For-Profit College Corinthian Drops Out as Industry Faces Crisis

Jacob Harper |

corinthian college shares plummet, lincoln education, Apollo group, University of Phoenix

On July 7 the for-profit college chain Corinthian Colleges (COCO) saw its shares plummet as the company announced the intention to slowly yet surely completely dismantle. The move comes as little surprise as the viability for-profit colleges – which had for so long relied on federally-backed student loans for sustenance — has for some time been highly suspect.

As the government continues to crack down on businesses like Corinthian — whose degrees are often of dubious worth when it comes to actually landing jobs — the revenues of publicly traded educational institutions have dwindled. Corinthian saw shares fall to 22 cents a share in July 7 trading action, representing a 12-month decline of over 90 percent. Corinthian compatriot Lincoln Educational (LINC) has likewise seen shares plummet from $5.83 in February 2013 to its July 7 price of $4.08 a share amidst declining enrollments.

However, not all for-profit institutions are feeling the burn. Apollo Group ($APOL), the proprietors behind the high-profile University of Phoenix chain, has recovered from the drastic decline in enrollment that in mid-2013 rocked the company. Cost-cutting measures have caused a surge in the company’s stock price, with shares rising 81.21 percent in a year.

But Apollo is the exception that proves the rule. The current administration has taken an unfavorable stance towards moneymaking educational facilities and has begun to take punitive actions in response.

For-Profits Need That Federal Cash

The struggles of the for-profit college sector can be traced to the Obama administration targeting institutions whose students have an unusually high student loan default rate. But perhaps the bigger issue is that the product that these companies sell – degrees that ostensibly get the customer a better job than they currently have – don’t work.

According to the Wall Street Journal, a month ago the Department of Education sent Corinthian a letter informing them that their access to student loan aid was being frozen because the company “failed to address concerns about its practices, including falsifying job placement data used in marketing claims to prospective students.” As a result, Corinthian was effectively cut off entirely from its main revenue stream, and was thus forced to close up shop.

This complete dependence on the federal government is not unique to Corinthian. As Cornell Professor Suzanna Mettler wrote in her book Degrees of Inequality: How the Politics of Higher Education Sabotaged the American Dream, the 15 largest publicly traded for-profit colleges received, on average, a whopping 86 percent of their revenue in the form of federal student loans.

This job placement problem is not unique to Corinthian either. Job placement, or the very efficacy of for-profit college degrees, has always been an issue, with the discrepancy between promises of future employment and actual future employment remaining large.  The Department of Education found that Corinthian, whose brands included Everest, Heald, and WyoTech colleges, greatly misled its customers about the usefulness of their degrees.

Next on the chopping block is ITT Technical Institute (ITT) , whose shares are down more than 60 percent in 2014. ITT has also been singled out for inflating the value of the degrees they sell, and if the government deems so they too could see their federal aid spigot turned off, and face the same fate of Corinthian: forced liquidation.

When For-Profits Die, They Die Quick

While the Corinthian bust-up did not happen entirely out of the blue, the complete cessation of 86 percent of revenue is enough to cripple almost any company. With no revenue to meet payroll and rent, Corinthian has no choice but to sell off assets and make plans to liquidate their nearly 100 campuses.

While Corinthian, ITT, and Lincoln falter; other "storefront academies" downsize; and Apollo Group soars; it appears the for-profit college industry isn’t dead but merely coalescing around a market leader. But the University of Phoenix as well has long struggled to prove the worth of their degrees, and, despite their relatively recent stock rebound, could very well eventuall face the same potentially fatal challenges from the government.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
APOL Apollo Education Group Inc. 9.48 -0.01 -0.11 408,233
ARB.H:CA Ardonblue Ventures Inc. 0.10 0.00 0.00 0

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