5 Education Investments Sure to Kill Your Portfolio

For-profit colleges are "getting schooled." As consumers rethink the value of a for-profit degree, and government regulations increase, even the most popular for-profit educational institutions are hurting. Surprisingly, the Wall Street Journal thinks that there may yet be a bright spot, while I think it will be a black hole for your portfolio.

Why for-profits won't make you a profit
In the first time in more than a decade, the U.S. Department of Education reported that college enrollment has dipped. Private, for-profit colleges were hit worse – seeing enrollment fall by 2.8%. The economy – with a weak job market and rising college costs – has no doubt made prospective students skeptical of investing in an education without guaranteed returns.

Apollo Group's (Nasdaq: APOL  ) University of Phoenix has been hit the hardest. After losing enough students to fill Ohio State three times over, Apollo recently announced another 14% drop this past quarter.

Faced with ever-increasing government regulation, Apollo's competitors aren't doing much better. It seems like just about every for-profit is under scrutiny for how they incentivize recruiters. Right now, the Consumer Financial Protection Bureau is investigating ITT Educational Services (NYSE: ESI  ) and Corinthian Colleges (Nasdaq: COCO  ) , while the U.S. Department of Justice has led a broad inquiry into Bridgepoint Education (NYSE: BPI  ) .

Go to school, get a job, and vacation at the Grand Canyon?
In an October 24 article, the Wall Street Journal argued that specialized and niche schools have done well. The Journal points to Grand Canyon Education (Nasdaq: LOPE  ) , a Christian university with campus and online programs in Arizona, as the best example – claiming that enrollment has soared by 60% since 2009. Unfortunately, multi-year statistics masks year-to-year trends. As seen below, enrollment growth YOY has slowed down at an alarming pace.

 

2012

(as of June 30)

2011

2010

2009

Enrollment

44,435

43,917

41,482

37,709

Enrollment Growth YOY

1.18%

5.87%

10.01%

53.06%

Source: 10-Q (August 15, 2012) & 10-K from 2011 (Fiscal Year Ends in December).

Still, there are two ways that Grand Canyon can increase enrollment and, more importantly, protect its long-term profitability. To do so, it must focus on helping its graduates find gainful employment.

First, can Grand Canyon prepare students successfully for the job market? Grand Canyon doesn't disclose its employment statistics, but we can look at its two-year cohort default rate. The rate calculates what percentage of graduates default on their loans in the first two years. Those who have are the ones who probably haven't found gainful employment. (Currently, the government requires that default rates are kept below 30% to receive Title IV funding.)

 

2010

2009

2008

2007

Grand Canyon

12%

9.2%

3.4%

1.4%

University of Phoenix (APOL)

17.9%

18.8%

12.9%

9.3%

Western International University (APOL)

7.7%

9.3%

10.7%

18.5%

All proprietary postsecondary institutions (APOL)

12.9%

15%

11.6%

11%

Source: 10-K from LOPE 2011, 10-K from APOL 2012 and 2009, U.S. Department of Education.

As seen above, Grand Canyon's default rates have jumped – increasing at least 3% every year since 2007. With the exception of Western International University, Apollo Group institutions are faring worse. (Western International only consists of 2,512 students -- a far cry from University of Phoenix.) If Grand Canyon's default rate continues to grow, the government may soon expel Grand Canyon from the education market.

The second way that Grand Canyon can increase its long-term profitability is by expanding its university operations -- online, and through brick-and-mortar campuses. Unfortunately, any expansion plans seem doomed: The education space has seen an incredible spike in competition from traditional universities and from start-ups.

Although part of the state university system, University of Maryland University College has expanded its online operations to open its doors to those in the D.C. metro area. Also moving into the online space is Coursera. In less than a year, this education start-up has struck partnerships to classes from 33 elite universities, including Brown, Duke, and Stanford University. With well-established brands, and zero reputational baggage, these new entrants are well poised to legitimize technical and distance learning to employers.

To make matters worse, the new entrants' costs are very competitive. UMUC costs $499 per credit-hour for non-Maryland residents ($244 for in-state), while Grand Canyon costs $450. Though Coursera is only an upstart and has yet to offer a formal degree program, courses are free!

Education is not always a great investment
In the past, people have returned to school to weather economic downturns in the hope that they would graduate with new, profitable skills in a better economy. This is no longer the norm. As enrollment slows across institutions, it's clear that people are rethinking the importance of education.

Grand Canyon University is no exception. Even as some may consider the company well-positioned to grow past its for-profit rivals, its enrollments rates are slipping, and cohort default rates are increasing.

As traditional institutions continue to bolster their services and meet consumers' changing demands, keep your portfolio away from for-profit education companies. You might just find that the Grand Canyon is really a bottomless pit.

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Fool contributor Kevin Chen has no positions in the stocks mentioned above. The Motley Fool owns shares of Bridgepoint Education. Motley Fool newsletter services recommend 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 (4) | Recommend This Article (6)

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  • Report this Comment On November 01, 2012, at 4:12 PM, ck5000 wrote:

    Hey Kev - your enrollment growth numbers are a little off. YoY enrollment growth at the end of Q2 was 12% and accelerating. You can't compare Q2 numbers when the campus students are on summer break to Q4 numbers when they are in session. Numbers should jump significantly in Q3 when the kiddies get back to campus.

  • Report this Comment On November 01, 2012, at 4:36 PM, TMFKang wrote:

    Hi ck5000,

    You're absolutely right. I decided to show the Q2 results because I thought it'd give readers a good indicator of current enrollment levels. Next time, I'll be sure to also show the comparison quarter-to-quarter. Again, nice catch.

    In any case, we'll have to wait until the yearly results. Given significant decline in students over the past three years, I expect that enrollment growth should continue to slow. They've pretty much maxed out their growth in Arizona.

    Kevin

  • Report this Comment On November 05, 2012, at 12:01 PM, Bell3WV wrote:

    Actually, the quarterly numbers should be dead-on. For profit schools do not operate on a traditional schedule with long breaks. Cuts into the bottom dollar of the business.

  • Report this Comment On December 05, 2012, at 12:05 PM, lemoneater wrote:

    Very interesting. Did not realize on-line education was experiencing similar enrollment challenges to bricks-and- mortar education.

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