Wednesday, March 12, 2003

Reading, Writing And Regulation

WASHINGTON - It may not be at the top of Congress' to-do list right now, but the Higher Education Act of 1965 is up for reauthorization in 2003. For-profit purveyors of postsecondary education--and their shareholders--will be watching closely.

These outfits draw the largest portion of their revenue from government financial aid programs. Career Education (nasdaq: CECO - news - people ), for example, which runs schools such as The Texas Culinary Academy and the International Academy of Design & Technology, pulls in about two-thirds of its total revenue from government sources.

Some background: The main federal source of postsecondary funding is Title IV of the Higher Education Act. Title IV encompasses such programs as Federal Family Education loans, Pell Grants and Perkins Loans. For the 2004 budget, President George W. Bush recently asked for $62 billion in total grants, loans and work-study programs at the postsecondary level. Pell Grants, $11.4 billion for this fiscal year, would rise to $12.4 billion.

But with that money comes a raft of standards and requirements set forth by the U.S. Department of Education and others. These include ensuring that default rates on student loans don't exceed 25% for more than three years straight; keeping each institution's federal aid revenue under 90%; hitting certain targets, vis-à-vis completion and placement rates; and maintaining acceptable levels of "administrative capability," such as providing sufficient financial aid counseling and other services.

So which way will the rulemaking pendulum swing in the reauthorization process? Some members of Congress have made noises suggesting a tightening. A fact sheet from the House Education & the Workforce Committee, for example, has this to say: "While the cost of a quality education continues to rise, questions remain about the quality and accountability of America's higher education system."

Analysts say such bluster shouldn't cause investors in for-profit postsecondary education firms much anxiety. On the accountability issue, for instance, analyst Richard Close, who follows the sector for Atlanta-based brokerage SunTrust Robinson Humphrey, says for-profit providers have a fairly solid track record. "They have an incentive to provide a quality education that enables a student to get employment after [graduation]," he says, "and they do a pretty good job on that front, as opposed to their competitors in public schools and community colleges."

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