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For Profit Education Jumps From the Frying Pan to the Fire

On Friday, the Department of Education released data showing that the student loan repayment rate at some schools was as low as 25%, and that it would take action to disqualify these schools for future student loans. That amounts to the taking away the punch bowl from a highly leveraged, overpriced industry, a  hedge fund manager’s dream come true. This is turning into a major home run for those who took my advice to sell the sector on June 2 (See “Hedge Funds Target for Profit Education” by clicking here, and my follow up by clicking here). I knew I was on to a great trade here because of the torrent of emails I received from these schools threatening litigation or worse. For profit schools have made a killing from naïve aspiring students taking out $5 billion in Pell grants and $20 billion in federal subsidized loans. A few weeks after my initial report, the General Accounting Office reported the results of an undercover investigation showing widespread fraud and abuse in the sector, with some financial aid officers advising students to lie on their applications. Today was the day when the chickens came home to roost. Since my call, lead stock Apollo Group (NASDAQ:APOL) of University of Phoenix fame has fallen 27%, DeVry (DV) 33%, and Capella Education (NASDAQ:CPLA) 35%. Those who cast a wider net caught Corinthian Colleges (NASDAQ:COCO) down a spectacular 62% and Strayer Education down 30%. The management of Strayer said they where shocked, shocked that repayment rates were so low, as Claude Raines might have said in the classic film, Casablanca.  I’ve had some friends get their eyes ripped out by these guys through running up $50,000 in debt to obtain useless degrees, so this couldn’t be happening to a nicer bunch of people. Although these stocks have already gone down a lot, there may be more to go. It is safe to say that the Obama administration hates these predatory schools, and that criminal prosecutions are certain to follow. Still, if you prefer to sleep at night, you might want to book some profits now.