CREW v. U.S. Department of Education: Regarding For-Profit Education: 2/17/11 - Document 8-1

Case 1:10-cv-01712-RMC Document 8-1 Filed 02/17/11 Page 1 of 36
Kvaal, James
From: Swarthout, Luke (HELP Committee) (Luke_Swarthout@help.senate.govj

Sent: Friday, July 23, 2010 10:50 AM
To: 'Pauline Abernathy'; 'Steve Burd'; Dannenberg, Michael; Kvaal, James; Barmak Nassirian
(nassirianb@aacrao.org); 'Christine Lindstrom'
Subject: FW: Statement of Chairman Tom Harkin (O-IA) on New Education Department "Gainful
Employment" Regulations
From: Gustafson, Grant (Harkin) fmailto:Grant Gustafson@harkin.senate.oovl

sent: Friday, July 23,2010 10:44 AM
To: Cyrul, Kate (Harkin); Swarthout, luke (HELP Committee); Stein, Beth (HELP Committee)
Subject: FW: Statement of Chairman Tom Harkin (D-1A) on New Education Department "Gainful Employment"
Regulations
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Statement of Chairman Tom Harkin (D-IA) on New Education Department

"Gainful Employment" Regulations
WASHINGTON, D.C. - Senator Tom Harkin (D-fA) today issued the following statement after the U.S. Department of
::ducation released proposed regulations on the definition of "gainful employment." "Preparing students for gainful
~mployment in a recognized occupation" is used in the Higher Education Act as one of the eligibility requirements that
nost for-profit programs, and many less than two year non-profit programs, must meet to receive federal student aid. It is
~xpected that the proposal will receive public comment for 45 days, be finalized by November and go into effect July I,
2011.
1
Last month, Chairman Harkin released a report and conducted the Committee's first oversight hearing on the for-profit
~ducation sector. The second hearing in this series is set for August 4th.
'I applaud Secretary Duncan for moving forward with these new safeguards for students and taxpayers. This regulation is
)Iain common sense. If a school can't show that its students are repaying their college debt and not defaulting, this is a
;ure sign that the school is failing to prepare its students for gainful employment, as the law requires.
'The HELP Committee is in the early stage of its investigation into the for-profit education sector, but we already have
Imple evidence that some of these schools are raking in big profits without ensuring that students get the knowledge and
;kills to justify the substantial federal investment in student grants and loans. J will be looking closely at this rule to ensur,
:hat it goes far enough to protect the $23 billion in federal aid to for-profit schools each year. At first glance, the
'egulaLion appears to set a low bar. Ifwe are allowing a school to continue to walk away with taxpayer dollars, despite the
fact that less than a third of its students are able to repay their loans, that would seem to be a case of shockingly low
~xpectations."
HELP Committee Website I News I Hearings I About Chairman Harkin
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2
Kvaal, James
From: Finley, Steve

Sent: Monday, July 26,20101:09 PM
To: Gomez, Gabriella; Kvaal, James; Yuan, Georgia; Bergeron. David
Cc: Adams, Kristen
Subject: RE: statutory authority
To qualify for eligibility under the FSA programs, a proprietary institution or a postsecondary vocational
institution must provide a program of training to prepare students for gainful employment in a recognized occupation.
20 U.s.C. §§ lOO2(b), (cl. A public or private nonprofit institution that provides not less than a one-year (non-degree)
program of training must also prepare students, within that program, for gainful employment in a recognized
occupation. Effective July 1, 2010, certain proprietary school programs leading to liberal arts baccalaureate degrees
need not prepare students for gainful employment in a recognized occupation.
The Secretary has broad authority to promulgate regulations to implement programs established by statute. Under
section 414 of the Department of Education Organization Act, 20 U.S.c. § 3474, "[t]he Secretary is authorized to
prescribe such rules and regulations as the Secretary determines necessary or appropriate to administer and manage
the functions of the Secretary or the Department." Similarly, under section 410 of the General Education Provisions Act,
The Secretary, in order to carry out functions otherwise vested in the Secretary by law
or by delegation of authority pursuant to law, and subject to limitations as may be
otherwise imposed by law, is authorized to make, promulgate, issue, rescind. and
amend rules and regulations governing the manner of operation of, and governing the
applicable programs administered by, the Department.
20 USc. § 12210-3.
Section 492 of the Higher Education Act of 1965, as amended (HEAl. 20 U.s.C. § 1098a, specifies the process by
which the Secretary is to develop proposed regulations implementing Title IV of the HEA, which includes the statutory
authority for the FSA programs. In particular, the Secretary is to solicit public involvement in the development of
proposed regulations by obtaining the advice and recommendations of individuals and others representing students,
different sectors of the postsecondary educational institution community, and other entities that participate in the
programs. He is then to conduct a negotiated rulemaking process involving representatives of these interests, seeking
agreement on the substance of proposed regulations if possible. The Secretary has complied with this process by
presenting the gainful employment issue and proposals during the negotiated rulemaking meetings, and now by
publishing a proposed regulation for comment.
From: Gomez, Gabriella

sent: Monday, July 26, 2010 12:39 PM
To: Kvaal, James; Yuan, Georgia; Finley, Steve; Bergeron, David
Cc: Adams, Kristen
Subject: FW: statutory authority
Sorry for the mass email on this but do folks have a response I can pass along on this question highlighted below? They
specifically would like to have an answer to the comment that we do not have the statutory authority to define gainful
employment through regulations. Can you send me something that I can pass along? Thanks
1
From: Juliano, Robin (HELP Committee) [maitto:Robin_Juliano@help.senate.gov]
Sent: Monday, July 26,201012:17 PM
To: Gomez, Gabriella
Subject: statutory authority
Hi Gaby - We are wondering if you or OGG have any response to the claims that the Department lacks statutory authority
to issue the gainful employment regs (see below). Thanks! Robin
For-Profit Education Faces New Regulations

Posted by Alex Altman Friday, July 23, 2010 at 4:59 pm
30 Comments
TIME's Elizabeth Dias has this report:
The Department of Education has poured more gas on the for-profit career college fire. Today it unveiled proposed
regulations designed to protect for-profit students from debt traps and taxpayers from footing the bill when students
default on their loans. For-profit schools must demonstrate how they prepare students to be gainfully employed to
qualify for financial aid. "Gainful Employment" will be determined by student loan repayment and the relationship
between loan debt and average earnings. (Catch up on TIME's developing for-profit story here.)
Senator Tom Harkin, who is leading the senate Health, Education, labor and Pensions Committee's oversight
investigations into for-profit schools, cautions that while the DOE regulations may be a productive start, they may not go
far enough. "At first glance, the regulation appears to set a low bar. If we are allowing a school to continue to walk away
with taxpayer dollars, despite the fact that less than a third of its students are able to repay their loans, that would seem
to be a case of shockingly low expectations," Harkin said in a statement.
The Career College Association has deeper gripes with the gainful employment regulations, called them "unwise,
unnecessary, unproven," "likely to harm students, employers, institutions and taxpayers," and "unlawful, since the
Department of Education lacks the statutory authority to impose such a new measure." The Career College Association
declined to comment further on the DOE, but told TIME last week that Senator Harkin's office and the HELP committee
education policy team has become increasingly closed to hearing CCA perspective and research.
Other critics continue to insinuate that hedge funds and investors may be underhandedly driving these proposals in
order to capitalize on the for-profit education sector's regulation. Today, Citizens for Responsibility and Ethics in
Washington filed a Freedom of Information Act request to see communication records between DOE officials, prominent
for-profit entities, and individuals/firms who may have criticized the for-profit sector for financial gain, including the
following: investor Steve Eisman (who testified at the HELP committee hearings and is openly short the for-profit
education sector), Eisman's firm FrontPoint Partners, Morgan Stanley Investment, Inc, and Johnette McConnell Early,
who Pro Publica reported was working for an undisclosed investment company to solicit homeless shelters' signatures on
a letter to the DOE alleging for-profits exploit their clients.
The HelP committee will continue to investigate the for-profit education sector in a second hearing on August 4.
2
Kvaal. James
From: Kvaal, James

Sent: Tuesday, June 08, 2010 6:13 PM
To: mmcguire@who.eop.gov
Hi MaryEllen,
I was about to send my contact info but I see you successfully deduced it.
Sorry to ask, but would you mind sending the powerpoint that Steve Eisman left and I subsequently emalled to you? I
wasn't able to bring over much of my files.
See you soon, I am sure,
James
1
Kvaal, James
From: Kvaal, James

Sent: Monday, June 14, 2010 12:06 PM
To: Rowe, David
Subject: FW: Eisman Talk at Ira Sohn Conference
Attachments: Eisman-Ira Sohn Conference slides. pdf
Kvaal, James
From: Kvaal, James

Sent: Monday. June 21, 2010 11:32 PM
To: Shireman, Bob
Subject: Fw: Beckerand Posner
Posner has an interesting approach to cost benefit
------
Sent using BlackBerry
From: James Kvaal <jkvaal@gmail.com>

