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State of the For-Profit Education Sector

On Wednesday, January 27th, President Obama laid out several initiatives that he hoped would advance the cause for higher education in America. We note that two of the three mentioned are positive for the for-profit education sector. However, we view the most important initiative as a net negative for the sector.

The first was a proposed $10,000 tax credit for four years of college education. This should be viewed positively, as the tax credit will increase incremental demand in the for-profit sector. Schools which have a focus on Bachelor’s degrees would benefit more as a result. We would especially like to single out companies such as Strayer Education Inc. (NADSAQ: STRA) and DeVry Inc. (NYSE: DV) as beneficiaries.

The second proposal was an increase in Pell Grants. Pell Grants are targeted towards lower income students. Currently, Pell Grants provide a student with $5,350 per year in tuition assistance. Although it is not yet known how much of an increase will be proposed, this should also be viewed positively for the schools with a higher mix of lower income students. Companies that would benefit from this proposal include ITT Education Services (NYSE: ESI) and Corinthian Colleges Inc. (NASDAQ: COCO).

The third proposal was a 10 percent cap on student debt repayments. Under this proposal, a student would be required to allocate a maximum of 10 percent of their post graduate income towards tuition debt repayments. We view this as a negative for the sector. Longer term programs such as Bachelor’s and graduate programs will be more negatively affected, since students who enroll in those programs tend to graduate with higher levels of debt. Schools might be forced to be more selective when enrolling new students, thus slowing down growth rates. The schools might also be forced to lower tuition fees, as well as slow down tuition fee increases.

Currently, there are a lot of uncertainties regarding the proposed terms of the President’s program. While President Obama mentioned 10 percent as a threshold, Education Department regulators are floating the idea of an eight percent threshold on student loan payback limits. Ultimately, schools that are likely to be more hurt by this proposal are those whose student mix stems from a lower economic bracket, while schools with a “higher quality” of revenue mix will reap the rewards.

Disclosure: No positions