How For-Profit Colleges Ace Marketing and Flunk Education

The biggest advertiser on Google, spending $400,000 a day, isn't a retailer or insurance company. It's the Apollo Group's (APOL) University of Phoenix. However, all the spending in the world can't save the University of Phoenix or three of its for-profit competitors. With their horrible student loan default rates and increasing competition, you may need to expel these for-profit companies from your portfolio, before they shut their "ivied" gates for good.

For-profit universities major in marketing
After losing enough students to fill three Ohio States, followed by another 14% drop this past quarter, the University of Phoenix seems to believe that it can advertise its way out of declining enrollment. With 75% of its enrollment consisting of online-only students -- higher than the average 59% for for-profit colleges -- the university spent investors' dollars to buy students with Google ads. From Oct. 12 to Nov. 12, the university doubled its online advertising spend from $170,000 to $380,000. That's more than Amazon.com (No. 6), the world's largest online retailer!

Unsurprisingly, daily ad spending seems to be an industrywide trend.

Source: Spyfu.com, Most recent 10-K. 

After hemorrhaging students this past year, for-profit universities seemed to follow the University of Phoenix's lead. DeVry (ATGE 1.10%), Washington Post's Kaplan, and ITT Tech (ESINQ) are among the 17 biggest advertisers online -- outspending companies from Progressive to J.C. Penney. (Although the Apollo Group describes this data as "gross speculation," The Washington Post cited SpyFu, the site that provided these numbers, as a credible source regarding online advertising during the 2008 presidential election.)

Marketing can't change reality
Although marketing may increase enrollments, it will do so only in the short term. In this sluggish economy, graduates from traditional four-year colleges are struggling to find jobs. Prospective students have begun to realize that education isn't always a great investment, and they are now scrutinizing their options even more intently.

Source: 10-Ks.

Looking at how many alumni default on their loans two years after graduation, we see that most for-profit education companies seem to have failed to provide their students with better long-term prospects. (If students have defaulted on their loans, they probably aren't making enough income to repay those obligations.)

Interestingly, the two companies with the lowest default rates don't show up anywhere near the top of SpyFu's list of advertisers. Although Bridgepoint's (ZVO) Ashford University came close, only the 5.6% default rate of Corinthian's (NASDAQ: COCO) Everest Colleges beat the national rate of 9.1%. How?

Unlike the University of Phoenix, which passes along repayment responsibilities to third parties, Corinthian created its own "multifaceted cohort default prevention program." First, the for-profit company built a contact management system to keep connected with alumni. Second, Corinthian set up an internal department to focus on students at risk of early default. Finally, the company expanded its entrance and exit counseling program and financial literacy training for current students.

Unfortunately for students, Devry, ITT Technical Institute, and the University of Phoenix's new focus on marketing may be distracting those institutions from revamping their own financial programs.

Education is not always a great investment
In a desperate act to increase enrollment, the University of Phoenix has plowed thousands upon thousands of dollars into online advertising. The sad news is that it could have pursued a simpler solution. The company must train its students for jobs that pay, while imparting the financial wisdom students need to repay loans.

Although Corinthian Colleges may seem like a bright spot, I wouldn't invest any dollars yet. Yes, the company has cut its cohort default rate to a quarter of what it was, but that rate has yet to stabilize. For now, I'd sit back and watch carefully.

Of course, you could profit if Corinthian ends up surprising me. But the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. To read it, click here now.