Education Stocks Continue Slide On Gainful Employment Fears
January 29 2010 - 4:08PM
Dow Jones News
Education stocks continued their downward slide Friday as the
Department of Education showed it would stand strong in an effort
to rein in the debt load that college graduates carry, a move
investors fear could hurt for-profit colleges with high tuition and
default rates.
As a months-long negotiation of 14 higher-ed policies wraps up
this week, the outlook is dimming on a resolution regarding a
proposal released late Wednesday that recommends capping students'
debt load at eight percent of their average incomes. The proposal
is related to the discussion of "gainful employment" and
fundamentally questions how well schools prepare their students to
get jobs that can cover their educational debt. Analysts say
certain for-profit colleges are more at risk than others, though
the whole sector has been under pressure.
Shares of ITT Educational Services Inc. (ESI), a company singled
out by a few analysts, fell 8.4% to $97.56 in recent trading after
dropping as low as $95.57. ITT is the only school that could see a
"high" potential impact from the gainful employment changes the DoE
proposes, according to William Blair & Co. analyst Brandon
Dobell. He cites the school's high tuition, high default rates and
students' high debt levels.
American Public Education Inc. (APEI), whose courses are among
the cheapest in the field, has a "low" likelihood of being affected
by the changes. And while Capella Education Co. (CPLA) has high
tuition, its graduates land high-paying jobs and rarely default on
their loans. Shares of APEI were recently down 3.53% to $38.27,
while Capella slid 0.1% to $73.45.
All for-profit college stocks were trading lower Friday
afternoon.
The Education Department recommends that programs whose
graduates have a debt-to-income ratio above eight percent, or who
don't meet certain other criteria, lose access to Title IV federal
financial aid, the main revenue source for these schools. While the
entire school wouldn't lose eligibility, just the program with poor
debt numbers, it could still harm a school's reputation and result
in significant revenue loss.
Negotiators are unlikely to find a middle ground, insiders say,
leaving the Department free to make further changes on its own.
While schools may try waging a legal battle to at least soften the
debt-to-income rule, Dobell says, they likely won't make much
headway.
"At this point, we consider it highly likely that the Department
of Education will unilaterally make its own changes to the rules
regarding gainful employment," Wedbush Securities analyst Ariel
Sokol wrote in a note to clients Friday.
There will be a public comment period on the Department's
recommendations later this spring or summer and final rules will be
published by Nov. 1.
"What this means for postsecondary stocks in our opinion is that
the 'regulatory overhang on the stocks' regarding valuation may now
be viewed as the 'new normal' by investors," Sokol warned.
-By Melissa Korn, Dow Jones Newswires; 212-416-2271;
melissa.korn@dowjones.com
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