Under the rule, vocational programs whose students have the highest debt burdens and lowest loan-repayment rates will become ineligible to receive federal student aid.
The changes, which give colleges more time and ways to meet the rule's benchmarks, are expected to significantly reduce the number of programs that would be penalized by the department.
Secretary of Education Arne Duncan said the extension was designed to give programs "every opportunity to reform themselves."
"This was not about gotcha," he told reporters in a conference call after the stock markets closed Wednesday. "This gives folks at the margins time to get their act together, but at the end of the day, does not let them off the hook."
But for-profit colleges continued to question the department's authority to issue the rule and accused the administration of imposing cost controls on colleges.
It's "basically a back-door way of price fixing," said Harris N. Miller, president of the Association of Private Sector Colleges and Universities.
Supporters of the original rule, meanwhile, were disappointed that it was softened.
"We think the department should have stuck to their guns," said David Halperin, director of the advocacy group Campus Progress, "but it's a step in the right direction."
A Fierce Fight
The gainful-employment rule has been the subject of intense lobbying since it was released in draft form almost 11 months ago. The Education Department received a record 90,000 comments on the proposed changes and held more than 100 meetings with the rule's opponents and supporters.
In theory, the rule is intended to protect students and taxpayers from programs that overpromise and underdeliver, leaving students saddled with debt and no job to show for it. Though for-profits educate only 12 percent of students, they receive roughly a quarter of all student aid and account for nearly half of the student loan dollars in default. Last month, the Education Department released data showing that default rates at for-profits had climbed to their highest level in more than a decade, with more than 15 percent of students defaulting in their first two years.
When the government is unable to collect on those loans, taxpayers are on the hook for the losses. Borrowers, meanwhile, face damaged credit histories and may have their wages and tax refunds seized by the government.
Supporters of the rule say it will eliminate ineffective and overpriced programs, shifting students to cheaper and more-successful programs.
But for-profit colleges counter that the rule punishes programs for serving a riskier demographic. They warn that the proposal would reduce college access for the thousands of minority and low-income students who attend their programs.
At times, the fight has turned nasty, with opponents of the rule accusing the department of colluding with short-sellers who stand to profit from a drop in for-profit stocks and supporters accusing critics of race-baiting and AstroTurfing—using form letters to create the appearance of student opposition.
Over the past three weeks, for-profit college leaders and their allies from the U.S. Chamber of Commerce have been mounting a last-ditch effort to quash the rule.
White House records show that after it received the rule in early May, its Office of Management and Budget—the agency that must sign off on all new regulations—held 16 different meetings with lobbyists and chief executives of some of the largest higher-education companies, including the heads of Career Education Corporation, ITT Educational Services, and Education Management Corporation, and Donald E. Graham, chairman of the Washington Post Company, which owns Kaplan Inc. and part of another for-profit chain, Corinthian Colleges. The budget-office officials also met once during that time period with a group of more than a dozen consumer activists, civil-rights leaders, and labor-group organizers who support the rule.
The final rule contains a number of revisions from the original, which could have cut off aid to hundreds of programs, and limited enrollment growth at many more.
Under the draft rule, programs whose graduates carried debt-to-earnings ratios of less than 20 percent of discretionary income or 8 percent of total income, or where at least 45 percent of former students (graduates and nongraduates) were paying down the principal on their loans, would have been fully eligible for aid.
Programs whose graduates carried debt-to-earnings ratios above 30 percent of discretionary income and 12 percent of total income, and where fewer than 35 percent of former students were paying down principal on their loans, would have been ineligible for aid.
Programs that fell somewhere in between would have faced restrictions on enrollment growth and been required to demonstrate that employers supported their program.
The final rule doesn't change the eligibility caps, but it does away with the restrictions for programs in the "yellow" zone. It also gives colleges time to comply with the rule, disqualifying only programs that fail the debt-to-income and repayment rate tests three times in a four-year period.
The department also made several other changes sought by for-profit colleges, such as including interest-only loans in the repayment calculation and giving colleges a choice of which data to use to calculate debt-to-income ratios. Those changes, and others, will make it easier for colleges to pass the department's two-part test.
Kent Jenkins, vice president for public affairs at Corinthian Colleges Inc., one of the higher-education companies with several programs that could have become ineligible under the proposed rule, praised the department for making revisions to initial standards that "were unrealistic" and for recognizing that "implementing a complex and far-reaching proposal takes time" and that schools need a "longer runway" to put effective programs in place.
The ultimate fate of the rule may rest with Congress, or even the courts. In February, close to 300 members of the U.S. House of Representatives, including 58 Democrats, voted to bar the department from using federal funds to enforce the rule. Though the Senate rejected the plan, some members of Congress have vowed to block the rule by other means.
Meanwhile, for-profit colleges, which have already sued the department over another recent rule making, are threatening to sue again. Mr. Miller, the president of the for-profit-college association, said his group would evaluate the rule before deciding whether to challenge it in court.
"We need to get our facts and figures together," said Mr. Miller, calling the gainful-employment regulation "the most serious issue that the sector has faced in 20 years."
But for-profit colleges aren't waiting for a judicial reprieve. In anticipation of the rule, some companies have already begun making changes to their programs to reduce student debt levels and improve loan-repayment rates. Career Education Corporation is shifting to shorter-term culinary programs, while lowering costs, and Corinthian has said it plans to slow enrollment in degree programs for criminal justice and medical insurance and billing.
Further announcements are likely, said Jeffrey M. Silber, an analyst with BMO Capital Markets. Even with the revisions in the rule, 18 percent of for-profit programs are expected to fail the debt-to-income and repayment-rate tests at least once, and five percent are expected to lose eligibility. Unless the colleges want to close those programs and forfeit their revenues, they'll have to find a way to comply with the rule, he said.