U.S. education stocks tumbled Monday after Department of Education data on student loan repayments showed most for-profit schools would be ineligible for federal aid, spooking a sector concerned about increased regulatory scrutiny.
The S&P education services index dropped more than 6 percent to a 22-month low in an overall Nasdaq market that was up 0.4 percent. The sector saw blistering growth in much of last year as job seekers headed back to school to boost their employment prospects after the financial crisis.
Several for-profit education providers, however, complained that the way the department calculates ex-student loan repayment rates conflicted with the companies’ findings and with many brokers’ views.
To be eligible for federal aid, schools have to ensure that45 percent of former students are paying down debt. If that rate is below 35 percent, schools lose that eligibility.
According to the data released Friday only two listed for-profit education firms — American Public Education Inc. and Bridgepoint Education Inc. — would qualify for federal aid.
“We acknowledge that some of the department of education repayment figures, especially Strayer’s, seem odd, and we are therefore not completely confident the figures are 100 percent correct,” said Credit Suisse analyst K Flynn.
Strayer Education, Capella Education and Washington Post, whose Kaplan higher education unit accounts for more than 60 percent of revenue, separately complained of big discrepancies in the data.
Washington Post said that if the department stuck to its original findings — loan repayments at Kaplan averaged in the low 20s — it could hit future results at the business.
According to the data, Strayer University’s loan repayment rates also averaged in the low 20s — placing it among those ineligible for aid.
In a note titled, “Does ED data make sense?,” BMO Capital Markets analyst Jeff Silber said the data were questionable given the shockingly low repayment rate for Strayer and other anomalies.
Others said data on Strayer and Capella, in particular, were surprising considering both have relatively low default rates.
The discrepancy in methodology between the DoE, Wall Street and the companies is the inclusion of consolidated loans as a part of non-repaid loans, which led to low student repayment rates at these schools.
“If you do that, the implied performance of consolidated loans would suggest that 98 percent of our students’ consolidated loans were non-performers,” Strayer CEO Robert Silberman said on a conference call.”That makes no sense to us.”
A consolidated loan is one in which only interest is paid.
Shares of Arlington, Va.-based Strayer, which said the discrepancy has a significant operational and financial impact, slumped more than 18 percent to below $170, its lowest in 16 months.
Capella, which the data showed has a 40 percent repayment rate, said its programs would continue to qualify for federal student aid participation and have a repayment rate of more than 45 percent.
Strayer and Capella said they wanted to discuss the data and methodology with the department. Strayer said the department had indicated it would try to provide the company with details of its calculations which indicate a discrepancy of $130 million.
According to Friday’s data, different locations of peer DeVry Inc.’s DeVry University averaged around 40 percent student loan repayment, while Corinthian Colleges’ Everest colleges and institutes averaged in the low 20s.
Capella shares dropped 17 percent to $58.30, while Corinthian was down 25 percent at $5.02. Washington Post slumped 16 percent to a lifetime low, but clawed back some of those losses to trade 7 percent lower in close to four times normal daily turnover. DeVry was down nearly 9 percent, at $39.01.
