The fight over whether the department can look at default data of students who left school three years ago is the latest twist in a larger battle over new rules aimed at cracking down on tuition loan abuses and ensuring courses lead to gainful employment.
A preliminary rule says programs at for-profit schools could lose their eligibility for student loan funding if 65 percent of students default or are shown to be unable to pay their loans. Losing federal aid could cripple some for-profit schools.
The Education Department opted to use default data from students who left the programs in previous years. The rule — which is not yet final — is slated to go into effect in mid-2012.
"I would suggest that any rule made based on three years of data only go into effect three years after the rule is promulgated," Roger Swartzwelder, general counsel of the Education Corp of America, told an Education Department forum held to discuss the regulations.
For-profit schools often offer graduate and undergraduate degrees, but also offer trade training for people wanting to become mechanics and medical technicians, for example.
Some schools have been criticized for signing up unprepared students, helping them get federal loans and then inadequately educating them. Many then default on the loans.
Shares of for-profit schools have moved sharply in recent months during jockeying over the regulations.
Many of the schools, which include Apollo Group and Corinthian Colleges, have raised admissions standards in hopes of bringing down their loan default rates, even though the decision will hurt revenues.
Swartzwelder said the schools had discussed mounting a legal challenge. "No decision has been made," he said.
Nancy Broff, who spoke for ITT Educational Services, also criticized the retroactive nature of the rule, as did Terry Hartle of the American Council on Education. "The obvious solution is to make it prospective," he said.
Jeff Silber, a BMO Capital Markets analyst who follows the schools, called the discussion of retroactivity "a valid issue."
Other speakers at the Thursday morning session of the two-day forum pointed out that extremely small programs could lose funding based on a very small number of defaults.
Critics of the new rule also said that public university students could defer payments on federal loans while those attending for-profit schools would not be allowed to.
Late last month the Education Department put out final versions of most of its new rules.
These will ban incentive pay for admissions recruiters, limit the creation of new programs, require disclosure of graduation rates and job placement rates to new students and strengthen the department’s hand in taking action against schools which fail to advertise honestly.
The biggest for-profit education company, Apollo Group, said on Thursday that the Education Department intends to review its programs at the University of Phoenix that receive federal student aid.
Apollo shares lost 8 percent on Thursday to close at $35.38 and have fallen 47 percent since their 12-month high of $66.69 reached in April.
Other for-profit education stocks also fell sharply on Thursday, pressured by analyst downgrades.