For-Profit Education Still Faces Headwinds

Corinthian Colleges, Inc. (COCO) expects student enrollment percentage increases to be constrained by more difficult comparisons and a stabilizing unemployment rate in the coming quarters, according to their second quarter conference call. Meanwhile, the company also noted that it could face several new regulations from the Department of Education.

Other companies in the sector with expensive tuition, high graduate unemployment or high default rates are facing similar concerns. Among the most singled out by analysts was ITT Educational Services, Inc. (ESI). Meanwhile, other companies with low tuition are considered low risk, such as American Public Education, Inc. (APEI).

The Department of Education recommended that programs whose graduates have a debt-to-income ratio above 8%, or who do not meet certain other criteria, lose access to Title IV federal financial aid, which is the main source of revenues for many schools. The for-profit education sector in particular relies heavily on these funds to subsidize their students.

After months of negotiation, the resolutions regarding the proposals seem unlikely to pass as regulators appear unable to reach a middle ground. While this leaves the Department free to make changes on its own, many analysts do not think it is too likely that it will act unilaterally without external support from other officials.

Piper Jaffray, for instance, remains confident that the proposed measure of gainful employment will not be drafted by the Department and reiterated its Overweight ratings on four companies in the sector. Meanwhile, Wedbush wrote to its clients that it also considers it highly unlikely that the Department will unilaterally make its own changes to the rules.

The Takeaway…
The for-profit education sector has been under pressure over the past month amid potential regulations on the cost of programs and limitations on recruiter compensation.

While it is unlikely that the proposed legislation will pass, the Department of Education has the ability to push through its own changes at will.

Many analysts remain confident that things will not change in the intermediate term, but caution that some names in the industry are better than others.

SUMFOLIO

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