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School Stocks Brace For New Regulations

(Updated with analyst commentary.)
WASHINGTON ( TheStreet) -- The Obama administration's newly proposed regulations, aimed to protect students at for-profit colleges, are adding pressure to for-profit education stocks. And with mid-term elections coming to a close Tuesday, focus on the postsecondary schools will be even sharper.

"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.

The new rules 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.

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

"Although the Department added some positive changes to the package, the requirement that online providers comply with the laws of the states in which their students reside is likely to concern current online providers and make it difficult for schools not already providing online education from doing so," said Dennis Cariello, former Deputy General Counsel for Postsecondary Education & Regulatory Services and current Chair of Regulatory Compliance for the Education Group at law firm DLA Piper.

"While more time is needed to assess the impact of this rule, the provision may prevent the proliferation of online programs just as they are gaining wider acceptance."

"This poses a greater problem for new entrants" into the for-profit education sector, Cariello cautioned, such as those looking to build online institutions.

It is also likely to promote consolidation within the sector, he said, because it will be easier for larger sector players to take on the cost of regulatory compliance.

"The full extent remains to be seen."

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