NEW YORK ( TheStreet) -- The for-profit education sector was once again on the firing line this week facing accusations that schools fail to adequately prepare students for profitable careers while leaving them saddled with heavy debt. In fact, most students don't even make it to graduation day.

It's not a new claim. For-profit schools' stocks traded sharply lower over the summer when the U.S. government proposed regulations that were seen as hurting the industry's booming earnings growth. The Obama administration argued that for-profit schools like Apollo Group ( APOL), Everest colleges parent Corinthian Colleges, Strayer Education ( STRA) and a number of their peers leave students unequipped for the job market and a means with which to repay their hefty loans.
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The Education Trust, a non-profit student advocacy organization, released a report Tuesday rehashing many of the statistics demonstrating the sector's rapid enrollment growth, booming profits, staggeringly low graduation rates and high loan default rates.

The report, titled Subprime Opportunity: The Unfulfilled Promise of For-Profit Colleges and Universities , likened the operations of for-profit schools to subprime lenders -- lenders largely held responsible for leading to the collapse of the housing market and ensuing Great Recession.

"As with the collapse of the subprime lending industry, the showdown between for-profit colleges and the government shows how the aspirations of the underserved, when combined with lax regulation, make the rich, richer and the poor, poorer," the report began. "For-profit colleges provide high-cost degree programs that have little chance of leading to high-paying careers, and saddle the most vulnerable students with heavy debt. Instead of providing a solid pathway to the middle class, they pave a path into the subbasement of the American economy."

"It's a heavily recycled report," said RBC Capital Markets analyst Robert C. Wetenhall, offering "nothing new to the whole thesis that's been out all summer."

Lauren Stephens, communications specialist at Education Trust, countered that the advocacy group was "not trying to keep on pace with media coverage but needed to examine" the for-profit education sector. She said the report was the tenth in a series of reports looking at college and university graduation rates, and that "it was just time for us to look at the for-profit industry."
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Stephens said the differentiating factor in Tuesday's report was underscoring scarily low graduation rates on the campus level, rather than just at the school brand level.

"I don't know that anyone else has put that out there," she said, "and it's a step further in making the connection that people have been making."

Education Trust research found that "the ten for-profit schools with the largest entering classes of first-time, full-time, bachelor's degree-seeking students graduate only one in five students, although success ranges widely across systems."

Six-year graduation rates at Apollo's University of Phoenix, the largest for-profit college in the U.S., are just 9%, the report said. DeVry's six-year graduation rate is 31%. ITT Technical Institute ( ESI) fared better with a 66% six-year grad rate.

Broken down by campus, University of Phoenix's online campus, its largest by enrollment with more than 175,000 students, has the lowest six-year grad rate at just 5%. Students are most successful at its New Mexico campus, where 33% of students can expect to graduate.

The Institute for College Access and Success, a separate student-advocacy group, said in August that its research showed nearly two-thirds of for-profit colleges' students were not repaying their loans .

Repayment rates at for-profit schools were just 36% in fiscal 2009. At private nonprofit schools the repayment rate was 56% and at state colleges and universities the rate was 54%.

Corinthian and Strayer averaged repayment rates in the low 20s last year. DeVry ( DV) averaged repayment rates of 40% at its universities last year. Strayer Education, like Corinthian's Everest colleges, averaged in the low 20s. The Washington Post's ( WPO) Kaplan came in slightly higher at weighted average of 28%, the company said.
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At those levels, Strayer, Kaplan and Everest colleges would be ineligible for federal aid if the proposed legislation is enacted.

The Department of Education's proposed regulations , aimed to protect students at for-profit colleges, are adding pressure to for-profit education stocks.

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These new rules will help ensure that students are getting from schools what they pay for: solid preparation for a good job," Secretary of Education Arne Duncan said.

Proposed regulations cover everything from restricting incentive-based recruiting practices, the need for new job-training courses and taking action against schools which fail to advertise honestly to requiring schools to notify students of graduation and job placement rates. Institutions will also be required to limit student enrollment to those who have high school diplomas or can readily demonstrate their readiness for university-level education.

Arguably the most controversial of the proposed regulations, known as the "gainful employment" rule, expected to be issued early in 2011, would cut federal aid to schools where less than 45% of students are able to repay their loans.

It will consist of a two-part measurement to determine a program's eligibility to receive federal student aid. The measurement is based on loan repayment rates and debt-to-income ratios, and requires a minimum of four years of repayment history and three years of employment history.

The rules will go into effect in the middle of next year, in time for the fall 2011 semester.

-- Written by Miriam Marcus Reimer in New York.

>To contact the writer of this article, click here: Miriam Reimer.

>To follow the writer on Twitter, go to http://twitter.com/miriamsmarket.

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