CORRECT: For-Profit Schools Could See Bigger Hit From Debt Rule

Some for-profit colleges, whose shares were being pummeled Monday, are objecting to U.S. Department of Education data that suggests students are paying back loans at surprisingly low rates.

Some of the schools are arguing their internal estimates of loan repayment rates are better than the department's findings and are expressing frustration with what they say is the agency's unwillingness to share data supporting the calculations. The schools could face tough new regulations stripping them of access to federal funds if their students are found to have heavy debt burdens. Some argue the department is punishing schools for having graduates enroll in loan deferment programs that the government itself supports.

Earlier this summer, the department proposed a rule intended to measure how well for-profit schools train students for gainful employment in a recognized occupation. Late Friday, the department issued its calculations on loan repayment rates for more than 8,000 schools in an attempt to preview the rule's potential impact were it to be implemented. Schools could "pass" based on student loan repayment rates, or by maintaining a debt-to-income ratio below a certain percent.

The rule would also apply to non-profit schools with vocational programs, though the government expects for-profit schools to bear the brunt of any penalties.

"Community colleges are subject to the rule, but we don't believe that they're going to be impacted by the rule because the vast majority of community college students do not borrow," said David Bergeron, acting deputy assistant secretary for policy, planning and innovation at the department's Office of Postsecondary Education.

Shares of for-profit schools sank Monday as investors digested the data.

Strayer Education Inc. (STRA), considered among the most shielded from the proposed rule because of its large proportion of students in bachelor's and graduate degree programs and historically low loan default rate, was trading off 12.3% to $175.2. Corinthian Colleges Inc. (COCO) was down 20.3% to $5.31, ITT Educational Services Inc. (ESI) was off 12% to $56.59 and Capella Education Co. (CPLA) was down 12.3% to $61.59. Washington Post Co. (WPO) was off 7.8% to $316.82.

Strayer, Corinthian, ITT, Capella and Washington Post all hit 52-week lows earlier Monday.

Strayer, which late last month said it believed its programs would clear the department's highest proposed hurdle of loan repayment by 45% of graduates, scored a 25% school-wide. The company had noted last month that it was difficult to measure rates exactly because loan consolidation complicates the measure of repayment.

The school said on a conference call early Monday that it would file a Freedom of Information Act request to see some of the data on which the Department based its calculations, calling the data "inaccurate," "nonsensical" and "arbitrary."

"This discrepancy has significant operational, financial, and public policy implications," Strayer said in a statement Saturday.

"The fact that [Strayer] had among the lowest repayment rates among the publicly held group despite having relatively low cohort default rates leads us to question the validity of this data series," said Jeff Silber of BMO Capital Markets.

Kelly Flynn of Credit Suisse agreed, calling the data "odd," and noting that she is "not completely confident the figures are 100% correct."

Still, given the stock reaction, Flynn cut her price targets on ITT Education to $57 from $78, Education Management to $11 from $21 and Strayer to $180 from $220.

Capella Education also questioned the data, saying the 40% repayment rate across its schools was inconsistent with findings from an internal analysis it had conducted of its larger programs. According to that calculation, the programs would have a repayment rate above the 45% threshold. Capella said it has requested to see the Department's underlying data and methodology.

Washington Post Co., whose Kaplan unit had a weighted average repayment rate of 28%, expressed concern Monday about the implications of the department's data. The company said if program-level repayment rates are similar to the data provided Friday, a significant number of Kaplan schools could become ineligible for federal student aid, which "could have a materially adverse effect on the future results of the Company's higher education division."

Based on Friday's data, Universal Technical Institute Inc. (UTI), Grand Canyon Education Inc. (LOPE), American Public Education Inc. (APEI) and Bridgepoint Education Inc. (BPI) had the highest repayment rates among publicly traded for-profit schools, all above the 45% threshold. Corinthian, Washington Post Co.'s Kaplan and ITT were among the lowest performers.

Apollo Group Inc. (APOL) shares were up 6.5% as the company's University of Phoenix posted a repayment rate of 44.2%, higher than most analysts expected, and Universal Technical Institute shares rose 9.7% to $16.28 as its 52% repayment rate also pleased investors.

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

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