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For-Profit Education Needs a Semester Abroad

http://www.fool.com/investing/general/2011/12/07/for-profit-education-needs-a-semester-abroad.aspx

Dan Newman
December 7, 2011

The U.S. Department of Education may start handing out detention slips and revoke for-profit educators' ability to take federal student aid if they don't meet certain requirements. To avoid this trouble, schools might find the solution in heading overseas.

Classroom rules
To keep raking in revenue from Title IV programs (federal student aid), these schools must have acceptable student default rates. The requirement is that student default rates cannot exceed 25% for three consecutive years. In 2014, that changes to 30% three years after graduation. Schools also must have other substantial revenue sources. Specifically, federal aid at maximum can be 90% of cash revenue, or the "90/10 rule." How do major for-profit schools rank?

Company

Most Recently Reported 2-Year Cohort Default Rates

90/10 Rule

Apollo Group's (Nasdaq: APOL  ) University of Phoenix 18.8% 86%
Corinthian Colleges (Nasdaq: COCO  ) 21.9% 80%
Education Management (Nasdaq: EDMC  ) 13.1% 74%
Strayer (Nasdaq: STRA  ) 10% 78%
DeVry (NYSE: DV  ) 14.2% 70%-86%*
Bridgepoint Education (NYSE: BPI  ) 15.3%, 3.3%** 85%-86%**

Sources: NSLDS.ed.gov and companies' most recent 10-Ks. 2-Year Cohort Default Rates ending Sept. 30, 2009. *Percentages across various institutions under DeVry. **Percentages across various institutions under Bridgepoint.

Several schools are edging near the 90% barrier, and default rates are climbing toward the 25% limit, with Apollo and Corinthian Colleges near the top. And one of two laws that allowed institutions to count some loans as non-Title IV expired in July of this year, while the other law expires in July 2012. Without those two laws, nine of Corinthian's 49 schools would have exceeded the 90/10 rule.

What happens once schools reach the limits? The school is first placed under review, which gives it time to improve. If it fails to improve and fall back within the guidelines, then it loses its certification to receive federal loan funds -- obviously removing this industry's largest source of revenue.

So what are schools doing about it?
A variety of things:

  • Corinthian Colleges partnered with a private loan group offering students $450 million in loans to help source funding outside of Title IV programs.
  • Apollo is trying to shift more students to bachelor and master degrees from associates. It hopes this will give students increased job prospects and a higher likelihood of paying off any loans.
  • Many schools focus on recruiting military students, since military-provided assistance does not count as a Title IV program.

Transferring abroad
While these measures will help keep percentages from breaking the thresholds, the most important moves companies will make are international. Operations abroad free companies from U.S. Department of Education regulations and give schools the potential for much higher growth than the domestic market offers. Domestic new-student enrollment at for-profit schools fell swiftly this year, with one example being the Washington Post's (NYSE: WPO