Obama's Higher Ed Plans a Mixed Bag

By Battle Road Research, an equity research firm.

President Obama laid out several initiatives on Jan. 27 that he hoped would advance the cause for higher education in America. We note that two of the three mentioned are positive for the for-profit education sector. However, we view the most important initiative as a net negative for the sector.

The first was a proposed $10,000 tax credit for four years of college education. This should be viewed positively, as the tax credit will increase incremental demand in the for-profit sector. Schools which have a focus on bachelor's degrees would benefit more as a result. We would especially like to single out companies such as Strayer Education(STRA) and DeVry(DV) as beneficiaries.

The second proposal was an increase in Pell Grants. These grants are targeted towards lower income students. Currently, Pell Grants provide a student with $5,350 per year in tuition assistance. Although it is not yet known how much of an increase will be proposed, this should also be viewed positively for the schools with a higher mix of lower-income students. Companies that would benefit from this proposal include ITT Education Services(ESI) and Corinthian Colleges(COCO).

The third proposal was a 10% cap on student debt repayments. Under this proposal, a student would be required to allocate a maximum of 10% of their post-graduate income toward tuition-debt repayments.

We view this as a negative for the sector. Longer-term programs such as bachelor's and graduate programs will be more negatively affected, because students who enroll in those programs tend to graduate with higher debt levels.