Education stocks rally on speculation of softer regulation

BANGALORE (Reuters) - Shares of U.S. for-profit education companies, including bellwether Apollo Group (APOL.O), rose Monday on speculation that the highly anticipated regulations on the sector might be watered down.

Apollo shares rose about 10 percent to $49.98 on Nasdaq, while the broader S&P 1500 education services sub industry index .15GSPEDUS rose as much as 9 percent. Among top gainers were Corinthian Colleges Inc (COCO.O), up 19 percent, and Capella Education Co (CPLA.O), up 10 percent.

"There is a rumor that the gainful employment number has moved from 8 percent to 12 percent, and clients are telling us this is what they are hearing," said Signal Hill analyst Trace Urdan.

Under the gainful employment regulation, the Obama administration is weighing cutting off loans to programs that leave graduates with debt service costs greater than 8 percent of expected starting salary.

"The prospect of the debt to income ratio moving from 8 percent to 12 percent would provide a significant amount of relief to companies operating in the sector," said Urdan.

Schools that may fall afoul of the gainful employment rule will have to increase quality, lower tuition, accept fewer students who take out large amounts of debt, or cut programs.

As a result, the impending gainful employment regulation has been an overhang on the shares of education companies.

In a note to clients, Baird analyst Amy Junker said, "We believe education stocks are rallying this morning on speculation regarding the highly anticipated release of gainful employment, expected in a briefing to Democratic staffers this afternoon or tomorrow."

Junker added that while a watered-down version of gainful employment is positive for all higher education companies, some could remain at risk of violating the proposal.

Options action also picked up in Apollo.

(Additional reporting by Saumyadeb Chakrabarty; Editing by Gopakumar Warrier)