dept expects 5 pct of for-profit programs to lose funds
By Diane Bartz
WASHINGTON, June 2 A rule that threatens to cut off tuition aid to some programs run by for-profit colleges was softened in the final version issued by the U.S. Education Department on Thursday.
Officials delayed until 2015 before a program can be denied tuition loans over too many former students in the same course having defaulted on their loans.
The draft rule had said students in troubled programs would lose their aid as early as the 2012-2013 school year.
The modified final rule could give a boost to the stocks of for-profit education companies such as Apollo Group (APOL.O), Career Education Corp (CECO.O) and the Washington Post Co WPO.N, parent of Kaplan Higher Education.
The S&P education index .GSPEDUS of such companies gained 1.7 percent on Wednesday after it was reported the final version of the so-called "gainful employment" rule was near.
"Many of the for-profit career colleges do a great job of preparing students for work," Education Secretary Arne Duncan told reporters on a conference call, but "there's been some whose intentions we frankly doubt."
Duncan said there were "bad actors who recruit aggressively" in the industry and he hoped to give them "plenty of time to improve."
Nevertheless, the government expects 5 percent of for-profit education programs to fail under its new requirement and 2 percent of all programs, once private and public colleges are included.
For-profit schools remain unhappy about the prospect of programs potentially losing access to federal loans, arguing that the proposed rule is outside the Education Department's authority, said Harris Miller, president of the Association of Private Sector Colleges and Universities.
The association has not decided yet whether to appeal the rule in court, but has already filed suit against other new rules that would curb deceptive advertising by schools and bar recruiters from being paid based student enrollment numbers.
"Our final opinion will be based on a factual analysis on our students and our programs," he said. "We're going to need to trust but verify."
Miller did give the department credit for confining the latest rule to debt used to pay for tuition, after schools complained they should not be responsible when students take out oversized loans to cover other expenses.
The Education Department under President Barack Obama has been cracking down on the for-profit learning sector, arguing that some of the vocational schools and colleges they run fail to educate students while burdening them with unpayable debt.
Other new rules require schools to disclose graduation rates and job placement rates to new students.
Under the latest rule, which is due to go into effect mid-2012, at least 35 percent of graduates and dropouts of programs must be paying back loans, or their loan payments must equal 30 percent of discretionary income or 12 percent of total earnings.
Schools which fail to meet this standard three years out of four will no longer be allowed to accept students who pay with federal loans. And for the first year they fail to meet the standard, they must tell new students of that failure.
Under the original proposal, programs would have been barred from taking students with federal loans after just one year of missing the target.
Students who attended for-profit schools defaulted on their school loans at considerably higher rates than students who went to private or publicly funded colleges and universities, according to draft U.S. Education Department data issued last month. [ID:nN20288208]
The Education Department blames the default rate at some schools on poor quality teaching while schools say their students come from poorer backgrounds with fewer resources to repay loans in a sluggish economy.
Some schools have already tightened their enrollment standards in a move to reduce loan defaults and increase graduation rates. (Reporting by Diane Bartz; Editing by Tim Dobbyn)