Published: August 16, 2010

It's been an absolutely brutal summer for the for-profit education stocks. In late June, the Senate began investigating whether for-profit academic institutions such as Apollo Group (Nasdaq: APOL) were a worthwhile use of taxpayer funds for student loans when their students have higher-than-average loan default rates. Senate investigators also questioned whether all of these institutions even offered academic benefits of sufficient value to justify such a high number of student loans.

Then, in early July, the Department of Education (DOE) began to look into these issues as well, as rumors swirled that some of these firms might run into trouble if the scrutiny got even more intense. Well, that day has arrived. The DOE has just released data that show a number of these institutions are seeing their students default on loans at an alarming rate. The DOE established a 45% payback rate as the threshold that is deemed acceptable.

As the chart below indicates, one can guess which schools passed the test simply by seeing what stocks are rising and which are falling in Monday trading. Several institutions exceeded that threshold, and are seeing their shares move up nicely. But the schools that failed to meet that threshold are seeing their shares take a fresh beating.
 

The timing couldn't be worse. Congress is considering cutting off access to loan funds for for-profit schools that suffer from both high loan-default rates and poor job placement rates. Access to student loan support is the life-blood of many of these institutions.
 

Of course, some of these schools with a high amount of poorly-performing student loans nevertheless provide useful educations. Devry (NYSE: DV) and ITT Educational (NYSE: ESI) have long-standing solid reputations in the fields of technical training, and high student loan defaults for these companies are partially due to a very weak economy, and not frivolous lending. Yet others such as Strayer Education (Nasdaq: STRA) and Corinthian Colleges (Nasdaq: COCO) could be quite vulnerable as they offer a higher percentage of bachelor's and master's degrees, which can be more costly than the more focused associate degree-granting schools such as Devry and ITT.

The companies that passed this test must be thrilled, as they had seen their shares dragged down by some of the more dubious educational firms in the group. The thumbs-up given to Universal Technical Institute (NYSE: UTI), Bridgepoint Education (NYSE: BPI) and Apollo Group means they are likely to escape deeper legislative restrictions and should benefit from any troubles suffered by the high-default schools, as those schools will have far fewer funds to lend. This means students will increasingly turn to the healthier academic institutions, which in turn allows those schools to be more selective, thanks to a greater applicant pool.

Action to Take --> It's not clear if the Senate will take action to restrict access to student loans before the mid-term recess. And if the GOP regains control of Congress, it's not clear if they will look to clamp down, as this is an issue that has mostly been championed by Democratic legislators thus far. So it pays to watch these events unfold, but the shares in the above-noted table could have significant further upside if today's DOE report leads to Congressional action.

-- David Sterman
Staff Writer
StreetAuthority