Tags: Education | Stocks | Key | Rule | Softened

Education Stocks Rally After Key Rule Softened

Thursday, 02 Jun 2011 12:47 PM

A rule that threatens to cut off tuition aid to some programs run by for-profit colleges was softened in the final version issued by the U.S. Education Department, ending a long regulatory process that has clouded growth outlook for education companies.

Shares of companies that run for-profit colleges Apollo, Washington Post, Corinthian Colleges and Strayer, surged on the news.

The changes to the rule are a big positive as they drastically lower the threshold for education companies to qualify for federal student aid, the main source of profit and give them more time to adapt to the rules.

The rule is part of the Obama administration's crackdown on for-profit schools, accused of overcharging students, burdening them with debt and not preparing them adequately for jobs.

The department finalized a set of 13 rules last year but delayed the hotly debated "gainful employment" rule after much opposition. The colleges were preparing for a tough rule and had made changes to their admissions policies, leading to sharp declines in enrollment numbers.

"We no longer expect gainful employment to limit growth at the majority of for-profit institutions," Jarrel Price and Heights Analytics said.

Morgan Stanley analyst Suzanne Stein said the sector has arguably become "more investable" given clarification on the rule, but slowing enrollment will continue to be an overhang.

Analysts said the rules benefited every company across the sector. Companies like Apollo and Capella Education which were in the restricted zone to access federal aid based on the repayment rate metric, will now not have barriers to grow their student base.

Officials delayed until 2015 before a program can be denied tuition loans over too many former students in the same course having defaulted on their loans.

According to the rule, due to go into effect mid-2012, at least 35 percent (down from 45 percent) of graduates and dropouts of programs must be paying back loans, or their loan payments must equal 30 percent of discretionary income or 12 percent of total earnings.

"The most significant change for this group is that they will now have more time to improve their rates and try to cross the 35 percent all-clear threshold — much more obtainable than the draft rule's 45 percent," said analyst Price.

© 2015 Thomson/Reuters. All rights reserved.

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