July 23, 2010 / 4:49 PM / 9 years ago

UPDATE 1-US educ. stocks up on softer-than-expected regs

* For-profit rule “better than expected” news

* Legislation could be next shoe to drop (Adds comment from analyst, Senator Harkin)

BANGALORE/WASHINGTON, July 23 (Reuters) - Shares of U.S. for-profit education companies, including bellwether Apollo Group APOL.O, rose on Friday, a day after the Department of Education came out with its highly-anticipated proposal on gainful employment.

The department’s proposed rule said for-profit schools would have to prove that their former students were either paying off loans or were capable of doing so in order for the schools’ current students to receive federal loans.

“The actual proposal that came out was not good news for the sector, but better news than what was expected,” analyst Luke Shagets of Sterne, Agee & Leach said.

“The stocks have been down a lot, waiting for the news to come, and the news was actually a little better than expected,” the analyst said.

Apollo shares rose as much as 10 percent to $51.28 on Nasdaq but gave back half those gains by the afternoon to be up 4.7 percent to $48.43. Apollo shares had dropped about 30 percent in the last three months.

DeVry Inc DV.N was up 10 percent, but Career Education (CECO.O) lost much of its early gains to be up 2.2 percent. The S&P education services index .15GSPEDUS was up 4.7 percent.

Under the proposed rules, the federal government would no longer lend to programs if more than 65 percent of former students failed to pay the principal on federal loans, and if their graduates’ debt was more than 30 percent of discretionary income and 12 percent of total income, the department said.

“The gainful-employment rule looks to be better than at least the short sellers expected it to be,” said Trace Urdan, an analyst at specialty investment bank Signal Hill Capital.

Urdan pointed out that the share price rises came against a backdrop of “incredibly depressed” stock prices in the sector.

And the schools were not totally out of the woods, he said, since there was talk that Senator Tom Harkin, who has been critical of the schools, could introduce legislation that would tighten the rules further.

Harkin’s office put out a statement saying that he would continue to look at the sector.

“At first glance, the regulation appears to set a low bar,” he said in a statement. “If we are allowing a school to continue to walk away with taxpayer dollars, despite the fact that less than a third of its students are able to repay their loans, that would seem to be a case of shockingly low expectations.”

Analysts named American Public Education Inc (APEI.O), Apollo, Career Education, Strayer Education (STRA.O), Capella Education Co CPLA.O, Grand Canyon Education Inc (LOPE.O) and DeVry as institutions that will not be much impacted from the proposed regulation.

“Institutions with more favorable student body characteristics, relationships with employers and relatively less expensive programs are least likely to be impacted,” Robert W Baird & Co analyst Amy Junker wrote in a note to clients.

Education Secretary Arne Duncan predicted that five percent of programs would lose those funds. [ID:nN22158531]

The proposed rule is part of a broader overhaul of the industry, which has been criticized for producing poorly prepared students with big debts. (Reporting by Bijoy Koyitty and Fareha Khan in Bangalore, and Diane Bartz in Washington; Editing by Tim Dobbyn)

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