By Battle Road Research, an equity research firm.
President Obama laid out several initiatives on Jan. 27 that he hoped would advance the cause for higher education in America. We note that two of the three mentioned are positive for the for-profit education sector. However, we view the most important initiative as a net negative for the sector.
The first was a proposed $10,000 tax credit for four years of college education. This should be viewed positively, as the tax credit will increase incremental demand in the for-profit sector. Schools which have a focus on bachelor's degrees would benefit more as a result. We would especially like to single out companies such as
The second proposal was an increase in Pell Grants. These grants are targeted towards lower income students. Currently, Pell Grants provide a student with $5,350 per year in tuition assistance. Although it is not yet known how much of an increase will be proposed, this should also be viewed positively for the schools with a higher mix of lower-income students. Companies that would benefit from this proposal include
ITT Education Services
The third proposal was a 10% cap on student debt repayments. Under this proposal, a student would be required to allocate a maximum of 10% of their post-graduate income toward tuition-debt repayments.
We view this as a negative for the sector. Longer-term programs such as bachelor's and graduate programs will be more negatively affected, because students who enroll in those programs tend to graduate with higher debt levels.
Schools might be forced to be more selective when enrolling new students, thus slowing down growth rates. The schools might also be forced to lower tuition fees, as well as slow down tuition fee increases.
Currently, there are a lot of uncertainties regarding the proposed terms of the president's program. While President Obama mentioned 10% as a threshold, Education Department regulators are floating the idea of an 8% threshold on student loan payback limits.
Ultimately, schools that are likely to be more hurt by this proposal are those whose student mix stems from a lower economic bracket, while schools with a "higher quality" of revenue mix will reap the rewards.
Battle Road Research (www.battleroad.com) an equity research firm, serves fund managers, analysts and financial advisers with an independent voice on technology, health care, solar power and education stocks. Battle Road analysts place an equal weight on industry and securities analysis in an effort to seek out stocks to buy and stocks to avoid. As an integral part of our research process, we tap into a network of industry sources who provide insight into the companies we cover. We present our conclusions in a straightforward buy, hold, sell format. As a matter of principle, we refrain from investment banking, company-paid reports, and personal investment in the stocks we research. Visit us on the Web at www.battleroad.com and www.battleroadblog.com.