Why I'm Staying Away From For-Profit Education.

In Tipping Point, Malcolm Gladwell shows how major structural changes usually aren't the result of just one big event. Rather, they come about through an accumulation of several smaller events that, when added together, provide the impetus for change. The for-profit education industry is currently teetering on the edge of a tipping point that could topple it for years to come.

The schools themselves certainly have an important role to play in our society. Combining online and on-campus classes, they provide an education to working adults who otherwise might not get the chance to attend college. Proponents claim that this flexibility, coupled with more individual attention, make for-profit colleges a better value than a traditional community college.

Before investing in these companies, though, it's important to review all of the tipping points working against them.

Deceptive recruiting practices
In August 2010, the Government Accountability Office released findings from an undercover investigation into the industry. GAO officers posed as prospective students and recorded their interactions with employees of for-profit schools. The investigation included visits to branches of:

  • Apollo Group's (Nasdaq: APOL  ) University of Phoenix
  • Corinthian College's (Nasdaq: COCO  ) Everest College
  • The Washington Post's (NYSE: WPO  ) Kaplan,
  • Education Management Corporation's (Nasdaq: EDMC  ) Argosy University

In several of the clips, students were encouraged to lie about their financial standing in order to qualify for government aid. Furthermore, it was revealed that some recruitment officers were paid on commission, adding an extra incentive to mislead prospective students. Since then, the Obama administration has introduced new guidelines to prevent this practice. Shockingly, the industry has filed suit with the Department of Education, saying that eliminating incentive compensation is unfair.

Student loan defaults
Because of adjustments made in 2008, the benchmark the federal government uses to measure federal loan repayment will soon change. Under the new metric, officials look to see what percentage of students have defaulted within three years of beginning repayment.

If the numbers hold to historical rates, this is what they will show:

  • A whopping 25% of all for-profit students default within three years.
  • At public institutions, 10.8% of students default over the same time frame
  • The number sits at 7.6% for private institutions.

If any college has a rate of more than 30% for three consecutive years, it risks forfeiting any federal funding. Corinthian Colleges is one of the worst of the group, with 40% of its 2008 student cohort currently in default. Lincoln Educational Services (Nasdaq: LINC  ) and ITT Educational Services (NYSE: ESI  ) would also be in trouble, with their rates hovering right at 30%.

Foot-in-mouth syndrome
Many executives at these companies haven't been helping their case, either. Apollo's executives are currently under investigation by the SEC. During two different time frames last year, for-profit insiders sold a grand total of 3.2 million shares on the market, and brought in roughly $238 million in the process. It just so happens that both occasions happened to coincide roughly with notifications from the SEC that it had received complaints and would be launching investigations -- raising eyebrows about the possibility of illegal insider trading.

Not to be outdone, Corinthian CEO Jack Massimino wasted no time looking down his nose at his very own customers while trying to excuse their default rates. "We deal with the most difficult students in American education," Massimino claimed. "At the end of the day, these students are graduating and getting opportunities they've never had before." I can only hope that by this, he meant that economically disadvantaged students can have a rough time repaying loans. Of course, if graduates can't easily repay the government for Corinthian's high tuition, what does that bode for their job prospects?

Finally, in what I consider one of the most outlandish examples of corporate arrogance, Strayer (Nasdaq: STRA  ) CEO Robert Silberman blamed a 20% drop in enrollment on ... the media. Instead of addressing concerns about enrollment, graduation rates, or loan defaults, he stated that bad press was responsible for the drop in enrollment.

Put your money elsewhere
In the end, it might be unfair to paint the industry with so wide a brush as to include all for-profit schools. There are, I'm sure, schools that are doing exceptionally well by their students. However, with over 5,000 different publicly traded companies to put your money into, I think you'll find better deals with significantly less risk by staying away from this industry.

Fool contributor Brian Stoffel does not own shares in any of the companies mentioned. 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 (9) | Recommend This Article (13)

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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 February 18, 2011, at 7:47 PM, richardsonma wrote:

    It looks to me that this Gainful Employment amendment is setting up President Obama and the White House to take a fall by exposing their ties to Wall Street. Wall Street short-seller Steve Eisman is in the middle of gainful employment (see: http://www.politico.com/news/stories/0211/48695.html).

