• December 18, 2014

As For-Profit Colleges' Enrollment Growth Slows, Analysts See Signs of an Industry Reset

After several years of record enrollment growth, the increases have slowed at many for-profit institutions, according to earnings reports of the last few weeks. Many companies say they're expecting that trend to continue as they change course on their marketing and recruiting strategies to comply with new federal regulations.

"The unrestrained growth is coming to an end," says Kevin Kinser, senior researcher at the Institute for Global Education Policy Studies at the University at Albany who studies the for-profit education industry.

ITT Educational Services reported that the number of new students at its campuses declined by 3.9 percent over the previous year. Corinthian Colleges Inc. said it expected declines of 5 percent to 7 percent this year. Strayer Education reported a 2-percent decline. DeVry Inc. and Capella Education both said they expected new enrollment would be down slightly from the previous year.

The biggest changes occurred at the biggest for-profit institution. The University of Phoenix said the 92,000 new degree-seeking students it enrolled in the quarter that ended August 31 represented a 10-percent decline from the previous year.

More telling, the university's parent company, the Apollo Group, said it expected its new-student enrollment could drop by more than 40 percent in the quarter ending November 30, as it radically revamps its enrollment machine in response to new federal regulations and what company executives describe as a transition for the company's business model. The new regulations, which go into effect in July, will eliminate the "safe harbors" that have allowed colleges to base a portion of recruiters' compensation on how many students they enroll.

Phoenix is also adopting new strategies—like its free three-week orientation required for students seeking to enroll with fewer than 24 credits, and financial-literacy training to deter undue borrowing by students—to reshape its student-body makeup so it includes students who are more likely to persist to a degree and repay their student loans.

"We are not focusing on maximizing new-student enrollments," Charles Edelstein, co-chief executive of the Apollo Group, said in a telephone call with investment analysts last month. The comments and that enrollment projection sent the stock price plunging, from about $50 to $37. But Mr. Edelstein said the changes, while likely to hurt profitability in the near term, would position Apollo for "more stable" results in the future.

Adjusting the Enrollment Mix

Apollo has been among the most visible in making changes to alter its enrollment mix, but it's not the only one. A few months ago, Corinthian announced it would no longer enroll "ability to benefit" students—those who lack a high-school diploma or GED but pass a basic test.

"Colleges are paying much more attention to the students they bring into their doors because they're going to be accountable for them," says Mr. Kinser, of the University at Albany.

He was referring to two sets of new federal regulations. One, which is already scheduled to go into effect, will make it harder for colleges to "manage" their rates of student-loan defaults because defaults will be measured over a period of three years after a student graduates or leaves school, instead of two. The other is the proposed "gainful employment" rule that could require colleges to eliminate or restrict enrollment in programs where students graduate with high levels of student-loan debt relative to what they earn. For-profit colleges have lobbied heavily against the rule, and the Education Department has delayed issuing a final version of it until early next year.

Trace Urdan, an analyst with Signal Hill investment bank, says he believes it was a concern of running afoul of the gainful-employment rule that prompted ITT to recently announce it was cutting back on its television advertising, which has been an effective tool for recruiting to its fast-growing and highly profitable criminal-justice programs. Such programs "represent a real problem for gainful-employment compliance," says Mr. Urdan, so if ITT is curtailing those advertisements, cost was probably not the only motivation.

Weeding Out 'the Bad Actors'

Although a number of the companies are still projecting growth, investment analysts say the reported slowdowns and recently announced changes in strategy reflect only the beginning of what may be a major industry reset.

"We're in the third inning for how bad things will get for the sector," says Ariel Sokol, an analyst with UBS Securities.

The confluence of political, regulatory, and financial pressures is prompting what Mr. Sokol calls "an appropriate contraction" for the for-profit higher-education industry. Those pressures include U.S. Senate hearings (the third of which is scheduled for early December), state investigations, the new federal regulations on student recruiting and student debt, and a slowdown in student inquiries in the wake of news accounts about student-recruiting abuses.

In the end, says Mr. Sokol, the pressures could "weed out the bad actors that don't have the appropriate cost structure or the appropriate business model to serve the student population" they set their sights on.

The shift is notable for its velocity. "Rarely does an industry change abruptly," as this one has, says Jerry R. Herman, an analyst with Stifel Nicolaus. But he notes that the previous few years were unusually heady for the industry, with annual enrollment growing by about 17 percent in 2008 and by 28 percent in 2009, versus the historic growth rate of about 10 percent to 11 percent.

Rising unemployment rates, enrollment caps at budget-squeezed public colleges, an "accommodating" regulatory climate, and the ability to pay enrollment counselors partially on how well they landed students all contributed to the "unsustainable growth" of the past couple of years, he says. "It was a friendlier world."

Comments

1. richardtaborgreene - November 12, 2010 at 05:39 am

Interviews with Silicon Valley founders---there are dozens of books of them---show founders curtailing growth greatly to preserve product/user value for sustained future growth. Those that gave into the temptation for spurt growth, lost all quality and disappeared 15 to 18 years after start, eroding continually behind market leaders that grew more slowly while maintaining a value proposition minimum.

The for profit education sector is not exception to these rules.

2. feudi - November 12, 2010 at 07:49 am

The gravy train is over boys and girls. The new sheriff (Arne Duncan) has seen through the "business models" used at Apollo, Strayer, ITT, Corinthian, et al. This reminds me of what happened at Sallie Mae when the feds stole the cookie. I believe the word is karma.

3. lsoares - November 12, 2010 at 08:10 am

This could be the best thing that ever happened to higher education. The for-profits have been experimenting with everything from enrollment management to marketing to instructional delivery to staffing to student support to assessment. This experimentation is the stuff of entirely new approaches and cost structures in higher ed.

In some ways the easy federal money shifted their attention from disrupting the sector with new offerings aimed at underserved markets to meeting Wall Street requirements for growth.

We may yet see an explosion in higher education delivery innovation that puts traditional incumbents at risk.

Afterall, imagine a I. of Phoenix with long term value creation as its goal. I doubt that many traditional higher education institutions to could modify their practices quickly enought to keep up.

4. prof_truthteller - November 12, 2010 at 09:22 am

Puh-leeze, Phoenix, Apollo, ITT, and their ilk will NEVER have long term value creation as a goal. Some marketing exec may think it a brilliant idea to put some statement to that effect into their media campaign, but will of course be only suggesting but not guaranteeing it, and oh, yeah, not to any one specific student. Can you name one corporation that has that as an explicit goal? Why should for profit educational industry be any different? Make money, keep the customer happy by mostly fooling them, or paying off their lawsuits and requiring confidentiality as part of the settlement.

5. a_voice - November 12, 2010 at 09:26 am

It is great to see organizations aligning quickly with new requirements, instead of spending countless years in committee consultation to decide how to respond. As a graduate student at the University of Phoenix, I hope that it does get the administration in order, and it comes out even stronger. This is great!

6. hms3683 - November 12, 2010 at 09:27 am

As the practice of paying per enrollment bonuses to recruiters is curtailed, the for-profit sector is positioned to have a significant role in the marketplace for learning services. The lower-cost publics are so stretched for dollars that, in the wake of taxpayer demands for more service at lower cost, they are reducing mission-critical personnel from their work force. With that reduction, the quality of product at the publics will be more difficult to maintain at a high level. And this opens the way for for-profits to place their product into a position as more reliable than that of public colleges.
Both sectors rely on extremely high percentages of instruction by adjuncts. Both sectors currently have a big need to improve retention, graduation, and placement rates. These rates can be improved by improving the effectiveness of courses, services, and faculty members - particularly of the adjuncts. The tax-based (and shrinking) funding of the public sector means that libraries, advisement services, career placement service, course design services, and faculty training services are all areas that can be cut without the immediate appearance of having reduced instruction. Under the more realistic model that presumes that a student pays for services that are actually delivered, for profits have an opportunity to make up ground in these areas. The budget model of the public colleges is unsustainable in a climate of shrinking tax support. If for-profits start to do their job well, they may well experience a long stretch of controlled growth.

7. hms3683 - November 12, 2010 at 09:32 am

Hey prof_truthteller,

Can you name one higher educational institution that has long term value creation as an explicit goal? Are any of them measuring this? If so, how?

8. cwinton - November 12, 2010 at 10:01 am

For all the squalling coming from the for-profit sector, the bottom line is that 90% of their revenue comes from government backed loans, which in essence makes them a "private" enterprise feeding at the public trough. The only real objective for far too many of these operations is to line the pockets of their executives with excessive multi-million dollar salaries. Talk about a broken system ... this is a classic and corrective steps need to be taken quickly. We now have hundreds of thousands out there trying to pay off loans for worthless "education" provided by the charlatans who have taken over the for profit education sector. Sadly, they also are now able to throw enough money into politics thay may even get away with it for some time to come. Basically, we have indebted a whole lot of people, who can't even escape it via bankruptcy proceedings, to fatten the hogs who are running these kinds of bait and switch operations.

