There are three things certain in this world: death, taxes, and the necessity of a college degree.
While there is no index for death or taxes, there is one for college tuition. Since 1978, no basic good has become more expensive as college tuition, which increased 1120%. That’s nearly twice the rate of growth in medical costs, and more than four times the change in food costs.
The Benefit in For-Profit Education
For-profit education is a new product with its history dating back only to 1992. As part of a legal change, the United States House of Representatives Committee on Education decided on a 90-10 rule that would allow for-profit educators to accept money from federal aid programs so long as 10% of their students paid out of pocket.
It was a simple idea at the time: if government and nonprofit universities were ignoring facets of education that could be served by for-profit enterprises, then the 10% rule would be a standard for determining whether or not that group was truly underserved. In short, if 10% of people paid out of pocket for for-profit education, there must be a reason, right?
That’s the idea.
Hundreds of new colleges came out of the woodwork to provide an education to students with the intent of making a profit. In general, these for-profit educators focused on:
- Students with limited financial resources who might not have had the opportunity to attend a 2- or 4-year school out of high school.
- Non-traditional students who work full time or who were older than the average college student.
- Degrees or certifications for careers. Their services had definite end points – an RN license, certifications in computer networking, or even study courses to become a CPA. (Some programs could be described as more frivolous expenditures including degrees in the arts or fashion, for example – the fields that have drawn the most scrutiny.)
In some ways, for-profit schools would fill a void left even after aggressive investments by states and the federal government in community colleges. Over the summer, though, the government gave the sector a quick punch to the gut with a new barrier designed to keep it out of highly-profitable services geared toward non-high school graduates.
Meet ATB Testing
Previously, students could attend for-profit colleges without having completed high school or earning a GED equivalent provided they passed an “ability to benefit” test. This was a route to easy money in for-profit education, as students who have not completed high school tend to sign up for highly profitable certification study programs, or drop out entirely after racking up bills in the tens of thousands of dollars.
After a rule change by the Department of Education, students cannot attend a for-profit school without a high school diploma or GED, regardless of their ATB performance.
This change has a drastic impact on the for-profit education environment. Schools are scrambling to close education centers that rely on ATB students while others are changing their marketing schemes to provide free GED certificate programs that would allow for-profit schools to draw in new students. Some schools have even proceeded to lay off employees.
The ATB rule change is largely responsible for the summer declines in education behemoths like DeVry (DV), Apollo Group (APOL), Bridgepoint Education (BPI), and Strayer Education (STRA).
Is There Money to be Made?
I think there are four significant headwinds that will halt the sector’s rapid growth:
- Economics – An improving economy leaves challenges for for-profit education providers. Given that community colleges are now on a level playing field with for-profit centers due to ATB testing changes, currently overcrowded community colleges will have room to steal for-profit customers on any rebound in job growth.
- Competition – No industry can sustain the impressive returns on capital that for-profit providers have in a competitive environment. Not only do for-profit colleges compete with state and nonprofit schools, they also compete with themselves. As the industry shifts and shrinks due to ATB changes, schools will have to lure customers on cost to fill excess capacity.
- Regulation – The sector has attracted scrutiny from lawmakers. New proposals set to undermine the industry are quite radical – one bill in Congress would require rebates to students and the government should any school spend less than 80% of revenues on providing an education. A report by the Senate found that for-profit schools currently spend less than 20% of revenues on education – far more is dedicated to marketing.
- Negative Goodwill – Students and graduates of for-profit schools are the industry’s worst enemy. Seeing as their graduates default on loans at six times the rate of traditional schools, the public is beginning to associate poor performance and joblessness with a degree from a for-profit school.
What do you think? Can for-profit schools shake their reputation and add more students?