For-Profit Education and the Jobs Debate

I have been following the for-profit education sector for a number of years now. In that time, I've been convinced that many of the major players weren't offering much value to students -- instead plunging them into debt, and relying on the government  to foot the bill. That, in part, helps explain why new student enrollment figures have been falling for the past three years.

Over the past three years, one of the most hotly contested new rules to be enforced has centered on graduates obtaining "gainful employment." This provision, where for-profit schools have to report and make this information available to prospective students, is intended to show what graduates do after they leave school, and how severe their debt burden is.

Thanks in large part to lobbying on behalf of the for-profit sector, the Department of Education's first version of the gainful employment provision was largely a joke. As I noted when it came out, there are lots of problems with the rule:



What's wrong with it?


At least 35% of former students must be actively paying down their loans.

With such a low threshold, schools could have almost two-thirds of their students not paying off their loans and they would pass.


Graduates cannot be spending 30% or more of their discretionary income on loan payments

To be honest, I'm baffled at how the Department of Education will go about collecting information for this. How will "discretionary income" be determined? It seems to me there's lots of room for distortion in this provision.


Graduates cannot spend more than 12% of their income on loan payments

I actually think this rule makes sense and -- using tax forms -- can be easily followed.


Apparently, I wasn't the only one who saw flaws in the government's rule. Just before the gainful employment provisions were to take hold, a federal judge struck down the first provision listed above, saying that the government's 35% threshold was arbitrary, and provided no expert opinion on why this would represent an organization not preparing someone for gainful employment. Though much of the rest of the law was kept intact, the damage was done. As Inside Higher Ed put it: "due to the way the regulations work, that invalidation set off a domino effect, making enforcing the rule effectively impossible." 

Because of this, the Department of Education is going back to the drawing board, and rewriting the gainful employment rules. If history is any indication, I don't expect the government to back down one bit, and think that we'll likely see tough rules eventually being enforced.

Where do the big players stand?
While it's now more of a mental exercise, I still think it's worth seeing where the six schools I've been covering would have fallen under the previous version of the rules. Here's a look at how many individual schools each company has that failed at least one of the three provisions.


% of Programs Failing at Least 1 Provision

DeVry (NYSE: DV  )


American Public 




Apollo (NASDAQ: APOL  )


Corinthian (UNKNOWN: COCOQ.DL  )


Bridgepoint (NYSE: BPI  )


Source: U.S. Department of Education. 

While these numbers look bad, it's worth noting that for all but one school, the provision that was failed was the first provision listed above. That is the same provision that was overruled in court, so we'll have to wait and see if a similar provision takes hold in the newer version of the gainful employment rule.

Corinthian Colleges and its Everest-brand schools, however, did particularly bad -- with several of its institutions failing more than one provision. Clearly, by this measure, those schools are the worst of the bunch.

Stay tuned as I'll be wrapping this series up tomorrow by taking a look at which -- if any -- of these for-profit schools are worth investing in.  Even if they are, however, I'm pretty sure you can tell I'm not going to be buying any shares in the industry anytime soon.  

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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 August 09, 2013, at 1:23 AM, Blondesamantha wrote:

    Apollo will do fine; many of their students are already working in their field when they enroll.

  • Report this Comment On September 27, 2013, at 6:12 AM, Klarmanite wrote:


    The dept of Ed just released a second GE rule draft. How do you see this impacting Apollo Group and the other companies in the sector?


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