Dow Jones Newswires | For-profit education companies were under pressure Thursday after a U.S. Department of Education official did an about-face and bashed the companies and the accreditation process in a speech late Wednesday, allegedly comparing the sector with Wall Street firms whose actions brought about the financial turmoil of the last few years.

In a speech to state regulators who oversee for-profit colleges, Robert Shireman, the man behind the Education Department’s strategy, called out the colleges one by one for the increasing amounts of federal student aid money they’re getting, according to an article in industry publication Inside Higher Ed.

BMO Capital Markets analyst Jeffrey Silber said in a note to clients he
doesn’t think the author of Inside Higher Ed’s article was present to
hear the speech, and that it’s based on accounts from people who
“presumably did attend.”

Silber said his thesis hasn’t changed on the stocks — that there will
likely be some constraints because of the regulation process, but he is
cautiously optimistic the changes proposed earlier this year, like the
gainful-employment proposition, will be diluted somewhat.

“However, the ‘fear factor’ has certainly risen this morning,” he wrote.

There were no prepared remarks for Shireman’s speech, a Department of
Education spokesman said, and Shireman wasn’t immediately available for
comment.

“For-profit colleges play a critically important role in helping to
ensure so many Americans have access to education and training that can
improve their job prospects and their lives,” the spokesman said. “We’ve
had constructive discussions in recent months and look forward to
continued thoughtful dialog with the career education community.”

Shares of Career Education Corp. fell 10% to $30.07, while
Corinthian Colleges Inc. dropped 7.2% to $15.70. ITT Educational
Services Inc. declined 5.4% to $104.73, Apollo Group Inc. slid 6% to $57.83 and Grand Canyon Education Inc. declined 2.4%
to $24.37.

Strayer Education Inc., which beat analysts’ expectations with
its first-quarter earnings earlier Thursday, pared some declines,
falling 1.1% to $244.03.

Signal Hill Group analyst Trace Urdan thinks Shireman’s speech shows the
Education Department is “taking a very hard line” in promoting its
gainful employment regulations.

The most hotly-debated measure to come out of the negotiated rulemaking
discussions was a government proposal to hold colleges accountable for
graduating students with high debt loads and low income levels, or
literally not preparing students for “gainful employment.” Though the
exact criteria have been debated, the Department of Education has pegged
a fair level of debt at about 8% of income and originally said it would
scrutinize schools that don’t graduate at least 70% of their students
or place 70% of graduates in jobs related to their fields of study.

Shireman’s comments seem to signal the department intends to go after
accrediting agencies, Urdan said.

Shireman said accreditors lack the “firepower” to regulate the sector,
and states and the federal government don’t have all the tools they need
to do it, either, Inside Higher Ed said, citing the notes of several
people in the audience.

Urdan said it looks likely the department will pressure the accrediting
agencies, but it’s a tricky situation for them, because other than
kicking one of the agencies out of the club, the department is limited
as to what it can do. There’s a panel made up of six Senate members, six
House members and six White House staffers that has the job of looking
over accreditation agencies, he said, so though the market is worried
Thursday, the process of making changes is going to be much slower and
will probably have to involve Congress.

Shireman’s comments were a switch from his stance of late. Earlier this
week, Shireman told Dow Jones Newswires in an interview that there was a
misimpression that the Education Department was out to get or was
biased against for-profit education companies. The companies “play a
very important role” in the higher-education system, he said at the
time.

Urdan said he thinks the market is going to see Shireman in the press a
lot this summer drumming up positive sentiment for the
gainful-employment rules, which have so far generated only negative
comments from the industry.

He added Career Education’s shares were down more than the others since
the company had been trying to switch its accreditation to the North
Central division, which had already been called to task by the Education
Department for being too lax in allowing other schools to make that
switch.