9. willynilly - November 12, 2010 at 11:20 am

Thankfully the end of this bad educational dream is at hand. Analyists dare not publicly reveal the real reason for the decline in enrollment for fear of attack from the for-profit farmers who routinely milk the federal cash cows. So they dance around the facts causing the decline. But the real fact is that students are not enrolling, and will not enroll in sustaining numbers in the future, because the word is out and has spread. The educational experience and the residual value in the market place doesn't measure up to the investment. In plain language, it's over. The time has come for those who bought stock in this enterprise to sell as fast as possible, unless you want to go down in flames with the milkers.

10. alvitap - November 12, 2010 at 12:20 pm

A while back, a truck-driving school in Arizona was exposed for scamming locals(Indians). Learning to drive a truck, apparently, involves weeks of high-tuition trainng (that the truck-driving school help them pay for with government-backed student loans). The issue was exposed when trainees couldn't find jobs to repay the loans). But the school made money.

11. misanthropic789 - November 12, 2010 at 06:31 pm

I am always amused by some of the vitriole that is spewed on here whenever the words "for-profit" appear. prof_truthteller particularly amuses me with his ignorance and unfounded assertion. No higher education institution ANYWHERE guarentees ANYTHING for their students, as unemployed lawyers and "women's studies" students can tell you.

Regarding innovation, any of you in traditional higher ed who sit on your hands will, AGAIN, get run over by the University of Phoenix's of the world. They did it once, rolling out distance, evening and convenient education to adult learners, and will do it again now that they are pressed. Money that is coming out of marketing and bonuses to employers is going to go in to improving all aspects of what is delivered to the students.

So sit back and cheer their "downfall" if you like, but remember a bit of history; when University of Phoenix first appeared they were roundly predicted to fail by traditional higher ed. They now graduate 100,000+ students per year. If that's failure, I'd hate to see how success was defined.

12. jrllanes - November 12, 2010 at 10:05 pm

What is happening in some of the capitalized universities is that they are shifting from a hyper-growth model to a quality improvement and innovation model. In a couple of years growth will resume, this time with a better product. Traditional universities cannot provide the needed services to the expanding 24-35 group, they don't know how and most of them do not care. Apollo at 9 times earnings is a great buy as a stock and its diplomas are being accepted by employers and traditional graduate schools. Don't bury them just yet. See the Oohm blog on these matters --http://jrllanes.wordpress.com

13. bugjackblue - November 13, 2010 at 10:52 pm

For-profit "universities" will continue to be profitable for some time. It is just too difficult for the sucker/student (excuse me, I am informed by X U. HQ that the paying customers are to be called "learners" as that is a more politically correct term-- seriously, I was told to do this by the regional office when I worked at X*) to assess the value-- or total lack thereof-- of the diploma, and few understand the ramifications of taking on the loan debt. And very few can get over their wishful thinking to get this by observing the experience of others; they will only learn through their own discouraging experience and by then it will be too late for them.

It's a starkly simple equation: quality education at the university level is mutually exclusive with shareholder profit, and there's nothing any of these "universities" can or will do that will change any of this in the slightest. The surest indicator of academic quality is the competitive nature of admissions. And as a for-profit firm's first and only obligation is to its shareholders, unless cutting enrollments in some miraculous way increases shareholders' returns, these corporations can not (and should not) do anything which compromises maximization of profit. Their mission is-- and has to be-- hard-sell the product to any and all warm bodies and squeeze every last penny out of the transaction. If I'm a shareholder I expect them to do just this and nothing but. Any talk about value creation is nonsense, probably impossible, and at any rate actually undesirable.

If employers are fooled by these semi-mill diplomas, then they deserve what they get. (Though it's not surprising that many might as some of those making hiring decisions may be for-profit graduate degree sucker/students themselves.)

*Not Phoenix

14. davh7278 - November 14, 2010 at 10:39 am

Goldie,

Do you own many shares in the Washington Post?

