UPDATE: 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 numbers, disputed by some institutions as being based on faulty or unclear calculations, pushed schools' shares down sharply premarket as investors weighed how it would translate to the program-level figures on which the rule would ultimately be based.

Premarket, Strayer Education Inc.'s (STRA) stock was off 16.2% to $167.54, while Corinthian Colleges was down 12.2% to $5.90. Shares of ITT Educational Services Inc. (ESI) were down 9.2% to $58.40, DeVry Inc. (DV) slid 7.2% to $39.65 and Washington Post Co. (WPO) was down 13.3% to $297.66.

The proposed rule, intended to measure how well for-profit schools train students for gainful employment in a recognized occupation, would penalize 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.

While a handful of schools have said they think at least most of their programs would pass the government's proposed hurdles based on internal calculations, they've warned that programs such as deferment and forbearance, often championed by the government to allow students to pursue additional education or take on low-paying public service jobs, would count as non-repayment under the new rule.

The newly released data "suggests ineligibility issues are meaningfully understated for proprietary schools," FBR Capital Markets analyst Matt Snowling wrote in a note on Monday.

Strayer, 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% schoolwide. The company had noted last month that it was difficult to measure rates exactly because loan consolidation complicates the measure of deferment or forbearance. 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 on Saturday. The school had been considered among the 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.

Washington Post Co., whose Kaplan unit had a weighted average repayment rate of 28%, also expressed concern Monday about the implications of the department's data. The company said in a press release that 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 Colleges Inc. (COCO), Washington Post Co.'s Kaplan and ITT Educational Services Inc. (ESI) were among the lowest performers.

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

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