What a strange summer break the education sector is having. For-profit colleges have been shaken by Department of Education regulations, court rulings, and accreditation denials. Let's take a look at these events and see whether or not they'll hold the for-profit-education sector back a year.
The thin ice
The summer began on a mixed note for for-profit colleges. At the beginning of June, the DOE announced it was creating new regulations for the education sector to determine which schools would receive federal grants for student aid. In order to receive these grants, which can provide up to 90% of revenue to for-profit colleges, schools must meet at least one of the following standards by fall 2015:
- "At least 35% of former students are repaying their loans (defined as reducing the loan balance by at least $1)."
- "The estimated annual loan payment of a typical graduate does not exceed 30% of his or her discretionary income."
- "The estimated annual loan payment of a typical graduate does not exceed 12% of his or her total earnings."
While these may seem like reasonable standards, the Department of Education was well aware that some schools would fail to meet them. In fact, after a series of studies, the DOE reported on June 26 that 5% of the programs at for-profit colleges failed the new requirements. For Apollo Group
However, the tables quickly turned. On June 30 a federal judge struck down the requirement that at least 35% of graduates must be repaying their loans. By denying this portion of the regulations, the judge also made the other two standards invalid, forcing the Department of Education to go back to the drawing board.
This was great news for all for-profit colleges, but most especially Career Education
Good-bye, blue sky
On July 9 for-profit colleges received news of a different sort: Ashford University, part of Bridgepoint Education
Revenue Growth Year Over Year
Revenue From Federal Loans
|Bridgepoint Education||3.60||9.2%||16%||7.5%||approx. 85%|
Outside the wall
Although each of the above companies has several factors in its favor, there are just too many reasons to stay away from them. Apollo is extremely reliant on federal loans, Corinthian doesn't have a long enough track record to make a case for itself, and Career Education is not only expensive, but it also has four schools on probation for over-reliance on federal loans (hence the approximate revenue). Of all the for-profit companies, Bridgepoint looks like the best choice of the lot. The setback Bridgepoint just suffered at Ashford University may be just the opportunity a value investor needs to buy low.
The show must go on
So what does all this mean for investing in the education sector? When the majority of companies in a sector rely on one source (federal student aid) for the lion's share of their income, that's a risky business model. It gets even riskier when that source is looking to disrupt the flow of money with tougher standards. I'd steer clear of this sector until the colleges have a track record of meeting government requirements; until then, keep Bridgepoint on your watchlist.
Also, if you want some ideas for other stocks relying heavily on the folks in Washington for future growth, be sure to check out our new special free report: "These Stocks Could Skyrocket After the 2012 Presidential Election."