• by Erik Sass  @eriksass1, August 17, 2010

Just as its newspaper publishing divisions begins to recover, the Washington Post Co. faces a new threat to its Kaplan education division -- proposed rule changes which would remove Kaplan schools from the list of services covered by federal Title IV student loans, or limit the number of students enrolled in Kaplan courses.  

WaPo disclosed the potential for damage from the rule change, proposed by the Department of Education, in a filing with the Securities and Exchange Commission on Monday.

The proposed DOE rule change would cut back on loans to institutions with a high proportion of students who fail to service their loans or are carrying an excessive amount of debt. It would limit full funding to schools where at least 45% of former students who are loan recipients are repaying principal on federal loans -- or where recipients had an average debt-to-earnings ratio under 8% of their total income.

The crackdown could pose a serious threat to Kaplan's revenues and WaPo's profitability, according to Moody's Investor Services. Senior credit officer John E. Puchalla noted that "Kaplan's higher education division derives approximately 80% of its receipts from Title IV programs. Moody's estimates KHE generated approximately 38% of WPO's revenue" -- and an even higher percentage of the company's earnings for the year ending in June.

As a result, Moody's said it will review WaPo's credit rating, hinting at a possible downgrade. However, WaPo's financial outlook and credit rating remain far better than other big newspaper publishers, due largely to its portfolio of businesses, which include cable and broadcast TV divisions, as well as Kaplan.

This bad news comes just as WaPo's beleaguered newspaper business appears to be turning a corner.

Two weeks ago, WaPo announced its newspaper publishing revenues rose 2% from $168.8 million in the second quarter of 2009 to $172.7 million this year, due in part to growth in online ad revenues, which climbed 14% from $23.5 million to $26.9 million.

The company's overall revenues increased 11% from just under $1.1 billion in the second quarter of 2009 to $1.2 billion this year, powered mostly by Kaplan, where total revenues jumped 15% to $747.3 million, including Higher Education and other test prep services.