Education Companies Drop on Draft Recruitment Rules

Education companies including Apollo Group Inc., which operates the largest U.S. for-profit university, fell after the government released draft rules that would restrict how college recruiters are paid.

Apollo Group, the Phoenix-based operator of the University of Phoenix with about 443,000 students, fell 2.2 percent in Nasdaq Stock Market composite trading after the U.S. Department of Education said it may stop allowing schools to compensate recruiters based on the number of students they enroll. Bridgepoint Education Inc., based in San Diego, fell 4.2 percent, and Phoenix-based Grand Canyon Education Inc. fell 3 percent.

A 1992 law bans U.S. colleges from giving incentive payments to recruiters based on their success in securing enrollments. The Education Department draft seeks to scrap a 2002 Bush administration rule allowing exceptions, known as “safe harbors.” The new guidelines may suggest to investors that for-profit education companies will face difficulties attracting students, said Ariel Sokol, a Wedbush Morgan Securities analyst in New York.

“The stocks are down because people are assuming there will be a deceleration in new enrollment starts,” Sokol said in a telephone interview. “While they might decelerate, these new rules may give the sector more credibility in the long run, and could be a positive down the road.”

Congressional Intent

Apollo Group fell $1.26 to $55.81 at 4 p.m. New York time after touching $54.76. Bridgepoint fell 67 cents to $15.30 after dropping as low as $15.21. Grand Canyon fell 57 cents to $18.60 after touching $18.47. Corinthian Colleges Inc., based in Santa Ana, California, fell 31 cents, or 2.1 percent, to $14.51, and earlier fell as far as $14.05.

A safe-harbor provision permits companies to link recruiters’ compensation to the number of new enrollees when salary adjustments aren’t solely based on enrollments.

The Education Department, in comments released with the guidelines, said it “believes that the specific language of the statute is clear, and that the elimination of all of the regulatory ‘safe harbors’ would best serve to effectuate congressional intent.”

For-profit educators can continue to enroll new students without the safe harbors, Sokol said. Companies such as Strayer Education Inc., based in Arlington, Virginia, pay recruiters flat salaries and continue to enroll students, he said. Strayer fell $2.69, or 1.4 percent, to $194.81.

“In the big picture, this could be one of the best things to happen to the sector,” said Sokol, who recommends investors hold Strayer shares. “I think this is a step towards a stronger sector.”

BLOOMBERG