Correction:

An earlier version of this article incorrectly said that education industry analyst Ariel Sokol works for Credit Suisse. He works for UBS Securities. This version has been corrected.

For-profit education companies’ stock up as regulation pared back from early draft

For nearly a year, for-profit colleges have been battling the Obama administration over a key rule designed to keep the schools from saddling students with more debt than they can repay.

On Thursday, the stock market declared a winner: the industry and its network of lobbyists.

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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.

Half a dozen leading firms in for-profit education — including The Washington Post Co. on behalf of its Kaplan education division — and the trade group Coalition for Educational Success spent a total of $4.3 million lobbying in 2010 and at least $2 million this year. The Education Department said it received a record 90,000 letters on the rule.

Lawmakers from both parties, though mainly Republicans, have urged the administration to drop the gainful-employment rule. In February, the House went as far as barring the Education Department from implementing the new regulation, although the Senate later blocked that move.

Industry lobbyists said political opposition — and competing legislative priorities — may have prompted the Obama administration to compromise on the rules.

On Thursday, some of the rule’s critics on Capitol Hill said they were not satisfied by the administration’s modifications.

Rep. John Kline (R-Minn.), chairman of the House Education and the Workforce Committee, called the changes “minor” and vowed to continue fighting the rule, saying it would hurt students. “It is deeply troubling the administration continues to push an initiative that will limit the ability of millions of individuals to gain the skills and training necessary to succeed in the workplace,” Kline said in a statement.

Industry lobbyists and supporters said they were still calculating their next moves to oppose the rule, which could involve legal challenges and drumming up more opposition on Capitol Hill.

The Education Department estimated that 5 percent of programs at for-profit schools would ultimately lose access to federal student loan dollars, which currently account for as much as 90 percent of revenue at the for-profit schools. Earlier, the department estimated that 16 percent of the programs could be cut off.

Despite concessions won by the industry this week, analysts said schools teaching vocational skills still face a painful retrenchment. Several other rules designed to curb bad practices go into effect July 1. And many schools are remaking their business models to attract wealthier students who are more likely to pay back their loans.

“The whole landscape is changing,” said Bradley Safalow, an analyst with PAA Research. “You have a major shakeout.”

 
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