For-profit colleges sue U.S. to stop rules protecting students

By Diane Bartz Diane Bartz – Fri Jan 21, 2011

A group of for-profit schools sued the U.S. government on Friday, seeking to overturn three rules that are part of a federal crackdown on the sector.

The rules are part of a larger package of new regulations being imposed on for-profit schools, accused of churning out poorly educated students with large debts.

The Association of Private Sector Colleges and Universities (APSCU), which represents more than 1,500 for-profit schools, filed the lawsuit in the U.S. District Court for the District of Columbia. It asked the court to toss out the rules, which are due to go into effect on July 1.

One rule challenged by the suit would stop deceptive advertising by schools, another bars recruiters from being paid based on how many students they enroll and a third requires states to authorize post-secondary schools for their students to be eligible for federal loans.

The lawsuit did not challenge the yet-to-be-finalized and most controversial of the reforms -- the "gainful employment" rule.

That rule would require schools to show that students are paying back federal loans or can do so. Students at schools that fall short would be barred from receiving federal loans, which would cripple many schools.

APSCU members include Career Education Corp, which owns the Sanford-Brown schools; Corinthian Colleges, DeVry Inc; Education Management Corp; ITT Educational Services; and Lincoln Educational Services.

The pending reforms have rocked shares in the sector over the past few months and Friday's suit failed to give the overall sector a lift. The Standard & Poor's education index closed 1.1 percent lower on Friday.

Shares of sector leader Apollo Group, which does not belong to APSCU, fell 2 percent.

Harris Miller, head of the trade group, said the rule barring misrepresentation by the schools was poorly done so that inadvertent misstatements by a single employee would be treated the same as intentional deception.

"We certainly oppose any misrepresentation to any actual or potential students," he said.

The Education Department defended the rules.

"We're confident that the published regulations will do the best job of protecting students and taxpayers," said department spokesman Justin Hamilton in an emailed statement.

Sector analyst Jeff Silber of BMO Capital Markets said the lawsuit was not a surprise since schools had been threatening to file suit.

"But it shows the industry is using all angles to try and fight this. I wouldn't be surprised to see the same strategy used once the final gainful employment regulations are posted," he said in an emailed comment.

The prospect of the rules has already roiled the sector as some schools tighten enrollment standards in a move to push down their loan default rates and increase graduation rates.

On Thursday, Career Education said it would cut about 600 jobs over the next several months and close a culinary school in Pittsburgh because of lower enrollment.

Apollo cut about 700 jobs in late November amid a 40 percent drop in new enrollments at its flagship University of Phoenix. Washington Post's education unit, Kaplan Higher Education, slashed about 770 positions.

(Reporting by Diane Bartz; Editing by Andre Grenon and Tim Dobbyn)