Santa Ana-based vocational school operator Corinthian Colleges Inc. and others face new rules on how they recruit and counsel students, but the initial proposals aren’t as harsh as some industry watchers feared.
The Department of Education plans to mandate that Corinthian and others provide students with graduation and job-placement rates and limit how the companies pay recruiters to bring in students.
The proposals are part of an effort to crack down on students who take on too much federal aid and run the risk of defaulting on loans.
The rules, unveiled late Tuesday, are set to take effect a year from now and would apply to more than 600 colleges and universities.
They’re aimed squarely at for-profit school operators, including Corinthian and its rivals.
Competitors that fall under the federal rules include Phoenix-based Apollo Group Inc., Indiana’s ITT Educational Services Inc. and Career Education Corp. of Illinois.
But the proposals aren’t as harsh as some feared. They fall short of cutting off federal aid to schools with low rates of employment for graduating students.
Shares of Corinthian closed flat Wednesday on a market value of $1 billion.
Instead of losing federal aid, Corinthian and others will be required to provide more data on graduation rates and to counsel students on expected salaries and how much debt they can handle.
A rule disqualifying for-profit colleges from federal aid if their graduates spend more than 8% of their starting salaries repaying loans was delayed and could come by August, according to the Education Department.
Corinthian runs more than 100 campuses in the U.S. and Canada offering degrees in healthcare, criminal justice and other areas.
The company and others saw big growth during the recession but have come under fire for students who took on debt they couldn’t afford.
The school operators have been under scrutiny from regulators and some Wall Street critics.
Corinthian is dealing with an Education Department review that found one of its colleges made misrepresentations to students, breached its fiduciary duty and intentionally evaded a requirement that only 90% of funding come from federal student loans.
The company disputes the findings.
Last month, a hedge fund manager known for his early bets against subprime mortgages came out and called Corinthian and its rivals “marketing machines masquerading as universities.”
Steve Eisman, who runs Morgan Stanley’s FrontPoint Partners LLC of Greenwich, Conn., said for-profit school operators seek out the most desperate members of society and lure them into expensive programs and tie them down with debt.
The hedge fund manager is known for betting against subprime mortgages before their crash and was chronicled by author Michael Lewis in his bestselling book “The Big Short.”
Also last month, an analyst at Argus Capital downgraded Corinthian from “buy” to “hold,” citing regulatory risks and slowing enrollment growth.
Corinthian’s shares are off about 30% in the past 12 months. The stock saw a big run-up in 2008 as the jobless took to education in hopes of finding new work.
