Education Stocks Jittery Over Stimulus Cuts

The education sector slid Friday on fears that the Senate could cut increases in education grants from the ballooning stimulus plan.
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With the epic stimulus package on the operation table in the U.S. Senate, market observers worry that spending on education may be surgically removed from the plan in order to drop the cost to something that is more palatable for Republican members of Congress.

As senators from both parties have jockeyed to get their own initiatives into the bill, the already steep price tag of $888 billion has steadily increased to a newly recalculated $937 billion.

Several Republican attempts

to remake the bill with more tax cuts and less spending have failed, so now the expectation is that senators will be forced to pare back some of the spending initiatives in order to gain enough support to finally pass the bill.

A vote is expected later Friday, according to Senate Majority Leader Harry Reid, although Reid had previously said the bill would go to a Senate vote late Thursday.

Just as education stocks like

Apollo Group

(APOL)

,

Career Education

(CECO) - Get Report

,

Grand Canyon Education

(LOPE) - Get Report

and

Corinthian Colleges

(COCO)

rallied when President Barack Obama's stimulus plan initially showed education spending would increase, the sector lost ground Friday while the rest of the market advanced.

The

Dow Jones Industrial Average

jumped more than 2% during Friday's session, but Apollo Group shares were down 2%. Grand Canyon Education was slipping 1.1%,

Strayer Education

(STRA) - Get Report

was off 0.3%, and other names in the sector were also trading lower.

Weeks ago, the House of Representative's draft of the bill included an increase in unsubsidized Stafford student loan limits by $2,000 and more funding for Pell grants, which aid low-income families sending children to college, by $15.6 billion over two years, increasing the maximum grant by $500 from $4,850 to $5,350.

With more than $100 billion expected to be taken out of the Senate's draft of the plan, the cuts could come in areas where job creation doesn't seem to be evident. If the Pell grant portion of the stimulus plan were taken off the table, as some analysts believe could happen, it would reduce the overall price tag by $13.9 billion.

As the bill currently stands, it supports an increased Pell grant maximum award of $281 in the 2009-2010 academic year and $400 in the 2010-2011 academic year. This would help 7 million students pursue post-secondary education, but its effectiveness in creating jobs is unclear.

"Specifically, the thing the group is worried about is the effort to pull Pell out," said Trace Urdan, an analyst with Signal Hill Group. "The line there is that it's nice spending, but it's not creating jobs. That story started to surface Wednesday and was nearly confirmed Thursday in the mainstream press."

President Obama has rallied for the inclusion of the changes to the Pell grant before, but with the president pushing for an urgent and quick resolution to the stimulus package's holdup in Congress -- and without the argument that a Pell increase helps create jobs -- that part of the stimulus plan could be in trouble.

Urdan says that current estimates for the education sector do not take into account the fact that support for an increase in Pell grants could be yanked from the Senate's version of the bill, which clouds the picture going forward.

"It's hard to say what the impact is," said Urdan. "It wouldn't be devastating. The Pell piece is obviously important and meaningful on the margin. There's just so much volatility. Right now, the market is not assuming anything."

However, Urdan argues that even if the Pell grant increases were cut from the stimulus package in the Senate, it could still make its way into the final version of the bill that ends up on President Obama's desk. The education sector, he said, could see a rally if the final signed plan does include the Pell increases, even if the Senate's version doesn't.

"What Obama is saying now is get me something, pass it, and then we can really work on it in conference," Urdan said. "It seems like he might flex his muscles in the conference process. As long as it's in the House bill, it's still on the table. As long as the administration is saying that Pell is important, it may not matter if it gets into the Senate version or not."