School Stocks Tumble on GOP Win

The still-Democratic Congress is likely to push to instate the controversial and yet-to-be-published "gainful employment" rule before Jan. 5 when elected Republicans take office.
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NEW YORK (

TheStreet

) -- Stocks in the for-profit education sector were mostly lower Wednesday after Republicans took control of the House of Representatives in Tuesday's midterm elections.

With Republicans' takeover of the House, a fair amount of oversight is expected to be done in the for-profit education sector, 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.

Cariello told

TheStreet

he expected the GOP to take the House, and said the win will effectively delay enacting the Obama administration's newly proposed regulations, creating leverage for for-profit institutions.

But that also means the still-Democratic congress will likely push to instate the controversial and yet-to-be-published "gainful employment" rule before Jan. 5 when elected Republicans take office.

If the education department is able to instate the rules prior to Jan. 5, the gainful employment rule will go into effect, and oversight will follow, Cariello said.

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 Brace For New Regulations

Shares of

Corinthian Colleges

(COCO)

,

Career Education

(CECO) - Get Report

,

ITT Educational Services

(ESI) - Get Report

and

Bridgepoint Education

(BPI) - Get Report

were trading between 3% and 7% lower Wednesday.

"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 Cariello.

Tuesday's mid-term congressional elections "could be the tipping point," forecasted Herb Greenberg in an Oct. 28 appearance on

CNBC

. He said the gainful employment rule is "key," especially whether the rule will be published before Jan. 5 when the newly elected congressional members are sworn in.

If new members are opposed to the Obama administration's proposals, they could slow down the process and make it more difficult to instate the controversial rule, Greenberg explained.

He also said that market watchers shouldn't discount the importance of the rules published last week by the education department.

While many of the new regulations are likely to pressure for-profit education provider's businesses, Greenberg said recent share price gains in the sector are likely related to investors covering their short positions.

Democratic Senator Tom Harkin of Iowa hopes to tighten legislation on for-profit schools even further.

"This first package of regulations from the Department of Education closes the Bush-era loopholes that allowed this industry to expand predatory recruiting practices that mislead students, and is an important first step toward protecting the billions of taxpayer dollars invested in for-profit colleges," he said.

For-profit schools 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

(APOL)

,

Everest colleges parent

Corinthian Colleges

,

Strayer Education

(STRA) - Get Report

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

>>School Stocks Fall on Enrollment Outlook

Worries were amplified after data 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, according to research from the Institute for College Access and Success, a student-advocacy group. At private nonprofit schools the repayment rate was 56%, and at state colleges and universities the rate was 54%.

The Higher Education Act of 1965 requires that programs in need of federal aid must provide their students "gainful employment in a recognized profession."

The Department of Education report released Thursday said that students at for-profit schools make up 11% of all higher education students, 26% of all student loans and 43% of all loan defaulters. Students at for-profit schools carry, on average, student loan debt of $14,000, while most community college students do not borrow money to pay for their studies. And more than 25% of for-profit schools receive 80% of their revenue from taxpayer financed federal student aid.

Arguably the most controversial of the proposed regulations, known as the "gainful employment" rule, would cut federal aid to schools where less than 45% of students are able to repay their loans.

The gainful employment rule will be issued early next year. 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.

In an effort to prevent schools from creating new programs to circumvent the proposed regulations, aiming to "game the system," for-profit institutions must notify the education department of any new programs.

Institutions could be asked to formally apply for new program approval if the Department has any concerns but "expects that very few new programs will be subject to this type of approval."

A number of for-profit education providers -- including

DeVry

(DV)

,

Capella Education

(CPLA) - Get Report

,

ITT Educational Services

,

Apollo Group and

Corinthian Colleges

-- have warned of declining student enrollment in recent weeks, in anticipation of the new, more restrictive regulations.

>>Apollo Outlook Weighs on School Stocks

-- Written by Miriam Marcus Reimer in New York.

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Miriam Reimer

.

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