NEW YORK (
) -- 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.
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
, 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.
Data prepared for the Department of Education by the non-profit Institute for College Access & Success shows that Corinthian Colleges, Career Education and the Washington Post's Kaplan have schools where less than 20% of federal student loans are being repaid. Nationally, for-profit colleges trailed public and private non-profit universities by a wide margin, with only 36% of students repaying loans, versus 54% at public universities and 56% at private non-profit schools.
An important caveat in the data is that it was prepared at the level of the institutions as a whole, while the Department of Education 45% student loan repayment/gainful employment rule will be program-specific.
The previous Department of Education data had shown that the government expected 5% of institutions to be deemed ineligible for federal student loan financing as a result of its new rules. Therefore, the data showing the for-profit companies like Corinthinian, Strayer and Kaplan were wide of the mark, and by wide margins, rocked the stocks.
James Maher, an analyst at ThinkPanmure, said the Senate hearings and GAO undercover report served to compound the revelations about the student loan repayment rates. Even though there seemed to be a sign of relief just a few weeks ago in the for-profit educations ector, "the mood has darkened and the fears have intensified again," Maher said.
The ThinkPanmure analyst said the sentiment will remain negative in the near-term on the group. Some stocks, like
, were up on Monday against the tide, but were coming off 52-week lows reached on Friday. The ThinkPanmure analyst said it is hard to make generalizations across the group based on the newest revelations, and specifically because the Department of Ed rule will be program-specific, rather than measured at the level of an entire institution.
"For some schools, it will just be relatively minor changes in policy, where other for-profit education companies will have to adapt both recruiting and enrollment procedures, and reduce tuition and eliminate some programs in order to meet the new requirements," Maher said.
Corinthian Colleges shares were down 20% at midday on Monday.
shares were down 17%, followed by Strayer shares, down 13% and Washington Post shares, down 10%.
-- Written by Eric Rosenbaum from New York.
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