Putting the brakes on the growing for-profit school industry?

It’s easy to understand the appeal of for-profit colleges, especially with the push to get more Americans to earn degrees.

They offer personalized recruiting and generous financial aid packages, along with a range of professional, vocational and technical training and degrees.

They take full advantage of federal financial aid dollars and advertise and market their offerings heavily. And they bring in record amounts of federal aid money, up from $4.6 billion in 2000 to a staggering $26.5 billion last year. The largest for-profit institution in the country, the University of Phoenix, received over $1 billion in federal Pell Grants in 2009-10.

For-profit institutions have also come under fire for saddling students with too much debt and not enough job options, even as enrollment has nearly tripled to 1.8 million since 2000.

Hedge-fund manager Steven Eisman recently called for-profit colleges “marketing machines masquerading as universities,” and Sen. Tom Harkin (D-Iowa) held a series of hearings aimed at reining them in.

U.S. Secretary of Education Arne Duncan stepped in on Friday, proposing new regulations that would penalize schools for leaving students with unmanageable debt loads. Training programs at for-profit schools would be judged on whether former students are repaying the principal on federal loans, as well as whether their debt-to-earnings ratios exceed set limits.

For the schools, implications could range from enrollment restrictions to a drop in federal aid. Duncan estimated that the new rules would cut federal aid off to only about five percent of for-profit programs. Some 55 percent of the schools would have to warn students about high debt-to-earnings ratios, he said.

Barack Obama and Arne Duncan

And while it’s too early to say how the regulations might slow what has felt like an unstoppable expansion of the fastest growing education sector in the U.S., an uptick in for-profit school stock prices suggests the rules aren’t as restrictive as the industry feared they might be.

For-profit schools – also known as “career colleges” – enroll just 10 percent of all students in U.S. higher education, but serve a disproportionate number of minority, low-income and first-generation college students. Professional healthcare diplomas and online doctorates are among the offerings, alongside opportunities for students to become gunsmiths or spend as much as $85,000 to earn a bachelor’s degree in animation and visual effects.

Their growth comes at a time when President Barack Obama, governors and foundations are urging more Americans to pursue a postsecondary education. But with many community colleges oversubscribed, students are finding their way to for-profit schools instead, particularly in cash-strapped states like California.

The rapid expansion of for-profits has created a huge concern about student debt loads. And the schools have faced scrutiny for questionable recruiting tactics, high loan default and dropout rates, and low job placement rates. In a series of  recent hearings, Sen. Harkin compared the average of annual tuition of $14,000 at for-profit schools in 2009 to the average annual tuition of $2,500 at community colleges, noting that  “serious questions have been raised about some of the major players in this rapidly growing industry.” Harkin likened for-profit schools to the subprime mortgage industry for persuading students to go deeply into debt “to purchase a product of often dubious value.”

Photo by Lost Tulsa

Duncan’s complex regulation formula weighs the debt-to-earnings ratio of recent graduates and takes into account whether all enrolled students repay their loans on time. The rules came after intense lobbying from the Career College Association, which has more than 1,800 members. The group’s president, Harris Miller, called the regulations “unwise, unnecessary, unproven” in a statement, saying they are likely “to harm students, employers, institutions and taxpayers.”

Duncan said he recognizes and values the role for-profit schools play at a time when U.S. students have dropped to twelfth in the world for the percentage of the young adult population with postsecondary credentials, and only 57 percent of students who enroll in a bachelor’s degree program graduate within six years. But he said the debt into which some students sink is unacceptable.

“While career colleges play a vital role in training our workforce to be globally competitive, some of them are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use,” Duncan said in a statement. The proposal is now subject to a 45-day public comment period before final rules are announced in November. And in the meantime, questions remain about the role of for-profits going forward.