Risks Grow at For-Profit Schools

Dec. 7, 2009 12:01 am ET

Bill Alpert

Source: https://www.barrons.com/articles/SB125997158283277569

FOR-PROFIT EDUCATORS TOOK FRIGHT LAST Monday when the federal Department of Education suggested tougher rules for the industry's recruiting and tuition. The draft rules -- to be discussed this week by an advisory panel -- would raise the risk of sanctions for schools that run admissions offices like high-pressure telemarketing operations and overburden students with federally backed loans. Monday, regulators will also reveal school-by-school student default rates. The industry was criticized in a recent Barron's cover story ("Leveraging Up to Learn," Nov. 9).

In a week when the market rose about 1%, the regulatory surprise contributed to an average decline of over 3% for the industry's dozen-odd public companies, such as University of Phoenix parent Apollo Group (ticker: APOL) and DeVry (DV). ITT Educational Services (ESI) has raised tuition faster than most rivals; its shares fell 8%. Bridgepoint Education (BPI) has spent more on recruiting than teaching at its Ashford University; its stock fell 9%.

SHORT SELLERS REJOICED, but wondered why the stocks didn't fall further. Bulls insisted enactment wouldn't dent the industry's fast-growing profits. This tug of war has made stocks such as Apollo and Corinthian Colleges (COCO) more volatile, but left them only a bit lower since Barron's story. The news shows for-profit stocks still have headline risk.

Career College Association President Harris Miller says this week's advisory-committee meeting will be "more interesting than I thought it would be," now that the Education Department has put forward "some pretty 'out-there' ideas." Among them: the elimination of 12 Bush Administration "safe harbor" exemptions to a law that banned compensating recruiters based on the number of students they enroll. In its proposals last week, the government said the safe harbors may contribute to misrepresented admissions standards, lowered academic progress standards and altered student records.

Operators like Strayer Education (STRA) and Grand Canyon Education (LOPE) have professed indifference to changes in compensation rules, but Miller says some members of his trade group fear that eliminating the safe harbors would prove "a lawyers' relief act," as schools repeatedly seek the Education Department's opinion on recruiting programs.

The government also floated the idea of restricting vocational-school tuition to levels proportional to the earnings boost averaged by graduates. Bulls challenged the government's ability to adequately measure the relative returns of a vocational education. However, the Labor Department has made such measures in evaluating the Job Corps program. While controlling for demographics and SAT scores, a vocational-college study could compare earnings of for-profit grads with their "counterfactuals" -- that is, the folks who considered for-profit education but did something else instead, says Joshua Angrist, a noted labor economist at MIT.