15. jungianscholar - November 14, 2010 at 04:41 pm

My sense is that while a small number of for profit schools may have enrolled students at risk, who, finally wash out, this scene is not much different than the thousands and thousands of students who are encouraged by the media, the government, and of course, the schools themselves, to sign up with community colleges regardless of their college readiness.

In America, many individuals, families, organizations, and schools themselves have a vision and mission of what education is, and what it can do for individuals and society. Almost all large state universities, and many private ones' too, are at the milk trough of Federal and State grants. For these schools, income from grants trumps student education, so while the "research professors" work in the labs or on their computers, the poor students are getting taught often by those not much more knowledgeable!

The complex and bloated bureaucracy in traditional higher education was alluded to years ago by Warren Bennis. He spoke of the challenges of trying to lead and manage these places. They must change in a big way, or they will disappear.

At the end of the day, most for profits do a good job educating their students, managing their organizations, and realizing a reasonable return on investment percentage, that they often split between a return to investors, and reinvestment into the organization. Large public institutions are not kindly, heart oriented places where they roll back tuition as they reel in the grants; instead their presidents go on capital funding campaigns, loading the school and its future with much debt, since they are determined to leave an ego oriented legacy that may be framed in concrete reality. IF they have millions left, it goes into new "stuff" not saving anyone anything.

Some good research comes from our public and private not for profit schools, but do does some poor and deceptive research, too. There are dedicated faculty, and competent ones in both areas, but the ones in for profit will be identified and sacked quicker. For profits also don't have the baggage of the huge overhead to sustain a wide range of non interdisciplinary research - they focus on educating the student for the world today.

16. kindrickfletcher - November 15, 2010 at 11:58 am

I have worked in admissions in the for-profit education industry for 6 years at 2 companies. It's so weird to call a university a for-profit company. The job economy has been so bad that most of the for-profit admissions employees are from other work industries and generally bring creativity to the table when it comes to relating to these prospective students.

I recall being pressured to enroll by any means to meet monthly sales quotas. These prospect see the ads and admissions reps sale the dream of a better life with higher income and being a role model for their kids. People want honest advice from an educational brand that is respected for it's contribution to the community, academics and it's products (students) it produces. It's all about the money with for-profit institutions.

There are some students who can do these online programs or medical assistant programs and graduate to a successful career but the majority quit or drop out due to their financial aid packages, technical problems, bad service from the university and administrators or the student realizes they may have acted to fast and this option is just not for them.

It's very unfair that for-profit institutions hold the admissions advisor responsible for students that quit the program and do not complete enough credits for the institution to make money. I recall being forced to persuade a students to take out additional loans to cover their tuition and I would have to sale prospective students on how to overcome obstacles like not having any money to pay their application fees.

It was a terrible work experience that lacked integrity and ethics. Most of my managers and work peers in for-profit education did not even have college a degree themselves but would sale the dream and be pressured to enroll prospective students, financially package them and start them in classes. I promised myself I would never work in admissions for a for-profit institution ever again. I believe that for-profit institutions should have been thinking about the quality of students they enroll years ago back in 1999-2000. Instead they all went for the money, grew fast and did things the wrong way while abusing and misleading admissions advisors in the process.

Most of these for-profit institutions have been placed on probation at one time or another. The Department of Education has been watching them and I'm sure quite a few ex-admissions advisors like myself have told the story how it is. I would not encourage anyone to enroll in for-profit institutions unless you are one hundred percent focused on your goals and know about financial aid option before hand.

17. rtyrrell - November 18, 2010 at 05:02 pm

I am troubled at the way this issue is constantly framed, i.e., good education = ability to earn big bucks.

Education is so much more than how big a paycheck a student takes home. I have never held a regular, paying job in the field I hold my degree in, it took me decades to pay off my student loans, and I wouldn't trade in my education for a billion in gold bullion. My education is priceless and far more important than any income I earn from it. This is why I teach today. I want my students to have a better life.

It's bad enough to hear politicians, including President Obama (a former college professor - so shame on him), frame education in this way, but when educators start doing it themselves, it becomes even more disturbing.

How has it become acceptable to value education by the almighty dollar? Maybe I'm living in the past, or in some fantasy Utopia, but I always thought the purpose of getting an education was to become an educated person. When did it become an "investment" that we only value by ROI?

When we go down that road we devalue ourselves by saying that any profession or field of inquiry that doesn't come with a golden paycheck is a waste of time and money. How sad.

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