Are These Smarties Headed for Disaster?

With today's increasingly competitive job market, it's no wonder enrollment at universities has amplified. Good jobs are hard to find, and with an increased number of qualified candidates applying, having a college degree has become somewhat of a requirement.

As a result, for-profit education has sprung up as a solution to traditional not-for-profit universities' inability to support demand. But is for-profit education a good solution to this growing need, and thereby a good investment? 

An act of Congress
According to the U.S. Department of Education, for-profit universities, such as the Apollo Group (Nasdaq: APOL  ) , Corinthian Colleges (Nasdaq: COCO  ) , and ITT Educational Services (NYSE: ESI  ) , receive government funding under Title IV because of their promise to prepare students for "gainful employment." Recently, however, for-profit schools have come under intense congressional fire for their inability to do just that.

Sen. Tom Harkin's (D-Iowa) investigative report, "Emerging Risk? An Overview of the Federal Investment in For-Profit Education," revealed that for-profit schools have tremendous turnover and dropout rates and don't equip students with the tools necessary to acquire gainful employment. This outcome results in an increased number of student-loan defaults. 

Accordingly, Congress is looking to more closely regulate for-profit educators. Under the new rules, default numbers are collected from students who are three years removed from graduation. If the school surpasses 30%, it's placed on probation. If it remains on the list for more than three years, it could have its Title IV funding cut.

Three dunces
For the past few years, Apollo has continued to see rising three-year cohort default rates (the percentage of students defaulting on loans). Its estimated three-year cohort default rate for 2008 is 20.9%, and its new student enrollment is down 42% from the same period a year ago. 

Corinthian's situation looks pretty grim as well. It estimates that a majority of its institutions will exceed the 30% threshold for the 2009 cohort. In addition, new student rates were down 8% from this same time last year.

The news isn't any better for ITT. Its three-year cohort default rate for 2008 is 26.5%. And, as with the previous two universities, it has seen its new student enrollment drop from the same time a year ago -- in this case, by 9.4%.

Potential investing gold mine? Um, no.
These three universities are examples of what's happening to many for-profit universities. But there are some for-profit schools, such as Bridgepoint Education (NYSE: BPI  ) , that don't earn an F: Bridgepoint's cohort default rates are within acceptable standards, and student enrolment has continued to climb.

If Congress does cut funding, it'll result in reduced student populations and an increase in operating costs. For-profit universities will probably pass on the added expenses to students and won't be able to offer as many scholarships and grants.  The end result: a decline in profits.

Foolish takeaway
With the intense scrutiny from Congress, Foolish investors would be wise to steer clear of the players here. Want to watch the ongoing saga of for-profit education?  Add Apollo, Corinthian, or ITT to your watchlist!

Fool contributor Katie Spence is sitting in on Congress and owns no shares of any company named above. The Motley Fool owns shares of Bridgepoint Education, and Motley Fool newsletter services have recommended creating a call spread position in Bridgepoint. 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.


Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

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 May 29, 2011, at 4:52 PM, jimmy4040 wrote:

    "Bridgepoint's cohort default rates are within acceptable standards, and student enrolment has continued to climb"

    That is part of the deception carried on by BPI

    "Nearly 85% of Ashford alums delinquent on their student loans have been granted deferments or forbearance – practices that keep them from showing up in Bridgepoint’s official default numbers. Harkin argues that Bridgepoint arranges for these deferments and forbearances in order to game the government default measures"

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1500778, ~/Articles/ArticleHandler.aspx, 12/19/2014 4:53:09 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement