For-profit colleges get schooled by new reality
The for-profit colleges have just been enrolled in the school of hard knocks. Many of these educators spent the past decade feeding happily on federal loans to students — many of which default. New data released on Monday suggest just how tough the future may be for the sector, sending many shares down 10-20 percent. More regulation and higher costs are coming.
The government is now cracking down. The U.S. Education Department has proposed restricting admissions growth or cutting federal funding if not enough students can repay their loans. This would partly be based on starting salaries following graduation. The significance of these new schoolyard rules can’t be understated: federal aid makes up at least three-quarters of revenue at many for-profit educators.
Preliminary estimates suggest many of the big schools will get hit. Corinthian Colleges, the Washington Post’s Kaplan Higher Education, ITT Educational Services, and DeVry had estimated overall loan repayment rates that would fall well below the 45 percent proposed threshold.
Some of them say the government’s figures were too harsh. Consolidated loans in which student borrowers were only paying interest were not counted as being repaid. They may have a point — not all of these will go bust. But the housing crisis has shown that consumers often default on loans when the principal isn’t being chipped away at.
Companies in compliance with the proposal may appear to be bargains. Bellwether Apollo Group, for one, is trading at seven times estimated earnings for the next fiscal year. But hearings in the Senate earlier this year highlighted abuses among recruiters at several schools. More congressional scrutiny is promised, which will increase pressure on the Obama administration to impose further restrictions and enforce existing ones more rigorously.
Enrollments will presumably shrink. And there could be a scramble among for-profit colleges to find those high-quality students who are least likely to default — which means higher recruitment costs and, perhaps, salaries for teachers. The sector’s era of heady growth and high margins increasingly looks like history.