American Public University which is owned and operated by American Public Education, Inc. (NASDAQ: APEI) was recently in the news when Wal-Mart Stores Inc. (NYSE: WMT) announced that it was starting a program to help its 1.4 million US employees gain a post-secondary education. Wal-Mart employees who participate in the program will get a grant from the school to meet 15% of their tuition costs, and Wal-Mart will pay up to $50 million over the next three years for tuition assistance and other costs.
A typical three-credit-hour course at American Public University costs $750. At the University of Phoenix, owned and operated by Apollo Group, Inc. (NASDAQ: APOL), a three-credit-hour course could cost $1,350. Costs are comparable at other for-profit colleges owned at operated by
Career Education Corp. (NASDAQ: CECO), DeVry Institute (NYSE:DV), and Strayer Education Inc. (NASDAQ: STRA).
At a state of California community college, a three-credit-hour course costs $78. So why would a student choose to pay a minimum of 10X more for a course at the least expensive for-profit instead of attending a public community college? Simple — the community college is stuffed with students who cannot enroll in over-full classes.
Students attending a for-profit school are eligible for federal and federally guaranteed student loans and grants, and this is where the money is. In 2000, federal aid to for-profit colleges equalled $4.6 billion. In 2009, the bill totaled $26.5 billion.
For-profit colleges serve a large number of low-income, first-generation, and minority college students. Critics of the for-profit schools argue that rather than recruiting low-income students and enrolling them in low-cost schools they can afford, for-profit schools recruit these students and enroll them in high-cost programs that are paid for with federal funds.
To alleviate the debt burden carried by students, the US Senate will soon consider a proposal limiting the debt-repayment-to-income ratio to 8%. The president of the Career College Association, a group representing some 1,400 for-profit schools, says this will have “a horrendous effect.”
That’s a fact. But who will suffer most from the effect? The Financial Times puts the answer to that in perspective: “[Federal grants and loans] have funnelled more than $100bn to the [for-profit college ]industry in the past decade in spite of a default rate that is nearly three times as high as non-profit private universities.”
If repayment limits are instituted, then loan amounts must be lowered or the loans won’t be federally guaranteed. That would be a disaster for the for-profit schools.
American Public Education set a new 52-week high following the announcement from Wal-Mart and the other for-profits have also gotten a bump from the news. The schools have a lot of supporters in Congress and even the Secretary of Education is quoted in the Washington Post saying that the for-profit colleges are “making a huge difference in helping people take the next step in the economic ladder.”
The sailing is not all smooth for the for-profit schools, but if lower loan repayment limits are enacted, the schools’ current hefty profit margins could take a serious hit.
