On Wednesday, the Obama administration will begin choking off the financial lifeline of for-profit colleges whose graduates can’t find well-paying jobs — and the move is likely to accelerate a wave of shutdowns for an industry taking assaults from all sides.

Reining in the multibillion-dollar industry has been the administration’s goal for most of President Barack Obama’s term in office, fueled by complaints that for-profit colleges lure students with misleading promises, then saddle them with debts they can’t pay back despite their newly granted degrees. Its latest tool is the Education Department’s long-debated “gainful employment” rule, which requires colleges to track their graduates’ performance in the workforce and eventually will cut off funding for career training programs that fall short.


The rule — upheld by a court ruling last week and set to take effect Wednesday — will trigger the closure of 1,400 programs that together enroll 840,000 students, the department has estimated. Ninety-nine percent of those students attend for-profits.

The regulation is part of a broader series of crackdowns on the industry by agencies including the Consumer Financial Protection Bureau, the Federal Trade Commission and the Securities and Exchange Commission, along with investigations, lawsuits and fines from states and blistering criticism from Democrats like Sens. Elizabeth Warren and Dick Durbin. Some major college operators have begun closing or selling campuses under the onslaught.

Supporters call the regulatory moves long overdue. But the industry denounces them as a witch hunt.

“We’ve come to expect these unjust assaults,” said Gene Feichtner, president and chief operating officer of the huge for-profit chain ITT Technical Institute, which has been sued by CFPB, faces fraud charges from SEC and is under investigation by 16 state attorneys general. “Let there be no presumption here that we believe we’ll be treated fairly.”

For-profits blame the regulations and investigations for accelerating their financial decline — a turnaround from the way the industry blossomed under what the White House has described as looser restrictions implemented by the George W. Bush administration. (Sally Stroup, general counsel for the industry’s national trade group, worked for Bush’s education secretary after working for for-profit operator Apollo Education Group.)

Assaults are coming from all fronts. Last Wednesday, the Justice Department announced that the college operator Education Affiliates would pay $13 million to settle allegations it had falsified federal financial aid claims and misled Education Department officials by helping applicants obtain fake diplomas and then collecting federal financial aid dollars for those students.

For-profit colleges enroll just 11 percent of students nationally, yet account for 44 percent of federal student loan defaults, department officials often say.

Now-defunct Corinthian was once a giant in the for-profit college industry, before financial sanctions imposed by the Education Department essentially killed it. Three other major operators — DeVry Education Group, Career Education Corp. and Education Management Corp. — announced in the past month that they would either sell or shut down campuses, with some citing the upcoming gainful employment rule.

Critics and regulators say the colleges are so vulnerable only because of their own practices. The industry is plagued with student loan borrowing and default rates higher than other types of institutions, and graduates report worse career outcomes.

The gainful employment regulation applies to community colleges and public universities as well, but for-profit programs fare worst under the rule’s key evaluation metric, a debt-to-earnings ratio. The industry, which collected about $22 billion in taxpayer loans and Pell Grants in 2013, says it’s being unfairly targeted, punished by the government for enrolling high-risk students — first-generation, adult, low-income and the like — who are less likely to repay loans but need access to the flexible models that for-profits provide.

Reflecting on the recent closures, Education Undersecretary Ted Mitchell said: “I do think that’s a positive sign, and I think it’s a sign that the industry is taking outcomes seriously, just as we’re saying we’re going to take outcomes seriously.”

This is the Education Department’s second try at a rule, after the first attempt was upended in court.

For-profit colleges have taken some steps to change their practices, in part to push back against the legal and regulatory onslaught. Kaplan restructured or closed several programs. Colleges started offering trial enrollment periods. And some, like the largest operator, University of Phoenix, agreed to use the federal “Shopping Sheet” financial aid comparison tool.

“They’re responding — in what I think is an appropriate way — to limit programs that are underperforming,” Mitchell said. “Which is what we hope all institutions across the for-profit and the nonprofit sector would be doing.”

