Monday was a severe bloodletting for many players in the for-profit education sector. While the U.S. federal government had made no secret of its intentions to reform its approach to the industry, there were not a lot of details previously in play. Late on Friday, August 13, though, the government released data about loan repayment rates in the industry and the data was not pretty.
The Government Wants Its Money Back
There has been an ongoing debate as to whether or not the surge in for-profit education over the last 20 years has benefited students and society nearly as much as the operators. Specifically, critics have pointed to programs that leave graduates ill-prepared to get better jobs and program costs that exceed the likely earnings benefit of the education. Said differently, these programs rely upon government-subsidized loans for a large percentage of their revenue, but students are often unable to repay the loans.
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As a result, the Department of Education has proposed new standards for the industry. If a school's students show a 45% or better repayment rate, then nothing really has to change. Below a 35% repayment rate, though, the schools risk getting cut off from offering federal student loans. In between is a "restricted area" that would limit enrollment growth, but it won't forbid new loans outright. Investors should also note that this is a simplified explanation - there is more to it than just the repayment rate, but that is the metric that everyone seems likely to focus upon.
Winners and Losers
On first blush, a surprising number of well-known programs came in with unacceptably low rates. Corinthian Colleges (Nasdaq:COCO), Strayer (Nasdaq:STRA) and Washington Post's (NYSE:WPO) Kaplan all appeared to come in below a 30% repayment rate, while others including ITT (NYSE:ESI), DeVry (NYSE:DV) and Career Education (Nasdaq: CECO) were more or less in the warning zone and/or had mixed results.
On the flip side, Apollo (Nasdaq:APOL), Universal Technical (NYSE:UTI) and Grand Canyon Education (Nasdaq:LOPE) were among the relatively few to come out looking pretty strong. The latter two in particular both can boast over 50% repayment rates according to the DOE's methodology.
Does the Math Hold Up?
Perhaps not surprisingly, some of the operators who ended up looking the worst are complaining the loudest. Strayer, for instance, claims that its math shows a repayment rate of 55%, and Capella (Nasdaq:CPLA) similarly claims that its calculations show a much higher rate of repayment. Given that these calculations are never quite as simple as they seem at first, these companies may have a point and they may be right that the government miscalculated. On the other hand, it is pretty clear that the government has had an ax to grind with this sector for some time now, so don't expect a very sympathetic ear.
The Bottom Line
The cynic in me would love to hear why banks that made foolish mortgage loans deserve government bailouts and support, but educators facilitating student loans deserve rebuke and constitute a social disgrace. I am not suggesting that the poor loan repayment performance is not an issue, nor that the post-high school educational system (for-profit or otherwise) does not need serious reform. I simply question how the government is going about the process of reform - though I suspect "tough love" will sound pretty good to a lot of folks.
In any case, investors should also remember that while much of this data is being compiled and discussed at the "company level", the on-the-ground application of the rule will be on a program-by-program basis. What that means is that a firm may have a "problem child" program that gets cut off, but the remainder of the business can operate as before.
When I last wrote about for-profit education I liked Apollo, UTI and DeVry. I admit to being a bit more sheepish about DeVry right now, but Apollo and UTI are showing that quality can often pay for itself over the long run when talking about investments. (For related reading, see Paying For College In An Economic Downturn.)
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