Education Management Subpoenaed

PITTSBURGH ( TheStreet) -- Education Management ( EDMC) said Tuesday its subsidiary was subpoenaed for documents and details about its business practices.

Education Management, a for-profit postsecondary education provider, said its Stauzenberger College Education, which owns Brown Mackie College locations in Louisville and Hopkinsville, Ky., as well as another location in Ohio, received the subpoena from the Office of Consumer Protection of the Attorney General of the Commonwealth of Kentucky.

>>For-Profit Education Stocks: Winners & Losers of 2010

The subpoena requested documents and details for the subsidiary's operations between Jan. 1, 2008 through the end of the 2010 calendar year.

Education Management's Brown Mackie College in Fort Mitchell, Ky. is not owned by Strauzenberger, the company said in a filing with the Securities and Exchange Commission.

Education Management shares bid 0.8% lower in morning trading Tuesday.

The filing said the Kentucky Attorney General's previously announced investigation of for-profit colleges' business practices included issuing subpoenas to six other schools in Kentucky.

Education Management said it intends to cooperate with the investigation.


Stocks in the education sector had a rough 2010. Regulatory uncertainty weighed on the sector, criticism about colleges' graduation rates and student loan repayment rates abounded, future enrollment figures were called into question, schools were accused of failing to adequately prepare students for profitable careers yet leave them saddled with heavy debt and federally proposed restrictions on the industry's business operations cast a shadow no bull market could fully offset.

Critics argued that for-profit schools like Apollo Group ( APOL), Everest colleges parent Corinthian Colleges ( COCO), Strayer Education ( STRA) and a number of their peers saddle their students with debt yet leave them unequipped for the job market and a means with which to repay the hefty loans.

Earlier this year the Obama administration proposed regulations that 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.

>>School Stocks Brace for New Regulations

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. Schools must also comply with what is called the 90:10 rule in fiscal 2012. The rule stipulates that no more than 90% of a for-profit education provider's revenue may be generated from Department of Education's federal student aid program.

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.

Federal aid to for-profit education providers came to nearly $150 billion in the last academic year.

The gainful employment rule 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 would go into effect in the middle of next year.

-- Written by Miriam Marcus Reimer in New York.

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

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