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July 26, 2010 10:00 AM Bad Apples

By Daniel Luzer

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Because America’s for-profit colleges depend so heavily on federal largess, news from the U.S. Department of Education can matter a great deal for their stock prices. When Education deputy undersecretary Robert Shireman called out for profit schools by name for unsavory practices at a meeting in April, stock prices of education companies fell. When Shireman resigned a month later, stock prices rose.

But all for-profits are not the same. In May Education Secretary Arne Duncan said that some propriety schools played a “vital role” in helping Americans get better jobs. His department, however, wanted to eliminate a “few bad apples” in the for-profit education industry.

When the department issued its recommendations on new rules for gainful employment last Friday, specifying that graduates of for-profit schools couldn’t pay more than eight percent of their total income in order for the school to continue to be eligible for federal aid, the market reaction was curiously mixed.

Despite the fact that the rules will put additional burdens on America’s for-profit schools, it’s not likely to negatively affect all of them. According to a Huffington Post article, shares of many for-profits—those where most graduates are able to successfully make regular payments on their student loans—actually rose in Friday trading:

DeVry was among the biggest gainers in the Standard & Poor’s 500 index Friday, climbing $6.58, or 13 percent, to $58.09 in afternoon trading, while Apollo rose $2.25, or 5 percent, to $48.57. Other companies that analysts said will be least affected by the proposed rules also gained. Capella Education Co. rose $4.35, or 5 percent, to $87.95; Bridgepoint Education Inc. added $1.17, or 7 percent, to $18.39; and American Public Education Inc., climbed $2.06, or 5 percent, to $46.04.

In contrast, institutions with reputations for poor service didn’t do so well after the department released the new gainful employment rules:

Companies such as ITT Educational Services Inc., Corinthian Colleges Inc., Education Management Corp. and Career Education Corp., that operate career colleges focusing more on 2-year programs or lower-income students may need to make big changes, analysts said. Their shares were mixed. ITT rose 4 cents to $85.22 and Corinthian dipped 19 cents to $10.06. Education Management rose $1.07, or 7 percent, to $16.24 and Career Education gained 57 cents to $25.11.

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Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer