Let’s start off with my favorite quote on the matter, from Mark Kantrowitz, the publisher of FinAid.org, who says that the new legislation “appears to represent a reasonable compromise that separates the wheat from the chaff without discarding too much wheat.” What’s this mean for for-profit schools? It means that the degree mills tarnishing the industry’s good record will be getting a bit of comeuppance.

Arne Duncan Gives For-Profit Colleges a Big Thumbs-Up

For-profit schools in general–and online education specifically–get a bad rap. There’s something about not having a traditional brick-and-mortar campus that makes people think of the degree mills that promised a doctorate in a weekend for three easy payments. Those days are gone, thank goodness, but not all for-profit institutions are providing the quality of education they should be. As is usually the case, a few bad apples are making everybody else look bad.

Secreary of Education Arne Duncan understands this, fortunately. In a briefing today, he went so far as to point out that “Some proprietary schools have profited and prospered but their students haven’t, and this is a disservice to students and to taxpayers. And it undermines the valuable work, the extraordinarily important work, being done by the for-profit industry as a whole.” If that isn’t a vote of confidence for the industry as whole, I don’t know what is.

The Market Agrees: Stocks Go Up for For-Profit Schools

When they heard about this proposed legislation on Wall Street, stocks started climbing. DeVry Inc.’s stock jumped a full 13 percent, making it one of the biggest gainers for the day. Other for-profit schools saw mixed reactions today, but as it becomes clear just which schools will be affected by the new rules, things are sure to sort themselves out.

It’s estimated that if no changes are made, only 5 percent of schools would be losing their federal funding 2012. That’s a good amount of time to get things up to par and not very many schools that have to do it. During the press briefing, Duncan commented, “We want to hit the ones at the bottom, those that simply aren’t working for students. The 5 percent would frankly be the bottom of the barrel.”

What Are the New Rules?

Under the proposal, schools would be grouped into three groups, largely based on former students’ federal student loan debt and income:

• The Good (Qualify for federal aid): A minimum of 45 percent of former students are paying down the principal on their federal loans. Graduates have at most a 20 percent debt-to-earnings ratio for discretionary income and 8 percent ratio for total income.
• The Bad (Subject to enrollment limits and required to warn about high debt levels): Between 35 and 45 percent of former students are paying down their principals, and graduates have a debt-to-earnings ratios of between 20 and 30 percent, and 8 and 12 percent, for discretionary and total incomes respectively.
• The Ugly (Do not qualify for federal aid): Less than 35 percent of students are paying down the principal on their loans. And their debt-to-earnings ratio is enough to make anyone’s life uncomfortable at over 30 percent for discretionary income and 12 percent for total income.

The idea is to make the schools responsible for the claims they make about preparing graduates for careers. And it seems perfectly reasonable to me. This can only help the image of for-profit education, which will be a boon for online education.