Shame of a Nation

As a former educator who spent more than five years teaching in urban Washington, D.C., I get especially worked up when it comes to education and investing. It's no secret that our education system is one that leaves much to be desired, especially for students who need it most. The role that for-profit institutions should play in improving our system has been a hot topic.

While I haven't been shy about my distaste for for-profit universities writ large, I've also acknowledged that for some students, such schools make sense.

Before today, though, I'd never paid too much attention to K12 (NYSE: LRN  ) an online for-profit business that operates public charter schools in several states. However, today's New York Times article brought the company front-and-center ... literally.

After reading the piece, I'm left wondering who deserves more ire, K12 for some of its structural deficiencies, or the New York Times, for its myopic and misleading use of facts.

Exhibit A: Questionable journalism
The author, Stephanie Saul, shows that, in most cases, students attending K12's subsidiaries score significantly lower than state averages on standardized tests. She then uses this information to jump to the conclusion that this is irrefutable proof that the schools are failures.

Her sobering conclusion actually leads the story off: "By almost every educational measure, the Agora Cyber Charter School [which K12 operates] is failing. Nearly 60 percent of its students are behind grade level in math. Nearly 50 percent trail in reading."

Though there are several valid points the author raises later in the piece (which I will discuss below), it's clear that test scores are the crux of her argument.

Sadly, the conclusions she draws from these scores are misleading and uninformed at best.

If this were a real statistical analysis -- truly showing that K12 wasn't adding educational value -- there would have been an analysis by cohorts: groups of kids entering the same grade at the same time. This would offer a far more accurate and contextual picture of K12's performance.

For our purposes, let's hypothetically say that 20% of incoming fifth-graders in 2008 tested proficient in math or reading. By following that cohort, we may see that two years later, 50% are now testing as at-least proficient.

If my hypothetical situation were true, the Times could still write: "Fifty percent of students are below proficiency, and the schools are, therefore, failures." But in truth, the school would be doing an excellent job, as it is accelerating the average student's pace of learning to the point where he/she could be on par with his/her peers. 

This isn't to say that K12 does, in fact, do a great job. I'm simply saying that the author produced no real evidence to prove that it was doing a bad job as far as test scores go.

Exhibit B: A questionable model for education
But it was the supporting evidence Saul offered that I actually considered to be more damning than test scores. Specifically, there were three broad areas that I found particularly alarming about the K12 experience.

1. Recruitment practices: One of the key complaints Saul cites from employees: "Problems begin with intense recruitment efforts that fail to filter out students who are not suited for the program." Such misalignment of incentives -- where students and their parents are looking for a good educational fit while recruiters are simply looking for more students -- is a recipe for disaster. It's exactly what got Apollo (Nasdaq: APOL  ) , Corinthian (Nasdaq: COCO  ) , the Washington Post (NYSE: WPO  ) and Education Management (Nasdaq: EDMC  ) in big trouble with the Government Accountability Office this summer.

2. Heavy teacher loads: Though K12 receives less money per student than typical public schools, it also has far less overhead in the form of an actual bricks-and-mortar school building. It's hard to understand, then, why some teachers report student loads in excess of 250 students. Either (1) this model isn't scalable to support such numbers or (2) there is gross negligence on behalf of the management entrusted with providing the requisite number of teachers.

3. A broken model: But the most troubling aspect of the school is its lack of accurate quality controls. This goes from the attendance policy to its grading system. "A new grading policy states that students who do not turn in work will be given a '50' rather than a zero." This screams of social promotion, and unlike in regular public schools, this is social promotion with a profit motive -- a very dangerous place for a school to be in the court of public opinion.

Where does this leave us?
K12 no doubt provides a service that is valuable and helpful to some students. But in its pursuit of profits, it is luring people -- children and their parents -- into its system that simply won't/don't benefit.

There are limits to growth in the industry -- online schools aren't for everyone. School operators, however, have no problem trying to plow right through those limits. A final death blow to the stock could come in the form of real statistical analysis from the Times. Until then, evaluating the quality of the school will be far more difficult.

To see if any damning or supporting analysis comes out regarding these institutions, I encourage you to add them to My Watchlist, a totally free service by The Motley Fool to bring you relevant news and analysis about the companies you care about. You can click the links below to start today.

