The U.S. Department of Education on Friday will propose a measure to penalize for-profit career colleges for graduating students with high debt-to-income ratios.

The proposal, which will undergo a 45-day comment period that is expected to include opposition from industry lobbyists, is an effort to ensure schools are training students for gainful employment in a recognized occupation. It comes at a time when for-profits are under new scrutiny as they capture a growing share of federal student aid dollars.

"Some proprietary schools have profited and prospered but their students haven't," Secretary of Education Arne Duncan said. "While career colleges play a vital role in training our work force to be globally competitive, some of them are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use."

Under the proposal, training programs would be judged on whether former students are repaying the principal on federal loans, and the relationship between total student loan debt and average earnings upon graduation. The recommendation sets up three tiers of eligibility, with those in the middle tier facing enrollment restrictions and debt-to-income disclosure requirements, and the weakest tier losing access to federal student aid for new students.

According to the Education Department, if career colleges made no changes, 5% of all programs would no longer be eligible for federal aid and 55% would be required to warn students about high debt-to-income ratios. Many publicly traded schools derive close to 90% of their revenue from federal aid.

The recommendation, known as a Notice of Proposed Rulemaking, has been a long time coming, with federal officials and industry representatives meeting for a year to discuss new higher education regulations. The government put forth its first proposal in late January and the stocks of for-profit colleges have soared and swooned since, propelled by rumors of how programs could gain exemption from the regulation.

The Education Department said that this version is "thoughtful," with income calculations based on actual graduate earnings rather than Bureau of Labor Statistics figures. To give time for program improvement, the agency proposed that the 2012-2013 academic year be the earliest that programs could be found ineligible for federal aid.

The Education Department had released 13 other proposals in June but said it needed more time for this one.

"Some key issues around gainful employment are complicated and we want to get it right," Duncan said at the time.

The earlier recommendations included proposals on incentive compensation for student recruiters, a clearer definition of a credit hour and a new metrics by which students must show academic progress in order to continue receiving federal aid.

The colleges' programs include training for students to work in the culinary arts, as medical assistants, and in criminal justice.

-By Melissa Korn, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com
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