To: Kvaal, James
sent: Mon Jun 21 22:16:30 2010
Subject: Beckerand Posner
The Controversy over For-Profit Collc::.:.cs-Posncr
Conservative economists believe that the basic regulatory mechanism of a capitalist economy should be
antitrust law, designed to preserve competition; because as long as a market is competitive, the self-interest of
producers and consumers should operate to maximize the value of the market's output. Of course if the activity
of the market participants produces external costs or benefits--costs or benefits to nonparticipants, as in the
case of pollution, competition will not optimize output. Output will be too large from an overall social
standpoint if the externality is a cost, as in the pollution example, and too small if the externality is a benefit, as
in the case of education; hence the government's subsidization of education.
A college that is operated for profit might seem a worthy object of subsidization. That was the view of the Bush
Administration and led to the relaxation of a number of restrictions on the subsidization of such colleges, and so
the number of students enrolled in them soared; it is now almost one million. Under what is known as the "Title
IV" program, the government makes loans to college students to finance their education. Students at for-pro lit
colleges are eligible for thesse loans. Title IV loans to such students have increased by 500 percent since 2000
and now amount to $26.5 billion a year, which is more than a quarter of all Title IV loans. A for-profit college
may not derive 90 percent or more of its revenue from such loans, and the default rate of its students may not
exceed 25 percent for three consecutive years. The for-profit colleges tend to keep just below the 90 percent and
25 percent ceilings, which means that the bulk of their revenue is derived from the federal government and that
the rate of default of their students on the federal loans is very high. Defaulting on a student loan is particularly
painful to the defaulter, moreover, because the unpaid balance ofa federal student loan can't be discharged in
bankruptcy. Still, even the government can't squeeze water out ofa stone, so many of the defaulted loans are
never repaid.
The default rate is so high because the dropout rate from for·profit colleges is so high; it probably exceeds 50
percent on average. (The overall college dropout rate is high too--about a third-but considerably lower than
the for-profit college dropout rate.) In 2007, students at for-profit colleges were only 7 percent of all students in
higher education (they are now close to 10 percent), yet they were 44 percent of all students who defaulted on
their federal loans.
Steven Eisman is a very able hedge fund manager who was one of the few financiers to spot (and profit from)
the financial collapse that crested in September 2008. He is one of the heroes depicted in Michael Lewis's fine
recent book, The Big Short. Eisman believes that there is an uncalUlY resemblance between the financial
1
situation of the for-profit colleges and that of the banks before the collapse. See Steven Eisman, '''Subprime
Goes to College," May 26, 20 10, www.marketfolly.com/2010105/steve-eisman-rrontpoinl-pal1ners-ira.html.In
both cases loans-mortgage loans in the bank case, student loans in the for-profit college case-were made to
people who were at high risk of defaulting, and in both cases "rating agencies" (credit-rating agencies in the
case of the banks, college accreditation agencies in the case of colleges), were afflicted with a conflict of
interest because they were paid by the institutions whose securities (in the case of the banks) or educational
programs (in the case of the colleges) they were rating. (For criticism of the accreditation agencies, see Melissa
Konun "New Scrutiny of Groups That Accredit Universities;' Wall Street Journal, June 7, 2010, p. A8,
h ttp:/lon 1i n e. w sj.comla rli cI e1SB2000142405274870334090457528501409451591 O. h1mI.)
Eisman thinks that the federal government is likely to lose $275 billion on its Title IV loans over the next
decade. These defaults will not have the macroeconomic consequences of the financial collapse, but they will
slow our economic recovery and increase the federal deficit.
The government is concerned. The Department of Education has proposed denying eligibility for federal-
financed student loans to students who cannot repay their loans within 10 years by annual payments of no more
than 8 percent of their starting salary. See Tamar Lewin, "Facing Cuts in Federal Aid, For-Profit Colleges Are
in a Fight," New York Times, June 6, 2010, p. A21,
\Vww.l1vtim~s.comI20 10/06/06/education/0611ain.hlml?scp-1 &sg=Eisman&st=csc. This would mean, for
example, that a student whose first job paid $18,000 a year could borrow no more than $10,000.
The Department of Education has delayed action on the proposal, apparently in response to lobbying by the for-
profit colleges. The proposal may eventually be watered down, if not abandoned outright, because no interest
group has a big stake in shrinking the industry. Ifit were adopted, this "gainful employment" rule as it called
might reduce student enrollments at such colleges by a third, by driving a number of for-profit colleges out of
business. It would also lead to reductions in tuition for students in the surviving for-profit colleges by reducing
the amount they could borrow from the government to pay college tuition. Despite their high drop-out rates,
these colleges charge high tuition (often higher than public colleges charge) because the students can borrow
most of it. The colleges are also very profitable, so most of them will be able to survive with lower tuition-
which is a bit of a puzzle, since one expects competition to drive the average price of a product or service down
10 cost (including an allowance for profit, viewed as the cost of equity capital). It is possible, however, Ihatlhe
industry faces a sharply rising average-cost curve, so that the costs of the efficient firms are lower than the
market price. In addition, demand for for-profit college education has been rising rapidly, and when demand for
a product rises at a fast ratc profits may rise becausc of delay in expanding supply.
The aggregate cost of the for-profit college industry is great. The $275 billion default cost to the federal
government anticipated by Eisman is not a cost in the economic sense, but a transfer; it is money that goes from
the government to the students to the colleges and stops at the colleges rather than being repaid by the students.
But we cannot be insensitive to large government transfers, because they increase the federal deficit at a time
when the national debt is growing at an alarming rate from an already very large base. These transfers are not
costs but they give rise to costs.
The (other) costs of the industry, consisting of the opportunity costs of the teachers (and other staff) and the
students, the considerable marketing expenses that the colleges incur to build enrolment, and other expenses. are
substantial and the question is whether they generate commensurable benefits. Assuming that almost 90 percent
of the industry's revenues are the federal student loans and that the industry's total costs are 90 percent of its
revenues-the rest being profits in excess of the cost of equity capital-the total annual costs of the industry are
equal to the student loans: $26.5 billion.
The benefits conferred by the for-profit college industry would consist in the first instance of any increased
income of the graduates of these colleges (or of the drop-outs, assuming they attend for a significant time before
2
dropping out) as a result of their having attended college, but also of the nonpecuniary benefits of their col1ege
experience and the benefits to society as a whole of a more educated population; the second and third types of
benefit are impossible to measure, however.
It's hard to believe that the dropouts obtain benefits commensurate with the costs, especially when we consider
their opportunity costs-they might have been working and earning an income rather than attending college-
and the interest and other costs to them of the loans, which rememberthey can't shuck off by declaring
bankruptcy_ Among the graduates there are many defaults as well, which suggests that they don't gain a lot
from college attendance so far as bolstering their incomes is concerned. So it is quite likely that on balance the
costs of the for·profit colleges exceed the benefits, and that costs and benefits would be brought into closer
alignment if the new 10 percent·8 percent rule were adopted.
The big puzzle is why (to return to my opening point) the for-profit college market is not self-regulating-why,
for example, for-profit colleges don't emerge that set higher entrance standards and as a result can advertise
truthfully that their students are less likely to drop out and therefore more likely to derive a net benefit from
attending. Stated differently, if the 10 percent-8 percent rule is optimal, why doesn't competition drive the
industry to that level without the government's having to intervene? For remember that most for-profit colleges
would survive under such a regime, and some surely \.. 'ould thrive-in fact would be able to charge higher
tuition than they do now because they would be offering a belter product. Does anyone think that Harvard is
hurting itselfby having very high entrance standards? (The dropout rate at Harvard is 3 percent, and some of the
dropouts, like Bill Gates and Mark Zuckerberg, go on to become billionaires.)
The solution of the puzzle may be, as Eisman argues, that the private-college industry, which is at a
disadvantage in competing against nonprofit colleges because of the ta'\{ advantages, donor income, and direct
state and federal support of nonprofit (including public) colleges, has targeted a class of people who cannot gain
admission to those colleges because they do not meet their entrance standards. There is evidence that just as in
the case of the marketing ofmongage loans during the housing bubble of the early 2000s, Lhe for-profit colleges
use aggressive advertising to attract students from low-income families that lack financial sophistication and the
ability to evaluate the benefits of attending a for-profit college. These people-who may be the only people who
would consider a for-profit college, because no other college would admit them-almost by definition have
little infonnation about higher education and are therefore prey to skillful marketing that even if literally
truthful may create a misleading impression of the benefits of attendance at a for-profit college. For-profit
colleges often pay recruiters by the number of enrollments that a recruiter generates. (The Department of
Education is trying to prevent that with a new regulation.) Recruiters have been known to recruit at homeless
shelters.
An alternative possibility, however, is that most of the people who attend a for-profit college understand the risk
offailure but prefer to gamble on succeeding in obtaining a college degree and using the credential and what
they have learned to obtain a much better job as a result-a job that will enable them to repay their loan and
derive a net benefit from having borrowed it. (This is likewise a theory of why during the housing boom so
many people took out adjustable rate mongage loans, or home equity loans, that they could not "afford"-they
were gambling, many with Lheir eyes open.) College graduates earn substantially higher salaries than less-
educated workers, but it is doubtful whether, in the aggregate, graduates of for·profit colleges earn enough more
to compensate for Lhe costs and the dropout risk.
Posted at 09:56 AM I Permalillk I Comments (1)
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Default Rates and For-Profit Colleces- Becker
3
Since a college education is expensive, many students would be unable to receive a higher education unless they
got help with the fmancing. Some students are lucky to receive the needed resources from their parents, but
many others in the United States and elsewhere have to borrow in order to attend college. The vast majority of
loan programs available to students are highly subsidized by governments, either through direct government
loans with generous interest rates and other terms, or through government insurance of loans from private banks
combined with restrictions on the interest rates banks can charge students.
Even though student loans cannot be discharged through personal bankruptcy, default rates have been high. The
average rate of default in 2007 was high, about 7%, but still much below the over 20% rate in 1990. In addition,
many borrowers with lower incomes work out terms that involve slow and usually only partial repayments of
the amounts borrowed. As Posner indicates, for-profits have a high default rate of close to 25% on their student
loans. There is a clear hierarchy in default rates by type of school: For-profits have the highest default rates,
followed by public and non-profit junior colleges, then by graduates of four year colleges, and graduates of
medical and law schools, and other high earning professionals have the lowest default rates.
Since student loans are heavily dependent on government financing, governments have a legitimate and
important interest in these defauh rates. Consequently, it is proper for governments to impose limits to colleges
on both the fraction of their students who can default, and also on the fraction of students at a school who can
receive government loans. However, the present default limits of25% for profit-making institutions are too
generous. Banks would be forced out of business if the default rates on their commercial loans were so high.
The maximum allowable default rates should be cut to 15% %, or so. That itself, without any other changes,
would give for-profit and other colleges much stronger incentives to police better who they accept as students
since they would not want to exceed such more stringent ceiling on default rates.
A lowering of the permitted default rate is a far superior approach to reducing defaults than is the proposed limit
on the amount of loans available to students who are expected to have low incomes. For it is hard in most cases
to know in advance how much a student borrower will eventually earn. Students entering well-paying fields
may tum out to do badly, whereas those entering poorly paying fields might do extremely well. Colleges have a
strong incentive to police their default rates in order to remain eligible for student loans, but one can hardly
expect government officials to be able to predict with any accuracy the eventual earnings of students applying
for loans.
Unfortunately, various proposals to restrict loans to low earning students partly reflect the federal government's
desire to bash for-profit colleges. Yet these colleges playa significant role in the portfolio of college choices
available to students. For-profit colleges appeal to older and fulltime working students who never received a
college education. To be sure, the quality of the courses offered by for-profit colleges are generally are not so
high. But many public colleges, such as Loop College in Chicago, or Santa Monica Junior College, also offer
courses at the low end of the quality spectrum, and also have high loan default rates. That for-profit colleges can
compete against highly subsidized public and private non-profit schools indicates that the for-profits are
offering an education valued by certain students that is not available to them at other schools.
In addition, comparison of default rates between for·profit colleges and public colleges is not the right measure
of how much government subsidies they receive. All public colleges and most private ones receive large direct
subsidies from various governments that enable them to offer much lower tuition levels than are offered by for-
private colleges. Many students in public colleges, especially the lower quality ones, also drop out without
finishing, and also receive low earnings, after having been generously subsidized by governments. The right
comparison between for-profit and public schools might be the increase in earnings of students per dollar of
government subsidy, no matter what fonn these subsidies take. The for-profits may still look worse on this
measure than do the public colleges they compete against, but the difference would be much smaller than the
differences in default rates.
4
Some argue that for-profits can only compete by misleading students into believing they will benefit much more
from such an education than they will actually benefit. Clearly, some of that does occur. However, even some of
the best colleges and universities are quite misleading in their advertising and other attempts to attract students.
For example, very few philosophy, French, or English Lit departments warn incoming students that jobs in their
fields are scarce, and that most entering students may never get a decent job using their specialized training. To
be sure, for-profits tend to be more flagrant in their efforts to attract students, but it is a difference in degree.
So my conclusion is that while stiffer default rules on government subsidized student loans are needed, for-
profits should not be discriminated against in these rules since they offer valuable fonns of education.
Moreover, public colleges receive substantial direct government subsidies that for·profit colleges do not
receive. With lower allowable default rates, for-profit (and other colleges) would cut back on the number of
students accepted whom they expect to eventually default on their student loans.
Posted at 09:16 AM I Pcrmalink I Commenls (4)
5
Kvaal, James
From: Kvaal, James

