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

To say the last few years have been interesting ones for the for-profit schools like Apollo Education (APOL) or Corinthian Colleges (COCO) would be a significant understatement.

Strayer LogoBetween a nasty recession that shoved people out of the market and back into classes, the subsequent risk of many of these schools’ students losing financial aid, and the hysteria that ensued for the entire industry when Apollo Education was at risk of losing its accreditation, the past several years have been downright dramatic for the group.

Yet, for all the challenges the likes of Corinthian Colleges, Strayer Education (STRA) and other for-profit schools have faced since 2007, their biggest battle — what is ultimately a fight for their lives — has only just begun.

Anybody who owns a stake in APOL, COCO stock or any other of these companies should heed the warning.

For-Profit Schools Headed for Expulsion

It’s admittedly a bit ironic to argue that for-profit school stocks are in jeopardy in the shadow of last Friday’s 38% gain from shares of STRA stock and bumps higher in related stocks. Strayer Education posted much better Q4 results than anticipated, earnings $1.32 per share last quarter to put estimates of 98 cents in the dust. Revenue of $124.1 million topped expectations of $119.3 million, too.

So what’s the problem for the industry?

In short, the jig is up.

While the idea that many of these schools’ programs were worthless had quietly been whispered for years, as it turns out, investigators might be about to prove it in a more significant context. Specifically, the allegation is that these these companies knowingly don’t make its students any more marketable in the workplace, yet they saddle students with debt they’ll never be able to repay.

And the arguments might be coming to a courtroom near you sooner than later.

The attorneys general in 13 states have ordered investigations (civil investigative demands, technically) of Corinthian Colleges. Per the company’s most recent 8-K, Corinthian notes…

“The CIDs seek documents and answers to interrogatories related to the students recruited from the various states; organizational information; tuition, loan and scholarship information; lead generation activities; enrollment qualifications for students; complaints; accreditation; completion and placement statistics; graduate certification and licensing results; and student lending activities, among other matters.”

Thirteen states is a lot, and those investigators are leaving no stone unturned.

It’s not just at the state level that the for-profit schools are under some serious fire, however. The Justice Department sent an official inquiry in the latter part of last year as part of what might become a false claims lawsuit by the DoJ.

The Securities and Exchange Commission also subpoenaed documents from Corinthian Colleges in the middle of 2013, as part of an investigation along the same lines as those being conducted by the Justice Department and several state attorneys general. And, as of last month, the Department of Education rejected Corinthian’s request to open new locations, saying…

“The Department has denied approvals for certain new locations and new programs because CCI has admitted to falsifying placement rates and/or grade and attendance records at various institutions and because of ongoing state and federal investigations into serious allegations with respect to CCI’s improper administration of Title IV programs.”

Fans and investors of for-profit schools will respond with an explanation that these are nothing more than allegations at this point, and all of them are pointed at only one school: Corinthian Colleges.

In response to the first defense … as they say, where there’s smoke, there’s fire. The SEC and the DOJ and the DOE and several states’ attorneys general can’t all be nosing around just for kicks.

As for the second defense of these schools, no, it’s not just Corinthian Colleges in the spotlight.

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,

©2022 InvestorPlace Media, LLC