Is the End of For-Profit Education Approaching?

The nation's largest for-profit education firm came out with earnings numbers this week, and investors didn't like them one bit. As a former teacher, I've railed against the industry for some time now. I've tried to be fair, recognizing that there might be a role for such schools to play.

However, I can't help but wonder whether this week's earnings signaled the beginning of the end for the industry as it does business now. Below I'll explain my reasoning, and at the end I'll offer up a few investment ideas that are much more solid than for-profit educators.

A quick look at earnings
By far the largest player in the industry is Apollo (Nasdaq: APOL  ) and its University of Phoenix. Back in June of 2010, the company had a total enrollment of almost a half-million students. To put that in perspective, the combined undergraduate enrollment of all 12 schools in the Big Ten is roughly 370,000. So, for a time, Apollo's schools were larger than the entire Big Ten Conference.

Since then, enrollment in the school has shrunk by 31% to 328,000 students. Again, to put it in perspective, the loss of roughly 150,000 students is like three Ohio States evaporating over the course of two years.

This week, the school announced that it would close 115 locations across the United States -- roughly half of its locations stateside. It comes on the announcement of earnings shrinking 60% since last year on revenue that was 11% lower, enrollment that was down 14%, and new-student enrollment -- an important figure to spot trends -- that was also down 14%.

What's the deal with the decline?
In short, the recent boom in for-profit education stocks was fueled by easy government money, promises of opportunity that couldn't be guaranteed, management that was woefully out of touch with its clients, and misaligned values that made college recruiters seem more like predatory lenders than people who were genuinely interested in helping people get access to a quality college education.

In August of 2010, the threads of the industry started coming apart when officers from the Government Accountability Office visited the campuses of schools owned by Apollo, Corinthian Colleges (Nasdaq: COCO  ) , The Washington Post (NYSE: WPO  ) , and Education Management Corporation (Nasdaq: EDMC  ) . The officers posed as prospective students, and during their visits, recruiters encouraged the "students" to lie on financial aid forms.

Since then, it has been revealed that several recruiters were motivated to lie because their commissions were based partly on how many students they could bring in. That practice has now been outlawed, and schools aren't able to keep as much of every dollar they bring in, nor are they able to attract nearly as many students.

There has to be a better way
When it comes to business and education, there's a precarious tightrope that needs to be walked. It's not as if a luxury good is being peddled that one could easily live without. The education these schools are pushing comes with the promise of an improved station in society. While that outlook may be fundamentally flawed, it leads many students into crushing debt that can't be lifted by filing for bankruptcy.

Recently, a wave of alternatives has been surfacing that might knock for-profit education -- as we know it, at least -- into obscurity. For starters, many large state universities have begun offering online-only classes that carry far more clout among employers for a lower cost than for-profit degrees.

Some for-profit schools are offering classes that don't require financial aid from the government and charge 0% APR with no hidden fees to students. This eliminates both the funding problem (money from the government) and the student-debt problem.

Probably most importantly, President Obama has focused on increasing the role affordable community colleges play in helping students get a college education.

Naysayers will point out that currently, for-profit schools might be a screaming deal. Bridgepoint Education (NYSE: BPI  ) , for instance, now trades with an ultra-low PEG ratio of just 0.33. Those pundits may be right.

But for some, including me, there's something to be said for being proud of what you own. That is, after all, what being a shareholder makes you: a part-owner in a business. I can only make decisions for myself, but I have absolutely no interest in profiting from this industry.

While you can certainly make huge gains if one of these schools ends up surprising me, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Fool contributor Brian Stoffel has no positions in the stocks mentioned above. The Motley Fool owns shares of Bridgepoint Education. 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 (19) | Recommend This Article (39)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 18, 2012, at 5:51 PM, steltek wrote:

    The "not for profit" state colleges have become almost as predatory and unethical. They reward their recruiters and "advisers" indirectly and secretively instead of out in the open. They are hurting for money also and looking to cash in on the easy money from the government. Neither for-profit nor public colleges are required to publish numbers or even do anything about helping their graduates with employment. The whole industry is hopelessly lazy and unethical.

    If you have a way to short education over the next few years, do so. Investing in companies who provide solutions for these problems might not be a bad idea, either.

  • Report this Comment On October 18, 2012, at 6:04 PM, greenverde wrote:

    Let's hope this is the beginning of the end. I actually have more of a gripe with "for profit" lower education. I beleive in public education, free and oriented toward teaching students how to think and solve problems. To that end, public schools need full funding and teachers need to be respected as the developers of our childrens positive impact on the country's and worlds future. And that form of education should NOT be run like a for profit business. For that matter, nor should health care.