Sent: Tuesday, June 22, 2010 9:55 AM
To: Chesley, Susan; Bergeron, David; Yuan, Georgia; Klock, Dan; Jablonski, Sandy; Kolotos,
John; Finley, Steve; Baker, Jeff; Shireman, Bob; Higgins, Shannan; Madzelan, Dan; Sellers,
Fred
Subject: Posner and Becker on for-profits
These comments from Posner and Becker might be interesting as we think through these issues.
Posner has an interesting cost-benefit calculation.
The Controversy over For-Profit Colleges-Posner
Conservative economists believe that the basic regulatory mechanism of a capitalist economy
should be antitrust law, designed to preserve competition; because as long as a market is
competitive, the self-interest of producers and consumers should operate to maximize the
value of the market's output. Of course if the activity of the market participants produces
external costs or benefits-costs or benefits to nonparticipants, as in the case of pollution,
competition will not optimize output. Output will be too large from an overall social
standpoint if the externality is a cost, as in the pollution example, and too small if the
externality is a benefit, as in the case of education; hence the government's subsidization
of education.
A college that is operated for profit might seem a worthy object of subsidization. That was
the view of the Bush Administration and led to the relaxation of a number of restrictions on
the subsidization of such colleges, and so the number of students enrolled in them soared; it
is now almost one million. Under what is known as the uti tle IV" program, the government
makes loans to college students to finance their education. Students at for-profit colleges
are eligible for thesse loans. Title IV loans to such students have increased by see percent
since 2gee and now amount to $26.5 billion a year, which is more than a quarter of all Title
IV loans. A for-profit college may not derive 99 percent or more of its revenue from such
loans, and the default rate of its students may not exceed 25 percent for three consecutive
years. The for-profit colleges tend to keep just below the 90 percent and 25 percent
ceilings, which means that the bulk of their revenue is derived from the federal government
and that the rate of default of their students on the federal loans is very high. Defaulting
on a student loan is particularly painful to the defaulter, moreover, because the unpaid
balance of a federal student loan can't be discharged in bankruptcy. Still, even the
government can't squeeze water out of a stone, so many of the defaulted loans are never
repaid.
The default rate is so high because the dropout rate from for-profit colleges is so high; it
probably exceeds 59 percent on average. (The overall college dropout rate is high too-about a
third-but considerably lower than the for-profit college dropout rate.) In 2907, students at
for-profit colleges were only 7 percent of all students in higher education (they are now
close to 19 percent), yet they were 44 percent of all students who defaulted on their federal
loans.
Steven Eisman is a very able hedge fund manager who was one of the few financiers to spot
(and profit from) the financial collapse that crested in September 2908. He is one of the
heroes depicted in Michael lewis's fine recent book, The Big Short. Eisman believes that
there is an uncanny resemblance between the financial situation of the for-profit colleges
and that of the banks before the collapse. See Steven Eisman, "5ubprime Goes to College," May
26, 2e1e, www.marketfolly.com/291B/B5/steve-eisman-frontpoint-partners-ira.html. In both
cases loans-mortgage loans in the bank case, student loans in the for-profit college case-
were made to people who were at high risk of defaulting, and in both cases "rating agencies"
(credit-rating agencies in the case of the banks, college accreditation agencies in the case
of colleges), were afflicted with a conflict of interest because they were paid by the
institutions whose securities (in the case of the banks) or educational programs (in the case
of the colleges) they were rating. (For criticism of the accreditation agencies, see Melissa
Kornm "New Scrutiny of Groups That Accredit universities/' Wall Street Journal, June 7, 2010,
p. A8, http://online.wsj.com/article/SB200014240S2748703340904575285014094515910.html.)
Eisman thinks that the federal government is likely to lose $275 billion on its Title IV
loans over the next decade. These defaults will not have the macroeconomic consequences of
the financial collapse, but they will slow our economic recovery and increase the federal
deficit.
The government is concerned. The Department of Education has proposed denying eligibility for
federal-financed student loans to students who cannot repay their loans within 10 years by
annual payments of no more than 8 percent of their starting salary. See Tamar lewin, "Facing
Cuts in Federal Aid, For-Profit Colleges Are in a Fight," New York Times, June 6, 2010, p.
A21, www.nytimes.com/2010/06/06/education/06gain.html?scp=1&sq:Eisman&st:cse. This would
mean, for example, that a student whose first job paid $18,000 a year could borrow no more
than $10,000.
The Department of Education has delayed action on the proposal, apparently in response to
lobbying by the for-profit colleges. The proposal may eventually be watered down, if not
abandoned outright, because no interest group has a big stake in shrinking the industry. If
it were adopted, this "gainful employment" rule as i t called might reduce student enrollments
at such colleges by a third, by driving a number of for-profit colleges out of business. It
would also lead to reductions in tuition for students in the surviving for-profit colleges by
reducing the amount they could borrow from the government to pay college tuition. Despite
their high drop-out rates, these colleges charge high tuition (often higher than public
colleges charge) because the students can borrow most of it. The colleges are also very
profitable, so most of them will be able to survive with lower tuition-which is a bit of a
puzzle, since one expects competition to drive the average price of a product or service down
to cost (including an allowance for profit, viewed as the cost of equity capital). It is
possible, however, that the industry faces a sharply rising average-cost curve, so that the
costs of the efficient firms are lower than the market price. In addition, demand for for-
profit college education has been rising rapidly, and when demand for a product rises at a
fast rate profits may rise because of delay in expanding supply.
The aggregate cost of the for-profit college industry is great. The $275 billion default cost
to the federal government anticipated by Eisman is not a cost in the economic sense, but a
transferj it is money that goes from the government to the students to the colleges and stops
at the colleges rather than being repaid by the students. But we cannot be insensitive to
large government transfers, because they increase the federal deficit at a time when the
national debt is growing at an alarming rate from an already very large base. These transfers
are not costs but they give rise to costs.
The (other) costs of the industry, consisting of the opportunity costs of the teachers (and
other staff) and the students, the considerable marketing expenses that the colleges incur to
build enrolment, and other expenses, are substantial and the question is whether they
generate commensurable benefits. Assuming that almost 90 percent of the industry's revenues
are the federal student loans and that the industry's total costs are 90 percent of its
revenues-the rest being profits in excess of the cost of equity capital-the total annual
costs of the industry are equal to the student loans: $26.5 billion.
The benefits conferred by the for-profit college industry would consist in the first instance
of any increased income of the graduates of these colleges (or of the drop-outs, assuming
they attend for a significant time before dropping out) as a result of their having attended
college, but also of the nonpecuniary benefits of their college experience and the benefits
2
to society as a whole of a more educated populationj the second and third types of benefit
are impossible to measure, however.
It's hard to believe that the dropouts obtain benefits commensurate with the costs,
especially when we consider their opportunity costs-they might have been working and earning
an income rather than attending college-and the interest and other costs to them of the
loans, which remember they can't shuck off by declaring bankruptcy. Among the graduates there
are many defaults as well, which suggests that they don~t gain a lot from college attendance
so far as bolstering their incomes is concerned. So it is quite likely that on balance the
costs of the for-profit colleges exceed the benefits, and that costs and benefits would be
brought into closer alignment if the new 10 percent-8 percent rule were adopted.
The big puzzle is why (to return to my opening point) the for-profit college market is not
