Student Loan Scrutiny Could Hurt Washington Post

As the newspaper industry suffered through historic lows in advertising sales and circulation in recent years, Washington Post Co. (WPD) could always rely on its Kaplan testing and education unit to help prop up results. With the company's media business still hurting, a crackdown by the Obama Administration on student loan repayment rules could threaten Kaplan's outlook.

For-profit colleges such as those owned by Post, Strayer Education (STRA), and Corinthian Colleges rely in some cases on federal financial aid for up to 90 percent of their revenue. Yet data released by the Education Dept. last month showed that less than 35 percent of federal student loan aid is repaid at some campuses of those three college operators. The loans that aren't repaid come out of taxpayers' pockets. Congress and the Administration are proposing tougher oversight of for-profit schools amid concern that recruiters working for some of these colleges are signing up unqualified students and saddling them with loans they won't be able to repay. Regulations under consideration include rules that could make students at schools with the worst repayment records ineligible for federal loans. That could make it difficult for some for-profit colleges to survive. "This student financial aid is pretty important for for-profit colleges," said Jeffrey Silber, a BMO Capital Markets analyst. "Schools are going to have to revise some programs and seek out different types of students," if the regulations are enacted.

Kaplan operates college admissions test preparation courses as well as Kaplan University, which offers degree programs online and at campuses in Iowa, Maine, Maryland, and Nebraska. Although the Washington Post newspaper and its Newsweek magazine are better known, Kaplan has become the Post's largest unit, accounting for nearly 60 percent of revenue last year, up from 11 percent 10 years ago. Kaplan's impact on profits are even greater. In 2009, Kaplan had operating income of $194.8 million, while the Post's newspaper business lost $163.5 million and Newsweek lost $29.2 million. (Washington Post in August agreed to sell the magazine.)

The Education Dept. data showed that for-profit colleges have an average 36 percent loan repayment rate, compared with 54 percent at public universities and 56 percent at private nonprofits. The government is considering a rule, to take effect next July, that could restrict federal grants and student loans at for-profit schools with less than a 45 percent repayment rate and prohibit aid at for-profit schools with less than a 35 percent repayment rate. The schools can also qualify for aid by showing that loan repayments don't exceed a certain percentage of former students' income. The Education Dept. has said 5 percent of for-profit programs could lose eligibility.

Washington Post Chairman Donald E. Graham, who has personally lobbied on Kaplan's behalf, says the regulations "don't have the effect they intend and, in fact, have the perverse effect of punishing schools that serve low-income students." Graham says "over 70 percent of our students are Pell Grant-eligible, which means we serve a very low-income population."

The company says the federal data showed Kaplan had a 28 percent repayment rate. A Kaplan spokesperson, Melissa Mack, says the company takes issue with the data, noting that students who defer repayment on certain loans are being counted as failing to repay. "Were schools at least not penalized for having students that participate in those programs, our percentage would increase by 20 to 30 points," says Mack.

Hal Jones, Washington Post's chief financial officer, says it's not yet clear what financial impact the proposed changes would have on Kaplan. Washington Post last month said tighter restrictions on federal education grant and loan programs could cause it to lose students and struggle to retain teachers. If it cannot lift the average repayment rate or help graduates lower their debt-to-earnings ratio, the U.S. could deny Kaplan aid, the company said.

In August the Government Accountability Office issued a report critical of recruiting tactics at 15 for-profit schools, including two Kaplan campuses. The company said it was complying with a federal request for information on financial results, recruiting, operations, enrollment, and regulatory compliance over the last four years.

The warnings about Kaplan have shaken investors in Washington Post stock, whose largest common holder is Warren Buffett's Berkshire Hathaway (BRK.A), sending the shares at one point to a 14-year low. The stock has tumbled more than 18 percent this year. Short-selling of Post shares, basically a bet that the stock price will fall, has soared to its highest level in at least 19 years. "People are noticing just how important Kaplan has been to Washington Post all these years," says Will Duff Gordon, senior analyst with Data Explorers, which tracks short sales. The company may also face higher borrowing costs. Standard & Poor's (MHP) cut its outlook on Washington Post, and Moody's Investors Service (MCO) is reviewing the company for a potential downgrade.

The bottom line: Washington Post has long profited from its lucrative Kaplan education unit. Tougher rules on loan repayments could hurt the business.

With John Lauerman and John Hechinger

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