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What the DOE's Regulations Mean for the For-Profit Education Industry

|Includes: American Public Education, Inc. (APEI), APOL, ATGE, BAC, BPI, CECO, COCO, CPLA, EDMC, ESI, GHC, LINC, LOPE
Today the Department of Education released the final version of the rules governing the standards that for-profit colleges and universities have to follow in order to maintain eligibility for Title IV funding.  The regulatory act gives three criteria that the educators must follow in order for their students to receive government education loans.  First they must have 35% of students repaying loans.  Second the estimated annual load repayment of a typical graduate can not exceed 30% of his or her discretionary income.  Third the estimated loan repayment must also not exceed 12% of a graduate’s total earnings.  Educators aren’t held to these criteria until 2015 and they are given 3 chances to pass at least one criteria for the four years.  All of this regulation has been implemented to ensure that students who graduate from these universities are actually getting jobs that pay them enough so that they can then repay loans.  A common opinion of this type of education is that it is sub-par and therefore limits the students employment prospects.
Now the reason that education shares are flying high today is that these criteria are much less strict than the original standards.  Some of the differences are that, originally, at least 45% of students must be repaying their loans to be eligible, the estimated annual loan repayment must be less than 20% of discretionary income and less than 8% of total income.  As you can see these rules would have been much stricter and could have possibly resulted in more for-profit educators failing.  Despite the easing of the regulations, the DOE expects 18% of educators to fail the criteria at some point and about 5% to fail by 2015 and have their eligibility for Title IV grants revoked.
Alright so, based on the revised regulations, now we have to answer the inevitable question, cui bono.  To be honest basically everyone in for-profit education benefits from the eased policy.  At least investors seem to think so; I created a mock portfolio with the “best” 14 education stocks in it and there is not one down today.  The stock the worst off is American Public Education, Inc (APEI) who is up ~1.30% at the time of this writing.  The best is Corinthian Colleges, Inc (COCO) who is up ~29.3% at the time of this writing.  Bank of America (BAC) contributed to the fray after upgrading DeVry (DV) to buy from neutral and upgrading Education Management (EDMC) to neutral from underperform.  

Symbol        Last price     Change %
EDMC            24.91            4.61
CECO            24.1              1.23
WPO             426.5             20.54
LINC             15.84             1.25
COCO           5.15              1.16
BPI                24.23             0.55
STRA            142.33           20.46
ESI                82.72            11.99
APOL            46.4               4.21
DV                61.04             7.05
LOPE            14.1              1.28
APEI             44.01             0.51
CPLA            50.05             2.07
NAUH            8.06              0.5

Specifically the change from a debt-to-earnings calculation for students repayment is changed from 10 years for everyone to a tiered plan that favors more advanced degrees with a longer repayment period.  This helps educators that are BA and MA heavy as it extends the amount of time a student can repay loans, allowing for lower individual repayments and therefore increasing the chances of successful repayment.  Schools with such exposure are Apollo Group Inc (NASDAQ:APOL), Bridgepoint Education Inc (NYSE:BPI), Capella Education Company (NASDAQ:CPLA), DV, EDMC, Grand Canyon Education Inc (NASDAQ:LOPE) and Strayer Education Inc (NASDAQ:STRA).
This is all a perfect example of why you should wait to trade on news until after you have all the facts.  At first glance the introduction of new regulations would seem to be a negative catalyst.  This would indeed be the case had the released regulations not been a watered down version of the originals.  If you are interested in the beginning of this saga I encourage you to check out a speech given by Steven Eisman (yes, that guy from The Big Short) on the scourge that is the for-profit education industry.
Now the question is what will happen in the future.  I think that people are going to realize that they bought education stocks that still have had strict regulation introduced and will sell off into the high prices today and tomorrow.  By no means do I think that the 29% and 23% gains shown by COCO and EDMC will all be given back but a good chunk will.  Today was a massive trading day for these stocks.  I would want to listen to the quarterly earnings reports scheduled in late summer to see what the CEOs have to say about their prospects facing the new regulations before I jump on board.