self-regulating-why, for example, for-profit colleges don't emerge that set higher entrance
standards and as a result can advertise truthfully that their students are less likely to
drop out and therefore more likely to derive a net benefit from attending. Stated
differently, if the 10 percent-8 percent rule is optimal, why doesn't competition drive the
industry to that level without the government's having to intervene? For remember that most
for-profit colleges would survive under such a regime, and some surely would thrive-in fact
would be able to charge higher tuition than they do now because they would be offering a
better product. Does anyone think that Harvard is hurting itself by having very high entrance
standards? (The dropout rate at Harvard is 3 percent, and some of the dropouts, like Bill
Gates and Mark Zuckerberg, go on to become billionaires.)
The solution of the puzzle may be, as Eisman argues, that the private-college industry, which
is at a disadvantage in competing against nonprofit colleges because of the tax advantages,
donor income, and direct state and federal support of nonprofit (including public) colleges,
has targeted a class of people who cannot gain admission to those colleges because they do
not meet their entrance standards. There is evidence that just as in the case of the
marketing of mortgage loans during the housing bubble of the early 2eees, the for-profit
colleges use aggressive advertising to attract students from low-income families that lack
financial sophistication and the ability to evaluate the benefits of attending a for-profit
college. These people-who may be the only people who would consider a for-profit college,
because no other college would admit them-almost by definition have little information about
higher education and are therefore prey to skillful marketing that even if literally truthful
may create a misleading impression of the benefits of attendance at a for-profit college.
For-profit colleges often pay recruiters by the number of enrollments that a recruiter
generates. (The Department of Education is trying to prevent that with a new regulation.)
Recruiters have been known to recruit at homeless shelters.
An alternative possibility, however, is that most of the people who attend a for-profit
college understand the risk of failure but prefer to gamble on succeeding in obtaining a
college degree and using the credential and what they have learned to obtain a much better
job as a result-a job that will enable them to repay their loan and derive a net benefit from
having borrowed it. (This is likewise a theory of why during the housing boom so many people
took out adjustable rate mortgage loans, or home equity loans, that they could not "afford"-
they were gambling, many with their eyes open.) College graduates earn substantially higher
salaries than less-educated workers, but it is doubtful whether, in the aggregate, graduates
of for-profit colleges earn enough more to compensate for the costs and the dropout risk.
Posted at e9:56 AM I Permalink I Comments (7)
Default Rates and For-Profit Colleges- Becker
Since a college education is expensive, many students would be unable to receive a higher
education unless they got help with the financing. Some students are lucky to receive the
3
needed resources from their parents~ but many others in the United States and elsewhere have
to borrow in order to attend college. The vast majority of loan programs available to
students are highly subsidized by governments~ either through direct government loans with
generous interest rates and other terms~ or through government insurance of loans from
private banks combined with restrictions on the interest rates banks can charge students.
Even though student loans cannot be discharged through personal bankruptcy, default rates
have been high. The average rate of default in 2887 was high, about 7%, but still much below
the over 28% rate in 1998. In addition, many borrowers with lower incomes work out terms that
involve slow and usually only partial repayments of the amounts borrowed. As Posner
indicates, for-profits have a high default rate of close to 25% on their student loans. There
is a clear hierarchy in default rates by type of school: For-profits have the highest default
rates, followed by public and non-profit junior colleges, then by graduates of four year
colleges, and graduates of medical and law schools~ and other high earning professionals have
the lowest default rates.
Since student loans are heavily dependent on government financing~ governments have a
legitimate and important interest in these default rates. Consequently, it is proper for
governments to impose limits to colleges on both the fraction of their students who can
default, and also on the fraction of students at a school who can receive government loans.
However, the present default limits of 25% for profit-making institutions are too generous.
Banks would be forced out of business if the default rates on their commercial loans were so
high. The maximum allowable default rates should be cut to 15% %~ or so. That itself, without
any other changes, would give for-profit and other colleges much stronger incentives to
police better who they accept as students since they would not want to exceed such more
stringent ceiling on default rates.
A lowering of the permitted default rate is a far superior approach to reducing defaults than
is the proposed limit on the amount of loans available to students who are expected to have
low incomes. For it is hard in most cases to know in advance how much a student borrower will
eventually earn. Students entering well-paying fields may turn out to do badly, whereas those
entering poorly paying fields might do extremely well. Colleges have a strong incentive to
police their default rates in order to remain eligible for student loans, but one can hardly
expect government officials to be able to predict with any accuracy the eventual earnings of
students applying for loans.
Unfortunately, various proposals to restrict loans to low earning students partly reflect the
federal government's desire to bash for-profit colleges. Yet these colleges playa
significant role in the portfolio of college choices available to students. For-profit
colleges appeal to older and full time working students who never received a college
education. To be sure~ the quality of the courses offered by for-profit colleges are
generally are not so high. But many public colleges~ such as loop College in Chicago, or
Santa Monica Junior College~ also offer courses at the low end of the quality spectrum, and
also have high loan default rates. That for-profit colleges can compete against highly
subsidized public and private non-profit schools indicates that the for-profits are offering
an education valued by certain students that is not available to them at other schools.
In addition, comparison of default rates between for-profit colleges and public colleges is
not the right measure of how much government subsidies they receive. All public colleges and
most private ones receive large direct subsidies from various governments that enable them to
offer much lower tuition levels than are offered by for-private colleges. Many students in
public colleges, especially the lower quality ones, also drop out without finishing, and also
receive low earnings, after having been generously subsidized by governments. The right
comparison between for-profit and public schools might be the increase in earnings of
students per dollar of government subsidy, no matter what form these subsidies take. The for-
profits may still look worse on this measure than do the public colleges they compete
against~ but the difference would be much smaller than the differences in default rates.
4
Some argue that for-profits can only compete by misleading students into believing they will
benefit much more from such an education than they will actually benefit. Clearly, some of
that does occur. However, even some of the best colleges and universities are quite
misleading in their advertising and other attempts to attract students. For example, very few
philosophy, French, or English Lit departments warn incoming students that jobs in their
fields are scarce, and that most entering students may never get a decent job using their
specialized training. To be sure, for-profits tend to be more flagrant in their efforts to
attract students, but it is a difference in degree.
So my conclusion is that while stiffer default rules on government subsidized student loans
are needed, for-profits should not be discriminated against in these rules since they offer
valuable forms of education. Moreover, public colleges receive substantial direct government
subsidies that for-profit colleges do not receive. With lower allowable default rates, for-
profit (and other colleges) would cut back on the number of students accepted whom they
expect to eventually default on their student loans.
Posted at 09:16 AM I Permalink I Comments (4)
5
Kvaal. James
From: Kvaal, James

