I finally caught the latest Frontline program, “College Inc,” on PBS late last night (no need to troll your local PBS station though–you can watch it online here). It certainly makes for some interesting viewing. Here’s the summary from Frontline:
Even in lean times, the $400 billion business of higher education is booming. Nowhere is this more true than in one of the fastest-growing — and most controversial — sectors of the industry: for-profit colleges and universities that cater to non-traditional students, often confer degrees over the Internet, and, along the way, successfully capture billions of federal financial aid dollars.
In the meantime, have a look at this rather dispiriting article I found in Barron’s, “Leveraging Up to Learn” (below the fold). Some of the links below are pdfs of charts/tables. The most important, in my view, is the one labeled “Giving It the Old College Try.”
THE FOR-PROFIT COLLEGE BUSINESS grew sensationally right through the recession. September-quarter enrollments rose 20% to 50% across the industry, from little Grand Canyon Education to giant Apollo Group (APOL), parent of the well-advertised University of Phoenix. So why are the industry’s stocks trading at historically low multiples of their fast-rising profits? And why did an Education Department panel spend last week discussing regulation of these businesses — which enrolled more than 10% of all U.S. college students last year while accounting for almost 25% of $60 billion in government-backed student loans?
In part, it’s because of stories like Amer Alata’s. The Michigan man says he was urged to withdraw from his medical residency after being told he’d received poor clinical training from Ross University School of Medicine, a for-profit institution in the West Indies that’s owned by DeVry (DV). He has defaulted on more than $470,000 in student loans and therefore can’t borrow more money to complete his education and become a licensed doctor.
“My life has been crushed,” says Alata, age 30. “All those good things I wanted to do — making a difference one life at a time — I can no longer do.” Bill collectors call him dozens of times a day. He expects to file for bankruptcy, but student loans can rarely be discharged in bankruptcy. DeVry says that Alata’s residency program says he left voluntarily, and that Ross grads generally fare as well as U.S.-trained med students.
FOR ALL THE BEAMING testimonials on for-profit schools’ Websites, there are too many sad cases like Alata’s. Bad stuff just keeps emerging from some of these lucrative enterprises, which whistleblower lawsuits depict as high-pressure sales operations bent on vacuuming up student-loan dollars. The stocks therefore carry what fans like Jeffrey Silber-a leading analyst of the industry at broker BMO Capital Markets-calls “headline risk.”
Two weeks ago, for instance, Apollo surprised investors by announcing that the Securities and Exchange Commission was informally investigating its revenue recognition. The Phoenix-based company’s stock fell from 72 to a recent 56, with the company saying its accounting was proper. “We’re in deep value territory,” claims Silber. “Some of these stocks are trading at six to seven times trailing 12 months’ Ebitda [earnings before interest, taxes, depreciation and amortization]. Literally, all-time lows.”
But the young industry’s enrollment and cash flow won’t merit good multiples if for-profit operators don’t deliver value to their students. And there’s scarce evidence that these schools deliver a better education than America’s traditional colleges. Education Department numbers show the industry’s dropout rates are as miserably high as those at public universities. A Barron’s analysis of the just-released data from 2008 shows a year-over-year dropout rate of 37% at the 1,350 for-profit colleges whose students got federal aid, the same level as 1,800 public colleges and well above the 29% dropout rate at the 1,760 nonprofit private colleges. (Students who fail to continue from the prior year are defined as dropouts.)
Graduation rates at for-profits were much worse, on average, than at traditional schools. Just 34% of for-profit students attained their bachelor’s degrees after six years, compared with 45% at public colleges and 52% at the nonprofits. And even where public and for-profit private educational outcomes are similar, the for-profit students pay higher tuition and leave with twice the debt to service. Both students and the taxpayers guaranteeing student debt must wonder if for-profit grads get enough of a career gain to cover that nut.
President Obama has called for $12 billion in funding to support public community colleges over the next decade, but Congress has barred the Education Department from collecting the student-level earnings data needed to assess graduate outcomes. So there’s no solid data to let prospective students-or investors-compare the salary boosts from public and for-profit degrees. But one crude measure of the relative return on those educations is the default rate on student loans. Defaults were about twice as high among for-profit alumni as among the alumni of public colleges, and three times the level of non-profit alumni — according to the government numbers on those who started repayment in 2007. More worrisome, the Education Department says defaults of the for-profits’ students get much worse over time, rising above 23% of individual loans after four years, compared with 10% for public college alumni and 7% for nonprofit alums.
“This reminds me of the ‘liar loans’ that helped create the housing bubble,” said California Democrat George Miller, chairman of the House Education and Labor Committee, at a hearing last month where government investigators told how a for-profit company’s testers helped applicants pass an entrance exam. “They end up defaulting,” fumed Miller, “with ruined credit reports, and all their problems got worse.”
For-profit higher education is surely a worthwhile experiment in America’s struggle to retrain its workforce and address its scandalously high college-dropout rate. Before this decade, most of the industry’s enrollment was at trade schools run by the likes of DeVry, ITT Educational Services (ESI) and Career Education (CECO). In recent years, however, enrollment has grown at a 15% annual clip at for-profit universities that offer bachelor’s, master’s and even doctoral degrees. Since 2000, the Apollo Group’s University of Phoenix has expanded its rolls from 100,000 to more than 400,000 students. Many companies have emulated the University of Phoenix model of small campuses in commercial locations around the country. Corinthian Colleges (COCO) has about 90 Everest campuses, while Strayer Education (STRA) has more than 70. Education Management (EDMC) has more than 100,000 students at its widely scattered Art Institutes and Argosy Universities; last month it returned to Nasdaq after three years in private hands. Outfits like Capella Education (CPLA) operate exclusively online. The Washington Post (WPO) has enrolled more than 100,000 students at its Kaplan colleges.
