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For-profit colleges: Will the latest blow be fatal?

A federal regulation that aims at "abusive practices in the career college industry" took effect this month after court challenges failed. And it has the potential to shut down roughly 1,400 schools that enroll 840,000 students.

Under the new gainful employment regulation, for-profit schools will be at risk of losing federal aid if the typical graduate's annual loan repayments exceed 20 percent of their discretionary income, or 8 percent of their total earnings.

Ninety-nine percent of the colleges in the regulation's bull's eye are for-profit institutions, an industry that has been reeling from repeated setbacks in recent years.

Whether any of these schools end up shutting down could very well depend on the outcome of the next presidential election. Industry insiders suggest that if a Republican nominee prevails, the closures may never materialize because the president could decide against keeping the gainful employment regulation.

The gainful employment change represents the Obama administration's signature effort in an ongoing power struggle with the tarnished industry, which relies heavily on federal financial aid dollars. A high percentage of graduates at these institutions are being hit with a double whammy: poor job prospects and high student debt.

Forty-four percent of all federal loan defaults can be traced to students attending for-profit institutions even though they represent only 11 percent of the higher-ed population.

"The clock is ticking for bad actors in the career college industry to do right by students," said U.S. Secretary of Education Arne Duncan in a statement when the regulation took effect. "We know many have taken steps to improve or to close programs that underperform, but we believe there is more work to be done across the board so students get what they pay for: solid preparation for a good job."

This is just the latest blow for an industry struggling for years in a heightened regulatory environment. With the industry's reputation tarnished, enrollments have dropped by 20 percent since 2010, and stocks of some the for-profit players have plummeted. Corinthian Colleges, once one of the largest for-profit chains, closed its remaining campuses earlier this year. ITT Educational Services (ESI), another giant, is battling state and federal regulators, and fraud charges from the U.S. Security & Exchange Commission.

In reality, degree-granting, for-profit institutions are a relatively new phenomenon. While for-profit schools have been around for at least 100 years, most of them were vocational such as beauty and trucking schools up until the 1990s. For-profit institutions then began granting degrees and growing in volume with aggressive and controversial enrollment strategies that attracted more attention to their expansion.

Will the for-profit schools retreat to their earlier vocational mission? Industry observers predict that won't happen. They suggest that the industry will evolve from a growth-at-any cost strategy to a more sustainable degree-granting model.

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