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Corinthian Miss Drags on School Stocks

Stocks in this article: COCO DV APOL STRA WPO

Editor's note: This article has been corrected to reflect that the weighted average rate for the Washington Post's Kaplan is 28%.

SANTA ANA, Calif. ( TheStreet) -- Shares of Corinthian Colleges (COCO - Get Report) tumbled sharply Friday, dragging sector peers DeVry (DV - Get Report) and Strayer Education (STRA - Get Report) down with it, as fears mounted the for-profit post-secondary education companies may become ineligible for federal aid under newly proposed legislation.

Corinthian Colleges also forecast earnings guidance well below Wall Street's expectations.

The school operator's shares plummeted 15.6% in morning trading Friday at nearly triple their average volume, dragging the rest of the sector along with it. Shares of DeVry lost 5.8%, Apollo Group (APOL - Get Report) 2.1%, Strayer Education 2.4% and Kaplan-operator Washington Post (WPO) 1.2%.

A number of for-profit colleges saw share prices tumble earlier this week on concerns about tighter regulations for student loans. Worries were amplified after data showed nearly two-thirds of for-profit colleges' students were not repaying their loans.

Corinthian averaged repayment rates in the low 20s last year, meaning it could lose its eligibility for federal aid for student loans. The company said it would limit enrollment of new students more likely to default on their loans at some of its colleges, but high-risk students accounted for almost 15% of its total student population in the recent quarter.

Corinthian said it expects first-quarter pro-forma new student growth of less than 2%.

Repayment rates at for-profit schools were just 36% in fiscal 2009, according to research from the Institute for College Access and Success, a student-advocacy group. At private nonprofit schools the repayment rate was 56%, and at state colleges and universities the rate was 54%.

Under the Department of Education's proposed "gainful employment" rule, federal aid would be cut for schools where less than 45% of students are able to repay their loans. Additionally, schools would only be eligible for federal aid if student debt remains below 8% of total income or below 20% of discretionary income.

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