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 (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 (ESINQ) and Corinthian Colleges (NASDAQ: COCO), while the U.S. Department of Justice has led a broad inquiry into Bridgepoint Education (ZVO)

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 (LOPE -0.19%), 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.

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.)

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.