For-Profit Schools Can’t Dodge This Bullet Any Longer

It’s time for Strayer, Corinthian Colleges, Apollo Education and the rest to face the music

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For-Profit Schools Can’t Dodge This Bullet Any Longer

Education Management (EDMC) — which runs Le Cordon Bleu North America and Colorado Technical University, among other schools – disclosed in its most recent SEC filings that it also has received inquiries from 12 state attorneys general. The quarterly update noted…

“The inquiries focus on the Company’s practices relating to the recruitment of students, graduate placement statistics, graduate certification and licensing results, and student lending activities, among other matters.”

ITT Educational Services (ESI) disclosed it was under investigation by several states’ attorneys general. These civil investigative demands…

“…(contained) broad requests for information and the production of documents related to the Company’s students and the Company’s practices, including marketing and advertising, recruitment, financial aid, academic advising, career services, admissions, programs, licensure exam pass rates, accreditation, student retention, graduation rates and job placement rates, as well as many other aspects of the Company’s business.”

The Securities and Exchange Commission also subpoenaed records from ITT earlier last year.

More examples of wide and deep scrutiny could be cited, but the point is made — a wide swath of the industry is under a legal microscope no company wants to be under.

For-Profit Schools Lose in Court of Public Opinion, Too

As if their budding legal woes weren’t enough, companies like ITT Tech, Strayer, Education Management, Corinthian Colleges and Apollo Education might be facing an even tougher battle when it comes to the perception that would-be students now have of them.

Recent graduates of some of these schools have found their “degrees” and certifications don’t hold much — if any — clout in the real world, and doesn’t make their recipients anywhere near as marketable as billed.

For example, in August of last year, Career Education Corp. (CECO) paid $10 million to settle claims made in New York that its schools there “told prospective students that between 55% and 80% of students found jobs after completing programs, though only 24% to 64% of students found real work.”

And last week, ex-employees of privately held for-profit Harris School of Business and parent Premier Education Group — defended by whistleblower laws — claimed the school knowingly misleads students about the value of its programs, and accepts students who likely won’t benefit from the credential they’ll receive.

Case in point: One of the students in its pharmacy technician program was a former felon, which almost always prevents them from holding a pharmacy-tech position.

Margie Donaldson, a 38-year-old Detroit native who left a good-paying job as a warehouse worker with Chrysler, is now $75,000 in debt and unable to find a job in her chosen field despite receiving a criminal justice degree from ITT Tech. Problem? Her degree is not regionally accredited; the credits won’t even transfer to a school that is accredited. That’s five years down the drain.

Her experience is becoming a common one, and a commonly highlighted one.

The list of highly publicized ethical concerns could go on. In fact, these three scenarios don’t even begin to scratch the surface of the black eye the industry has received of late.

Consumers are finally starting to realize that the for-profit school industry is “selling the dream” more than providing a marketable education.

Bottom Line

Most companies can withstand the occasional potshot now and again. Most companies can’t, however, withstand a full-on assault from several government agencies while also fending off weak demand stemming from stunningly bad publicity. It’s the proverbial beginning of the end for the for-profit schools unless they can do something miraculous, and fast … like actually help someone get a job they wouldn’t have otherwise gotten on their own without crushing them with debt.

That miracle isn’t out of the question, but it’s a long shot at this point.

See, with rare exception, the industry has been developed from the ground up as a machine to siphon federally supplied financial aid without a care for providing students a worthy credential. For perspective, in 2009, for-profit schools only spent about $2,050 per student on actual instruction, while the average nonprofit public school spent $7,239 on instruction per student.

No wonder a degree or a certification at a for-profit institution costs significantly more than it would at a comparable community college, not to mention well more than a four-year bachelor’s degree at a fully accredited school. Even more alarming is that approximately two-thirds of for-profit schools’ students accept federally support student loans, vs. half (or less) of students at nonprofit schools accepting such student aid.

Yes, the for-profit education industry thrives on government-backed loans. Switching gears — and switching the mentality — will be a tall task, to say the least.

And just for the record…

While Strayer might have blown estimates away and while STRA stock might have soared on the news, investors should bear in mind that those expectations were ridiculously low. The adjusted $1.32 per share that Strayer earned last quarter might have topped estimates, but it was also 10% less than the year-ago bottom line of $1.47 per share. Revenue for Q4 still fell 13% too, and enrollment for the current term was lower by 14%.

That’s hardly a reason to celebrate, and it might well be the shape of things to come for all of these schools for a long while.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2014/02/for-profit-schools-apol-coco-stra/.

©2014 InvestorPlace Media, LLC

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