Education Stocks Pull Back After Gainful Employment Ruling

(Education stocks and final gainful employment ruling report updated with additional commentary).
NEW YORK ( TheStreet) -- Stocks in the education sector pulled back somewhat on Friday after the Department of Education released its long-awaited final ruling on gainful employment regulations Thursday, sparking a sector rally.

Analysts largely viewed the final ruling as less strict than expected for for-profit education providers -- many schools won't have to institute complete overhauls of their business practices as first feared -- lifting stocks in the sector much higher in early trading.

Stocks in the sector surged on Thursday following the DOE's announcement. By Friday however, investors were cashing in on their gains ahead of the weekend.

Everest Colleges' parent Corinthian Colleges ( COCO) led the sector in terms of volume, falling 1.6% to $4.98 ahead of midday. More than 3.2 million shares changed hands less than halfway through Friday's session, compared with their average daily volume of just 2.8 million.

University of Phoenix parent Apollo Group ( APOL) lost 0.9% to $46.50, DeVry ( DV) fell 1.5% to $60.93 and Strayer Education ( STRA) edged 0.1% lower to $144.82.

ITT Educational ( ESI) continued to gain, rising 0.4% to $86, while Education Management ( EDMC) added 0.9% to $24.98 and Career Education ( CECO) rose 2.5% to $24.69.


The gainful employment rule was expected to cut federal aid to schools such as DeVry University or Apollo Group's University of Phoenix if more than 65% of students were unable to repay hefty loans.

The ruling came as part of a larger push by the Obama administration to protect students from taking on too much debt, and then finding themselves unqualified or unable to get the jobs they would need to repay those loans.

Education regulations proposed last summer cover everything from restricting incentive-based recruiting practices, the need for new job-training courses, taking action against schools which fail to advertise honestly, to requiring schools to notify students of graduation and job placement rates . Institutions would also be required to limit student enrollment to those who have high school diplomas or can readily demonstrate their readiness for university-level education. Schools must also comply with what is called the 90:10 rule in fiscal 2012, a rule stipulating that no more than 90% of a for-profit education provider's revenue may be generated from the DOE's federal student aid program.

Federal aid to for-profit education providers came to nearly $150 billion in the last academic year and is among the primary sources of income for these education providers.

"These new regulations will help ensure that students at these schools are getting what they pay for: Solid preparation for a good job," Secretary of Education Arne Duncan said Thursday. "We're giving career colleges every opportunity to reform themselves but we're not letting them off the hook, because too many vulnerable students are being hurt."

The Obama administration's final regulations on requiring for-profit schools to better prepare students for "gainful employment" -- or risk losing federal student aid revenue -- stipulated that a program would qualify for federal aid if it meets at least one of the following three metrics:
  • A minimum of 35% of former students are able to repay their loans (defined as reducing the loan balance by at least $1);
  • Estimated annual loan payments of a typical graduate do not exceed 30% of his or her discretionary income;
  • The estimated annual loan payment of a typical graduate does not exceed 12% of his or her total earnings.
  • Programs could become eligible for federal aid as early as 2015 based on performance in fiscal years 2012 through 2014.


    The DOE expects 18% of for-profit school programs to fail its compliance regulations, with 5% losing eligibility for federal funding under the finalized new law.

    Devry

    "We're asking companies that get up to 90% of their profits from taxpayer dollars to be at least 35% effective," Duncan said. "This is a perfectly reasonable bar and one that every for-profit program should be able to reach."

    The Civil and Human Rights Coalition, a non-profit advocacy and outreach organization, said "the release of the final 'gainful employment' rule is an important and necessary step for protecting students and taxpayers from being ripped off by unscrupulous career education programs, including those for-profit colleges that are more focused on revenues than providing the level of education that their marketing brochures and recruiters promise."

    "While the rule does not include many important protections urged by civil rights, student, women's, labor and consumer organizations, it sends a strong message to many for-profit career education programs to start putting students first," the group added.

    "Regulation is urgently needed to hold these institutions accountable given the rising tide of debt and default rates faced by students enrolled in for-profit programs -- a majority of whom are women, minorities, low-income individuals, veterans and service members. For-profit colleges are a viable option for many of these students, but that doesn't give these businesses the right to exploit those they serve."

    Sen. Tom Harkin, a Democrat from Iowa who has been a vocal critic of the for-profit education sector, said "the Department of Education's gainful employment rule is a modest and important first step to protect students and taxpayers from subprime academic programs that have a demonstrated track record of failure."

    Pauline Abernathy of the Institute for College Access & Success, an education advocacy group that has pushed for stricter industry regulation, said "the only programs that would lose funding would be programs that are consistently failing to provide students with gainful employment, and are providing them with insurmountable debt."

    Analysts at Credit Suisse said the final gainful employment regulations eased more than expected, but the firm maintained that significant earnings risks in 2012 and 2013 persist.

    It tapped Education Management, ITT Educational, Corinthian Colleges and Lincoln Educational ( LINC) as the education providers likely to benefit the most from the final ruling. The group still holds risks, however, namely from student start declines, lower enrollment because of the negative impact of incentive compensation, rising competition and other headwinds.

    Piper Jaffray analysts said the final ruling was less threatening than originally expected, and generally positive for stocks in the sector.

    The firm tapped Bridgepoint Education ( BPI) and Grand Canyon ( LOPE) as its top sector stock picks.

    -- Written by Miriam Marcus Reimer in New York.

    >To contact the writer of this article, click here: Miriam Reimer.

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