Will DeVos' Revised Rules Favor For-Profit School Stocks?

The Trump administration is set to revise for-profit education industry regulations, as announced by the U.S. Department of Education on Jun 14. The department intends to form committees to bring about changes to the Borrower Defense to Repayment (BDR) and Gainful Employment (GE) system, introduced during Obama’s reign.

Post the victory of President Trump, shares of for-profit education companies like Adtalem Global Education Inc. (NYSE:ATGE) , Grand Canyon Education Inc. (NASDAQ:LOPE) , Strayer Education Inc. (NASDAQ:STRA) , Capella Education Company (NASDAQ:CPLA) rallied as Trump had assured support to schools, confirming federal funding for online companies and easing of regulations imposed on the industry by the Obama administration. The Zacks categorized Schools Industry gained 36.7% outperforming the broader market’s (S&P 500) gain of 12.7%, post the victory.

Obama Era Rules

In order to protect students from misleading prospects about programs offered by the different educational institutions and high debt burden, the Obama government introduced GE and BDR rules.

The GE rule is aimed at ensuring that a program offered by an educational institution lead to ‘gainful employment in a recognized occupation’. If the loan repayment amount is more than a certain percentage of the students’ income, the program will not be eligible for federal aid.

The BDR rule is aimed at protecting students from misleading claims made by educational companies about their programs or placement opportunities. Students can easily file lawsuits against the educational companies and get their loan waived off by the federal government, if the colleges are accused of being fraudulent in their claims. The government is currently processing nearly 16,000 borrower defense claims.

Education companies like Corinthian Colleges Inc and ITT Educational Services, Inc. were shut down and several programs were closed in other companies, as a consequence of such a scrutiny.

Revising Rules

U.S. Secretary of Education Betsy DeVos is of the view that the current regulation “is a muddled process that's unfair to students and schools, and puts taxpayers on the hook for significant costs.”

The revised regulations are expected to be fair and balanced for the educational companies at the same time protect students from fraudulent practices and misleading claims.

Bottom Line

For-profit education companies are poised to surge given the friendly approach of the Trump administration toward these companies. The government’s intention to do away ‘overly burdensome and confusing’ rules for institutions of higher education is likely to benefit such companies. However, some critics believe that the revised rules are more in favor of for-profit education companies than students.

Investors should keep a close watch on the story to find out how things shape up for the for-profit education companies as the Dept of Education plans to publish its Notice of Intent to Conduct Negotiated Rulemaking on BDR and GE in the Federal Register on Jun 16, 2017.

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