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Integrity of ED’s for-profit college rulemaking under scrutiny

Sen. Charles Grassley, R-Iowa, 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.

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.

An ED spokesman said officials there have never shared private information with traders.

“We’re very proud of the integrity of our process and feel we produced a regulation that gives students and taxpayers the protection they deserve,” agency spokesman Justin Hamilton told the New York Times. “We talked to as many people as possible when developing the regulations, including several officials from publicly traded for-profit colleges.” (ED failed to respond to an eSchool News reporter’s questions before press time.)

There has been no evidence that Eisman traded based on any inside information, but Eisman was one of several investors who lobbied for tougher restrictions on for-profit colleges.

POGO recently raised suspicions about Wall Street’s influence over the department after obtaining several eMail exchanges between agency officials and hedge fund traders that discussed the looming for-profit college regulations.

In his letter to Duncan, Grassley cited an eMail message from Eisman to an ED official that allegedly discussed education stocks. “I know you cannot respond,” the message reportedly said, “But just fyi. Education stocks are running [going up] because people are hearing [ED] is backing down on gainful employment.”

Grassley acknowledged that government officials can’t prevent such contact, but he said it was highly concerning that the eMail message was forwarded to other high-level ED employees. He also expressed surprise that Eisman was on such familiar terms with the official.

“Certain investors contact government agencies to try to gain any advantage they can over other investors,” Grassley said in a statement. “Since that’s inevitable, the question is how federal employees respond. Do federal employees give out information that short sellers can use to make money? Are the employees influenced in their rule-making by investors who don’t disclose their financial interests?”

He added, “The Department of Education should account for how it handled investor contacts leading up to the regulations affecting for-profit colleges and going forward. An accounting is necessary to establish confidence in the integrity of government management.”

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