GAO report on recruiting practices at for-profit colleges

Inside Higher Ed reports on the GAO (Government Accountability Office) investigation of the unethical, if not illegal recruiting practices at for-profit colleges. Read the GAO report (warning pdf): gaomarketing. Here’s an excerpt from the Inside Higher Ed article (the rest is here):

Undercover investigators posing as students found that employees at all 15 for-profit colleges visited for the investigations made “deceptive or otherwise questionable statements” to students about accreditation, graduation rates, employment outcomes, program costs or financial aid. At four institutions visited, admissions or financial aid officials encouraged students to submit fraudulent financial information in order to qualify for federal aid, the GAO says in its report. Though many similar tactics have been reported in the news media and recounted by former employees like Pruyn, the GAO report and video carry the weight and credibility of a Congressional investigation.

The investigators also submitted contact information for four prospective students with fictitious identities to “lead generation” websites that supply colleges with names of interested students, and encountered aggressive behavior, they said. Some students began receiving marketing calls from colleges within five minutes of submitting the information and, over the course of a month, one received more than 180 calls. Some came as late as 11 p.m.  In all, the four students received 436 calls in the span of a month. Of those that could be tracked, all but six came from for-profit institutions. The six that came from nonprofit institutions were all from the same public college, according to the GAO. More damning than aggressive calls are instances in which college employees encouraged prospective students to commit fraud, or conveyed incomplete or false information about the institution’s costs and student outcomes.

This caught my attention:

At all but two of the colleges visited, college employees offered deceptive or questionable information about graduation rates, exaggerated likely earnings, or guaranteed applicants jobs after graduation. An employee at a small beauty college told an applicant that barbers can earn $150,000 to $250,000 annually. According to Bureau of Labor Statistics data, 90 percent of barbers make under $43,000 a year. At a college owned by a publicly-traded company, an employee told an undercover applicant that instead of pursuing an associate degree in criminal justice, she should go after a medical assisting certificate with which, after nine months of school, she would be able to earn as much as $68,000 a year. A salary that high would be unlikely, since according to BLS data, 90 percent of people working in the field make less than $40,000.

Two colleges told undercover students they could earn rewards like a gift card or an MP3 player by recruiting other students — a practice that could run afoul of a federal statute on “incentive compensation,” depending on the monetary value of those items.

1 thought on “GAO report on recruiting practices at for-profit colleges


    How about a few current ideas?

    There has been a lot of interest in educational stocks. We currently are short Strayer Education [ticker: STRA].


    Enrollment-growth expectations are too high. The ability to pay tuition, and bad debt in the industry, are big issues. There are rules and regulations designed to prevent schools from allowing students to take on too much debt based on degree programs that won’t result in “gainful employment.” That can jeopardize a school’s funding ability. None of the schools has been in violation yet. The rules are very simple, and that’s part of the story of what is going on now. The government is looking into increasing the regulation of these schools. If you go out five, 10, 15 years, the default rates can be as high as 40%. The government is interested in curtailing the ability of students to take on large amounts of debt when they are unlikely to earn enough from their fields of study to pay the debt off.

    There are other problems, too: overly aggressive recruitment, and keeping students in school who shouldn’t be kept in school in order to make the numbers look better.

    Is Strayer focused on a certain aspect of education?

    They focus mostly on business degrees. Roughly 70% of their degrees are accounting or business-oriented. Even though increasing government regulation is a significant risk to Strayer, our thesis is based more on the fundamentals. We think the 20%-plusannual growth in enrollment they have had in the past couple of years is unsustainable.

    Strayer has a much, much higher valuation than any of the other large education companies. Some of the very small ones that are fast-growing have high valuations, but, among the large ones, Strayer has a price/earnings ratio double or more its peers. People perceive that it has a little more room to grow geographically. But given all the things that are going on—government regulation, economic slowdown, ability to pay, lack of jobs, corporate cuts in tuition reimbursement—it would seem Strayer is vulnerable. Apollo Group [APOL] is selling at eight times 2011 earnings estimates, versus Strayer, which is at 20 times next year’s earnings. We are starting to see some cracks, and it may be close to the time when the slowdown actually comes.

    What cracks?

    The past two quarters, the sell side has been expecting new-student enrollment growth of 20% or more at Strayer. In the first quarter, the winter semester, they reported 16%, and management of Strayer blamed that disappointment on one less week of recruitment time in the calendar. For the spring semester, they reported new-student enrollment growth of 16%, again when the Street was expecting about 20%, and blamed it on the snowstorms in the mid-Atlantic region.

    Sounds like a retailer.

    Wall Street is maintaining estimates of 20% new-student enrollment growth. If Strayer disappoints again with no excuses, then that’s a sign the slowdown is more fundamental. They break down their campuses into mature campuses and new campuses. New campuses are younger than three years old, and enrollment at new campuses has really decelerated. In fact, enrollment at new campuses in the spring semester was down roughly 10% from a year ago. Interestingly, a lot of these new campuses aren’t in the geographic areas impacted by the snowstorms. A lot of them are in the South. A lot of them are in Florida.

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