Shares of for-profit educational services outfits Corinthian Colleges (COCO), ITT Educational (ESI), Strayer Education (STRA), and the Washington Post (WPO), owner of Kaplan, traded sharply lower following a report issued by the U.S. Department of Education. Investors were apparently concerned that the government may soon make it harder for students to get federal financial aid. Currently, participating institutions need to attain a minimum student loan repayment rate of 35% in order to be eligible for continued federal funding, while a school may fully qualify for federal aid by having over 45% of students pay off the principal on loans.
The likelihood of increased regulation out of Washington seems to have gone up following the release of data showing that many graduates of for-profit schools are not repaying their government-backed loans. In fact, the Department of Education’s investigation revealed that Corithian, Strayer, and some Kaplan schools are far below the minimum repayment rates.
Stricter new loan requirements, expected to be tied to former students' default rates and income levels, would likely force Corinthian, ITT, Strayer, and other industry players to lower tuition or step up costly internal lending practices in order to sustain key enrollment growth. For many, though, revenues are primarily generated from student loans.
However, nothing is definitive yet, as Congress, the U.S. Department of Education, and the Obama Administration are still debating the subject. Investors interested in the Educational Services Industry are advised to watch the for-profit space for further developments.
For now, though, investors do not like what they hear. Indeed, the shares of some of these companies have traded down to 52-week lows in the last few days, as this news has begun to surface.