For-Profit Colleges Rally As Government Test Looks Easy

Stocks of for-profit college operators soared in early trading after the U.S. Department of Education released a softer-than-expected regulation governing career training programs, known as the "gainful employment" rule.

The long-awaited rule punishes programs for graduating students with heavy debt loads by eliminating their access to federal financial aid dollars, an attempt to ensure the programs are preparing students for gainful legitimate jobs. But it is less severe than a draft released last summer, giving programs more opportunities to right themselves if they run afoul of the measure.

Shares of ITT Educational Services Inc. (ESI) jumped 27% to $90 pre-market, while Corinthian Colleges Inc. (COCO) gained 40.1% to $5.62 and Strayer Education Inc. (STRA) rose 25.5% to $153. Those schools were considered particularly vulnerable to punishment under the prior proposal. Other schools, including Education Management Corp. (EDMC), Career Education Corp. (CECO) and Apollo Group Inc. (APOL) also saw their stocks rise by more than 15%.

"It’s a massive win," said Bob Wetenhall, an analyst at RBC Capital Markets. "Many investors now believe that the sector is investible, due to a combination of reasonable valuations and the removal of the regulatory overhang. I think it’s definitely safe to swim."

One reason for the relief is that under the rule, which goes into effect in July 2012, no program could lose eligibility for financial aid until at least 2015. Programs must fail the debt-load tests three times in four years in order to be disqualified.

To remain eligible for aid, a program must pass one of three tests: at least 35% of former students are paying down their loan balances by at least $1, or a typical graduate’s loan payment doesn’t exceed 30% of his or her discretionary income or 12% of total earnings. The rule applies to most for-profit programs and certificate programs at non-profit and public institutions.

According to Department of Education calculations, 18% of for-profit programs are expected to fail the debt tests at some point, with 5% ultimately losing eligibility. Across all institutions, those figures are 8% and 2%, respectively.

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Wall Street Journal 

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