Apollo Education Group in the Regulators' Crosshairs

The for-profit educator could be the next institution to feel the wrath of a regulatory crackdown.

Jul 16, 2014 at 1:05PM

Source: Apollo Education Group.

Fresh from crushing for-profit educator Corinthian College into oblivion, the Department of Education is ready to turn its sledgehammer on industry leader Apollo Education Group (NASDAQ:APOL).

In a filing to the SEC submitted after the markets closed Monday, Apollo announced that it had received notification from the regulator that an investigation into the way it handles federal aid will commence Aug. 4 and will initially cover the financial aid years 2012-2013 and 2013-2014.

Long a target of politicians and activists who've chafed at the notion that education can or should be run for profit, Corinthian College came under SEC scrutiny last year with a probe of its student recruitment practices and compliance with Education Department financial-aid rules. Much was made of its aggressive tactics, but it wasn't until Education stepped in back in January with allegations of falsification of data that the demise of the educator gained speed and culminated with a negotiated settlement last month that will lead to its dissolution.

Now the agency is turning its attention to Apollo, not nearly as egregious a practitioner as Corinthian, allegedly, but worse than, say, Strayer Education (NASDAQ:STRA) or Bridgepoint Education (NYSE:BPI), which passed regulator scrutiny.

In a set of proposed (but not adopted) regulations, Strayer and Bridgepoint had no programs that failed the department's standards while Apollo had several substandard ones. In comparison, half of Corinthian's programs were considered substandard, and it had the largest number that actually failed. It should also be pointed out that ITT Educational Services (NYSE:ESI) has the largest percentage of programs that are falling short of Education's goals; 57% of its programs come up short, with a small percentage, 3%, falling below standards but not qualifying as "failed."

The risk for Apollo, of course, is that irregularities are found and the probe widens. That was part of the problem Corinthian faced, as it uncovered problems on its own and addressed them, but then it had Education deem those actions to be an admission of guilt. Of course, it didn't help that Education alleged Corinthian wasn't being fully cooperative or forthcoming with its investigation, though the institution said the problem was that the department kept asking for more and more data while expanding the scope of what it was seeking such that it ended up assigning 100 employees solely to complete that task. 

The industry as a whole, though, is at risk. As the institutions have changed their recruiting policies, which were charged as being too aggressive, enrollment figures have declined. New degreed enrollment at Apollo's flagship University of Phoenix dropped by 13%, to 33,900, last quarter, and degreed enrollment decreased by 16%, to 241,900, compared with the same period a year ago, leading to a 14% decline in operating profits.

Even among institutions not under the microscope, like Strayer, enrollments have declined. Total enrollment was down 10% year over year, to 41,327 students, while Bridgepoint's is down 18%, to 64,495 students. ITT hasn't seen the same kind of falloff yet, as it reported total enrollments were down 6.4%.

Even so, Apollo is still focusing on growth and is expanding internationally, while at the same time working with business and industry to develop programs and certificates to build a more prepared workforce. Since that ought to be the goal of higher education to begin with, whether for-profit institutions or public ones, it's a notable endeavor.

But first Apollo Educational Group will need to get beyond this new probe by the Education Department and counteract the negative perceptions being generated by the persistent investigations into its own operations as well as those of the industry at large.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Bridgepoint Education. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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