Sent: Wednesday, June 23, 2010 9:49 PM
To: 'Mark.Kantrowitz@Monster.com'
Subject: Re: JP Morgan on Senate HEl.:P Committee Hearings Thursday
Thanks, hadn't seen this
Sent using BlackBerry
From: Kantrowitz, Mark <Mark.Kantrowitz@Monster.com>

To: Kvaal, James; Shireman, Bob
Sent: Wed Jun 23 20:30:49 2010
Subject: JP Morgan on Senate HELP Committee Hearings Thursday
Mark Kantrowitz
Publisher of FinAid.org and FaslWeb.com
mkant@fastweb.com
From: Andrew C. Steinerman <andrew.steinerman@jpmresearchmail.com>

To: Kan rowitz, Mark.
sent: Wed Jun 23 21:14:12 2010
Subject: Education services: 15 the senate's Agenda All about Gainful Employment? - ALERT
TO OUR FELLOW BUSINESS & EDUCATION SERVICES OBSERVERS,

Here arc our mosl recent thoughts.
Also see attached pdf.
J.PMorgan North America Equity Research
Education Services: Is the Senate's Agenda All about Gainful

Employment? - ALERT
Click here I~lr tilt' lull Alen and di ..cJaimen..
Tomorrow, the Senate Committee on Health Education Labor and Pensions (HELP) wilt hold the first hearing (in the series
of hearings on the for-profit sector) titled Emerging Risk? An Overview o[the Federallnves{mem in For-Profit EducatiQn
The Senate Committee will examine a broad range of issues related 10 the growing role ofthe for-profit higher education
seciOr. Spedfically, we think the Senate will discuss a growing proponion ofPell Grant and Stafford loan funding going 10
the sector. The witnesses are: Kathleen Tighe, the Education Department's Inspector General; Yasmine Issa, former Sanford
Brown Institute (CECO) student; Margaret Reiter, former Supervising Deputy Attorney General in California; Steve Eisman,
ponfolio manager at Frontpoint Financial Services Fund; and Sharon Thomas Parrott, DeVry's SVP of Government and
Regulatory Affairs. At the time of this report, we have not seen Sen. Harkin's report on the for-profit sector or a detailed
agenda for the hearing.
• The U.S. Senate turns up the heat on the for-profit schools. While the Senate Comminee has not stated the purpose
of this series of hearings, we think it may serve as a platform to support new higher education legislation/regulation, such
as the gainful employment proposal by the Education Department (ED). Clearly, the Senate is taking a more aggressive
stance against the sector after months of being quict on the subje<:t. Recall, the House Comminee hearing last Thursday
was focused on the role ofaccreditors and on-line education in general but highlighted a case ofCECO's AIU.
• Is there a congressional agenda? After months of discussions on gainful employment led by the ED, we now see
both sides of Congress becoming more active. One of the outcomes has been a request for the GAO study on the for·profit
education sector. By our view, we sense the House had started to see the shortcomings and unintended consequences (i.e.,
displacing students) of the current gainful employment proposals. However, the Senate's support will provide a charge for
the ED to push forward with thc gainful employment formulas.
• While the Senate hearing brings the discussion inlo the open, the tone will likely be negative. While the for·profit
sector (represented only by DeVry) will tell its side of the story (increased student access and support scrvices), we
believe the composition of witnesses (four critics) will lead to a highly negative tone. We think that Ms. Parrott (from
DeVry) wilt try to communicate the sector's essential role in expanding higher education capacity and providing
favorable student outcomes (her testimony is not available at the time of this report). In addition, she may highlight the
differences between degree-granting regionally-accredited for-profit institutions (such as DeVry) and other more career-
focused non-degree providers. She could argue for more scrutiny of lower-qual ity operators that taint the whole sector.
• What is the end goal? We continue to believe that the end goal of Congress (and the Education Department) is not to
shut down the sector but to provide adequate controls of the federal student aid and limit abuses. Despite the currently
menacing tenor in Congress. the ED has repeatedly stated that the for-profit sector plays an important role in higher
education by providing capacity in the supply-constrained industry and by spearheading innovation.
Andre" C. Steincrlllall
(1-212) 622·2527
andrcw.steinerman@jpmorgan.com
.Icffrc\ Y. Vol~hlc,"11
(I -212) 622-2940
jvolshteyn@jpmorgan.com
William W. Let'
(1-212)622-2596
wlee2@ipmorgan.com
If you 00 lon&cr wi~h 10 receIve these e-mailslheo.lidh.Nhlllnw\...c.ib.;- \\ ,\ w.Jnor2an lUll rkets.coru
Analyst certification: I certifY thaI: (I) all of the views expressed in lhis reS~3reh accurately reflect my personal vi~ws about any and all of the
subject S\,'Curiti(s or issuers; and (2) no part of my compensation was, is, or will be directly or indirectly related to the sP';:cific recommendations
or views expressed herein. Important disclosures, including price charts. related to the companies recommended in this report are available in lhc
PDF atlachment_ through the search function on J.P. Morgan's website hllpsJlmmjpmorgan.comldisclosuresicompany. or by calling this toll free
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3
Kvaal, James
From: Kvaal, James

Sent: Tuesday, July 13, 2010 9:59 AM
To: Kanter, Martha
Subject: RE: LA Times: For·profit colleges and the threat of a new bubble
OPINION
For-profit colleges and the threat of a new bubble

Students are taking out loans that they may not be able to repay, and some fear massive
defaults.
By Tom Harkin
July 13, 2010
Haven't we heard this story before? It features a high.pressure sales force persuading consumers in search of thc
American dream to go deep into debt to purchase a product of often dubious value. Default rates are sky high.
Taxpayer money is squandered. Top executives walk away with fortunes.
This sounds like a description of the subprime mortgage industry, which came crashing down two years ago.
But what I just described is the reality at many for-profit colleges.
Their recruitment ads are ubiquitous, offering visions of a cap·and-gown graduation, followed by placement in
a well.payingjob. At their best, for-profit colleges deliver. Many provide top-quality, innovative options for
students who want to pursue postsecondary education while managing work and family obligations.
But serious questions have been raised about some of the major players in this rapidly growing industry. Critics
charge that many for-profit colleges employ overly aggressive recruiting tactics targeting low-income students.
Students take on excessive debt, and though dropout rates are not available, there is reason to believe that they
are very high.
Critics say that the entire business model, especially in the case of publicly traded companies, is premised on a
college's ability to chum through many thousands of students, whose federal Pell grants of up to $5,550 and
Stafford loans are paid to the school, with no accountability for student learning or graduation. Even good
actors in this industry are lured into the vortex of bad practices in order to compete and meet investors'
expectations.
For more than 50 years, the federal government has provided students with grants and loans to help pay for
college. This has been a powerful investment in our human capital and our nation's future. However, an ongoing
investigation by the Senate Committee on Health, Education, Labor and Pensions (HELP) has raised serious
questions about whether students - and taxpayers - are getting good value for the surge of federal dollars
flowing to for-profit colleges.
From 2008 to 2009, 23.6% of federal Pel! grants flowed to for-profit schools, double the percentage from 1999
to 2000. Federal aid to for-profit colleges skyrocketed from less than $5 billion in 2000 to nearly $26.5 billion
last year. At many of the major for-profits, federal dollars now account for more than 80% of their revenue,
according to a Department of Education report
The HELP Committee heard testimony in June from Yasmine lssa, a 29-year-old divorced mother of twins who
used Pell grants and loans to pay for training to become an ultrasound technician. After completing the for-
profit college program in 2008, she was turned down for jobs because - as she belatedly learned - the
school's program was not accredited by the organization that determines ifshe is eligible for a required exam.
She was left with a $21,000 debt.
Issa is not alone; 96% of associate-degree students at for-profit colleges take out loans, compared with only
38% of community college students. And for-profit college students are eight times more likely to graduate with
a debt larger than $20,000.
For-profit colleges account for only 10% of students enrolled in higher education, but those students receive
23% of federal student loans and grants, and account for 44% of defaults.
Wall Street money manager Steven Eisman told the committee that many for-profit colleges are "marketing
machines masquerading as universities." Their rapid growth is driven by easy access to federal student loans,
guaranteed by the government. "The government, the students and the taxpayer bear all the risk," Eisman
testified, "and the for-profit industry reaps all the rewards."
Some for-profit schools spend a very large share of revenues - nearly 50%-- on non-instructional expenses,
primarily marketing and recruiting. They do a poor job of producing graduates but a stellar job of generating
wealth for shareholders and executives. One large for-profit institution has a nearly 40% profit margin, larger
than most Fortune 500 companies, including Apple. The president of the largest for-profit college is paid nearly
14 times the compensation of the president of Harvard University.
Eisman, who was one of the first to predict the collapse of the subprime mortgage industry, sees disturbing
similarities in today's for-profit college industry. He estimates that students enrolled by for-profit colleges could
default on as much as $275 billion in federal student loans over the next decade.
Subprime borrowers were able to walk away from their homes and, therefore, their debt But it is a different
slory for millions of students who take out loans to attend for-profit colleges. Under the law, people cannot
discharge student debt in bankruptcy; so if they can't pay it off, it will continue to accrue compounded interest
indefinitely. Subprime borrowers lost their homes, but students like Issa stand to lose their future.
In recent years, an absence of federal oversight has allowed a dangerous bubble to grow in the for-profit college
industry. The challenge is to crack down on the bad actors and abusive practices while preserving the positive
options and innovations that many for-profit colleges have pioneered.
Tom Harkin (D- Iowa) is chairman of the Senate Committee on Health, Education~ Labor and Pensions.
Copyright © 20 I0, lllC Los Angeles Times
K;Hc C) rill I Commulli(alions DircClClr I ScnatoJrTolll Harkin (0-11\)

