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House seeks to cut certain education funding

(Reuters) - The House of Representatives has proposed a cut in certain federal student aid funding in fiscal 2012, potentially hurting for-profit colleges.

The House has sought significant cuts in the Pell Grant funding -- federal aid to mainly low-income undergraduates -- from the 2011 levels in the Labor, Health and Human Services Funding bill.

A BMO Capital analyst note said the reduction is about 7 percent of the total estimated Pell Grants received in fiscal 2011.

The proposal, which was released late Thursday, seeks to stop Pell Grants for students attending school less than half time and for students who do not have a high school diploma.

Cutting Pell Grants would negatively impact the for-profit schools, where a majority of students are in the low-income category.

Colleges like Corinthian Colleges, Lincoln Educational Services and Career Education are the most exposed to these students, compared with other schools in the post-secondary education industry.

Though news of the cuts upset post-secondary stock prices, it is far too early in the process to discount what Budget will be passed given the political conflict in Washington, said Trace Urdan, an analyst with Wunderlich Securities.

The bill also looks to block the state authorization rule, which was finalized last year. This could prove to be a positive for the education companies.

The state authorization rule sets minimum standards that U.S. states must follow while approving or monitoring which schools get federal student aid.

Shares of education companies were down slightly on Friday morning. The education sector index was trading down 2 percent. (Reporting by Megha Mandavia in Bangalore; Editing by Sriraj Kalluvila)

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