Sun Could be Setting on For-Profit Colleges, Universities

The Motley Fool’s Brian Stoffel believes that the latest set of financial reports from for-profit education companies could signal the beginning of the end of the entire sector as we know it. From failing to meet earnings estimates, to reporting substantial declines in enrollment, Stoffel believes that the industry is experiencing the early stages of [...]

The Motley Fool’s Brian Stoffel believes that the latest set of financial reports from for-profit education companies could signal the beginning of the end of the entire sector as we know it. From failing to meet earnings estimates, to reporting substantial declines in enrollment, Stoffel believes that the industry is experiencing the early stages of a substantial structural shift in the foundation that forms the support for the entire business model.

Apollo Group, Inc., the parent company of the University of Phoenix – one of the largest for-profit education providers in the country –  reported its earning last week week, and the news wasn’t good. As part of the financial disclosure, the company revealed plans to close 115 locations throughout the U.S. in the coming year, in part to deal with the shrinking enrollment which declined from nearly half-a-million students to 328,000 students since summer of 2010. Shuttering the locations would shrink the company’s footprint in the country by nearly 50%.

In short, the recent boom in for-profit education stocks was fueled by easy government money, promises of opportunity that couldn’t be guaranteed, management that was woefully out of touch with its clients, and misaligned values that made college recruiters seem more like predatory lenders than people who were genuinely interested in helping people get access to a quality college education.

According to Stoffel, the seeds of Apollo’s recent decline were sown by the visits from the Government Accountability Office beginning in August of 2010. GAO officials visited campuses owned by several for-profit education companies, including Corinthian Colleges and Education Management Corporation. While in their guise as prospective students, officers met wholesale encouragement from admissions officers to lie on their application forms for federal financial aid. Recent revelations showed many admissions officers employed by for-profit colleges are paid on commission basis calculated on the number of students they are able to recruit. This compensation scheme has been made illegal since that time.

When it comes to business and education, there’s a precarious tightrope that needs to be walked. It’s not as if a luxury good is being peddled that one could easily live without. The education these schools are pushing comes with the promise of an improved station in society. While that outlook may be fundamentally flawed, it leads many students into crushing debt that can’t be lifted by filing for bankruptcy. Recently, a wave of alternatives has been surfacing that might knock for-profit education — as we know it, at least — into obscurity. For starters, many large state universities have begun offering online-only classes that carry far more clout among employers for a lower cost than for-profit degrees.

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