~02-2::!4-J254 I hllp:!/harkin.scnalC.g(\\!
2
Kvaal. James
From: Kvaal, James

Sent: Monday, July 19, 2010 10:09 AM
To: Martin, Phil
Subject: FW: i know you cannot respond
Importance: High
Let's discuss
From: Bergeron, David

To: Kvaal, James; Yuan, Georgia
Subject: FW: i know you cannot respond
Importance: High
fyi
From: Eisman, Steven [mailto:seisman@fppartners.com]

To: Bergeron, David
Subject: i know you cannot respond
But just fyi. Education stocks are running because people are hearing DOE is backing down on gainful employment.
Steven Eisman
FrontPoint Financial Services Fund
seisman@fppartners.com
917·934·1770
Kvaal, James
From: Kvaal, James

Sent: Monday, July 19. 2010 10:52 AM
To: Martin, Phil
SUbject: FW: Write-up
Attachments: Download.aspx.pdf
From: Nassirian, Barmak fmailto:barmak@aacrao.Qrgl

sent: Monday, July 19, 2010 10:47 AM
To: Kvaal, James
Subject: Write-up
Signall Hillll Business Services· Education Services

Industry Update
July 16, 2010 Regulatory Update •• What's Next
Trace Urdan
Our Call:
lllfdan@signalhil.com
415.364.0365 On GaInful Employment:
MUltiple reliable sources say that the Department of Education (ED) sent a revised.
metric-based Gainful Employment draft 10 the OMS for review around July 4, suggesting that
next week could see the proposal released for public comment. We believe this new draft could
include terms more accommodating than the infamous 8% language first floated by ED in
January's neg-reg sessions.
We further expect, based on reports of conversations between industry and ED officials over the
lasl few months, thai the revised proposal will effectively relieve most of the SA and MA
programs from the debVincome measure through an alternative measure of graduate loan
repayments. We believe the intent of the rules is to target AA and non-degree programs, where
students are seen as less sophisticated and less able to make informed decisions about
borrowing for their education. We also think there could be a completion/placement standard as
part of the final proposal.
Near-term. we see the publication of the Gainful Employment draft rule as most likely to relieve
pressure on BA and MA programs and to better clarify the exposure for non-degree and AA
degree providers. (We note that COCO management has publicly stated that it will offer an
indication of the the likely impact of the rule on its future earnings, even before a final rule is
published.) Because we believe that clarity in both cases will begin to discredit the
widely-drculated Eisman negative-earnings scenario. we see the GE rule as a potentially
positive catalyst.
Specifically, we believe the terms of an alternative default measure wilt be such that company's
with two-year graduate default rates of <3.5% should meet the 90% "active repayment"
criterion. We do not believe the assumption used by most shorts, including apparently Mr.
Eisman, that "active repayment" means current within 30 days.
• Near-term beneficiaries: APOL, BPI, DV, EDMC, LOPE, STRA.
But near-term evidence that negative earnings are unlikely will not by itself relieve the short
pressure on the sector or persuade disenchanted longs to reinvest. The more meaningful
catalyst for the sector will not come, in our opinion. until we see a) an LBO; b) a balanced
assessment of the industry's contribution to higher education by the GAO; or c) some positive
commentaryftestimony from USDOE following the rules being finalized.
We believe that private equity remains highly engaged in the sector, and possible Senate bills
notwithstanding. inclined to act as soon as rules become clearer. Though some may be cowed
by Harkin's rhetoric. we think others will be able to read the political environment as one in
which a liberal Democrat wilt be hard-pressed to pass heavy new regulations that will
discourage college access, industry jobs and tax receipts.
• Most likely LBO candidates: ESI, COCO. CECO, and (if John Sperling is prepared to cede
control,) APOL.
Please see important disclosure information on pages 2 - 3 of this report.

July 16, 2010
Investment Analysis:
Senate HELP Hearings
We're told that the next Senate HElP committee hearing on for-profit education will be devoted to the issue of
ftmisrepresentation" and will take place during the first week of August.
We believe the politics of rule·making, which encourages USDOE to generate support for the rules during this
public comment period, as well as the politics of the mid-term elections, in which the Democrats appear to be
appealing to the left in order to rally their political base, has caused the current fire storm of populist outrage in
Congress as expressed by Senators Harkin, Franken, Sanders, and Durbin.
Our read is that having been placed on the defensive early with respect to the need and appropriateness of
new Gainful Employment rules that effectively cap student debt levels by program, USDOE has coordinated an
impressive and highly successful public relations and lobbying effort to shift the terms of the debate such that
these rules now appear to the public to be a badly-needed and even moderate response to a crisis.
We read the Senate HELP hearings, as well as Senator Durbin's speech to the National Press Club, in this
context as well. There is a strong professional association between Senator Harkin's top education slaffer Luke
Swarthout and Bob Shireman's advocacy organiZation, the Institute for College Access & Success. And
Senator Durbin's speech likewise seems to have benefited from a host of talking points supplied directly by
USDOE.
In our analysis, the mid-term elections, the publication of a GAO report and most importantly, the finalization of
new rules on Nov. 1, 2010 governing the sector should result in a much more moderate tone among
lawmakers. While we cannot dismiss the possibility of new legislation being introduced in the Senate to alter
rules governing for-profit schools, we rate the likelihood of passage of any such law as very low given the
source of the agitation and the tough line being laken by Republicans on new regulatory initiatives.
Important Disclosures
Analyst Certification
I, Trace Urdan, hereby certify that all of the views expressed in this research report accurately reflect my
personal views about the subject securities or issuers. I also certify that no part of my compensation was, is or
will be directly or indirectly related to the specific recommendations or views expressed in this research
reporl.Signal Hill does not compensate its equity research analysts based on specific investment banking
transactions. Signal Hill Equity research analysts receive compensation based on several factors, inclUding
overall profitability and revenues of the firm, which include investment banking revenues.
Applicable current disclosures for all companies covered in this report are available in written or electronic
format upon request. To request copies of applicable current disclosures please write to the Signal Hill Capital
Group Research Department at the following address: Signal Hill Capital Group Research Department, 300
East Lombard Street, Suite 1700, Baltimore MD 21202.
Meaning of Ratings
Signal Hill uses a three-tiered rating system defined as follows:
BUY: We expect this stock to outperform its peers over the next 12 months:
HOLD: We expect this stock to perform in line with its peers over the next 12 months:
SELL: We expect this stock to underperform its peers over the next 12 months:
Post.Secondary Education 2
July 16, 2010 Sip..,] Hill
Ohitrlbutlon of RiltingsllB Services

Signal Hili
IB S8ri.JPillt 12 MoL
Rating Count Percent Count Percent
BUY
HOLD
SELL
.79
1
61.1
31.5
0.8
7.
J9
1
93.1
81.2
100.0
Disclaimer
This report has been prepared using sources we deem to be reliable but we do not guarantee its accuracy and
it does not purport to be complete. This report is published solely for information purposes and is not intended
to be used as the primary basis for making investment decisions, which should renect the investment objectives
and financial situation of the investor: The opinions expressed herein are subject to change without notice. This
report is not an offer or the solicitation of an offer to buy or sell securities. Additional information is available
upon request.
Post-Secondary Education 3
Kvaal, James
From: Kvaat, James

Sent: Monday, JUly 19, 2010 11:12 AM
To: Gomez. Gabriella
Subject: Fw: Write·up
Attachments: Downtoad.aspx.pdf
This is not aU accurate information
Sent using BtackBerry
From: Nassirian, Barmak <barmak@aacrao.org>

To: Kvaat, James
Sent: Mon Jut 19 09:47:29 2010
Subject: Write-up
1
Kvaal. James
From: Kvaat, James
Sent: Tuesday, July 20, 2010 10:46 AM
To: Woodward, Jennifer
Subject: RE: For·Profit Schools-Potential Recuitment of the Homeless
Thank you, this is helpful information
From: Woodward, Jennifer

Sent: Tuesday. July 20.20109:35 AM
To: Kvaal, James; Shireman, Robert
Subject: FW: For-Profit Schools--Potentiat Recuitment of the Homeless
FYI.
From: Woodward, Jennifer

