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For-Profit Schools Depend on Debt-Ceiling Fix

If the U.S. debt limit is not increased by Congress, the troubled for-profit education industry would be among the first to take a hit.

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Standard & Poor's warned Thursday that Kaplan higher education, a unit of Washington Post , could temporarily lose revenue from federal student loans if there’s no agreement on the $14.3 trillion debt ceiling by the August 2 deadline.

“We see the near-term risk that federal student-loan disbursements would not be processed. The end result would be that Kaplan’s higher-education business potentially might not receive revenue for an interim period,” said S&P in a report.

And that’s not a small matter. In 2010, Kaplan indirectly received about 82 percent of revenue from government-sponsored financial aid to its students.

The impact would be felt by other for-profit schools, as well. Like Kaplan, most finance their operations primarily with public dollars coming by way of federal student aid.

The consensus view is that the debt ceiling will be raised, but the question is what type of budget cuts are made in a final deal between congressional Democrats and Republicans. S&P said that a compromise that involves significant cuts to federal student loans and grants could negatively affect educational for-profits.

The industry is already under pressure from plunging new student enrollments, rising costs and declining revenue as a result of changes brought on by recent U.S. Department of Education regulation.

Interruption of federal aid disbursements may drive education stocks down, says Trace Urdan, managing director at Signal Hill. “This would cool company buybacks, which could embolden shorts and cause stocks to swoon,” he said in an email.

Jeff Silber of BMO Capital Markets believes that if the debt ceiling issue isn’t solved, loans will still be processed. “They will somehow find a way," he says. "Schools have got a very strong lobbying presence.”

Silber says he's more concerned about Pell Grants being cut, "since they serve a disproportionate amount of students at for-profit schools owing to their “poorer quality” demographics.”

Signal Hill's Urdan doubts that student-loan payments will be cut.

“I frankly think the politics of withholding student loan payments would ultimately backfire and they would likely save the cash elsewhere,” he said. “If the administration could find a way just to withhold the dollars from the for-profit schools they might consider it, but there is no basis in the law for cherry picking the schools.”

Education stocks are not reacting to the debt-ceiling crisis. “There are so many other issues facing the sector that this one has fallen between the cracks,” says BMO's Silber.

Some of the other schools to watch are University of Phoenix' parent Apollo , Devry , Bridgepoint Education , Strayer , Corinthian , and ITT Educational .

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