Blog: Dipping Stocks will Rebound

They’ll be back. That was my immediate reaction after reading the Rueters wire story summarizing yesterday’s market activity involving “for-profit” school stocks. The report noted that career colleges stumbled after President Barack Obama proposed shifting federal student loans into a “direct-loan program”. The program would be administered by the U.S. Department of Education.

Under Obama’s plan, students and parents would get Stafford and PLUS (parent) Loans directly through the department, rather than through private lenders participating in the Federal Family Education Loan Program (FFELP).

The shifting credit markets and changes in federal law have reduced the number of private lenders offering Federal Stafford and PLUS Loans through FFELP. And because of changes in federal law, private lenders can no longer afford to offer the discounts and incentives that previously made it preferable to borrow from them rather than the Department of Education.

Upon the news, a few stocks took a hit: Career Education Corp, ITT Education, and Corinthian Colleges Inc. In 2009, the market has fallen 3.4 percent. Last year, in the wake of the credit crunch, the program's volume increased about 50 percent, according to the Education Department. Traditional colleges and universities began transitioning to the direct loan program, saying it:

  • Is an easier process for families since every borrower uses the same application process and is subject to the same loan fees
  • Better guarantees the availability of funds for families
  • Is cheaper for families in the short term and offers the same cost to families in the long term
  • Offers loans through the same department that handles consolidation of student loans (the U.S. Department of Education)

But performance will overwhelm skepticism. Career colleges will continue their growth as the economy worsens. Investors will return. This hiccup will work itself out, and it will be clear that where the tuition comes from will not matter as much as student’s willingness to enroll.

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