Education

Banks Urge Investors To Buy For-Profit College Stocks Now That The GOP Is Taking Back Congress

CREDIT: AP

The Republican resurgence on Capitol Hill makes for-profit education company stock a hot commodity, according to industry analysts who expect a GOP-controlled Congress to loosen oversight of both student lending firms and for-profit colleges.

Investment advisers from both Credit Suisse and BMO Capital Markets issued research notes this week connecting the Republican victories on Tuesday to an improved outlook for education companies. The analyses were based primarily on future legislative predictions. The Higher Education Act needs to be renewed, and BMO’s Jeffrey Silber argued that a Republican Senate will produce a bill that is much friendlier to the companies that run for-profit schools, according to Buzzfeed. Credit Suisse wrote in Barron’s that the “diminished regulatory risk characteristics of a Republican-controlled electorate” makes student lending company stocks likely to rise in value because “Republicans have historically fought detrimental legislation originating from Congressional Democrats.”

Stock in Strayer Education Inc., one of the largest for-profit college companies, was up almost 10 percent from Tuesday morning to Thursday morning. DeVry’s stock is up nearly 3 percent and Apollo Education Group’s is up over 2.5 percent.

Education policy observers seem to agree with the financial analysts’ prognosticating about how Congress might legislate in the future. Steps that the Obama administration has already taken through regulation — such as the recently-unveiled “gainful employment” rules that are designed to cut off federal education dollars to schools whose graduates can’t get jobs — may be safe from retroactive interference. Congress could attempt to cut off funding to enforce such rules, as Forbes’ James Marshall Crotty argued Tuesday, though legislation to do that could potentially face a veto threat. But more ambitious administration efforts to establish a broader ratings system for higher education institutions that would be tied to their access to the federal student lending system are much harder after Tuesday, according to Inside Higher Education.

“I honestly don’t think that Wall Street really cares about gainful employment anymore,” said Wells Fargo Securities senior analyst Trace Urdan at a Center for American Progress (CAP) event on Wednesday. Urdan, who has followed the for-profit education sector as an investment adviser for a long time, suggested that companies are calm about the new regulations but spooked by the White House’s announcement of a new “interagency task force” to monitor for-profit colleges. “The task force from the announcement last week was far more disturbing to investors, because the task force sounds like a permanent cabal of federal agencies who are going to come together on whatever regular basis and find ways to go after the sector. And that makes it less investable, maybe uninvestable for some,” he said. “A rule’s a rule, a rule is fine, it’s this idea that we’re all gonna get together and look for ways we can beat up on you guys going forward, that’s the thing that makes investors really nervous.”

A few statistics on the for-profit education sector’s performance and revenue stream help illustrate why such a task force might be necessary. The average cost of a two-year degree from a for-profit school is $35,000, more than four times the $8,300 average price tag of the same degree at a community college. Drop-out rates are high, and among those who do graduate the median debt load is $13,000 higher than for graduates of non-profit schools. The schools don’t provide any clear reward for that higher price tag: job applicants with for-profit college degrees have no better luck getting a job interview than applicants with no degree at all, and earn thousands less per year when they do find work.

The companies that operate these high-cost, low-value degree-granting institutions are immensely profitable, spend a billion dollars more on recruiting than on educating annually, and reward their executive officers with massive pay packages. In many cases, these companies get 90 percent of their income from federal student loan dollars.

Student debt activists emerging from the Occupy Wall Street movement have targeted for-profit college students first in their new campaign to organize education debtors to fight for fundamental changes to the student lending system. If successful, The Debt Collective campaign could force policymakers to grapple with an educational financing system that the activists believe puts corporate profits over societal good and individual prosperity.

That sentiment also got voiced at CAP’s Wednesday panel discussion on for-profit schools. “What’s the goal of the federal aid program in higher education?” Generation Progress executive director Anne Johnson said. “It is not actually to provide stability for Wall Street investors. That’s not the point.” But after decades of using public resources to make higher education as cheap as possible for everyone who wanted to do the work, Johnson said, “we’ve shifted this burden from being about our society and what our society wants to provide to people, to saying that young people somehow have a responsibility to come up with $100,000 so they can get themselves through college, borrow it if you have to, so you can be a good engine of growth in the economy. And there are all sorts of people who are making a ton of money off that model.”