Sent: Monday, July 19. 2010 6:36 PM
To: Minor, Robin; Jenkins, Harold; Leon, Geneva; Dickerson, Patricia; Gust, Mary; Coughlin, Betty; Fernandez-Rosario,
Martina; Chauvin, Karen; Pickett, Veronica
Cc: Yuan, Georgia
Subject: For-Profit Schools-·Potential Recuitment of the Homeless
Colleagues:
I am writing to provide you with some background on the topic of for-profit schools' potential recruitment of the homeless.
On June 17, 2010, the heads of 20 homeless shelter organizations from accross the country sent a letter to Secretary
Duncan noting the harm caused their clients by for-profit institutions (attached). We in OGC were curious about the
compelling allegations raised by this letter, and so I called the first person who signed the letter, Jane Burch, the CEO for
New Beginnings for Women and Children (New Beginnings) in Tucson, Arizona. She had quite a lot to say, and was very
well-spoken.
Ms. Burch explained that drafting the letter was an evolving project that she and several others conceived of at a
conference. They were talking about some of the "outreach services" that she and others who run shelters do in
connection with placing homeless women and their children into more permanent housing. As New Beginnings expanded
and began to offer more permanent housing, in order to qualify for federal funds through HUD, New Beginnings was
required to ask questions of its clients about a multitude of topics, including questions about their educational level.
Expecting mostly high school drop outs, she was surprised to discover that 27% had some post-secondary education
even though they had never graduated from high school. As it turns out, they received their education from for-profit
colleges thai, again to her surprise, were recruiting the homeless right there at the shelter. She talked about the enduring
harm this has caused her clients and said that through word of mouth through the other organizations, she had been
contacted by Daniel Golden of Bloomberg News who was researching an article he wrote in fate April. She recalled that a
number of people like her worked on the letter and shared drafts before they signed. She personally knew some of the
others who signed, but said that it was Mr. Golden who brought them all together through his research.
You may have seen the article he wrote on April 3D, 2010, but here it is again:
Homeless High School Dropouts lured by For-Profit Colleges

http://www.bloomberg.com/newsl2Q1Q-Q4-30Jhomeless-droDOuts-from-high-school-Iured-by-for-profit-colleges-with-
cash.html
He was also featured in an interview in the recent Frontline segment rCollege, Inc'-), during which he spoke about this
issue, among other things. It is still available for viewing on the PBS website. If you haven't already watched the
segment. it is worthwhile to do so.
Since then, several articles have been written that have alternately supported and attacked this letter. I have attached the
link to two of these articles:
-Investment Funds Stir Controversy Over Recruiting by For-Profit Colleges,· Propublica, July 9, 2010.
http://www.propublica.org/article/investment-funds-stir-controversy-over-recruiting-by-for-profit-colleges
MAttack on College Recruiting Drafted by Investor's Researcher, MBloomberg, July 13, 2010.
http://www.busi nessweek.cem/news/20 10-07- I3/attack-en-coIlege-recru i t i fig-drafled -by-i fi vester-s-
researcher.html
A third article is attached (third icon). It is from the July 14, 2010 edition of The Chronicle of Higher Education, and is
entitled -For-Profit Colleges, Under Fire From Regulators, Face a New Foe: Short-Sellers.·
The reason for the controversy is that apparently the woman who visited the shelters, substantially drafted the letter, and
coordinated the effort to have it signed, Johnette Early, worked for a financial firm that paid her to investigage for-profit
schools. I say "apparently" because the articles each have slightly different accounts, and some of what is recorded as
"facts" differs from what Ms. Burch told me. According to one of the articles, two of the signatories now claim thai they did
not know of the author's connections to a financial firm and say that they would have never signed the letter had they
known of Ms. Early's affiliations. Others quoted say she made her connections known from the beginning, and Ms. Burch
is among those who are thus quoted. Ms. Burch further stated that her organization would never have signed a letter
unless they agreed with its contents. "I have no evidence that there is any wrongdoing here," Burch said. "Why would I
not want to see another avenue to have our clients' rights protected?"
Ms. Early herself explained in one of the article that NI have never felt any pressure to be for or against for-profit
education. My client has provided me with complete freedom to pursue my own research initiatives and reach my own
conclusions. N She said that she has been studying recruitment of the homeless by for-prifit colleges for about a year. She
said she typically worked with shelter staffers who forwarded the letter to their superiors for a decision about whether to
sign, and that it was her regular practice to disclose her position 10 shelter workers or managers as an independent
researcher for an investment firm.
Of course, the reaction of for-profit institutions has not been favorable, and they are already riled up about the testimony
of Steven Eisman before the Senate Committee hearings on June 24. Mr. Eisman is portfolio manager of an investment
firm known to short-sale stocks in for-profit education companies. Mr. Eisman testified that the for-profit education
industry is as "socially destructive as the subprime mortgage industry.N He made his affiliations known before and during
the hearings.
Keep in mind that persons like Mr. Eisman often have particular insights into an industry that are otherwise unavailable to
those in government who regulate that industry. Mr. Eisman, for example, is extremely intelligent regarding the stock
market, and his access to enormous wealth allows him to spend even more money to get even smarter through his
research. This applies as well to some others who are in finance and are providing information regarding for-profit
schools. In short, they have the resources to expose fraud, and America has a rich history of benefitting from
them. The attached article entitled, -Ray Dirks and the Equity Funding Scandal," which I edited to make shorter, will
provide you with an interesting example of how someone with a financial interest served to expose insurance fraud
despite certain obstacles imposed by the SEC and ridicule from outsiders regarding his purported self-interest.
The bottomline is that it appears that the issue raised by this letter and another that was sent to the Secretary in May
by an Ohio homeless shelter director (also attached (fourth icon)), is legitimate, Wall Street mogul-involvement,
notwithstanding. FSA of course needs to keep an open mind in its investigation of the allegations, and, as always, OGC
will be happy to assist you in planning and executing your reviews.
I look forward to talking with you further about this during the conference call on Wednesday.
Jennifer
2
Kvaal, James
From: Kvaal, James
Sent: Monday, July 26.20108:06 PM
To: Hamilton, Justin
Cc: Bergeron, David
Subject: RE: Brent Staples
Attachments: Questions Related to Gainful Employmentdoc
Most of them are attached. Two are in process. I am not answering this one: Profit margins versus defense contractors
From: Hamilton, Justin

Sent: Monday, July 26, 2010 6:24 PM
To: Kvaal, James
Subject: Brent Staples
Want to make sure you're responding to him. He can be a little demanding and expects very fast turn around times.
1
Questions Related to Gainful Employment
Thefive largest/or-profit compallies receive 77% o/their revellue/rom studellt aid. What is
typical/or public alld IIoll-profit illstitutiolls?
The source of the 77% figure is the corporations' annual reports, which obviously are not
available for all universities. However, other types of institutions are far less dependent on
tuition and student aid.
• In 2006 07, public two- and four-year institutions had total revenue of$269 billion, of which
M
$45 billion came from tuition and fees, including student aid, and $36 billion came from
federal grants, contacts, and other sources.
• Non-profit two- and four-year institutions had total revenue of$182 billion, including $47
billion in tuition and fees and $20 billion in other federal funds.
• Much of the tuition revenue came from sources other than federal student aid. Total student
aid in 2006 07 included $17 billion in scholarships and $49 billion in loans; these resources
M
supported living expenses as well as tuition.
Ullder the proposed regulatioll. what is required 0/ illstitutioll ill each category?
Fully eligible programs:

• Have (I) at least 45% of their former students paying down the principal on their federal
loans and (2) a debt-to-earnings ratio of less than 20% of discretionary income or 8% of total
lllcome.
• No requirements.
Fully eligible with disclosure:

• Have (I) at least 45% of their former students paying down the principal on their federal
loans or (2) a debt-to-earnings ratio of less than 20% of discretionary income or 8% of total
income, but not both.
• Must disclose their repayment rates and debt-to-income ratios.
Restricted:
• Described by none of the other categories. In other words:
o Repayment rate below 45%, and
o Debt-to-eamings ratio above 20% of discretionary income and 8% of total income,
and
o Does not fall into ineligible category.
• Cannot grow beyond average enrollment in the past three years. Must demonstrate employer
support for the program. Must disclose their repayment rates and debt-to-earnings ratios.
Ineligible:
• Have (1) less than 35% of their former students paying down the principal on their federal
loans and (2) a debt-to-earnings ratio above 30% of discretionary income and 12% of total
Income.
• An ineligible program may not offer federal student aid to new students. It can continue to
offer aid to current students during the academic year in which it is notified, plus one
additional year, provided that it discloses repayment rates and debt-to-earnings ratios.
• In 2012-13, no more than 5% of programs (weighted by enrollment) will lose eligibility; the
remainder will be treated as restricted.
Does II,e Deparlment believe Ihal Eisma" 's eslimale ofdrop-oul rates are correcl?
These figures are based primarily on school reports, not Department data. We haven't had the
opportunity to scrutinize them. The Department's graduation rates by institution are available at:
http; IInces. ed.govI co IIegcnavigatorl
How is Ihe 18 defaulls per JOO compJelersfigure calculated?
Here is a more precise formulation: For every 100 students who graduated [rom a public or
private institution in 2007-08, there were four former students of those institutions who entered
repayment in 2008 and defaulted the next year (See Chan B). For every 100 students who
earned a degree or certificate from a for-profit institution in 2007-8. there were 18 who defaulted
the very next year.
Ratio of Borrower Defaults to Degrees and Certificates by Sector

