Is the For-Profit Education Industry Facing Armageddon?

Apollo Group (Nasdaq: APOL  ) with its University of Phoenix brand is the biggest player in the for-profit education industry. So it has the most to lose in what could be a life-or-death battle for the industry. Apollo, along with Strayer (Nasdaq: STRA  ) , Bridgepoint Education (NYSE: BPI  ) , Corinthian Colleges (Nasdaq: COCO  ) , and others, are in danger of seeing the death of their golden goose of federally subsidized student loans. That could happen if proposed tougher for-profit-education rule changes pass the Congress and the White House.

The seeds of for-profit education were sown by the 1965 Higher Education Act. Title IV of that act provided federal funds to be made available for student loans. Since then, the industry has grown quickly and the vast majority of revenue has come from student tuitions paid for with those federal loans. This has led -- as industry critics charge -- to situations where students are coerced into applying for loans to get degrees in disciplines where they are unlikely to find work. Many of these students end up dropping out and defaulting on those loans, creating a bad credit record for themselves, and leaving taxpayers holding the bag for those bad loans. The only winners are the for-profit schools.

Ch-ch-ch-changes
Defaults on those student loans have been increasing and have led to intensified scrutiny of the industry's enrollment practices. The Government Accountability Office even went undercover and found deceptive claims and fraud common in the recruitment of students. Sen. Tom Harkin (D-Iowa) held hearings last year on the for-profit education industry and added: "The whole business model of the for-profit school industry depends on taxpayer money."

Thus, the Education Department's proposed regulations include a ban on the practice of tying a recruiter's compensation to "putting asses in classes," as a Senate witness so delicately told the Harkin committee last September.

Congress has chastised the industry before. A 1991 document known as the Nunn Report accused some for-profit institutions of abuse, including "unethical and/or illegal recruitment efforts." This report led to a ban in the 1992 HEA reauthorization bill on the practice of giving a "commission, bonus, or other incentive payment [based on] securing enrollments or financial aid to any person ... engaged in any student financial recruiting or admission activities." However, loopholes were created in the regulation in 2002.

Limbo wrapped in uncertainty
The industry has been extremely profitable as a whole, but not knowing what the final form of the Title IV rule changes will be (if any) has taken its toll. The University of Phoenix has seen a 45% decrease in new student enrollment over last year, and other for-profits have taken enrollment hits as well. Apollo, Career Education (Nasdaq: CECO  ) , and Washington Post's (NYSE: WPO  ) Kaplan Higher Education unit have all cut jobs.

For those holding education stocks and for those interested in buying some, what to do? Will tougher rules completely strangle profits enough to kill the industry? Or will nothing change? More likely, an ugly compromise will be worked out pleasing neither side totally, but making it harder for the weaker for-profits to stay in business. For now, if you are holding on to a company you think is a survivor, maybe holding on a while longer is in order. If you are contemplating buying in, perhaps a wait-and-see posture is the wiser option.

Fool contributor Dan Radovsky owns shares of Strayer 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.


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  • Report this Comment On May 25, 2011, at 11:07 AM, yhtbfkm wrote:

    Armageddon, eh?

    Do you homework, dude. The GAO report was borderline libelous it was so full of inaccuracies (much of it has had to be rewritten), the vast majority of the negative depictions of the for profits relative to the sector as a whole are attributable to the demographics of its students, and APOL, with its proactive approach to policy improvement, is widely acknowledged to be among the least vulnerable to whatever ridiculous, poorly thought through rules the Department of Education is about to put out.

    When the rhetoric becomes apolitical, two sided and rational, when "well respected" shorts are no longer able to front fun and then influence policy of politicians who have one-sided agendas, when the industry returns to growth (which it will on the back end of this absurdity), folks will recognize the huge market opportunity, a non profit education system in complete shambles in a nation that desperately needs it (this is where said politicians should be spending their time and money), and a long tailed investment opportunity in some of the better positioned for profits.

    Until then, I'll just continue to enjoy joker articles like this.

