For-Profit Schools Could See Bigger Hit From Student Debt Rule

A number of for-profit colleges may be in more danger than first believed of running afoul of a regulation proposed by the U.S. Department of Education that would force on them harsh penalties for graduating students with high debt loads, according to data the agency released late Friday.

The Department, in an attempt to show some of the rule's potential impact were it to be implemented, posted to its website late Friday a listing of the fiscal 2009 loan repayment rates at more than 8,000 for-profit schools nationwide.

The rule, intended to measure how well for-profit schools train students for gainful employment in a recognized occupation, proposes to measure that success by penalizing programs for graduating students with heavy debt burdens. Schools could "pass" based on student loan repayment rates, or by maintaining a debt-to-income ratio below a certain percent.

A handful of schools have announced that, based on internal calculations, most or all of their programs should pass the government's proposed hurdles. However, the newly released data "suggests ineligibility issues are meaningfully understated for proprietary schools," FBR Capital Markets analyst Matt Snowling wrote in a note Monday.

One element that makes Friday's data difficult to compare directly to the proposed rule is that it measures loan repayment rates on a school-wide basis, while the Department's recommendation only measures program-wide repayment.

Still, some schools are assuming the worst from the Department's numbers.

Strayer Education Inc. (STRA), which in late July said it believed each of 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 deferment or forbearance.

Strayer on Saturday afternoon issued a press release calling the findings "significantly at odds with Strayer University's own internal analysis," and scheduled a conference call with analysts for early Monday.

"This discrepancy has significant operational, financial, and public policy implications," Strayer said in the statement, calling for a meeting with the Department to "de-conflict" the data. The company said it will file a Freedom of Information Act request to see some of the data on which the agency based its calculations, calling the data "inaccurate," "nonsensical" and "arbitrary."

Strayer had been considered among the schools most shielded from the proposed rule, with a large portion of its students in bachelor's and graduate degree programs and historically low loan default rates.

"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.

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 Colleges Inc. (COCO), Washington Post Co.'s (WPO) Kaplan and ITT Educational Services Inc. (ESI) were among the lowest.

Shares of Corinthian were trading down 12% to $5.86 premarket. Corinthian has lost more than half its market value so far this year.

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

Bridgepoint Education, Inc. (NYSE:BPI)
Historical Stock Chart
From May 2024 to Jun 2024