Fool contributor Brian Stoffel does not hold a position -- long or short -- in any of the companies mentioned. You can follow him on Twitter at @TMFStoffel. Motley Fool newsletter services have recommended buying shares of K12. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (6)

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  • Report this Comment On December 14, 2011, at 6:55 PM, territherad wrote:

    I don't think your main criticism of the article is fair. It is unreasonable to expect a journalist to conduct a scientific study (with cohort comparison) of K12's effectiveness as raising (or lowering) test scores.

    But you neglect that the NYT does cite someone who did the next closest thing:

    "A Stanford University group, the Center for Research on Education Outcomes, tracked students in eight virtual schools in Pennsylvania, including Agora, comparing them with similar students in regular schools. The study found that “in every subgroup, with significant effects, cyber charter performance is lower.”

    Devora Davis, the center’s research manager, said the group’s analysis of Pennsylvania online schools showed that students were slipping. “If they were paired with a traditional public schools student, the public school student kept their place in line, and the cyberstudent moved back five spots,” she said."

  • Report this Comment On December 14, 2011, at 7:07 PM, TMFCheesehead wrote:

    @terriherad-

    I think we'll have to agree to disagree. I think the Stanford group study doesn't show anything when the lurking variable of self-selection is thrown in.

    As for it being unfair to expect a more thorough job, I'd point you towards the over $250 million in wealth that was wiped out due to the article. Though I'm not a shareholder, I'm sure they'd beg to differ with your "reasonable" level of due diligence.

    Brian Stoffel

  • Report this Comment On December 14, 2011, at 7:18 PM, territherad wrote:

    Sorry, you lost me. In your piece, you wrote that "If this were a real statistical analysis -- truly showing that K12 wasn't adding educational value -- there would have been an analysis by cohorts: groups of kids entering the same grade at the same time. This would offer a far more accurate and contextual picture of K12's performance."

    This is what the Stanford group study does. But now it's not good enough for you? What would make you happy? A randomized experimental design where self-selection plays no role? I don't think anyone is going to be able to pull that off.

    In any case, if K12 schools are underperforming because their students are self-selecting to be under-performers, that's pretty damning in itself. Why would I want to send my child to a school were the students are self-selecting (relative to their peers that are otherwise identical) to be likely to suddenly under-perform??

  • Report this Comment On December 14, 2011, at 8:08 PM, TMFCheesehead wrote:

    @terri-

    As I stated in the piece, I'm not one who is crazy about K12 either, but the fact of the matter is, when the author was attempting to give the most damning evidence at the beginning of the piece.

    In terms of the "slipping back five spots", I'd need to know more about what this precisely meant, but will admit it may have been a cohort measure.

    In terms of self-selection, I'm with you all the way. I wasn't saying K12 was a good investment or school, rather that it was a poor example of journalism.

    Brian Stoffel

  • Report this Comment On December 14, 2011, at 8:08 PM, TMFCheesehead wrote:

    **Didn't finish first paragraph**...she is referring to absolute numbers.

  • Report this Comment On December 15, 2011, at 1:38 PM, READALLABOUTIT wrote:

    I am a K12 investor and lost a considerable amount of money. I also think the US school system is deplorable, particularly unionization and tenure. My wife has 20 years on the job, teaching alternative kids mostly.

    Consider that municipalities have to find educational alternatives for kids who don't make it in the general population. K12 is there to do that. How can you even contemplate a study comparing kids when the samples are so dissimilar? It's not science by any stretch of the imagination. It's absurd, as is Stephanie Saul's shoddy reporting.

    No doubt kids that don't have a teacher watching and motivating them are not going to do very well. K12 provides the platform, and some support, but mostly just some hope for the disenfranchised. If the kids (no thanks to the parents) don't show up, you can't blame the platform. My wife taught K12 online for a while and tried to get the kids to respond when they didn't do the work, but the teacher has no means of forcing kids to attend or learn. So when they blame K12 for the class size, you have to consider that many students are no-shows so the class size is irrelevant. Gyms sell many more subscriptions than they should knowing that many people just want to belong, not actually exercise.

  • Report this Comment On December 15, 2011, at 5:16 PM, territherad wrote:

    And if gyms did that and billed taxpayers for the subscriptions, it would be a heinous scandal.

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