  • Report this Comment On October 18, 2012, at 6:06 PM, networkteacher wrote:

    Brian,

    I respectfully disagree that all for profits are lazy and unethical. My students enjoy an 84% job placement rate in the industry they are preparing for. I can show cost numbers that compete favorably with local universities and community colleges. My students go to work faster and more effectively because they have current skills instead of 5 year old skills. Be a bit more careful about applying black paint on all the walls. Just because you were a teacher does not mean you are qualified to be a judge.

  • Report this Comment On October 18, 2012, at 6:20 PM, NotJesseL wrote:

    I am no big fan of either for profit or non for profit education. Prices charged have been accelerating much faster than inflation for years with the reason being that its what the market will bear. Part of the problem has to be that public pre college education has been in decline for years, so a high school diploma is not worth much in the sense that the graduates are not trained to think logically, learn independently, and manage priorities. Students know that they want to be employable so they are willing to incur obligations to become employable. The problem is that the employers have learned that just having a degree is no guarantee of suitability any more. (With a few exceptions).

    Government doesn't seem to care about this bait and switch, so the result will probably be a bubble burst like we saw in housing.

    I don't see how we avoid bubbles like this without our country returning to a faith that causes its members to care about one another and what's right and what's wrong. You can't really expect justice unless people give a damn.

  • Report this Comment On October 18, 2012, at 6:28 PM, woodNfish wrote:

    Obama the fascist has gone out of his way to try and destroy for profit schools. Obama is an evil troll who needs to be fired in November. If he really wanted to improve education he would make public sector unions illegal, and we'd all go to tuition vouchers so parents can send their kids to the school of their choice. Public education is the worse thing this country ever did. The second one was electing the dope we have for president.

  • Report this Comment On October 18, 2012, at 6:48 PM, eldetorre wrote:

    The for profit schools destroyed themselves. Thje only reason they didn't do it sooner is because a market based economy only efficiently weeds out the garbage when the difference between price paid and realized value is realized sooner rather than later. A pure market economy is great for consumer goods, it's terrible for things like healthcare or education where the temporal disconnect between what you pay for and what you get is so large.

  • Report this Comment On October 18, 2012, at 6:55 PM, newport30 wrote:

    Certainly there are lots of drums beating about the horrible profit based educational COMPANIES (a bad word I guess...). I saw some interesting statistics a few months back that showed student default rate for Phoenix at about 40% (Which is indeed shameful). However the interesting thing was that the state college system in my state of California was over 30%!!! Certainly less but hardly something to be proud of. Bottom line is that neither type of system (profit or not-for-profit) has found the way to serve students well.

    I'll bet the profit crowd will be the one to find the answer, if they are allowed. Incidentally, the US government just raised the fee for the NIST Baldrige Performance Excellence (a tool used by organization to improve) for Profit- based educational organizations to about $18K. Not-for-profits/government schools pay $9K. Probably just a coincidence and not an effort to impede competition….

  • Report this Comment On October 18, 2012, at 7:09 PM, 48ozhalfgallons wrote:

    The cost of education will rise as high as government backs the cost of borrowing.

    In a true market environment the cost of education will fall to the most efficient and competitive providers.

    Federal government must leave education to the states and private sector.

    Education is a product. Some will buy crap; others will buy quality at competitive prices.

    The wealthy will always have access to the best education.

    Graduates are a product. Employers will first hire those who have the best educations.

    Increasing the efficiency of education will increase the quality and quantity of graduates thereby increasing the wealth of society.

  • Report this Comment On October 18, 2012, at 7:12 PM, gsturgis wrote:

    obama taking credit for any success in the community college system organized and paid for by largely non-federal taxes and state government is another ridiculous distortion of fact. it is also disheartening to hear this political dishonesty coming from an organization in which investors are relying on for objective facts and education. this is not a good sign for motley fool and those of us that invest in and follow your various publications!

  • Report this Comment On October 18, 2012, at 11:35 PM, thorw wrote:

    Not sure where @networkteacher is getting the 5-year old skills. I'm helping on a free course offered by Berkley on a platform run by Berkley, Harvard and MIT. There are other free competitors to, notably the Stanford platform where courses are offered for free by Stanford, Princeton, Duke, Uof Melbourne, John Hopkins, and a number of others currently totalling 33.

    This will change the face of education forever. For my part I wouldn't bet against the likes of Stanford, MIT, Harvard, Berkley, CMU, etc.

  • Report this Comment On October 18, 2012, at 11:38 PM, thorw wrote:

    Hit enter too early :)

    The courses are standard U courses (sometimes chopped into 2 parts), and some are pretty modern. The Berkley one is very leading edge on SaaS (Software as a Service) with inout coming from Microsoft, Google, Amazon, and a slew of others.

