Analysis: New rule clears growth track for for-profit colleges

A watered down rule for the U.S. for-profit education industry ends more than a year of uncertainty that has weighed on the colleges and their stocks, and sets the stage for renewed earnings growth and potential industry consolidation

The Education Department earlier released a softened final version of the ‘gainful employment’ rule that determines whether for-profit colleges qualify for federal student aid–which accounts for around 90 percent of their revenue.

Many colleges, which had been at risk of losing access to federal aid based on the initial proposal, should now meet the required metrics, allowing them to pursue profit growth without many restrictions.

The rule is part of the Obama administration’s crackdown on for-profit schools, which have been criticized for overcharging students, burdening them with debt and not fully preparing them for jobs.

Colleges could now return to aggressive admission strategies without fretting over student loan repayment rates, as most already meet the re-drafted rule. Some schools will be free to raise tuition fees.

Earnings this year, however, will be hit as colleges absorb the impact of measures they had taken to pre-empt the earlier, tougher, reforms.

Analysts said the latest changes were a big win for the for-profit industry, which has been under the cosh for more than a year as the government sought tougher regulation. Many colleges saw a sharp drop in the number of new students signing up for their courses.

"This sector is going to be a growth sector again, as it was in the past," said Sandy Mehta of Value Investment Principals Ltd, which holds positions in Apollo Group.

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