DeVry leads drop in education stocks after U.S. details rules
DeVry Inc. led a drop in education companies in New York trading after investors reacted to information the U.S. government released July 23 suggesting some for-profit college programs might lose their eligibility for student aid.
DeVry, based in Oakbrook Terrace, declined $3.38, or 5.7 percent, to $55.91 at 2:59 p.m. in New York Stock Exchange composite trading. An index of 12 education stocks fell 2.1 percent and Deutsche Bank analyst Paul Ginocchio cut his rating on ITT Educational Services Inc. to "hold" from "buy."
Analysts and investors believed that education companies would keep student-aid eligibility by meeting a standard for loan repayment, said Trace Urdan, an analyst with Signal Hill Capital in San Francisco. A government analysis suggested that many education programs might not be able to show that at least 45 percent of their former students are paying off their student loans, while meeting other benchmarks called for in the proposal, he said in a telephone interview.
"For some reason, the government is skeptical about repayment," said Urdan, who recommends investors buy DeVry, and ITT Educational, and doesn't own the shares himself. "There's a lot that we still don't understand about the impact of these rules."
Gainful EmploymentEducation Secretary Arne Duncan developed the proposed rules to weed out companies that lure students into taking on government loans to pay for expensive training programs that don't deliver benefits in the job market. The rules are intended to show which programs help students find gainful employment."While proprietary schools have profited and prospered thanks to federal dollars, some of their students have not," Duncan said Friday in a statement. "This is a disservice to students and taxpayers, and undermines the valuable work being done by the for-profit education industry as a whole."Federal aid to for-profit colleges totaled $26.5 billion last year, up from $4.6 billion in 2000, according to the Education Department. About 96 percent of students who graduated from for-profit colleges in 2008 had taken out student loans, and 24 percent of that graduating class had more than $40,000 in U.S. student loan debt, according to a Senate report released in June.ITT Educational, based in Carmel, Indiana, fell $1.10, or 1.3 percent, to $84.34 on the New York Stock Exchange. Apollo Group Inc., the Phoenix-based operator of the University of Phoenix and the biggest for-profit education company, fell $1.04 or 2.1 percent, to $48.24 on the Nasdaq Stock Market.Discretionary IncomeUnder the proposed rules, the Education Department would monitor loan repayments and salaries among graduates of for- profit colleges. To remain fully eligible, education companies would have to show that at least 45 percent of their students' loans are being paid off, or that graduates pay less than 8 percent of their total income or less than a fifth of their "discretionary income" on loan payments."My analysis was that most of these stocks would remain eligible based on repayment rates," Urdan said. An analysis included in the government's rulemaking document shows more companies keeping eligibility based on students' debt-to-income and debt-to-discretionary-income ratios, he said. "It's not clear what the reality is. The next step will be the companies telling the Street what kind of impact they think this will have."When a program's repayment levels and debt-to-income ratios both miss government targets, its access to federal student aid may be restricted. Companies would lose their eligibility for aid if less than 35 percent of former students are repaying and their educational debt is at least 12 percent of their annual total income or 30 percent of discretionary income, according to the proposed rules.