  • Report this Comment On May 25, 2011, at 12:28 PM, LouisXVI wrote:

    yhtbfkm...although I do agree with you that politicians should be inclined to focus on strengthening the non-profit educational system; however, the for-profit industry needs severe regulation. The entire premise is to bring in the lowest level student and use them as a means to an end (i.e. federal tuition dollars). That is not to say that students will not receive a decent education, however the legal requirements in terms of student support is substantively different with non-profit schools and for-profit schools and there lies the rub. For-profit schools are not required to provide remedial support for students but non-profit schools (that receive federal support) are bound to do so. The simple solution is to force students who enroll in for-profit schools to take a standardized test sponsored by the US Dept of Ed. (i.e. basic english, math, comprehension) to qualify for financial aid and eliminate funding for military students at for-profit schools. The entire demographic of admitted students and their abilities would completely change.

  • Report this Comment On May 28, 2011, at 5:20 PM, RICKYLAKER wrote:

    I'm currently a doctoral student in the Psy.D (doctorate of Psychology) program at Argosy University Atlanta. I have a few thoughts on this. First, "for-profit" schools vary considerably in their quality and in their recruiting practices. My program is APA accredited, and the APA has VERY high standards. its accreditation process is extremely rigorous-- it simply does not certify programs that aren't of a very high quality, and my program has an excellent reputation and track-record of internship placement for graduates. That being said, I applied to several other programs in the Argosy system and the recruiting process left much to be desired. The recruiter at one school which accepted me (Argosy Schaumberg) had a fit when I informed her that I would be going to another program- she said she felt "used" and "misled" (!) In short, completely unprofessional and it was clear she was on commission. Also, the information I got from recruiters was extremely inconsistent and often inaccurate. They simply had no real connection with the programs they were recruiting for. Thankfully, once I got to the stage of interviewing at the actual schools, it was a totally different experience.

    So, in my opinion, this "commission-based recruitment" is really bad news and I think should be illegal.

    but to totally cut off financial aid to schools based on this seemingly random and unrealistic figure - student loan payments must be less than 8% of income, is just a terrible idea. Few, if any, private schools could meet that standard.

    Essentially, these proposed regulations fail to take into account just how different "for-profit" institutions are from one another. An online vocational school is quite different from an accredited Psychology Doctorate program. Also, while I am white, about half of the students in my program are not. Putting these schools out of business will cut off the opportunity of literally thousands of people from obtaining degrees that would allow them to have something other than a dead-end job.

    FInally, right now, it looks like Obama is trying to push these regulations through via the Dept of education, bypassing the congress completely. more than 300 members of congress- including Pelosi AND Boehner, have written Obama a letter strongly opposing this move.

    There are definately some regulations which could be put into place to benefit these students. putting their schools out of business (and leaving those currently in the programs with debt and nothing to show for it) is not the way to do it.

  • Report this Comment On May 30, 2011, at 11:30 AM, XMFDRadovsky wrote:

    Rickylaker,

    Thank you for your comments. I agree that the commission-based recruitment is bad news. It could be a recipe for high pressuring prospective students into signing up for something that's not right for them AND weigh them down with debt on top of that.

    But your statement that "Obama is trying to push the regulations through via the Dept of Education and bypassing congress completely" is not correct.

    The procedure works this way: the Education Department proposes regulations that then have to be approved by Obama before they go on to be voted upon by congress. The Higher Education Act (HEA) states that the regulations have to come up for review by congress every eight years.

    By the way, in 1992 the practice of giving an incentive payment (i.e., commission) to secure student enrollment in an HEA for-profit school was banned by congress. In 2002, the Bush Education Department re-instated commission payments in the HEA regulations. Turns out one of the main people on the team that rewrote those regulations was a form lobbyist for the Apollo Group.

    And so it goes.

    Best, Dan

  • Report this Comment On May 30, 2011, at 11:31 AM, XMFDRadovsky wrote:

    sorry, meant to say "former" lobbyist.

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