Enrollment at for-profit colleges grew from 4.6 percent of all undergraduates in 2000 to 10.3 percent of all undergraduates in 2012, according to a recent Woodstock Institute report. That growth coincided with the Bush administration Education Department’s creation of a dozen “safe harbors” letting colleges base recruiters’ salaries on their success in securing enrollments, circumventing measures passed by Congress in the early 1990s.

“Each one of those safe harbors chipped away at the law’s ability to be enforced,” David Hawkins, director of public policy and research at the National Association of College Admission Counseling, once told the Senate.

The Obama administration repealed those loopholes.

Department data show that the number of students enrolled at for-profits peaked at about 2.4 million in 2010, and the number of four-year for-profit colleges plateaued at 671 institutions in 2011. (Continued growth in the two-year for-profit sector meant the industry was still on the upswing in 2012-13, the most recent year for which the department has data.)

And in some cases, taxpayers are paying the price. The department in June unveiled its debt relief plan for Corinthian students who relied on false job-placement rates when enrolling. The initial cost for the loan discharges is upward of $500 million — and that’s only a portion of what could ultimately reach billions of dollars in discharges for students at any law-breaking institution.

Corinthian is out of cash. But when students duped by other colleges seek discharges under “defense against repayment” regulations, as they surely will, the department will recoup that money from the institution whenever possible, Mitchell said.

“Our goal is not to close institutions and programs,” a White House official said. “Our goal is to improve them. And we see that happening. At the end of the day, if a program is unable to meet the gainful employment standard after being given every opportunity to do so … that’s not acceptable.”

Industry enrollments are now on the downswing, clocking a 20 percent drop since 2010. Many major providers’ stock prices have fallen dramatically in the same period: ITT, Corinthian and EDMC saw declines of 95 percent, while Strayer Education and Apollo dropped 65 percent. Apollo’s University of Phoenix has closed 115 campuses and halved its enrollment since initiating a restructuring in 2011 — “to re-engineer our business processes and educational delivery systems to students.”

Apollo disclosed Tuesday that it will lay off 600 employees, close more campuses and — in a major shift — add new admissions criteria, which could further cut declining enrollments while simultaneously increasing student retention and graduation rates.

Hundreds of campuses run by for-profit providers nationwide have closed in recent years, department figures show.

A for-profit model that aims to maximize enrollment — and thus, profit — without regard to innovation or program quality may not be long for this world, said Derrick Anderson, an assistant public policy professor at Arizona State University.

“There are many different for-profit models, and the for-profit paradigm is not inherently bad when applied to higher education,” Anderson said. For instance, a college like Flatiron School in New York City — whose simple financial model is built around student job placement — can and will continue to do just fine.

“However,” Anderson said, “it seems increasingly the case that some of those models cannot work.”

All the action hasn’t quieted for-profit critics in and outside of Congress, who think the Education Department isn’t doing enough to punish colleges or help students they believe have been left with huge debt and degrees deemed worthless in some cases.

“The continued upheaval in the wake of Corinthian’s collapse is a long-overdue reckoning for an industry that profits off students while sticking them with a worthless degree and insurmountable debt,” Durbin said. The Illinois Democrat called Corinthian’s dismantling “the canary in the coal mine for the for-profit college industry.”

Even while scrutinizing the department’s handling of Corinthian — most recently, regarding its process for closed-school student loan discharges — critics agree the country is undoubtedly better off with Corinthian out of the picture.

When a college closing means fewer students wind up in hopeless situations, it’s “absolutely a positive thing,” said Rory O’Sullivan, deputy director of Young Invincibles.

California Attorney General Kamala Harris sued Corinthian Colleges, alleging it misrepresented job placement rates and school programs to lure low-income state residents.(AP Photo)

O’Sullivan sat on the department’s negotiated rulemaking panel, which set out to develop the gainful employment regulation in 2013-14. The group failed to reach consensus on regulatory language, so the department wrote the rule itself, leaving neither colleges nor advocates like O’Sullivan entirely satisfied.

