Balance of Higher Power – Is a Democratic-controlled Congress something career colleges should fear?

Fear not … or, at least, not yet.

Those are the sentiments from within the career college sector after the power shift on Capitol Hill following November’s midterm election.

On Nov. 9, when the tallies from Virginia’s voting machines were final, it was clear: Democrats had secured both the House and the Senate. There was the expected reaction among investors: numerous for-profit education companies closed lower on the stock market and have since rebounded.

What wasn’t so predictable was the long-range impact new leadership would have on career colleges, which have flourished under Republican-controlled government. The investment community wasted no time in analyzing the power shift and its potential long-term impact on career colleges. In a note to investors, which was widely publicized by the Associated Press, BMO Capital Markets analyst Jeffrey M. Silber said the change in guard could halt progress that has been made to date on the Higher Education Act. Career college executives, on the other hand, are more reticent.

The act, which has been lumbering toward the finish line of line of approved reauthorization since May 5, 2004, governs many areas of education finance. In Congress’ last term, Republicans did not fully reauthorize the Higher Education Act, leaving the door open for Democrats to change the laws.

New rule

The “90/10” rule is one critical element involved in reauthorization. This stipulation requires for-profit colleges to generate at least 10 percent of their revenue from sources excluding federal financial aid. In both the House and Senate versions, the “90/10” rule has been extended to include not-for-profit institutions. The proposal has Republican support in the House, while reaction among Democrats has been lukewarm.

If the rule is expanded to not-for-profits, it could benefit the sector by reducing some of the competition facing career colleges. However, if Democrats reject the 90/10 rule, career college stock value could decline. While those predictions could hold true, those affiliated with the career college sector are saying it’s too soon to tell exactly what the threats are, or if they exist at all.

“We have a group of students we need to protect, and it doesn’t matter if they are Democrats or Republicans,” said Dr. Art Keiser, founder and Chancellor of Keiser University. “Whenever you have a change in power, you have change … and change is uncomfortable. As a sector, we need to get out and advocate our case to the people in power and the ones who understand our students.”

Keiser said Democratic control could yield some benefits to career colleges. At the top of the Democrats’ agenda is making higher education more affordable. The party’s American Dream Initiative sets its sights on improving life for middle America, which includes access to higher education. The Democrats are calling for the implementation of several measures, such as the lowering of student loan interest rates, increasing Pell grant amounts from $4,000 to $5,000, and instituting a $3,000 tuition tax credit.

Keeping watch

One area the sector should keep tabs on in the Democratic initiative is reductions to student cost and potential decreases in lender profits. Keiser said drastic changes to lender profits could take the sector back to the late 80s and early 90s, before the advent of direct lending.

In 1993, the implementation of the Student Loan Reform Act enabled students to borrow directly through colleges to receive their federal student loans. Direct lending removes the proverbial “middle-man” from the equation of applying for and receiving student loans, allowing students to obtain education loans without using a bank, credit union or private lender.

“Anytime there is a profitability issue with lenders – whenever they feel a squeeze – logically, they look at the best students on paper: the students who are more profitable in the longer term and have lower default rates. Obviously that puts one-year and two-year programs at risk.”

Such a grim fate could be offset by career college sector executives, said Jonathan Slade, a principal at The Cormac Group who focuses on higher education and for-profit colleges. Slade said career colleges must begin clarifying their mission and clearing the slate on any negative impressions Democratic officeholders could have.

“The growth of career colleges and its impact on traditional colleges, like community colleges, has been poorly portrayed,” Slade said. “A lot of forprofit schools have been very aggressive in terms of marketing. There are so many new career schools, a lot more students and some schools out there breaking rules and receiving bad press. Those issues and the supposed negative impacts they’ve had on traditional colleges raise concerns for Democrats. They just don’t really agree with (career colleges) on the issues right now.”

In that regard, 2007 stands to be a critical year for career colleges in regaining any ground that was lost in the election. Until then, the sector will remain on relatively uncertain terms.

“The for-profits supporters tend to be Republican,” Keiser said. “Those who are our friends, we need to continue to support. Those who are not our friends, we need to educate.”

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