For-profit colleges Strayer Education Inc. (NASDAQ: STRA) and Capella Education Co. (NASDAQ: CPLA) have agreed to an all-stock merger of the two companies in a deal valued at $1.9 billion. The combined entity will be renamed “Strategic Education Inc.” when the deal closes and will trade under the STRA ticker symbol.

Capella shareholders will receive 0.875 shares of Strayer stock for each Capella share, representing a 22% premium to Capella’s closing price on Friday. The transaction is expected to close in the third quarter of 2018 subject to customary closing conditions and approval by the U.S. Department of Education, state regulators and accreditation bodies, as well as stockholders of both companies.

The two companies will continue to operate independently and will be separately accredited. They currently enroll about 80,000 students. Each will maintain a separate board of directors and faculty and academic support service positions separately at each firm. The merger is expected to add 20% to 25% to Strayer’s earnings per share by 2019.

According to the announcement, “The combination is expected to achieve corporate level efficiencies that will enable each university to accelerate innovations that improve affordability, and enhance academic and career outcomes for students.” The deal is expected to achieve annual savings of $50 million, about half realized in the first 12 months following the closing and the rest with the next six months.

There was a time when shares of for-profit colleges traded at nosebleed levels. Enrollments surged and federally guaranteed student loan dollars flowed in. That cash flow became constrained when marketing to prospective students was regulated. Then came the bankruptcy of Corinthian Colleges that revealed former students at the for-profit school owed more than $3 billion in student loans.

According to a 2015 report by the Brookings Institution, non-traditional student borrowers (defined as coming from for-profit schools and two-year institutions) represented a small share of all federal student loan borrowers and an even smaller share of outstanding loan balances. Then:

Between 2000 and 2014, the total volume of outstanding federal student debt nearly quadrupled to surpass $1.1 trillion, the number of student loan borrowers more than doubled to 42 million, and default rates among recent student loan borrowers rose to their highest levels in twenty years. … [D]uring and soon after the recession the number of non-traditional borrowers grew to represent half of all borrowers. With poor labor market outcomes, few family resources, and high debt burdens relative to their earnings, default rates skyrocketed. Of all students who left school and who started to repay federal loans in 2011 and who had fallen into default by 2013, 70 percent were non-traditional borrowers.

The Obama administration forgave more than $550 million in federally guaranteed loans made to tens of thousands of students at for-profit schools like the now-defunct Trump University. U.S. Education Secretary Betsy DeVos is now developing a plan to grant such students just partial relief.

Strayer shares traded up more than 8% Monday morning, at $99.73 in a new 52-week trading range of $56.48 to $100.18.

Capella traded up more than 30% to $85.65, in a 52-week range of $65.15 to $99.25. That low was posted last Friday.

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