FBR Capital on Eduational Services: Takeaways from the 5th Senate HELP Committee Hearing

FBR Capital on Eduational Services: Takeaways from the 5th Senate HELP Committee Hearing

FBR analyst, Micheal Tarkan's Key Takeaways:

"90/10 and CDRs get a lot of attention. The 90/10 rule was addressed several times, specifically as it relates to schools taking advantage of the provisions by ramping up institutional loan programs and recruiting military students. With gainful employment (GE) now behind us, we expect the industry's lobbying efforts will shift to the 90/10 rule, to push for either modifications or an extension of the temporary relief that is set to expire in July 2011 and July 2012. In our view, the likelihood of either of these results is minimal given that the 90/10 rule is an existing regulation that would require new legislation to modify. Regarding cohort default rates (CDRs), Senator Harkin was emphasizing the need to look at lifetime CDRs as opposed to just two- and three-year cohort windows as many schools have lifetime CDRs in the 50% to 75% range."

"Community colleges should get more funding. By citing their lower tuition levels for similar programs, Senator Harkin is pushing for more assistance for community colleges. We expect this issue will continue to gain traction, especially in light of Pell grant budgetary constraints. We would not be surprised to see more funding allocated to community colleges or better performing schools.

"Harkin thinks gainful employment is only a "modest" step. Senator Harkin made it clear that he was hoping for a much stronger GE regulation by stating that the finalized rule is "better than nothing". As a reminder, the finalized version of GE loosened eligibility rules and gave schools a long time to come into compliance. Given his continued scrutiny of the for-profit sector, and based on his reaction to GE, we expect the Senator to continue to push for new legislation. However, we believe the likelihood that new regulations will be passed is diminished given the lack of bipartisan support and significant lobbying attempts on behalf of the industry."

"Accreditation meetings on deck. On June 8-10, ED's National Advisory Committee on Institutional Quality and Integrity (NACIQI) will hold its June 2011 meeting to review renewals for several agencies and examine specific accreditation issues ahead of the upcoming reauthorization of the Higher Education Act (HEA). Topics for discussion include the clarification of roles and responsibilities of federal, state, and accreditor entities, as well as accountability and the alignment of standards. Although we do not expect any immediate actions to come out of the meeting, we fully expect greater scrutiny and tighter controls in the accreditation of the for-profit schools."

Stocks of note include: Apollo Group (Nasdaq: APOL), Career Education (Nasdaq: CECO), DeVry (NYSE: DV), Education Management (Nasdaq: EDMC), ITT Educational (NYSE: ESI), and Strayer Education (Nasdaq: STRA)

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