President Barack Obama’s proposal to enable Americans to attend community colleges for free for two years shows that Washington still loves nonprofit universities and despises for-profit colleges.
And since the administration can easily deal for-profit colleges a deadly blow, investors should sell out of their for-profit education stocks sooner rather than later.
Pressure From Washington
Companies that are on the president’s enemy list typically have a rough go of things. Just look at the stock charts of the coal companies and BP plc (BP) … and of course, for-profit education stocks such as Apollo Education Group Inc (APOL), ITT Educational Services, Inc. (ESI) and Career Education Corp. (CECO) have already been struggling.
So history strongly suggests investors should avoid owning for-profit education stocks while President Obama is still in office.
The president’s proposal, if enacted, would naturally draw many students to community colleges, and thus away from for-profit colleges. It’s really hard to justify paying the high tuition that for-profit colleges charge if you can get a free ride at community colleges.
But even if the proposal is not enacted by Congress, for-profits aren’t off the hook — because it’s a clear sign that the president has no love for these types of educators.
Various things help explain Obama’s strong dislike for the for-profit sector. For one, many of his top contributors work at nonprofit universities; employees of nonprofit universities contributed about $21.6 million to Obama’s campaign, according to OpenSecrets.org.
Only lawyers and retirees contributed more money to the campaign, and employees of the University of California, with total contributions of $1.2 million, gave a greater amount to the campaign than employees or members of any other single organization or company. Employees of Harvard University were the fifth-most prolific givers to the Obama campaign, while Stanford and Columbia checked in at seventh and ninth.
Before the Obama administration began cracking down on for-profit colleges, the sector was posing a significant threat to nonprofit higher ed:
- “Pell Grants to students at nonprofit colleges more than tripled to $22.4 billion in the decade through the 2009-2010 award year,” Bloomberg reported in April 2011.
- Meanwhile, for-profit education companies’ share of Pell grants jumped to roughly 25% in 2011, up from just 13.1% in 1999-2000, according to Inside Higher Education, which cited a Senate report.
- In the 2009-10 school year, students at for-profit colleges received $7.5 billion in Pell grants, up from just $1.5 billion in 2000-2001, according to Propublica, which cited statistics from a Senate committee report. Students at private nonprofit schools and public schools received just $6.9 billion in Pell grants that year, the website added.
That encroachment threatened to eventually choke the nonprofits. Luckily for them, the Obama administration took action.
The federal government instituted a “gainful employment” rule that is somewhat complicated, but in essence would have denied federal aid to for-profit schools whose students’ debt levels were, on average, above 12% of their total income. As a result, the rule would have placed de facto caps on for-profit universities’ tuition levels.
In 2012, key parts of the rule were struck down by a federal judge, but the administration was persistent, handing down a rule based on similar principles late last year. For-profit colleges have sued again in an attempt to block the new version of the rule.
The government also implemented another rule in 2010 that prevented for-profit education companies from paying recruiters based on the number of students they enroll. (Imagine how many fewer cars an auto dealership would sell if it couldn’t pay its salesmen a commission.)
The Squeeze Is On
The administration and its Democratic allies in Congress and at the state level launched numerous probes of for-profit education companies.
For the most part, the probes have merely provided negative publicity that helped cause sharp declines in the schools’ enrollments. But in one case, a probe did cripple a prominent, publicly traded for-profit education company.
After shutting off federal aid to Corinthian Colleges for three weeks in June 2014, the Department of Education determined that the school’s finances were “in disastrous disarray.” In July, the department decreed that the company would have until the end of the year to close all of its schools. COCO, which was trading around $17 per share in April 2010, agreed to sell most of its schools for $24 million last November. Now, COCO has fallen to penny-stock status.
Several other for-profit education companies are under investigation by the federal government or states and could easily meet similar fates.
The largest name in the sector, University of Phoenix parent Apollo Education, is being probed by the Department of Education. ESI is under investigation by the SEC and has been sued by the federal government’s Consumer Financial Protection Bureau, plus it is being probed by several states. CECO is being investigated by at least 12 states. And New York’s attorney general is probing DeVry Education Group Inc’s (DV) marketing practices.
Bottom Line
It’s dangerous to fight City Hall, much less the White House. For-profit colleges eventually might battle through this, but for now, Obama’s foot is soundly on the pedal. Bail now if you haven’t already.
As of this writing, Luke Rollins did not hold a position in any of the aforementioned securities.
