Shares of for-profit education cos rise after proposed rules appear less harmful than feared

Sector Snap: For-profit education shares rise

NEW YORK — Shares of for-profit education companies soared Friday after the Department of Education proposed new rules that should allow most schools in the industry to continue to receive federal loan funds.

A new “gainful employment” rule would cut government aid to schools if too many students default on loans, or earn too little, after graduation.

The proposals are part of an overhaul of regulations of the for-profit education sector, which has come under scrutiny from the Obama administration over rising student loan defaults and questionable recruiting practices. Shares have tumbled for more than a year in anticipation that new rules would reduce federal aid, often the schools’ biggest source of revenue. Most schools, except for those with the highest loan default rates, would still be eligible for the federal student loans, which can make up as much as 90 percent of their revenue, Signal Hill analyst Trace Urdan said.

“(The) new gainful employment proposal is fair and reasonable and tries to catch the bad actors while not hurting the good ones,” Sterne Agee analyst Arvind Bhatia wrote in a note to clients.

While the rules may not be as damaging as feared, they will likely limit the sector’s growth rates and make it tough for them to raise tuition, analysts said. With more Congressional hearings planned, the drive to increase oversight of the for-profit sector might not be over, said Credit Suisse analyst Kelly Flynn.

Under the proposals, to remain eligible for aid, schools must show that at least 45 percent of former students are paying off their federal aid dollars, or that graduates have a debt-to-earnings ratio of less than 20 percent of discretionary income or 8 percent of total income.

Schools will be ineligible for federal student loans if less than 35 percent of former students are paying off loans and graduates have a debt-to-earnings ratio above 30 percent of discretionary income and 12 percent of total income.

The Education Department estimates that the new rules would make just 5 percent of for-profit college programs ineligible for aid starting in the 2012-13 academic year, if they make no changes to their programs. It said that 55 percent of all programs would fall into neither the eligible nor ineligible categories, but could face restrictions on enrollment growth and be required to tell potential students about the high debt of its graduates.

Shares of for-profit education companies jumped, with some of the biggest gains among companies such as DeVry Inc. and Apollo Group Inc., which analysts say would be least affected by the new rules.

DeVry was among the biggest gainers in the Standard & Poor’s 500 index Friday, climbing $6.58, or 13 percent, to $58.09 in afternoon trading, while Apollo rose $2.25, or 5 percent, to $48.57. Other companies that analysts said will be least affected by the proposed rules also gained. Capella Education Co. rose $4.35, or 5 percent, to $87.95; Bridgepoint Education Inc. added $1.17, or 7 percent, to $18.39; and American Public Education Inc., climbed $2.06, or 5 percent, to $46.04.

But companies such as ITT Educational Services Inc., Corinthian Colleges Inc., Education Management Corp. and Career Education Corp., that operate career colleges focusing more on 2-year programs or lower-income students may need to make big changes, analysts said. Their shares were mixed. ITT rose 4 cents to $85.22 and Corinthian dipped 19 cents to $10.06. Education Management rose $1.07, or 7 percent, to $16.24 and Career Education gained 57 cents to $25.11.

Shares of other companies in the industry mostly rose. Strayer Education Inc. gained $15.68, or 7 percent, to $234.88, while Lincoln Educational Services added 49 cents to $21.44 and Grand Canyon Education Inc. rose $1.06, or 5 percent, to $22.74.