Investors greeted the Education Department’s new “gainful employment” regulation with a collective sigh of relief, driving up the shares of the leading for-profit education companies from 3 percent to nearly 27 percent. The stock of the biggest player in the business, Apollo Group, owner of the University of Phoenix, jumped more than 11 percent, adding more than $700 million to its market value.
Despite Education Department efforts to keep the announcement secret, the number of investors betting Apollo’s stock would rise was unusually heavy Wednesday, about 10 times the normal volume, according to analysts. Options to purchase Apollo shares, which could be bought for $1 on Wednesday, were selling for $4 each on Thursday.
The new guideline caps two years of controversy about whether the for-profit education industry has used misleading marketing techniques to woo students and tap federal student loan programs while leaving low-income students heavily in debt. The industry has maintained that it serves a neglected population that needs job training.
After an intense lobbying campaign by the for-profit education industry, the regulation — which is supposed to push for-profit companies into designing programs that will lead students to good-paying jobs — was pared back from a draft proposal that was released last summer.
“I wouldn’t say people are dancing in the streets,” said one lobbyist who asked for anonymity to protect relationships with clients and officials. “But it is certainly an improvement over the proposed regulation.”
Ariel Sokol, an analyst with UBS Securities, said that “previously proposed onerous rules have been relaxed” and that the Obama administration’s final guideline “significantly reduces the risk associated with operating for-profit institutions.”
Robert MacArthur, an analyst who does research for investors who bet against companies by short selling, said, “I think they completely caved.”
On a conference call Wednesday evening, Education Department officials said the new guideline was “reasonable and thoughtful” and was designed not to shut down for-profit programs but to give them “every opportunity to improve.”
Schools that do not meet the new metrics risk losing federal funding. Key changes include giving schools more time to comply, penalizing only companies that fail to meet minimum loan repayment standards three times in four years, and giving companies more leeway in measuring income and repayment rates.
But Kevin Carey, policy director at the independent think tank Education Sector, said the administration’s effort marked an unprecedented move to hold schools accountable for giving students skills that lead to jobs.
“You’re establishing a principle, a new way of judging the success of colleges and deciding whether or not they’re worthy of federal dollars,” Carey said.