Subprime Programs in College?

By Gerri Willis
Published June 02, 2011

The government is trying to crack down on the country's for-profit schools. Students at these schools are often taking on too much debt to attend colleges that do nothing for their job prospects.

Most students at career colleges and vocational schools pay tuition with federal financial aid dollars - as much as 90% of a school's revenue can come from the government. But that leaves taxpayers on the hook if students can't find good jobs and default on their loans.

And they're defaulting in large numbers. Students at these institutions represent just 12% of all higher education students, but nearly half of all student loan dollars in default.

The average student earning an associate degree at a for-profit school carries $14,000 in federal loan debt. Compare that to the zero dollars in debt burden of most community college students.
The Department of Education last fall created rules to rein in deceptive advertising and barred schools from paying enrollment counselors based on how many students they signed up. But due to heavy lobbying, the rules had been delayed. Now the final version of the DOE's rule is much softer than its original incarnation.

Under the original terms, programs that failed to meet the criteria would have lost federal loan eligibility immediately and enrollment would have been frozen.

The finalized rule, which was announced today, gives schools multiple chances over a four-year period to improve their stats. It's not until after "three strikes" will a school lose eligibility for three years. Specifically: schools will only be able to get federal-paid tuition if at least a third of its former students are repaying their loans.

Or the estimated annual loan payment of a typical graduate must not be bigger than a third of his or her discretionary income. The DOE expects 18% of for-profit schools' programs to fail its tests at some point, but only 5% will likely lose eligibility.

The news of the easier rules sent education stocks soaring today, including shares of the nation's largest chain, Apollo Group, which owns the University of Phoenix. It rose 13%.

That success is nothing new for Apollo Group, which has seen revenue and net income grow about eightfold since 2000, and it's stock more than quadruple.

Some schools have been trying to get out in front of the new laws and adapt their business models to the new reality. For example, Apollo now offers a free three-week orientation that helps weed out unprepared students without charging them.

The Washington Post's Kaplan Education Division has also put in place a free trial period before students have to commit. The Career Education Corporation is making new online undergraduate students pass a college prep course if they haven't attended college before.

Its good Washington is finally taking notice of the "subprime" programs some - not all - of these colleges are partaking in. But a lot of the burden must also rest on the student. At the end of the day, they have to weigh their wants against the cost of education.

Because if you pay too much, you'll end up shortchanging your future in other ways, such as delaying buying a house and having kids. Compare your likely starting salary from a Website like with your monthly debt burden.

If you're going into a field that pays little- consider an institution that doesn't charge premium prices.

Be sure to catch the Willis Report on the FOX Business Network every weekday from 5-6pm ET.