By Melissa Korn Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- The Department of Education's effort to overhaul rules governing student recruitment and debt repayment could result in a fundamental shift in higher education, according to Career Education Corp. (CECO) Chief Executive and President Gary E. McCullough. McCullough said the department's proposals to eliminate restrictions on how recruiters are paid and to cap student loans at 8% of their gross income "would change the whole landscape." The CEO made the comments Friday to a group of editors and reporters from The Wall Street Journal and Dow Jones Newswires. The Department introduced the proposals late last month during the final session of industry talks known as negotiated rulemaking, leaving many in higher education and on Wall Street concerned about how--or even if--schools can implement the rules. The Department will begin a public comment period later this spring or summer and will release final rules by Nov. 1. No changes will take effect until July 2011. "There's a pall that hangs over the educational space right now," McCullough said. Shares of Career Education had been nearly flat in the month since the proposals were introduced, though they jumped this week after the company reported better-than-expected fourth-quarter results. The government in 1992 barred recruiters from being paid solely on their enrollment success, and it later created 12 "safe harbors" relaxing the ban. Career Education compensates its admissions counsellors based on milestones including retention and graduation, but it--like many other for-profit colleges--has faced lawsuits over the years alleging over-aggressive recruiting. McCullough said he can't figure out why the Department of Education wants to get rid of the existing guidelines. If the current rules are eliminated, McCullough said, the company would have to get permission for every minor move. He said they'd call the Department of Education, asking, "Is it OK to do this? Can we still do that?" Regarding the proposal to limit graduates' debt to 8% of their gross income, McCullough said the rules are still "really unclear," including whether they would only apply to for-profit colleges or all universities, as well as how schools were expected to keep track of their students' debt loads, because some students take on loans independently. The proposal is billed by many as a discussion of "gainful employment" and fundamentally questions how well schools prepare their students to get jobs that can cover their educational debt. McCullough said that if the proposal is implemented, Career Education may have to lower prices so as to limit the debt load its students take on, or even cut some programs in which students graduate into low-paying jobs. The company currently offers 1,300 programs across all its schools. Despite these concerns, Career Education hasn't seen any slowdown in demand and plans to continue growing its health-care, business, information technology and education programs. The company told investors and analysts Thursday that it would look to add six to eight new health-care campuses in 2010. However, less then a year after acquiring the rights to Le Cordon Bleu cooking schools in North America for $135 million, the company said it doesn't see huge growth potential in its culinary unit. Revenue there grew just 3% in the most recent quarter. McCullough noted Friday that the company already holds a 44% share of the culinary market. "We are not pessimistic," he said. "It's just not the largest growth area." Boosted by drivers such as health care and business, Career Education expects to reach $3 billion in revenue by 2013, up from $1.8 billion in 2009. Career Education's student population rose 21%, year over year, in the fourth quarter to 116,800, the seventh consecutive quarter of accelerated growth. Thursday, the company said its expansion will moderate somewhat beginning this year. It expects student population and revenue both to increase at more than 15% in 2010 but to slow to between 8% and 10% in 2011 through 2014. The company sees operating income increasing at more than 40% this year but says it will slow to a more sustainable 15% to 20% in 2011 to 2014. -By Melissa Korn, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com
