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Sector Snap: For-Profit Education

Monday, 1 Oct 2012 | 3:27 PM ET

NEW YORK -- Shares of education companies rose Monday after the release of a federal report showing a slight drop in student loan default rates at for-profit schools.

Schools that have too many students defaulting may not be eligible for certain federal financial aid. Such loans make up the bulk of for-profit schools' revenue.

The Department of Education released data Friday showing that the overall number of students defaulting on federal loans seems to be stabilizing. Students at for-profit colleges still have the highest default rates, more than students at not-for-profit private colleges and public universities, but improved compared with last year.

DeVry Inc. was one of the day's biggest gainers, rising $1.11, or 4.9 percent, to $23.87, after peaking at $25.02 earlier in the day.

Other gainers in the sector included Strayer Education Inc., whose shares rose $1.68, or 2.6 percent, to $66.03; Education Management Corp. rose 9 cents, or 2.9 percent, to $3.20; Corinthian Colleges Inc. added 5 cents, or 2.1 percent, to $2.44; and Career Education Corp. rose 9 cents, or 2.4 percent, to $3.85.

Shares of the country's biggest for-profit education chain, University of Phoenix owner Apollo Group Inc., fell 35 cents, or 1.2 percent, to $28.70.

For students overall, 13.4 percent of borrowers whose first loan payments came due in fiscal 2009 had fallen behind by last September, or within three years of entering repayment. For students at for-profit schools, 22.7 percent of them defaulted within three years. That was better than 25 percent a year ago.

Critics contend default rates are higher at for-profit colleges because they provide poor value for money, have poor graduation rates, and have too few incentives to ensure their students succeed in the job market. But for-profit colleges say they're working to improve and argue higher default rates are to be expected because they serve lower-income students.

The sector's student default rates fell for the first time since fiscal 2005, said BMO Capital markets analyst Jeffrey Silber.

But Credit Suisse analyst Kelly Flynn was skeptical, saying that lower default rates likely resulted from delay strategies and less disruptions from Department of Education loan servicing issues that hurt the rates the year before.

"We believe the `real' default picture is actually worsening and is poised to continue to worsen," Flynn wrote in a note to investors.

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