    Former Obama Chief of Staff Rahm Emanuel was an investment banker (see: http://dealbook.nytimes.com/2008/11/07/rahm-emanuel-former-i... and White House Senior Advisor Valerie Jarrett has hidden her Wall Street ties. Jarrett was involved with the Harris Investment Fund which engaged in short selling and derivatives. http://peureport.blogspot.com/2010/10/make-up-hides-valerie-....

    Wall Street and our kids’ education do not jive – I don’t want these people gambling our children’s future and selling to the lowest bidder.

  • Report this Comment On February 19, 2011, at 11:03 PM, lettejoy wrote:

    Why Can a Murderer or Cop Killer Receive The American Opportunity Award, but a person with an ex-felony drug conviction, can not receive it?

    Please read my story, and help me right a wrong.

    http://www.change.org/petitions/give-ex-felons-the-chance-to...

  • Report this Comment On February 19, 2011, at 11:45 PM, jmm222 wrote:

    You must be a little slow. The recession began in 2008. When graduates cannot find jobs because employers are not hiring, they tend to ignore paying loans. And getting a degree is no guarantee of success in life. Some graduates from major universities get out into the world and realize that they cannot get the job they want for the money they want. It happens. That should be no reflection on the For-Profit schools.

    PS. Every college is "for profit".

    PPS. If you have ever dealt with financial aid, you would know that these people were likely trying to help someone go to school, not be deceptive.

    Your article misses the target.

  • Report this Comment On February 20, 2011, at 8:32 PM, luxion wrote:

    To: jmm222 --> Not every college is "for profit"!!! It is your missive that seems off target. There is an incentive for people paid more for bottom-line enhancing performance, whether incentivized employee or owner, to stretch the rules to their financial advantage. Public institutions have no such employment or ownership arrangements. Look at the costs of attendance and operation. Public colleges and universities, especially community colleges, do a lot and charge far less. Of course they are citizen subsidized through real estate taxes and other such funding, but this latter system removes that personal for profit motive that seems to tempt some of the folks at the for-profit schools to stray from "just helping someone go to school".

  • Report this Comment On February 20, 2011, at 10:04 PM, jmm222 wrote:

    Public universities and colleges receive money from taxes. They receive donations and other funds from alumni. Perhaps an incentive plays a role, but going through the process of receiving financial aid is not easy. I went to a major university and received financial aid. EVERY SINGLE YEAR, there were problems. With the BS I had to put up with, I am fortunate to have graduated.

    You guys can talk about getting people to sign up aid and attend college all you want. The truth is that once these people have an education, it is their responsibility to make use of that degree and pay back their loans. The institution has no control over that. If the government does not think these people are capable of being gainfully employed, they should tell them they are too stupid to go to college and not give them the aid in the first place.

  • Report this Comment On February 21, 2011, at 2:21 PM, MarketingProf wrote:

    The author argues that the for-profit education industry faces risks, hence he is steering clear of it.

    Given that these risks are publicly known they are already factored into the share prices of these corporations, and indeed these prices have been declining over the past year.

    Given also that all industries face varying levels of risk, and that investors differ in their risk tolerance, why promulgate blanket advice? For investors who want to take a punt on the for profit sector working its way through the current issues it seems as though now might be an excellent time to invest.

  • Report this Comment On February 21, 2011, at 5:31 PM, CM001 wrote:

    richardsonma,

    As a shareholder of Apollo, I have only to gain from Apollo share price increase. However, the industry has serious issues, especially how much they rely on federal funding. Some of the recent changes in student recruiting by the industry is an acknowledgment that they were wrong. Trying to say everything government does is because some politician has to gain or OBama wants to destroy the business is simply naive.

  • Report this Comment On March 02, 2011, at 5:16 PM, agem800 wrote:

    so why did Hidden Gems recommend buying Bridgepoint Education - apparently one of the worst offenders, based on the PBS Frontline program aired last night (may have been a repeat).

  • Report this Comment On March 09, 2011, at 2:28 PM, ozzfan1317 wrote:

    I think the higher quality schools with a brand name will be fine. IE Apollo,Kaplan,Devry, ITT.

    Its the bottom rung schools that don't have a brand name and are going to face added pressures that will be hurting.

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