Yet between the regulations, the publicity and the action by agencies from various federal agencies, “there’s certainly a lot of progress that the administration could take some credit for,” O’Sullivan said.

“We’ve learned that this is hard work, that it’s detailed work, and that the stakes are high,” Mitchell said. “We want to get it right, but we can always learn more. And I think we’ve learned a lot through the Corinthian situation.”

There may well be more disruption to come.

This spring has certainly been tough on the industry: DeVry had already said it would close more than a dozen campuses. Corinthian’s announcement two months ago that its last 28 campuses would never again open their doors prompted several lawmakers to demand closed-school discharges for those students. And then Career Education Corp. and EDMC dropped their respective bombs: The former would phase out 14 campuses and sell another three, and the latter would eventually wind down 15 of its 52 Art Institute locations.

Further, EDMC said last week that it will cut 300 jobs. Enrollment at the company’s four for-profit brands has dropped nearly 30 percent since 2010, reports indicate.

Late last year, Career Education also said it would sell its 16-campus Le Cordon Bleu culinary school chain.

The gainful employment rule is only part of the picture. Factors beyond the control of the administration — and the colleges themselves — are at play, too.

“I think what you’re seeing right now is a market correction,” said Ben Miller, senior director for postsecondary education at the Center for American Progress. “You’re seeing the flexibility of the for-profit sector — that’s always talked about as a feature for growth — operating in reverse.”

That’s through no fault of their own, many colleges would argue. ITT recently accused its naysayers in Congress and the administration of “actions built on misinformation, false facts and allegations only.”

At his first day as a senior fellow at the Center for American Progress last Wednesday, former CFPB student loan ombudsman Rohit Chopra announced he’s targeting ITT over consumer protection concerns. ITT spokeswoman Nicole Elam said the move suggests “a personal bias against our institutions and an unwillingness to allow for due process to work, the cornerstone of the U.S. legal system.” Such transitions from the government to private sectors “raise serious concerns involving government ethics rules and the appearance of sharp practice,” she added.

Facing a litany of challenges including a one-day hold on federal financial aid, ITT closed four campuses last year.

The potential for closures has been a key point in for-profits’ argument against the gainful employment rule since its development.

“Because of gainful, you’re seeing fewer options in higher education for these types of [career and technical] programs,” said Noah Black, a spokesman at the Association of Private Sector Colleges and Universities, whose lawsuit failed to kill the administration’s rule. APSCU argues the regulations unfairly target the “new traditional” students who are older, borrow more, work more and gravitate toward for-profits.

“We’re going to see a lot more of this over the next five years,” Black said.

Career Education Corp. directly called out the gainful employment rule when it announced it would drop some campuses.

“The unfortunate reality is that a more difficult higher education marketplace and challenging regulatory environment have handicapped our ability to turn these institutions around quickly and operate these programs effectively in the long-term,” Mark Spencer, director of corporate communications, said in a statement.

Such actions seemed to indicate that for-profits were fully expecting gainful employment to come to bear, said Kevin Kinser, an associate professor of education at the State University of New York — despite APSCU’s success in getting a judge to throw out the first rule in 2012. The types of programs being eliminated — for example, at EDMC’s Art Institutes — are ones that won’t fare as well under the rule’s debt-to-income metric.

And not all of the floundering colleges are run by gigantic companies facing an array of charges, like Corinthian. Smaller, regional colleges are shrinking, too — schools like Eastern Hills Academy of Hair Design and Tulare Beauty College, both of which closed campuses this year.

“You’re erasing a decade of gains here,” Kinser said.

Yet even with last week’s court ruling, the rule’s not totally in the clear. Sen. Lamar Alexander (R-Tenn.), chairman of the Senate education committee, reiterated three weeks ago that he intends to block the rule — “if I can.”

House and Senate Republicans have already introduced legislation to throw a wrench in that White House initiative and others, and appropriations bills in both chambers would do the same.

But the administration isn’t backing down, and seems more confident than ever.

“We are planning to stick with the regulation,” the White House official said. “[Obama] believes in the importance of it.”