The US Government Accountability Office (GAO) released its study on proprietary schools on September 21st. Our analysis of the report indicates that the recommendations offered by the GAO are more favorable to postsecondary education companies than previously anticipated. Certain higher quality schools within the sector should benefit more than others as a result of the GAO recommendations.

The objective of the GAO study was to review how $16 billion in funding awarded to proprietary schools in the 2007-2008 academic year were used. Along with for-profit universities, the study also evaluated public universities as well as nonprofit private universities. Wall Street’s concerns in advance of the study included a combination of a lack of familiarity with the current administration’s stance on proprietary schools, as well as anxiety over how harsh the recommendations might be. There were specific concerns that profit margins would be a major focus of the study along with student enrollment standards.

After a thorough review of the report, we found that there was less scrutiny of the profitability of schools than previously anticipated. Instead the focus was on student outcomes. Good outcomes can be measured by high persistence rates among current students, or by student job prospects after graduation. If a student graduates and cannot find a job, he or she is at risk of defaulting on their federal loans. The cohort default rate (CDR) is the metric which indicates the percentage of students who default on their federal loans within two years after graduation. Using the most recent four year data, the CDR rates for proprietary schools stood at 8.6 percent. A school would lose funding if its CDR reaches 25 percent for three years in a row or 40 percent for one year.

The major reason cited by the GAO for the differences in performance between proprietary schools when compared to either public schools or private nonprofit schools is the differences in student population demographics and socioeconomic background. When these factors are taken into consideration, the higher CDRs and worse outcomes were not only unsurprising but also expected.

One concern raised by the report is the issue of quality control within the proprietary schools. The report mentioned cases where students who were not academically qualified for enrollment were allowed to enroll after taking an “ability-to-benefit” (ATB) exam. The exam tests basic Math and English skills. If the enrollment process receives further scrutiny, it is conceivable that a higher barrier will be erected for prospective students.

Among the for-profit companies that we currently cover, we believe the higher quality schools will benefit more from this report. Schools such as Apollo’s University of Phoenix (NASDAQ: APOL), DeVry (NYSE: DV), Strayer (NASDAQ: STRA) and Capella (NASDAQ: CPLA) will be the biggest beneficiaries. Among the schools that disclose post graduation metrics, DeVry graduates are shown to have the highest job placement rates as well as the highest salaries. Companies such as ITT Tech (NYSE: ESI), Career Education (NASDAQ: CECO) as well as Corinthian Colleges (NASDAQ: COCO) stand to benefit less than the aforementioned school in our opinion.