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Analyst picks the Winners and Losers of New Regulations for the For profit Schools.

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July 23, 2010 – Comments (0)

Ahead of the Bell: New for-profit education rulesAnalysts: New ed rule will hurt for-profit schools' growth, but most still have access to aid  On Friday July 23, 2010, 9:14 am EDT

NEW YORK (AP) -- New regulations proposed Friday that could block for-profit schools' access to federal student aid should let most schools continue to receive government loan funds, but will likely limit the sector's growth rates and ability to raise tuition, analysts said.

The Department of Education released a "gainful employment" rule Friday that would cut government aid to schools if too many students default on loans or earn too little after graduation.

The measure is part of an overhaul of regulations on the for-profit sector, which has come under scrutiny from the Obama administration for rising student loan defaults and questionable recruiting practices.

Signal Hill analyst Trace Urdan said almost all schools, except for those with the highest loan default rates, would still be eligible for the federal student loans, which can make up as much as 90 percent of their revenue.

The Education Department estimated that just 5 percent of for-profit college programs would be ineligible for aid in 2012-13, the earliest year the rule would apply, if the schools made no changes to programs.

The rule proposed is "less worse" than had been feared, said BMO Capital Markets analyst Jeff Silber.

Still, most companies' growth rates and ability to raise tuition will be hurt, said Credit Suisse analyst Kelly Flynn. And the drive to increase oversight of the for-profit sector might not be over, with a Congressional hearing reportedly planned for early August that could trigger additional legislation, Flynn said.

The gainful employment rule released Friday specifies that schools would be eligible for federal student loan dollars if at least 45 percent of their former students were paying off the principal on their federal loans, or their graduates had a debt-to-earnings ratio of less than 20 percent of discretionary income or 8 percent of total income.

Schools would be ineligible for aid if less than 35 percent of former students were paying down loans and graduates had a debt-to-earnings ratio above 30 percent of discretionary income and 12 percent of total income.

Schools that fall in the middle of those two ranges could face certain restrictions on enrollment growth. The government said 55 percent of all programs would fall into the "restricted" category.

Urdan said the proposed rule would mostly affect 2-year associate programs.

That could give some relief to stocks of schools which have been pressured, but are not likely to be much affected. Analysts said the new rule could benefit or have little impact on (APOL) Apollo Group Inc., (DV) DeVry Inc., (CPLA) Capella Education Co. and (BPI) Bridgepoint Education Inc.

Silber and Credit Suisse analyst Kelly Flynn said career colleges that focus more on 2-year programs or lower-income students may need to make big changes in their business, such as (ESI) ITT Educational Services Inc., (COCO) Corinthian Colleges Inc. and (CECO)Career Education Corp.

In premarket activity, shares of DeVry Inc. gained $1.49, or 2.9 percent, to $53, while Apollo Group Inc. added 21 cents to $46.53. Corinthian rose 23 cents, or 2.2 percent, to $10.48.

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