Apollo Education to Face Financial Aid Scrutiny by DoE

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Apollo Education Group, Inc. (APOL) recently revealed that the Department of Education (DoE) intends to review the administration of student financial aid by its flagship subsidiary, University of Phoenix (:UOP).

The DoE administered federal student financial aid programs — also referred to as the Title IV programs — contribute a significant portion of Apollo Group’s revenues. Moreover, UOP is the biggest unit of the for-profit education company and accounts for almost 90% of its revenues.

The review is expected to begin on Aug 4 and will initially cover federal financial aid years 2012-2013 and 2013-2014.

In order to remain eligible to participate in the Title IV funds, for-profit education companies have to follow certain extensive DoE rules/regulations. These include maximum student loan default rates, maximum debt-to-earnings ratios of its graduates, limitations on the proportion of its revenues that can be derived from federal student aid programs, elimination of incentive compensation to admissions advisors, standards of financial responsibility and administrative capabilities. If the companies fail to comply with these rules, their institutions may lose eligibility to participate in Title IV funds.

Educational institutions are being brought under the scanner due to widespread misuse of the Title IV funds. For example, the DoE has proposed that an educational program can only qualify for Title IV funds if it helps students achieve gainful employment in a recognized organization. Educational institutions are now being asked to furnish information to prospective students relating to recruitment procedures and the use of student grants.

Further, to remain eligible to participate in the Title IV programs, educational institutions must maintain student loan cohort default rates below specified levels. Institutions may lose their eligibility to participate in Title IV programs if their student loan default rates are higher than the DoE’s standard.

Other for-profit education companies like Corinthian Colleges, Inc. (COCO) and ITT Educational Company (ESI), are also facing strict enforcement of the DoE rules.

Earlier this month, Corinthian Colleges announced a transition plan to put up 85 of its campuses for sale and eventually shut down operations at another 12 under an operating agreement with the DoE. ITT Educational could face restriction of student financial aid funding as it has delayed the filing of key financial reports.

Other Stocks to Consider

Apollo Education carries a Zacks Rank #3 (Hold). A better-ranked education stock worth considering is DeVry Education Group Inc. (DV), which sports a Zacks Rank #1 (Strong Buy).

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