Education Stocks in Freefall

NEW YORK (TheStreet) -- For-profit education companies hit 52-week lows on Friday, and that freefall is continuing on Monday. The education stocks are among the market's most volatile, and on Monday are being hit by a double whammy. An analysis of Department of Education data on for-profit education company student loan repayment rates showed that many aren't making the grade.

The for-profit education companies have traded wildly this year ahead of changes in Department of Education regulation intended to make student loan availability more stringent. Yet just a few weeks back, companies in the sector were breathing a sigh of relief and thinking that the Department of Education changes would not be as draconian as feared.

>>Education Stocks Pop (Again)

That's not the case any longer.

The for-profit education stocks are notorious favorites of short traders, as the highly-regulated nature of the stocks, and the regulatory uncertainty surrounding the stocks, makes for volatile investor sentiment.

Renewed pressure hit the sector on Aug. 3 when the Governmental Accounting Office (GAO) released the details of an undercover investigation showing questionable recruiting practices from the for-profit sector. Senator Tom Harkin (D-Iowa) has demanded more hearings this year and great scrutiny of the for-profit education industry after the GAO undercover investigation. Department of Education Secretary Arne Duncan also sent a letter to Harkin last week saying that the department would be stepping up its policing of the for-profit schools and adding personnel to deal with "bad actors" in the sector.

The immediate issue for the stocks, in particular Corinthian Colleges(COCO), Strayer Education (STRA) and the Washington Post(WPO), which owns Kaplan, was a gainful employment rate that missed by a wide mark. The new Department of Education standard for allowing federal student loan financing for for-profit schools is based on a 45% gainful employment rate being the threshold for full eligibility.

For-profit colleges receive as much as 90% of revenue from student loans.