With New Regulations Looming, More For-Profit Career Colleges Shut Down

Jose Luis Magana / AP

Two major for-profit college companies announced Wednesday that they were slashing their career colleges, a likely sign of what will come in the industry as it faces declining enrollment and a regulatory crackdown on its two-year and certificate programs. The closures come just weeks after the historic collapse of Corinthian Colleges, a career college operator, which abruptly closed the doors on its schools and approximately 16,000 students.

Career Education Corporation, listed on the Nasdaq, said that it plans to sell off or close all of its so-called "career colleges," schools that offer certificate programs and two-year degrees tied to job placement. The company said it was "refocusing" on its online programs, which make more money and are slanted much more heavily toward bachelor's degrees.

And EDMC Corp., which was delisted from the NASDAQ last year amid financial woes, said it would close a quarter of the schools in its Art Institute chain—some 15 campuses that enroll about 5500 students.

The Obama administration's "gainful employment" law, proposed last year, attempts to regulate the industry by cutting off federal funding to programs where graduates incur high levels of debt but earn little money. With gainful employment set to go into effect this July, analysts and observers say more for-profit college companies are likely to shed their career-focused schools, which have historically struggled with high levels of debt and lower completion rates and would be at risk under the law.

There is likely to be more regulation in the pipeline, beyond gainful employment, that will target career schools. After the Department of Education announced it had hit Corinthian-owned Heald College with an unprecedented $30 million fine, Trace Urdan, an analyst with Wells Fargo, said in an analyst's note that the government's actions "presage a new level of scrutiny from federal and state agencies." He named Career Education Corp.'s now-closing Sanford-Brown schools among the most at risk.

"This is a reality, and we're going to see more of this," said Noah Black, a spokesman for the for-profit college lobbying group the Association of Private Sector Colleges and Universities, which has adamantly opposed the administration's gainful employment regulations. "This is one of our major concerns with gainful [regulations]. The bigger concern is: are we going to start transitioning to excluding nontraditional students from education?"

Industry advocates say that poor outcomes at for-profit career colleges can be explained by the fact that they enroll more nontraditional students, who take longer to graduate and, without family financial support, must take out more loans. Critics say the education offered by such schools is subpar, and have long encouraged the Obama administration to more carefully regulate the almost-unlimited flow of taxpayer money that the schools collect in the form of federal financial aid.

Either way, the programs are becoming riskier for companies to operate. They are not only subject to more regulations, but, because they are mostly taught on physical campuses, are less lucrative than high-margin online programs. Their lower-income, more highly transient student populations can push up schools' loan default rates and average student debt.

Career colleges often advertise their job-placement rates and support services, which have have been the main fuel in the fire of lawsuits and investigations into for-profit colleges. Career Education Corporation's career college group was the subject of a major lawsuit by the New York Attorney General that eventually resulted in a $10 million settlement. EDMC's Art Institutes chain has also been targeted by several investigations.