  • Report this Comment On October 19, 2012, at 1:00 AM, dgmennie wrote:

    Much has been said in general terms about making college education more accessible to middle- and low- income students. However, the nuts and bolts of the situation reveal an antiquated higher education system whose costs have shot up dramatically (much higher than inflation) during recent decades. Many students must now take out huge loans to participate, yet will find no decent jobs available when they graduate. Meanwhile, those who actually teach in college are mostly part-timers who must endlessly shop their skills around at various campuses rather than enjoy full-time professorships anywhere. A bloat of college administrative staff and an overemphasis on team sports are at least partly to blame. Would it not be better to use online teachers for presenting most college-level work and then following up with those seeking extra help? Skilled instructors could be paid directly by participating students, eliminating much of the expensive physical plant (classrooms, gyms, dormitories) and non-teaching administrative staff.

  • Report this Comment On October 19, 2012, at 1:59 AM, jomueller1 wrote:

    What the capitalists seem to overlook is that schools for profit have a much higher cost than European public schools and universities. The Europeans have no marketing cost, no profits to pay to shareholders, simpler administration, and so on.

    When US people are proud that in the US much more money is spent per student than anywhere else, they forget that 50% of the cost is waste in many forms.

    Sure, some universities are able to rake in billions to buy other countries' best. But the rest? Just to expensive and mediocre.

  • Report this Comment On October 19, 2012, at 9:35 AM, vitom999 wrote:

    I agree with thorw, Coursera and the like will change higher education and then, eventually (and God willing!), lower public education, which is a far bigger problem. I also question why the author finds it reasonable to look at the problems of one poorly run, albeit large, company in an industry and conclude that the entire industry is suspect. Perhaps Apollo needs to fail, but there remain some well run players in for-profit education.

  • Report this Comment On October 19, 2012, at 11:44 AM, LoadDrive wrote:

    In August of 2010, the threads of the industry started coming apart when officers from the Government Accountability Office visited the campuses of On-Line schools

    The officers posed as prospective students, and during their visits, recruiters encouraged the "students" to lie on financial aid forms.

    Now...We all know that this would NEVER Happen in a Old-Fashion "Brick build College", Not with the Over-Paid Liberal Professors (That would be Hard-Pressed to find a job in the Outside world) Like Bill Ayers & Friends, that were "Bombers terrorists for the notorious Weather Underground ! These are the same people that worked with Obama. Nothing like using Government to get rid of your Competition for Ed. Money, from the Government.

    Have a nice day

    http://www.theobamafile.com/_associates/BillAyers.htm

  • Report this Comment On October 20, 2012, at 4:51 PM, mikecart1 wrote:

    Online universities will always be put in the bottom of the pile when compared to resumes of top tier universities and colleges where you actually attend a lecture and take tests in person. For online universities to fall and be seen as a surprise makes me what people were expecting in the first place. I know if I was a hiring manager, I would never hire anyone from an online college like Phoenix University. A person doing the online route only shows me they can pass tests over the internet. No teamwork, in-person relationships, presentations, or people skills required in the online environment. All skills needed in the real world.

  • Report this Comment On October 22, 2012, at 2:18 PM, Darwood11 wrote:

    The "for profit" colleges have gotten a lot of press, and a lot of investment money. Meanwhile, the community colleges have languished and some have struggled.

    Politicians routinely take credit for these colleges, but few deserve any and in fact. some should be tossed out the door for breaking agreements and doing their best to destroy the school systems.

    The College of DuPage in Illinois is a prime example. The State of Illiinois has routinely violated its agreements and provides the college zero dollars. Homeowners nearby kick in about 3.5% of their property tax dollars for "Community District 502" to support the college. That pays for about 50% of the costs. Fees and tuition pay the rest. Capital programs are supported via the issuance of bonds.

    Residency requirements are liberal with 30 days. For those who don't live in the district, there are lots of private apartments available, some directly across the street.

    This community college offers a selection of four year BA and BS degree programs. This has been achieved by partnering with other 4-year colleges, some of whom provide classes on the campus. The cost of a four year degree? Estimated at about $30,000 for fees including books and tuition.

    Here's a link to the college website and the 3+1 program:

    http://www.cod.edu/academics/transfer_programs/3plus1.aspx

  • Report this Comment On October 22, 2012, at 5:14 PM, networkteacher wrote:

    Thorw's comments deserve an answer:

    5 years to obtain BS degree is often required in my state because students cannot get those remaining classes needed to graduate. In the meantime, the opportunity cost of not working is, in effect, a higher cost of education.

    As to coursera, MIT, other open source efforts....the education may be free, but the course credit is not. I would certainly hope that no one on this thread is so 'foolish' to believe in the 'free lunch' theory. There is always a cost to someone.

  • Report this Comment On October 22, 2012, at 8:48 PM, chris293 wrote:

    Homework or DIY types are the true scourses of progress in America, of course private or public educations help but I believe that people have to must do their homework to get ahead in any area of study or employment.

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