(all former students)
---
20.0%
15.0%
_ _ It" , /
- ... ·Public
10.0% --
~ Private not-for-profit
....... - Private for-profit
5.0%
t----t- ---.----.----:-
• •
0.0%
2004 2005 2006 2007 2008
Page Iwo says: for profil illSliluliolls have grow" 10 1.8 mil/ioll. Iripling 2000 - 2008. In your
IMPACT box: you say: subjecllo rule, 53,000 programs and 3.2 ",illion sludellls. Who are Ihe
3.2 ",iI.?
The proposed rule applies to occupational and vocational programs at public and non-profit
institutions, as well as nearly all students at for-profit institutions. The enrollment at for-profit
institutions is 1.8 million; the total enrollment in programs affected by the proposed regulation is
3.2 million.
How did the Bush Administratioll loosen regulatioll offor-profit schools?
More significant than any action was their inaction in the face of a rapidly changing landscape,
similar to their failure to respond to changes in mortgages, derivatives, and other markets.
A 1992 amendment to the Higher Education Act of 1965 barred financial aid-eligible colleges
and universities from paying commissions, bonuses or any other incentives to recruiters based in
any way on success in getting a student to enroll and apply for financial aid. In 2002, the
Department amended its regulations to add 12 "safe harbors," such as two salary adjustments per
year and profit-sharing plans. The Department is currently proposing to eliminate that safe
harbor.
The Higher Education Reconciliation Act of2005 repealed the SO/SO rule. The 50/50 rule
prohibited colleges receiving federal student aid from offering more than half their courses or
enrolling more than half their students through distance learning programs. Its repeal enabled the
rapid growth of institutions that are primarily or entirely distance education.
What are the most importallt rules governing the eligibility offor-profits?
This is forthcoming.
Does federal govemment require Notfor Profits and For Profits to report same information to
tlte DOE? If not, Itow are they different?
This is forthcoming.
Kvaal, James
From: Kvaal, James

Sent: Friday, June 25, 2010 8:51 AM
To: Yuan, Georgia
Subject: FW: call for gainful employment definition - letter sent to Secretary Duncan today
Attachments: Duncan_Orszag_GE_letter_6-24. pdf
fyi
From: lauren Asher [maUto:lAsher@ticas.Qrgl

Sent: Thursday, June 24, 2010 7:52 PM
To: Kanter, Martha; Kvaal, James; Shireman, Bob; Hamilton, Justin
Cc: Manheimer, Ann; Arsenault, Leigh; Pauline Abernathy
Subject: call for gainful employment definition - letter sent to secretary Duncan today
I wanted to Jet you know that the attached letter was sent today to Secretary Duncan and OMS Director Orszag (text is
pasted below as well). A broad coalition representing students. higher education, consumers and civil rights are urging the
Department to issue meaningful regulations on the definition of "gainful employmenr in time for them to go into effect next
year.
Since we sent this letter earlier today, the New York Community College Association of Presidents and AFL-CIO have
also signed on. In the next day or two we'll send an updated version with these and any other additions. Please let
Pauline or me know if you have any questions about the letter or coalition, and thanks, as always, for your work on behalf
of America's students and their families.
Lauren
June 24, 2010
The Honorable Arne Duncan

Secretary of Education
U.S. Department of Education
400 Maryland Avenue, SW
Washington, DC 20202
The Honorable Peter R. Orszag

DireclOr
Office of Management and Budget
725 17th Street, NW
Washington, DC 20503
1
Re: eed for career education "gainful employment" rule to go into effect in 20 II
Dear Secretary Duncan and Director Orszag:
Thank you for proposing important new regulations aimed at ensuring that taxpayer dollars are spent
appropriately and effectively on federal student aid. However, as organizations representing students, higher
education, consumers and civil rights, we write to urge the Obama Administration to issue draft regulations
defining "gainful employment" in time to be finalized by November I and go into effect in July 20 II, along
with rules on the other Title IV program integrity issues addressed in the June 18, 20 I0 Notice of Proposed
Rulemaking.
Each year, students borrow and taxpayers spend billions of dollars to subsidize attendance at programs required
by law to "prepare students for gainful employment in a recognized occupation." Yet current regulations
include no definition of «gainful employment." It is critical that regulations with a strong definition of gainful
employment go into effect next year. To be effective, the definition must be measurable, enforceable, not overly
burdensome to schools, inclusive of all debt incurred at affiliated schools, based on accurate, consistent and
independently verified data, and avoid loopholes.
In the next year alone, taxpayers will likely underwrite more than $30 billion in loans to students attending
programs that are required to prepare them for gainful employment. Students and taxpayers shouldn't have to
wait yet another year to be protected from career education programs that over-charge and under-deliver. Your
prompt action will demonstrate the Obama Administration's commitment to invest in education, cut wasteful
spending and strengthen our economy.
Sincerely,
American Association of Collegiate Registrars and Admissions Officers

American Association of University Women
American Federation of Teachers
American Federation of Slate, County, and Municipal Employees InternationaJ
American Federation of State, County, and Municipal Employees Local 3299
Campaign for America's Future
Campaign for College Affordability
Campus Progress Action
Community College League of California
Consumer Action
Crittenton Women's Union
Demos: A Network for Ideas and Action
Florida Council of Presidents
Florida Slate College at Jacksonville
The Greenlining Institute
The Institute for College Access & Success and its Project on Student Debt
National Consumer Law Center (on behalf of its low-income clients)
Neighborhood Economic Development Advocacy Project (NEDAP)
Public Advocates Inc.
Rainbow PUSH Coalition
U.S. PIRG
United States Student Association
Young Invincibles
2
(Please note Our new phOlle number 1J1IC19ddress'l

Lauren Asher
President
The Institute for College Access & Success
405 14th St., 11 th Floor
Oakland, CA 94612
(510) 318-7900, x304
ljasher@ticas.org
www.ticas.org
www.projectonstudentdebl.org
www.college-insight.org

CREW v. U.S. Department of Education: Regarding For-Profit Education: 2/17/11 - Document 8-1

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Case 1:10-cv-01712-RMC Document 8-1 Filed 02/17/11 Page 1 of 36

From: Swarthout, Luke (HELP Committee) (Luke_Swarthout@help.senate.govj

From: Gustafson, Grant (Harkin) fmailto:Grant Gustafson@harkin.senate.oovl

FOR IMMEDIATE RELEASE CONTACT: Kate Cyrul / Bergen Kenny

Statement of Chairman Tom Harkin (D-IA) on New Education Department

HELP Committee Website I News I Hearings I About Chairman Harkin

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From: Finley, Steve

From: Gomez, Gabriella

For-Profit Education Faces New Regulations

TIME's Elizabeth Dias has this report:

From: Kvaal, James

See you soon, I am sure,

From: Kvaal, James

From: Kvaal, James

Posner has an interesting approach to cost benefit

From: James Kvaal <jkvaal@gmail.com>

The Controversy over For-Profit Collc::.:.cs-Posncr

Posted at 09:56 AM I Permalillk I Comments (1)

Rcblog (0) II Digg This I Save to del.icio.us I Tweel This!

Default Rates and For-Profit Colleces- Becker

Posted at 09:16 AM I Pcrmalink I Commenls (4)

From: Kvaal, James

The Controversy over For-Profit Colleges-Posner

Posted at e9:56 AM I Permalink I Comments (7)

Default Rates and For-Profit Colleges- Becker

Posted at 09:16 AM I Permalink I Comments (4)

From: Kvaal, James

Thanks, hadn't seen this

Sent using BlackBerry

From: Kantrowitz, Mark <Mark.Kantrowitz@Monster.com>

From: Andrew C. Steinerman <andrew.steinerman@jpmresearchmail.com>

TO OUR FELLOW BUSINESS & EDUCATION SERVICES OBSERVERS,

J.PMorgan North America Equity Research

Education Services: Is the Senate's Agenda All about Gainful

If you 00 lon&cr wi~h 10 receIve these e-mailslheo.lidh.Nhlllnw\...c.ib.;- \\ ,\ w.Jnor2an lUll rkets.coru

From: Kvaal, James

For-profit colleges and the threat of a new bubble

July 13, 2010

Copyright © 20 I0, lllC Los Angeles Times

K;Hc C) rill I Commulli(alions DircClClr I ScnatoJrTolll Harkin (0-11\)

From: Kvaal, James

From: Bergeron, David

From: Eisman, Steven [mailto:seisman@fppartners.com]

From: Kvaal, James

From: Nassirian, Barmak fmailto:barmak@aacrao.Qrgl

Signall Hillll Business Services· Education Services

July 16, 2010 Regulatory Update •• What's Next

• Near-term beneficiaries: APOL, BPI, DV, EDMC, LOPE, STRA.

Please see important disclosure information on pages 2 - 3 of this report.

Signal Hill uses a three-tiered rating system defined as follows:

Ohitrlbutlon of RiltingsllB Services

From: Kvaat, James

This is not aU accurate information

Sent using BtackBerry

From: Nassirian, Barmak <barmak@aacrao.org>

Thank you, this is helpful information

From: Woodward, Jennifer

From: Woodward, Jennifer

Homeless High School Dropouts lured by For-Profit Colleges

From: Hamilton, Justin

Questions Related to Gainful Employment

supported living expenses as well as tuition.

Fully eligible programs: