Schools Stocks Gain on Short-Cover Trades

Stocks of for-profit schools trade higher on speculation that Secretary of Education Arne Duncan could soon meet with House members to discuss proposed regulations on the sector.
By Miriam Reimer ,

PHOENIX (

TheStreet

) --

Apollo Group

(APOL)

shares traded sharply higher Friday morning on speculation that Secretary of Education Arne Duncan could soon meet with House members to discuss recently proposed regulations on the for-profit education sector.

Apollo added 4.5% to trade at $36.94 ahead of midday Friday.

Corinthian Colleges

(COCO)

,

ITT Educational Services

(ESI) - Get Report

,

Career Education Management

(CECO) - Get Report

and

DeVry

(DV)

all traded higher by several percentage points as well.

The group's upward movement Friday was likely a result of short-covering trades based on speculation that Duncan will soon meet with House members -- a discussion many in the industry hope will result in the watering down of newly proposed regulations on the sector.

>>School Stocks Brace for New Regulations

There are many industry watchers who argue that for-profit education sector players have not put their students first.

The industry was once again on the firing line last week on accusations that schools in the sector fail to adequately prepare students for profitable careers yet leave them saddled with heavy debt, and that most students don't even make it to graduation day.

>>School Stocks Slammed By Report

It was not a new claim. For-profit schools' stocks traded sharply lower over the summer when the U.S. government proposed regulations that were seen as hurting the industry's booming earnings growth. The Obama administration argued that for-profit schools like Apollo Group,

Everest colleges parent Corinthian,

Strayer Education

(STRA) - Get Report

and a number of their peers leave students unequipped for the job market and a means with which to repay their hefty loans.

>>School Stocks Fall on Enrollment Outlook

The Education Trust, a non-profit student advocacy organization, released a report last week rehashing many of the statistics demonstrating the sector's rapid enrollment growth, booming profits, staggeringly low graduation rates and high loan default rates.

The report, titled

Subprime Opportunity: The Unfulfilled Promise of For-Profit Colleges and Universities

, likened the operations of for-profit schools to subprime lenders -- lenders largely held responsible for leading to the collapse of the housing market and ensuing Great Recession.

"As with the collapse of the subprime lending industry, the showdown between for-profit colleges and the government shows how the aspirations of the underserved, when combined with lax regulation, make the rich, richer and the poor, poorer," the report began. "For-profit colleges provide high-cost degree programs that have little chance of leading to high-paying careers, and saddle the most vulnerable students with heavy debt. Instead of providing a solid pathway to the middle class, they pave a path into the subbasement of the American economy."

The Obama administration recently 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. 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.

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.

It 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, in time for the fall 2011 semester.

Six-year graduation rates at Apollo's University of Phoenix, the largest for-profit college in the U.S., are just 9%, the Education Trust report said. DeVry's six-year graduation rate is 31%. ITT Technical Institute fared better with a 66% six-year grad rate.

The Institute for College Access and Success, a separate student-advocacy group, said in August that its research showed

nearly two-thirds of for-profit colleges' students were not repaying their loans.

Repayment rates at for-profit schools were just 36% in fiscal 2009, compared with a 56% repayment rate at private nonprofit schools and 54% at state colleges and universities.

Corinthian and Strayer averaged repayment rates in the low 20s last year. DeVry averaged repayment rates of 40% at its universities last year. Strayer Education, like Corinthian's Everest colleges, averaged in the low 20s.

The Washington Post's

(WPO)

Kaplan came in slightly higher at weighted average of 28%, the company said.

At those levels, Strayer, Kaplan and Everest colleges would be ineligible for federal aid if the proposed legislation is enacted.

The

Department of Education's proposed regulations, aimed to protect students at for-profit colleges, are adding pressure to for-profit education stocks.

>>School Stocks Tumble on GOP Win

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.

-- Written by Miriam Marcus Reimer in New York.

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