Colleges would no longer be allowed to pay recruiters for students or engage in aggressive or misleading recruitment under proposed new federal regulations that target the practices of for-profit colleges.
The proposed new Department of Education rules were to be announced Wednesday. They apply to all colleges but are of particular interest to the for-profit world, where some institutions have been accused of misleading students about the cost and value of their programs.
"This is about accountability and protecting students," said Education Secretary Arne Duncan, in a statement.
The "notice of proposed rulemaking" is set to be published in the Federal Register on Friday and will be open to public comment until Aug. 2. Final rules are scheduled to be announced in November and would take effect in July 2011.
Under the proposed new rules, colleges would be required to do the following:
— Give prospective students their graduation and job placement rates.
— Supply data to the federal government that would allow officials to determine student debt levels and incomes after they graduate.
— Make sure only students with valid high school diplomas are enrolled.
— Ensure students are making satisfactory academic progress.
The new rules would strengthen the federal government's ability to take action against institutions that engage in deceptive advertising, marketing and sales practices. All loopholes in rules that already prohibit colleges from paying recruiters for students would be closed.
The role of individual states in monitoring colleges would be clarified. The rules would also more clearly define the courses eligible for financial aid and the amount of aid that is appropriate.
Studies show students at for-profit schools — the fastest growing sector of higher education — are much more likely to default on their loans than students at other kinds of colleges.
The federal government is paying more attention to these schools as large amounts of federal aid go to these schools in the form of student loans and grants.
Sen. Tom Harkin, D-Iowa, chairman of the Senate Health, Education, Labor and Pensions Committee, has said he plans to hold hearings starting June 24 to look at federal education spending at for-profit colleges.
The rules were not released until after the stock markets closed Tuesday, but investors have driven down the value of for-profit colleges as concern over the rules mounted. The worry is that schools like the University of Phoenix or ITT Technical Institutes could lose students and revenue if loans are tougher to come by.
"Investors are nervous across the board," said Corey Greendale, an analyst with First Analysis Securities Corp. in Chicago. "Nobody knows exactly what this is going to do."
Shares of Apollo Group Inc., which owns the University of Phoenix, have sunk about 22 percent since April 1, while shares of ITT Educational Services are down 13 percent.
Schools most at risk of losing business are those that offer longer programs, which translate into more debt for students, Greendale said.
Representatives from for-profit colleges and their business associations were among those who negotiated the new rules during meetings this past winter.
One major area of contention was left out of the proposed regulations.
To qualify for financial aid, most career colleges and vocational training programs need to show they are giving students the skills they need for "gainful employment." The definition of gainful employment will be set in another set of proposed rules to be issued later this summer, the department said.
Harris Miller, president of the Career College Association, said he was glad to hear the federal government plans to keep negotiating about gainful employment, but noted one other area of contention in the rules proposed this week.
The plan to eliminate all kinds of recruitment pay instead of a more subtle reform of the practice does not make sense and will hurt students and legitimate institutions, Miller said.
Miller said he assumes his organization and the Obama administration are in agreement on the other proposed rules.
AP Business Writer Christopher Leonard contributed to this story from St. Louis.