Get Your Boring Accreditation (Bore Port) May 7, 1999

Boring Portfolio

<THE BORING PORTFOLIO>
Get Your Boring Accreditation
Education on education

by Alex Schay (TMF Nexus6)

ALEXANDRIA, VA (May 7, 1999) -- The topic du jour is education -- as was the case last week at this time. While Dale has taken a closer look at "petcare" this week, I like the current price of Apollo Group (Nasdaq: APOL) and will provide some background on the post-secondary education segment in general.

The elements fueling demand for post-secondary education include: a rising percentage of high school graduates going to college as well as a rising percentage of the requisite graduate age group within the population, rapid technological change that requires continuing education, and retraining requirements due to corporate, government, and military restructurings. An oft-cited factor advocating higher education is the income differential for those with more of the stuff. The growing income premium awarded to a bachelors degree over a high school diploma has been variously measured between 71% and 95%.

Mean Earnings of Workers 18 Years Old and Over,
by Educational Attainment: 1992 to 1996

Year Non-H.S./High/ Associates/ Bachelors/ Adv.Dg.
1996 14,650  22,120   24,700     37,850    58,542
1995 14,013  21,431   23,862     36,980    56,667
1994 13,697  20,248   22,226     37,224    56,105
1993 12,820  19,422   21,539     35,121    55,789
1992 12,809  18,737   20,867     32,629    48,652
1991 12,613  18,261   20,551     31,232    46,039

More data can be found at The National Association for Education Statistics. As well, check out the 1998 Digest of Education Statistics. In order to operate, most post-secondary education companies need to be approved by the state education licensing board and the accreditation boards (6 regional and over 100 national). It takes about six months to two years to get accredited but once it happens, the company can seek Title IV funds from the government (which funds about 75% of public-post secondary education).

The accreditation process recognizes educational institutions and the programs they offer for achieving a certain level of quality that entitles them to "the confidence of the educational community" and the public they serve (amen) -- and is an important qualification for receiving Title IV funds. In the United States, this recognition is extended primarily through non-governmental, voluntary, regional, or specialized accrediting associations. Accredited institutions are subject to periodic review by accrediting bodies to ensure that they maintain the level of performance, show evidence of institutional and program improvement, demonstrate integrity, and fulfill requirements established by the accrediting body. On the other hand, tough standards serve to slim down the pack of contenders and accreditation doesn't mean that education companies have a license to operate forever.

Accreditation is the oldest and least understood leg of the educational triad. It has two primary functions -- quality assurance and program self improvement. To participate in Title IV, a company must first produce an end result, such as a certificate or degree. Second, the program must be accredited by an organization recognized by the Department of Education. Third, the company must be approved by the state in which it is physically located. The company must be in full operation for two years to qualify for Title IV. The accrediting bodies are primarily concerned with academic quality (by monitoring teacher-to-student ratios), library facilities, classroom facilities, and quality of instructional support and materials. Once the accreditation standards have been met, the company's students can qualify for some of the following loans: Federal Family Education Loans, Stafford and PLUS loans, grants such as Pell and Federal Supplemental Educational Opportunity Grants, and campus-based programs such as Perkins and Work Study.

The lifeline to continue operating in the industry is Title IV. If the companies have a high student loan default rate, they need to control their admissions policy a little more stringently. Here is the skinny on the value chain for post-secondary education companies: raising the admission bar leads to higher retention rates, which leads to higher graduation rates, which leads to a greater number of students that pay back their loans.

Within the realm of post-secondary education companies, the primary division is between "training" companies and "degree" companies. Competition from new entrants is fierce in the training segment because there are fewer barriers to entry, however recruitment is a crucial function at all of the schools. Once recruited, retention is also key, because it costs a great deal more to recruit a new student ($1000-2000) than to retain an existing one. The critical line these companies cannot cross is making an outright promise to find their students a better (read: higher-paying) job. Regulators will not allow them to do this, and virtually every one of the for-profits have faced law suits from students for ostensibly not living up to their "better job" promises.

Well, that's about enough education on education for this week. If you haven't already done so, check out Yi-Hsin Chang's Berkshire Hathaway (NYSE: BRK.A) annual meeting musings in the archives, she recently filed another report for our 1999 collection. They are fun, lively, informative... and a bag of chips.

• Discuss Boring Investing on the Boring Port message board.

The Fool is hiring. Answer the call.