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Education Stocks Fall as Senator Durbin Details Curbs

Strayer Education Inc. led a decline in for-profit U.S. education stocks as Senator Dick Durbin said industry practices should be curbed.

“We need to consider whether it is wise for companies to profit so handsomely on federal funding when the results don’t match the investment,” Durbin, a Democrat from Illinois, said in a statement. “And we need congressional action to rein in abuses and ensure that taxpayer dollars are being wisely spent.”

Yesterday, hedge-fund manager Steven Eisman said he is betting against Strayer, saying its federal student loan repayment rate is 25 percent, less than half the 55.4 percent figure given by the company.

Strayer, based in Arlington, Virginia, retreated 9.1 percent to $144.64 at 4 p.m. New York time. An index of 12 education stocks fell 3.2 percent, the most since Aug. 16, after Durbin discussed the industry with students and executives in Chicago. Corinthian Colleges Inc. lost 7.6 percent to $4.88.

“It’s Strayer pulling the sector down,” said Trace Urdan, an analyst with Signal Hill Capital in San Francisco. “People are alarmed because of Eisman, they are alarmed about the suggestion that Strayer isn’t the company we thought it was.”

Bear the Risk

Durbin said for-profit colleges should “bear some of the risk” with taxpayers when students default on a federal loan and that the schools should disclose more information on job placement rates so “students can make informed decisions and aren’t burdened with debt without the skills and credentials necessary to succeed,” according to the statement.

The senator said the colleges shouldn’t be allowed to gain accreditation by buying licensed non-profit schools. Durbin also wants an examination of how much federal funding is being spent for marketing. He said for-profit universities get as much as 90 percent of their revenue from federal funding.

Congress won’t pass legislation to regulate the industry this year while there may be more hearings, Durbin said in a press conference after the forum.

“It is a massive political effort that is being made on behalf of these schools,” he said.

Accreditation Required

He said for-profit schools should be required to be accredited before their students can receive government aid and that schools should be “on the hook and responsible for the financial burden” if they mislead students about their loan obligations or the type of education that is offered.

“We have to have some kind of realistic limitation on the student debts that are incurred,” the senator said.

The index of colleges sank 7 percent on Aug. 16 as data from the Education Department showed that colleges owned by for-profit education providers have campuses where fewer than 20 percent of federal student loans are being repaid. The government wants to use the data to determine whether programs can remain eligible for aid.

“The other thing people worry about is the lack of transparency in the sector,” Urdan said. “We’re relying on the regulator for the data and there’s no accountability. It’s a black box and that definitely makes investors nervous. How can you invest in a sector where the regulator holds all the cards?”

Apollo Group Inc declined 1.6 percent to $42.49. The biggest operator of U.S. for-profit colleges said it is being sued by investors who claim the company made false statements about its business this year and last year that drove up the company’s stock price.

Trading of bearish Strayer options jumped to 2.6 times the four-week average. More than 2,700 puts to sell the stock changed hands, 2.9 times the number of calls to buy. The most-active options were September $135 puts, which almost tripled to $7.40.

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