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August 6th, 2011
Integrity of ED’s for-profit college rulemaking under scrutiny
Did Wall Street traders influence the development of new rules governing for-profit colleges, or benefit from inside information about these rules before it became public? Those are questions at the center of an investigation by the Education Department’s (ED’s) inspector general and a separate inquiry by Sen. Charles Grassley, R-Iowa.
The investigations were prompted by the release of several eMail messages exchanged between department employees and Wall Street traders. Government watchdog groups obtained the messages under Freedom of Information Act requests.
The probes could cast a dark cloud over ED’s efforts to crack down on predatory student recruiting practices by for-profit colleges, calling into question the department’s true motives. Aside from whether education officials acted appropriately, the flap also raises larger questions about “the integrity of government decision-making in the face of relentless Wall Street scrutiny,” the Project on Government Oversight (POGO) says.
For-profit education reportedly is a $35 billion industry, and ED’s rulemaking has had a significant effect on the stock prices of publicly traded providers.
Shares of for-profit college providers tumbled in value last fall as ED officials floated strict new rules aimed at cutting down the default rates on federal student loans made to for-profit college customers. Stock prices rose, however, when ED issued final “gainful employment” rules on June 1 that were less stringent than originally proposed.
As the new rules were being drafted, hedge fund traders—including noted short seller Steve Eisman—placed major bets against the for-profit college industry, which piqued Grassley’s interest. The senator wrote a letter to Education Secretary Arne Duncan in late July, questioning the lack of set rules regarding the department’s contact with Wall Street.