For-profit institutions have been receiving intense scrutiny on the heels of the Corinthian College closures, which has left its 72,000 students facing displacement and delays in graduation.
New legislation backed by Sen. Tom Harkin’s (D-Iowa) 2-year study of for-profit institutions is on its way to the Senate. It proposes for-profits meet requirements to maintain at least a 30% graduation rate for three years, provide proof of accreditation and list their student professional licensing and certification rates. The Assembly has passed the bill, and its next destination is the Senate Appropriations Committee.
Study Finds For-Profits Spend Big on Marketing, Little on Academics
Overall for-profit enrollment has been declining in the wake of federal investigations, most notably with Corinthian Colleges (COCO) , which is in the process of selling 85 of its national campuses while closing another 12.
Harkin’s studyfound that the largest for-profit institutions spend more on marketing and profit than on academics — in 2009, ITT Educational Services, Inc. (ESI) devoted 19% to marketing, 37% to profit, and just 44% to all other departments including executive compensation, lobbying and facilities. Student services and instruction also fell under “other,” competing for funding with branches unrelated to academics. Despite ITT’s stockpiling of profit, shares are down for a year-to-date loss of 75.15%.
The challenge for-profit universities face is a catch 22. Their revenue comes from students’ tuition payments, but as the student population becomes more wary of educational institutions like the Corinthian colleges, those universities are leaning on scholarships to attract enrollment. Scholarships in turn cost the universities money, which is undoubtedly drained from departments in the “other” category before funds are pulled from marketing or general profit. Companies from tech to oil understand the importance of cost cutting, but choosing what to cut is difficult when education is on the line.
The “90/10” Loophole Has For-Profits Hunting for Veterans
There is a safety law in place termed the “90/10” rule, which requires 10% of for-profit funding come from non-federal sources. If a for-profit school receives more than 90% of its revenue from federal student aid programs, government funding is cut off — exactly what led to the Corinthian College closures. The top 15 publicly traded for-profit universities come just shy of that ceiling receiving, on average, 86% of their revenue in the form of federal student loans.
However, these institutions have found a loophole: GI Bill funds do not count as federal funds. As it stands, funding sourced from the bill is essentially viewed as a grant to veterans to use at their own discretion, regardless of its US government origins.
For-profit universities quickly caught on to the loophole, and, since the bill went into effect in 2009, veterans have raised complaints that they have been aggressively targeted by those institutions’ marketing campaigns. Harkin’s study found that if this loophole were closed, the largest for-profit college corporations would be at risk of losing all federal funding, proving significant reliance on veterans to make up the 10% difference. Roughly $2.9 billion of the Post-9/11 GI Bill funds have been spent at for-profit institutions.
Thirteen percent of war veterans use their benefits at for-profit institutions, but only around half of them eventually graduate. Benefits are also extended to immediate members of family. The US Department of Veteran’s Affairs pays all tuition and fees for an in-state student at a public university, $1,000 annually for books and supplies, and a housing allowance generally the same as an army sergeant with dependents would get from the Defense Department. The average annual cost for a veteran attending a for-profit college is $10,875, more than double the average $4,875 spent on public school.
The number 1 recipient of GI funds is Apollo Group (APOL) , the parent company of the University of Phoenix that has made a comeback after drastic declines in enrollment in 2013. Apollo’s collection of veteran’s awards increased 72% between the 09-10 and 10-11 academic years from $77 to $133 million. 66.4% of Apollo’s student base pursuing 2-year associate’s degrees fails to graduate.
Long-Term Effect on Profits
On July 23, U.S. Reps. Susan Davis of San Diego and Mark Takano of Riverside (both D-Calif.) proposed legislation designed to close the 90/10 loophole, but it was crushed within 15 minutes of being introduced. US Rep. John Kline (R-Minn.), who also serves as chairman of the House Committee on Education and the Workforce, ruled the bill irrelevant to the meeting’s topic of financial aid. Apollo Education Group is Kline’s largest campaign contributor.
Given staunch House opposition, the newly proposed legislation does not request GI Bill funding be classified as federal aid. Instead, if approved, the proposals would cut off federal financial aid to programs whose graduates have high rates of default or high levels of student loan debt relative to their incomes.
Any type of new legislation forcing for-profit institutions to improve the quality of education will require a shift in revenue allocation away from its largest expenditures on marketing and profit. It has already forced campus closures and significant layoffs, as these companies (like any other) place primary focus on earning profit. The potential boost in enrollment and thus tuition may present a buffer for what will likely need to be pulled from profit stockpiles.
The national graduation rate average is 59%. If the for-profit universities in question are able to push their own rates to meet or exceed the proposed 30%, improved reputation will bring greater enrollment as well as better job placement for graduates, which could in turn funnel more students into accredited for-profit programs.
However, those institutions will have to move in tandem for any changes to be lasting in order to eliminate the concern of price competition between universities. The only catalyst for such a shift in for-profit college operations appears to be a change in regulation like the one currently headed to the Senate.
Not All For-Profit Education Stocks Are Created the Same
Strayer Education Inc. (STRA) is a notable company in the US for-profit education sector that has performed well, offering affordable programs and strong corporate relationships to its students. The company recently released strong second-quarter earnings with a year-to-date increase of 62%.
Nasdaq recently spotlighted DeVry Education Group Inc. (DV) based on its diverse portfolio of programs from healthcare and international business, as well as its performance over the last two quarters, which beat the Zacks Consensus Estimate for both revenue and earnings. Stifel Nicolaus upgraded DeVry to a Buy, citing a target price of $48.
Other stocks earnings accolades were the smaller Capella Education Company (CPLA) and Grand Canyon Education Inc. (LOPE) , both showing impressive earnings and significant potential for growth.
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