In 2010, short-sellers scored a knockdown against for-profit education stocks, but a well-financed lobbying campaign could spur Congress to punch back on the industry’s behalf.
From taxpayers’ perspective, it makes sense to rein in the schools. Many receive more than 80% of their revenue from government-financed student loans, yet provide questionable educations while leaving students to carry punishing debt loads. The Education Department estimates 46% of dollars lent to for-profit college students will go into default, compared with an average of 16% across all schools.
Shares of companies like Apollo Group, Corinthian Colleges and Education Management have fallen hard this year as the Education Department issued new regulations aimed at reining in questionable practices. Combined, the three have spent $2.9 million on lobbying and political campaigns since 2009, according to the Center for Responsive Politics.
That helped delay one regulation of particular concern, the "gainful employment" rule. It could potentially eliminate for-profits’ access to federal dollars if their students aren’t able to secure sufficient wages after graduating to pay back high debt loads.
The department still expects to adopt the rule early next year. But if it does, the incoming chairman of the House Education Committee, Republican John Kline, may try to overturn it.
Meanwhile, President Obama has bigger education issues on his agenda in 2011, namely an effort to update the No Child Left Behind Act. Congressional friends of the for-profit colleges could threaten to block those efforts if the administration pursues regulations against the industry.
Given that the president has shown a willingness to negotiate since his party’s midterm losses, a compromise can’t be ruled out. Short-sellers should bear that in mind.