ON TOP OF DOUBLE-DIGIT ENROLLMENT growth, for-profit schools benefited from the generous pricing umbrella of the traditional schools. For three decades, tuition has increased by an average of more than 7% each year at public and nonprofit private universities, according to the government’s National Center for Educational Statistics. By pricing themselves between the public and the non-profit colleges, the for-profits have been able to swell revenues at 20%-to-30% annual rates.
Grand Canyon Education CEO Brian Mueller previously worked at Apollo Group. He says visitors from traditional universities tell him that his for-profit operations are more advanced than their own institutions, and admit that they have a lot to learn from the for-profit sector.
The for-profit experiment has worked out fabulously for some venture and private-equity investors. Grand Canyon was a traditional Christian campus on the verge of bankruptcy in 2004 when it was acquired for less than $10 million by a group of investors led by the evangelical fundraiser Michael K. Clifford. Last November the retooled enterprise went public at a market capitalization of $500 million.
Returns like that are hard to ignore. Former GE chief Jack Welch is putting his name on an MBA program created by Clifford, who’s also a founder of Bridgepoint Education(BPI), the New York Stock Exchange-listed company whose Ashford University enrolled almost 20,000 new students in the quarter ended September, up 55% from a year ago. As at Grand Canyon University, nearly all of Bridgepoint’s new students seek online degrees. Online economies helped lift Bridgepoint’s September-quarter operating margins above 30%. At Strayer, operating profit was almost 40% of September-quarter revenue, if you don’t count the expense of stock options.
With dazzling margins and revenue growth, the for-profits have drawn legions of growth-stock investors. The index of post-secondary-school stocks compiled by BMO analyst Jeffrey Silber would have risen about 12 times more than the market in the past 15 years.
That stock performance has bloodied hedge-fund managers who made large short-sale bets against companies like Apollo, Corinthian, Strayer and Capella. Like moths to electric bug-zappers, shorts pile into these shares with the filing of each new whistleblower suit. Many for-profits have been sued by ex-employees who alleged the schools flouted federal restrictions on setting enrollment targets for the schools’ recruiters. A complaint against Apollo, filed in a Phoenix federal court in 2003, described awards of travel and electronics to salespeople for hitting recruitment targets, and salary boosts of at least $50,000. A more recent complaint against Grand Canyon, filed in the same federal court in 2007, told of a ski trip to Lake Tahoe promised to sales reps who enrolled the most new students. Both schools deny violating the government’s incentive-compensation rules and are in settlement discussions with plaintiffs. Under the Bush administration’s Education Department, restrictions on recruiting were loosened in 2004.
THOSE LEGAL SAFE HARBORS for the industry’s recruiting practices are now under review by Obama’s Education Department, in a public process called “negotiated rulemaking.” An advisory panel met on the issue last week. Yet Grand Canyon CEO Mueller insists his school could achieve its enrollment goals even if the Education Department banned compensating recruiters for the number of new students signed.
Whatever the legality of for-profit sales practices, enrollment will get harder on the margin as the industry gets larger. The chart shows high dropout rates for operators like Apollo-which admitted in its latest earnings call that it needs to improve “retention” rates. Before schools can continue their enrollment growth, they have to replace dropouts and graduates. Bridgepoint’s dropout rate last year was only slightly better than Apollo’s and, somewhat dismayingly, the Ashford University operator has been spending more on sales and marketing than it does on teaching.
Another sign that for-profits are stretching to make sales are the reports from case workers at homeless shelters, who see for-profit educators signing up shelter clients. Bob Augusta says he was living in the woods and frequenting the Tucson Gospel Rescue Mission when he enrolled in April in a program at Tucson College — owned by private-equity firm Gryphon Investors — to become a Patient Care Technician. Augusta quit two months before finishing after, he says, he heard that hospitals weren’t hiring such technicians. He says he must repay $16,000 in loans and gets repeatedly dunned by the school. “They were really friendly coming in,” says the 47-year-old. “Coming out they weren’t real friendly to me.”
Tucson College says Augusta was referred to them by a community-service organization and gave them a street address. The school often trains the homeless, and says the patient-care jobs are out there.
The burden’s far heavier for students like Alata, the graduate of DeVry’s for-profit med school with the $470,000 default. “It creates a burden not only on the person who has the debt,” he says, “but also a burden on the system, on all my lenders.”
Government-backed loans to the for-profit colleges grew by a third last year, to about $20 billion. As shown in charts at left, companies like Apollo are close to exceeding the legal limit of getting 90% of their cash revenue from government programs. That’s one reason why the industry’s pursuing military students, whose government assistance doesn’t count toward the 90% limit. Corinthian Colleges and ITT Education duck the 90% limit by supplying 10% of student loans themselves — while noting that more than half of such internal loans get written off. Corinthian has also disclosed that some of its units will probably exceed a default rate of 25%.
Only the state of Florida does a good job of linking education and earnings data that allows prospective students to see the average earnings of degree holders from the state’s public colleges. The Education Department’s overseer of higher education, Robert Shireman, says the federal government will soon make it easy for prospective students to see the sort of school-by-school graduation and dropout data that Barron’s compiled for this article. “The signs are moving in the right direction,” he says.
The government has almost always waived the corporate penalties for exceeding loan and default ceilings, but these deteriorating trends raise doubts about the economic returns of a for-profit education. For-profit schools like to blame dropouts and defaults on the population of poor and minorities the industry “serves”-but the evidence doesn’t show whether the industry’s serving that population or preying on it.