Education stocks get the dunce cap

Proposed new rules and a crackdown on the business model at for-profit schools hit the sector hard.

By Kim Peterson Oct 19, 2010 3:32PM
University of Phoenix building (©Joshua Lott/Bloomberg/Getty Images)For-profit education stocks like Apollo Group (APOL) were hot as the recession hit. Laid-off workers will return to school to sharpen their skills, right?

But those stocks have fallen hard. Their business models are lousy, with big profits ultimately funded by taxpayer dollars. They have come under fire by lawmakers and stockholders and are now having to change the policies that made them profitable in the first place.

For a glimpse at just how shoddy those policies are, consider this report issued three weeks ago by Sen. Tom Harkin. Here's how some schools rake in profits at taxpayer expense:
  • The schools have massive recruiting drives, paying recruiters a bonus based on the students they enroll. As a result, many of the students are not qualified.
  • Nearly all students take out loans or receive federal financial aid to pay the tuition.
  • More than half of students drop out without getting a diploma -- racking up substantial debt in the process.
  • To make up for the dropout rate, the schools recruit more and more students -- racking up big profits in the process. There's a reason those University of Phoenix ads are everywhere.
This is clearly not a sustainable business model, and all it took was an economy on life support to reveal that. The biggest implosion in the sector has come recently from industry leader Apollo Group, which has seen shares drop some 28% in the last month.

The government is considering new rules that could reduce the number of students who default on their debts. Under those rules, less federal aid will go to schools with a high dropout rate or whose students rack up huge debts.

So now, even before those rules go into effect, Apollo -- which runs the University of Phoenix -- is making some changes.

Now, the company says, it will focus on getting students who have a decent chance of graduating. As a result, new enrollment could drop more than 40% this quarter from a year ago, the company said. That's going to have such an impact on earnings that Apollo withdrew its forecast.

"People knew enrollment was going to decline, but my jaw dropped when I heard that number," one analyst told The Los Angeles Times.

Apollo will also stop paying recruitment bonuses.

The announcements caused Apollo shares to take an immediate dive last week, and they still haven't recovered. Other companies in the for-profit sector also suffered: Devry (DV) plummeted 17% but has begun a comeback. ITT Educational Services (ESI) fell 14% and is still struggling. Corinthian Colleges (COCO) and Strayer Education (STRA) were also hit hard.

Right now, for-profit education is becoming for-a-lot-less-profit education. And any investment prospects in the sector are shot -- at least until some stability returns. The proposed rules are still up in the air. A political election could play a role. And a push to cut government spending stands to eat into earnings.


1Comment
Oct 19, 2010 6:36PM
avatar

Anyone that get's a worthless degree online... and they all are worthless unless you have received your first B.S in a real 4 year college deserve to be ripped off. A worthless degree that most don't finish at 100%+ more then what you would spend at a real college! 

 

Also since no in class testing is done then they have no clue who is really doing your work and tests!. I would never hire anyone that has an online degree and that's all they have!

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