How For-Profit Colleges Ace Marketing and Flunk Education

The biggest advertiser on Google, spending $400,000 a day, isn't a retailer or insurance company. It's the Apollo Group's (Nasdaq: APOL  ) University of Phoenix. However, all the spending in the world can't save the University of Phoenix or three of its for-profit competitors. With their horrible student loan default rates and increasing competition, you may need to expel these for-profit companies from your portfolio, before they shut their "ivied" gates for good.

For-profit universities major in marketing
After losing enough students to fill three Ohio States, followed by another 14% drop this past quarter, the University of Phoenix seems to believe that it can advertise its way out of declining enrollment. With 75% of its enrollment consisting of online-only students -- higher than the average 59% for for-profit colleges -- the university spent investors' dollars to buy students with Google ads. From Oct. 12 to Nov. 12, the university doubled its online advertising spend from $170,000 to $380,000. That's more than Amazon.com (No. 6), the world's largest online retailer!

Unsurprisingly, daily ad spending seems to be an industrywide trend.

Company

Advertising Rank

Daily Ad Spend

Current Enrollment

Past Year's Change in Enrollment

Year-to-Date Stock Gain

University of Phoenix

1

$380,000

356,900

(14.7%)

(63.7%)

DeVry

7

$98,100

60,044

(14.7%)

(31.1%)

Kaplan

14

$69,500

96,701

(7.9%)

(5.4%)

ITT Technical Institute

17

$64,500

73,255

(13.5%)

15.1%

Source: Spyfu.com, Most recent 10-K. 

After hemorrhaging students this past year, for-profit universities seemed to follow the University of Phoenix's lead. DeVry (NYSE: DV  ) , Washington Post's Kaplan, and ITT Tech (NYSE: ESI  ) are among the 17 biggest advertisers online -- outspending companies from Progressive to J.C. Penney. (Although the Apollo Group describes this data as "gross speculation," The Washington Post cited SpyFu, the site that provided these numbers, as a credible source regarding online advertising during the 2008 presidential election.)

Marketing can't change reality
Although marketing may increase enrollments, it will do so only in the short term. In this sluggish economy, graduates from traditional four-year colleges are struggling to find jobs. Prospective students have begun to realize that education isn't always a great investment, and they are now scrutinizing their options even more intently.

Source: 10-Ks.

Looking at how many alumni default on their loans two years after graduation, we see that most for-profit education companies seem to have failed to provide their students with better long-term prospects. (If students have defaulted on their loans, they probably aren't making enough income to repay those obligations.)

Interestingly, the two companies with the lowest default rates don't show up anywhere near the top of SpyFu's list of advertisers. Although Bridgepoint's (NYSE: BPI  ) Ashford University came close, only the 5.6% default rate of Corinthian's (Nasdaq: COCO  ) Everest Colleges beat the national rate of 9.1%. How?

Unlike the University of Phoenix, which passes along repayment responsibilities to third parties, Corinthian created its own "multifaceted cohort default prevention program." First, the for-profit company built a contact management system to keep connected with alumni. Second, Corinthian set up an internal department to focus on students at risk of early default. Finally, the company expanded its entrance and exit counseling program and financial literacy training for current students.

Unfortunately for students, Devry, ITT Technical Institute, and the University of Phoenix's new focus on marketing may be distracting those institutions from revamping their own financial programs.

Education is not always a great investment
In a desperate act to increase enrollment, the University of Phoenix has plowed thousands upon thousands of dollars into online advertising. The sad news is that it could have pursued a simpler solution. The company must train its students for jobs that pay, while imparting the financial wisdom students need to repay loans.

Although Corinthian Colleges may seem like a bright spot, I wouldn't invest any dollars yet. Yes, the company has cut its cohort default rate to a quarter of what it was, but that rate has yet to stabilize. For now, I'd sit back and watch carefully.

Of course, you could profit if Corinthian ends up surprising me. But 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. To read it, click here now.


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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 December 06, 2012, at 9:53 AM, Gblayne1 wrote:

    Has anyone even considered the quality of the eduction received by the online students in these institutions?

    I have been an adjunct for over 50 years, both online and on ground. It is clear to me that for the class of people who opt for an online education, what they get for their money is far superior online to anything they can get in a brick and mortar institution.

    In spite of the challenges faced in your article, these institutions must be saved. They serve a need that has been, and will continue to be unmet by private, and public schools.

  • Report this Comment On December 07, 2012, at 3:34 PM, TMFKang wrote:

    Hi Gblayne1,

    Thank you for offering your perspective as an adjunct professor. I'm sure you've taught intelligent students who are better off today thanks to their for-profit education.

    If the quality of education provided by these for-profit institutions are comparable, I think many people have qualms with the tuition costs. Nowadays, traditional, four-year colleges have moved into the space. Not only do they offer a customized learning experience for distant students, but they also offer comparable, competitive tuition rates. Finally, there are several start-ups that have shown they can educate anyone to, say, the level of a Stanford computer science student.

    For more info: http://www.fool.com/investing/small-cap/2012/10/31/5-educati...

    Thanks,

    Kevin

  • Report this Comment On December 18, 2012, at 12:59 PM, codeculturist wrote:

    >> there are several start-ups that have shown they can educate anyone to, say, the level of a Stanford computer science student.

    Coursera, EdX, and Udacity offer courses from top-tier universities. That they educate anyone to the same level as a full-time graduate of those universities is a claim that cannot be supported with the data presently available.

    More data about the longitudinal outcomes of graduates from these and existing degree programs is needed to make any scientific claims about which methods are correlated with long-term student success. Sources of existing data would help move the conversation forward.

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