Second grade. That was my first and (because of my parents' reaction) only trip to the principal's office. Ms. Hoppe asked me why I would throw ice at a group of older students while shouting, "Let's show them what we're made of." Not realizing how truly lame it would sound, I responded: "Umm ... I meant ... let's show them what we're made of on the inside." I won't get into details, but the visit sufficiently scared me straight.

Listening to Apollo Group's (Nasdaq: APOL) conference call this week brought me back to that trip to the principal's office. Only this time, instead of me, it was Apollo's management team; and instead of Ms. Hoppe, it was the federal government shaming them into shape.

A little background
The for-profit education industry has been in a downward spiral ever since the Government Accountability Office came out with unfavorable findings from an undercover investigation last year. Over the past 12 months, Apollo -- along with industry peers Strayer (Nasdaq: STRA), Corinthian Colleges (Nasdaq: COCO) and ITT Education (NYSE: ESI) -- has seen its stock get hammered. If you had split an investment evenly between these four companies one year ago, you'd now be left with just over half of your money.

Among other things, the industry has been accused of:

  • Deceptive recruiting practices.
  • Enabling low-income students to run up huge amounts of debt.
  • Low graduation rates.
  • Not providing students with the tools for gainful employment.

Chickens coming home to roost
Apollo co-CEO Charles Edelstein might have sounded proactive, stating that Apollo changing how it conducts its business is "absolutely ... the right thing to do for [its] students." The fact that these changes are coming only after government intervention makes his sentiment ring hollow. And now, the report cards are coming home. A few takeaways from the earnings release:

  • New degree enrollment was down 45% year on year at University of Phoenix.
  • Student loan defaults (as measured in two-year cohorts) stands at 19%, up significantly from the 12.9% default rate last year. Management sees this number going even higher in the near future.
  • Perhaps most importantly, management sees both total enrollment and revenue growth rates to remain negative throughout 2012. Operating income is expected to drop 37% between the end of 2011 and 2012.

Looking forward
In truth, it was not all bad news for Apollo. Outstanding debt was reduced significantly, while it now sits on almost $1 billion in cash against debt of $191 million. But these silver linings pale in comparison to the challenges facing the company.

The Obama administration has yet to let the sector know what type of gainful employment requirement will be enacted -- a provision that could have far-reaching ramifications.

In addition, a key (and very simple) piece was missing from the company's guidance. While management remains certain that declines will continue between now and the end of 2012, they were unable to give much color as to how much enrollment would decline. There's a big difference between losing 50% of your students between now and then, and losing 80% of them.

Once enrollment bottoms out, logic dictates that it must "pick up"; but in no way does that mean enrollment will ever again reach the previous high of more than 450,000 students. I don't think there's any way to make an educated guess about those numbers, and the company doesn't seem to think there is either. In the end, putting your money on the line in a situation like this wouldn't be investing. It would be speculating, and that's not a very Foolish way to use your money.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.