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.
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?
Most Recently Reported 2-Year Cohort Default Rates
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.
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
Operating abroad also provides a different revenue source than Title IV programs, which helps schools avoid failing the 90/10 rule. In fact, DeVry's overall percentage of funding from Title IV programs fell from 74% in 2009 to 71% in 2010 because of its growth in Brazil.
Of the companies above, the ones with the largest campuses outside of the U.S. are Apollo, DeVry, and Kaplan. Apollo, with revenues abroad making up 7% of total revenue, operates schools in Britain, Chile, and Mexico, and recently expanded further internationally through a joint venture with an Indian media company. In its third quarter this year, Apollo Global revenue grew almost 6% while its domestic University of Phoenix's revenue fell 8% compared to the same quarter last year.
In April, DeVry acquired ATC International, which has accounting schools in Europe and Asia. Along with DeVry Brasil, revenue abroad equaled 12% of total revenue. In its last quarter, international revenue grew almost 7% while domestic revenue (not counting its medical and health-care segment due to an acquisition) fell 4% compared to the same quarter last year.
Kaplan has the largest share of revenue abroad, with 26% of its total, and this year acquired companies in Spain to reach a total of 30 operating countries. In its third quarter, international revenue climbed 25% versus domestic higher education revenue shedding almost 33% compared to the same quarter last year.
With tighter domestic regulations that hamper growth, future growth in both revenue and share price will reward the for-profit schools that study abroad. The schools that keep their growth in the U.S. will need to keep a careful eye on their students' debt and share of Title IV revenue, as will their investors. To keep a keen eye on these companies, add them to My Watchlist.
Companies with operations abroad:
Companies staying home, for now:
Fool contributor Dan Newman does not own any shares of the companies mentioned above, and recommends studying abroad in Denmark. The Motley Fool owns shares of Bridgepoint 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.