Tenor Of For-Profit School Discussion Gets Toned Down

This week's sell-off in for-profit school stocks, prompted by a report of a U.S. Department of Education official's speech, may have been overblown, some analysts say now that they have read a full transcript of the comments.

The sector's shares fell sharply Thursday after trade Web site Inside Higher Ed reported that Robert Shireman, deputy undersecretary for education, spoke harshly of market-funded colleges at a meeting of state school administrators and accreditors Wednesday. The article, citing sources at the meeting, said Shireman compared the schools to Wall Street firms whose actions helped cause the recent financial crisis. Inside Higher Ed, which didn't have a reporter at the meeting, attempted to confirm the comments with Education Department officials, who declined comment for the article.

Shireman did make that comparison, according to a transcript of his speech, which analysts believe was relatively even-handed and wide-ranging. He also said regulators could do a better job. Shireman devoted much of his speech, delivered at the National Association of State Administrators and Supervisors of Private Schools meeting, to proposed changes in rules governing all of higher education.

The Inside Higher Ed article sparked a nearly universal sell-off in higher-education shares, but some recovered ground Friday. Career Education Corp. (CECO), which fell more than 12% Thursday, was recently trading up 1.1% to $29.59. ITT Educational Services Inc. (ESI), which lost 6.6% the previous day, was off a fraction in recent trading at $102.78. Apollo Group Inc. (APOL), which fell 6.1% Thursday, was up 0.4% at $57.98.

Analysts who have read both Inside Higher Ed's report and a transcript of Shireman's speech say the comments were mostly in line with his earlier stance, which has generally accepted the role of for-profit schools in the Obama administration's plan to increase access to higher education.

Doug Lederman, editor of Inside Higher Ed and author of the article, said the story "made pretty clear that it was based on accounts from people in the room. There was no question that they interpreted his comments in a certain way." Lederman has heard a recording of the full speech since publishing the article.

"Shireman was laying out a case for greater government regulation given increased investments in Pell Grants," Wedbush Securities analyst Ariel Sokol said in an email message after reviewing the meeting transcript. "He seemed amenable to forming bridges with the sector."

Shireman commended the schools for "making sure that there was capacity to be able to serve additional students" during the recession, according to a transcript provided by Career Education Review. Shireman cited year-over-year percentage increases in Pell grant funds for 11 publicly traded school companies, including Corinthian Colleges Inc. (COCO), DeVry Inc. (DV), and American Public Education Inc. (APEI).

Most for-profit schools derive the majority of their revenue from federal student aid.

A Department of Education spokesman reiterated Shireman's comments, saying in an emailed statement: "For-profit colleges play a critically important role in helping to ensure so many Americans have access to education and training that can improve their job prospects and lives."

To be sure, Shireman did liken the relationship between schools and accrediting groups to that between banks and ratings agencies, which have an "inherent conflict of interest," as the agencies are paid by the companies they are supposed to regulate.

"Are there regulators in the room who feel like you do have the analytical firepower you need to assess what is going on with the entities you regulate in higher education," Shireman asked. "I don't think we feel we have the firepower we need."

Lederman said the speech was "a much stronger indictment of the system of higher education accreditation than of the sector."

Trace Urdan of Signal Hill Capital Group wrote in a note to clients, regarding the full transcript, that Shireman's "tone in general is much less severe" toward schools specifically. "He presents as a reasonable person struggling with accountability gaps that he perceives exist in the system."

According to the transcript, Shireman devoted a portion of his speech to detailing the process by which the Department of Education formulates new rules governing higher education, known as negotiated rulemaking. He stressed that there were productive discussions on many fronts, though he said college representatives weren't particularly constructive when it came to a measure to quantify how well the schools prepare students for "gainful employment" in a recognized occupation.

Concerns over that proposal have upended the for-profit school industry over the past few months, with a trade group estimating the government's early version would displace hundreds of thousands of students as their programs lose access to federal funds. During a question-and-answer session, Shireman said there is no final proposal yet, and he is open to suggestions to ensure the rule is fair.

-By Melissa Korn, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com

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