I T T Education (NYSE:ESI)
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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; firstname.lastname@example.org