For-profit Education Group Strikes Back, Sues Education Dept.

For-profit educators are tired of being pushed around.

On Friday, the Association of Private Sector Colleges and Universities, which represents more than 1,500 for-profit schools, filed suit against the U.S. Department of Education, saying new regulations hinder schools’ ability to innovate and advertise their programs. The regulations were released in October and go into effect this July.

With less uncertainty about the sector’s future, the for-profit college sector has bounced back. In the past three months, shares of the Apollo Group (APOL) are up 17%, Bridgepoint Education (BPI) up 25%, and Career Education Corp. (CECO) up 28%.

The suit attacks three of the 14 rules that the department imposed on Oct. 28. One of those rules makes colleges get authorization from every state where they operate, which the association says creates a bureaucratic nightmare that makes it hard to offer online courses.

Another regulation hinders colleges’ ability to pay merit-based compensation. And a third regulation limits how colleges can market themselves, and imposes what the association calls “severe penalties” for misrepresentations that may simply be inadvertent mistakes.

The suit comes as a surprise, wrote Citi analyst James Sanford, and it’s “more than just saber rattling.” It could help for-profit colleges even if the association loses, by clarifying the rules.

But the suit also comes with some risks, Sanford wrote.

“We see a few risks to this lawsuit, including: 1) Further breakdown of communication with the Department of Education is rarely a positive, particularly given recent commentary by companies in our coverage group and our channel checks confirm that the tone in Washington has become more constructive, 2) Legislative help becomes less likely while lawsuit is unresolved as opponents to restrictive regulation in Congress could put legislative relief on the backburner.”

BARRONS