For-Profit College Stocks Soar in Response to Weakened Federal Regulations

Shares of for-profit colleges surged the most in six years after the Obama administration eased rules that would cut off federal aid to schools whose students struggle the most to repay their government loans.

Under the rules published last Thursday, companies including University of Phoenix owner Apollo Group Inc. won't risk losing their federal funding until 2015, three years later than under a previous draft, the Education Department said.

Shares of Phoenix-based Apollo, the largest for-profit college company, rose $4.71, or 11%, to $46.90. The Bloomberg U.S. For-Profit College Index of 13 stocks rose 12%, the most since January 2005.

Calling the proposed rules a threat to their existence, for-profit colleges spent $6.6 million last year on lobbying and generated thousands of letters to the government in protest. The final version was delayed seven months, and some provisions were deleted or altered to favor the industry, said Jarrel Price, an analyst at Height Analytics in Washington.

"This is good for certain schools, and it's a home run for certain schools," he said. "Apollo is a clear winner."

Under the earlier proposal, loan-repayment rates at Corinthian Colleges Inc., Strayer Education Inc., Washington Post Co.'s Kaplan education business, DeVry Inc. and ITT Educational Services Inc. would have put them at risk of losing eligibility, according to Price.

Shares of Corinthian, of Santa Ana, jumped $1.07, or a whopping 27%, to $5.06. Strayer, of Herndon, Va., advanced $23.08, or 19%, to $144.95. Washington Post gained $20.46, or 5%, to $426.42. DeVry, of Downers Grove, Ill., rose $7.87, or 15%, to $61.86. ITT Educational, of Carmel, Ind., rose $14.94, or 21%, to $85.67.

Congress and state attorneys general are investigating the education companies' recruitment practices and use of government aid, which totaled $30 billion last year. The Education Department developed the rules to try to curb loan default rates at for-profit colleges that are twice as high as at public institutions and three times as high as at private nonprofit colleges.

The regulations seek to ensure that for-profit college graduates get jobs that allow them to repay their student loans. Although the harshest measures are being delayed, the regulations protect students from "exploitative" college programs that leave them with government-backed debt they can't repay, the Education Department said.

The rules "reflect input from the industry, and they're designed to give for-profit colleges every opportunity to reform without letting them off the hook," Education Secretary Arne Duncan said.

Under the rules, programs would remain eligible for federal aid if they meet at least one of three tests in a given year: at least 35% of former students are repaying their loan balance; yearly educational-debt payments of typical graduates account for a maximum of 12% of their total income; and those payments account for no more than 30% of their discretionary income.

Programs would have to fail all three tests in the same year for three out of four years before losing aid eligibility. The earlier draft would have cut aid to failing programs beginning next year.

About 5% of for-profit college programs are expected to lose eligibility, compared with 16% under the previous proposal, which gave colleges less time to comply.

For-profit colleges enroll about 12% of U.S. higher-education students, but they use about one-quarter of federal student grants and loans and account for 46% of student loan dollars in default, the Education Department said.