In Tipping Point, Malcolm Gladwell shows how major structural changes usually aren't the result of just one big event. Rather, they come about through an accumulation of several smaller events that, when added together, provide the impetus for change. The for-profit education industry is currently teetering on the edge of a tipping point that could topple it for years to come.
The schools themselves certainly have an important role to play in our society. Combining online and on-campus classes, they provide an education to working adults who otherwise might not get the chance to attend college. Proponents claim that this flexibility, coupled with more individual attention, make for-profit colleges a better value than a traditional community college.
Before investing in these companies, though, it's important to review all of the tipping points working against them.
Deceptive recruiting practices
In August 2010, the Government Accountability Office released findings from an undercover investigation into the industry. GAO officers posed as prospective students and recorded their interactions with employees of for-profit schools. The investigation included visits to branches of:
- Apollo Group's (Nasdaq: APOL) University of Phoenix
- Corinthian College's (Nasdaq: COCO) Everest College
- The Washington Post's (NYSE: WPO) Kaplan,
- Education Management Corporation's (Nasdaq: EDMC) Argosy University
In several of the clips, students were encouraged to lie about their financial standing in order to qualify for government aid. Furthermore, it was revealed that some recruitment officers were paid on commission, adding an extra incentive to mislead prospective students. Since then, the Obama administration has introduced new guidelines to prevent this practice. Shockingly, the industry has filed suit with the Department of Education, saying that eliminating incentive compensation is unfair.
Student loan defaults
Because of adjustments made in 2008, the benchmark the federal government uses to measure federal loan repayment will soon change. Under the new metric, officials look to see what percentage of students have defaulted within three years of beginning repayment.
If the numbers hold to historical rates, this is what they will show:
- A whopping 25% of all for-profit students default within three years.
- At public institutions, 10.8% of students default over the same time frame
- The number sits at 7.6% for private institutions.
If any college has a rate of more than 30% for three consecutive years, it risks forfeiting any federal funding. Corinthian Colleges is one of the worst of the group, with 40% of its 2008 student cohort currently in default. Lincoln Educational Services (Nasdaq: LINC) and ITT Educational Services (NYSE: ESI) would also be in trouble, with their rates hovering right at 30%.
Foot-in-mouth syndrome
Many executives at these companies haven't been helping their case, either. Apollo's executives are currently under investigation by the SEC. During two different time frames last year, for-profit insiders sold a grand total of 3.2 million shares on the market, and brought in roughly $238 million in the process. It just so happens that both occasions happened to coincide roughly with notifications from the SEC that it had received complaints and would be launching investigations -- raising eyebrows about the possibility of illegal insider trading.
Not to be outdone, Corinthian CEO Jack Massimino wasted no time looking down his nose at his very own customers while trying to excuse their default rates. "We deal with the most difficult students in American education," Massimino claimed. "At the end of the day, these students are graduating and getting opportunities they've never had before." I can only hope that by this, he meant that economically disadvantaged students can have a rough time repaying loans. Of course, if graduates can't easily repay the government for Corinthian's high tuition, what does that bode for their job prospects?
Finally, in what I consider one of the most outlandish examples of corporate arrogance, Strayer (Nasdaq: STRA) CEO Robert Silberman blamed a 20% drop in enrollment on ... the media. Instead of addressing concerns about enrollment, graduation rates, or loan defaults, he stated that bad press was responsible for the drop in enrollment.
Put your money elsewhere
In the end, it might be unfair to paint the industry with so wide a brush as to include all for-profit schools. There are, I'm sure, schools that are doing exceptionally well by their students. However, with over 5,000 different publicly traded companies to put your money into, I think you'll find better deals with significantly less risk by staying away from this industry.
