Related topics: college, education, financial aid, investing strategy, Michael Brush
Visit the Web sites of any number of for-profit college and universities and you'll find the happy faces of young people getting state-of-the-art educations and help in landing their dream jobs.
Listen to the critics, though, and you might decide many of the institutions are just clever schemes fed by government-backed loans that leave a lot of those shiny young faces disappointed and deep in debt.
At the moment, the critics seem to be winning the debate:
- Congressional hearings last year put the spotlight on for-profit schools, as student after student testified about their debts and dashed hopes (criticisms I also heard from several students I talked to for this column).
- The Department of Education (DOE) is rolling out broad reforms in the way the schools operate and market themselves to students.
- New student enrollment at for-profit colleges is down as much as 20% to 40%, depending on the school.
- In the face of all this, many stocks in the sector have been pummeled.
Michael Brush
To be fair, industry backers offer a strong defense against some of these attacks. And it seems that in the long run, these reforms could make the solid companies stronger while chasing out the rogues.
For investors, it's possible to capitalize on this uproar to get some very good stocks at low prices -- while supporting schools that truly do something useful. And after all, those are the sorts of companies I want to own anyway.
Before I get to the investment plays, it's worth a look at how this often controversial sector ended up back on the hot seat.
'Marketing machines masquerading as universities'
After rapid growth over most of the past decade, for-profit schools now have about 10% of all college-age students, and those students get 25% of all federal student aid. But the top-line results can certainly look discouraging:
- The graduation rate for first-time, full-time candidates for four-year degrees at for-profit colleges is just 22%, compared with 55% at state colleges and 65% at private nonprofit schools, according to the DOE.
- Nearly half (48%) of all students who default on government-backed loans attended for-profit colleges.
- The loan default rate at for-profit colleges sits at 25%. At public schools, the rate is 10.8%, and at private nonprofit schools it is 7.6%, says the DOE.
Stories abound of students who graduate to find themselves with few marketable skills after graduation -- and debts of $30,000 or more. Critics say the profit motive leads schools to push students toward government-backed loans, which carry little risk for the schools but lots of risk for students. (You can read Senate testimony from students and others on this issue here and here.)
The drive for loan generation is so great that for-profit colleges are little more than "marketing machines masquerading as universities," says prominent critic Steven Eisman, a portfolio manager at FrontPoint Financial Services Fund. Eisman was featured in the best-selling book on the real estate bubble "The Big Short: Inside the Doomsday Machine" as someone who spotted those problems early. He has since shifted his focus to for-profit colleges.
An undercover investigation of the sector by the Government Accountability Office (GAO) last year seems to support Eisman's criticism. The GAO found recruiters at for-profit schools lying about the potential for jobs and earnings after graduation. One investigator posing as an applicant was told barbers earn as much as $250,000 a year. Another got 180 phone calls in a single month after showing interest in a school. (You can learn more about the GAO report and listen to voicemails from recruiters here. The GAO also alleges that some recruiters told some applicants to falsify financial aid forms so they could qualify for aid.
To add insult to injury, consider that while many students have ended up in debt, executives at these schools have gotten rich. Strayer Education paid Chairman and CEO Robert Silberman $41.9 million in 2009, according to Equilar, an executive compensation research firm. ITT Educational Services Chairman and CEO Kevin Modany got $7.6 million. Executives at 10 of the largest publicly traded education companies got median pay of $4.5 million last year, says Equilar.
On the defensive
Wait a minute, say industry backers. These critics have it wrong at best, and are themselves driven by self-interest at worst.
Let's take a second look at those DOE numbers on graduation rates and loan defaults, which are often at the core of attacks on for-profit schools.
The industry says the numbers are misleading because they fail to adjust for the disproportionate number of minorities, low-income students, immigrants and working adults that for-profit colleges serve.
