For-profit colleges have gotten a bad rap in the last few years, and for good reason.
According to a 2013 investigation by USA Today, many for-profit colleges had higher default rates for student loans than they did graduation rates — including Apollo Education Group Inc.’s (APOL) University of Phoenix, which hit a low mark of just a 10% graduation rate at its Detroit campus but student loan default rate of 26.4%.
More recently, education providers including Corinthian Colleges Inc. (COCO), Education Management Corp (EDMC), ITT Educational Services, Inc. (ESI) and Career Education Corp. (CECO) have been targeted by government investigators to see if they are running afoul of more stringent marketing and recruiting guidelines.
President Barack Obama has been cracking down on for-profit colleges for some time, including an aggressive step this spring that could shut down many programs based on a requirement that demands students find work at a reasonable rate of pay. And based on the political climate, it’s unlikely this war on for-profit colleges is going away.
So it’s perhaps not surprising that at least one college is considering losing the for-profit label altogether and going ahead strictly as a nonprofit education provider.
Will For-Profit Colleges Really Give Up Profits?
According to Bloomberg, “The university told shareholders on Oct. 29 that it was exploring buying them out and converting to a nonprofit college as investigations of other schools tarnish the industry’s image.”
Click to Enlarge The amazing thing is that Grand Canyon is, in fact, quite profitable. While some for-profit colleges have cratered lately, with COCO stock down 92% in the last 12 months as Corinthian struggles to make a profit, LOPE stock is up slightly in the last year and has seen steadily rising revenue and profits for some time.
The university may be different, of course, because despite its for-profit operations it has carved out a niche as a Christian-affiliated institution and seems to be more concerned with doing things right than just making a quick buck.
That could explain the motivation for the move.
“The stigma surrounding the for-profit industry — some of which is deserved, and some not — is real and it is not improving,” Chief Executive Officer Brian Mueller wrote on the GCU website recently. He went on to say that “We believe it is the right time to consider an alternative to that model if it could be done in a way that would provide shareholders a fair return on their investment while also ensuring the long-term stability and legacy of the institution.”
So is this a rarity among for-profit colleges, or a trend?
Well, call me skeptical … but I don’t see Education Management Corp doing this anytime soon. It’s partially owned by Goldman Sachs Group Inc. (GS), and I’m sure profits are the most important motivation for that investment.
It’s nice to see Grand Canyon considering the move, but this probably is only an isolated incident.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.