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Why Wall Street has turned on for-profit colleges

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To a prospective college student, most of the announcements made last week by executives at the for-profit education giant Apollo Group Inc. would sound pretty good.

In an Oct. 13 conference call, officials at the parent company of University of Phoenix told analysts that they were going to shift from a strategy of expanding enrollment and instead focus on keeping current students and increasing graduation rates.

As part of that plan, Apollo says it is expanding a free orientation program, increasing the accuracy of marketing statements so that students aren't misled, and changing the way enrollment advisors are compensated so that their pay is not tied to the number of students they enroll.

But if it sounded like good news for students, it sounded like trouble to Wall Street. The changes to Apollo's business model, coupled with a great deal of negative press in the last several months, could result in a steep enrollment decline, Apollo executives said. They estimated this quarter's figures could be down 40 percent or more compared to last year at this time.

Stock prices for Apollo and other publicly traded for-profit firms took nosedives last week after the conference call, the Los Angeles Times reported:

'People knew enrollment was going to decline, but my jaw dropped when I heard that number,' said Jeff Silber, an analyst at BMO Capital Markets in New York. Apollo's stock sank $11.50, or 23%, to $38. Santa Ana-based Corinthian Colleges Inc. tumbled $1.23, or 20%, to $4.79. DeVry Inc. was off 17%, ITT Educational Services Inc. slid 14% and Strayer Education Inc. declined 13%.

The news suggests that the federal government's focus on regulating the for-profit college industry is already having an effect on the business model for these companies, even though no policy has been finalized.

Policy analyst Ben Miller of think tank Education Sector writes that the situation highlights the balancing act that for-profits face between doing the best thing for students and doing the best thing for shareholders. He argues that better regulation can help tip the scale in the students' favor:

All the various things described in the conference call are good activities to undertake if you care about your students and want them to do better. In fact, many of them are exactly the same things that a nonprofit or public college does when trying to improve its own graduation rates. The fact that investors didn’t see this as a positive development speaks volumes about how the market’s priorities and what’s best for students aren’t the same thing.

The transcript of the conference call, available at Seeking Alpha, offers highlights of Apollo's changing business model:

  • Free, pre-loan orientation: For students with little previous college experience (24 college credits or less), the company is going to require that students go through a free, three-week orientation program that gives students a sense of the coursework before they take out loans. The idea is to screen out students who are less likely to make it through the program so that they don't take on debts they might not be able to repay. A pilot version of "University Orientation" has already contributed to a 10 percent drop in new enrollment.

  • Accurate marketing: Apollo is also "refining" its approach to marketing so that the company is less reliant on third-party lead generators, allowing the company "to maintain better control over student messaging and to ensure accurate information is being provided to students."

  • No enrollment-based compensation: The company says it is no longer compensating admissions staffers based on the number of students they enroll. "We’ll be compensating them based on the competencies and relationships they build with students and the student experience they help create," said co-CEO Greg Cappelli.

"Implementing these new programs throughout the university next month will result in significant decline in new degree enrollment at both the associate and bachelor level, but we believe that many of these students may have dropped anyway. Thus, over time, we expect to see improved student outcomes, including improved retention rates, and ultimately, we hope to see better graduation rates as well," Cappelli said.

Many of the changes seem aimed at addressing the "churn" noted by Sen. Tom Harkin, D-Iowa, in his September report on for-profits. Harkin is chairman of the Senate Health, Education, Labor and Pensions Committee and has led hearings on the industry in recent months.

His report noted that 16 for-profit schools studied for the analysis were more likely to offer their students debt than a diploma. So many people withdraw that the schools have to recruit huge numbers of students to grow their enrollment levels:

In 2008-09, one school started the year with an enrollment of 71,246 and ended the year with an enrollment of 89,479. However, the school added 120,638 new students over the course of that year. Recruiters had to enroll 120,000 new students to increase enrollment by a net of 18,000 for the following year.

 

Filed under: Higher Ed, Daily Report

Comments

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ericalawson's picture
First Choice Drilling Thanks for this blog post! I actually like it Regards, Erica
frezelaV's picture
Because of recession unemployment rates significantly increased. As a result jobless people are in need of alternatives, one of it is going back to school. While there is no hiring for people who are seeking jobs they can use this opportunity to invest education. So that when the economy bounce back they will be more educated and will have a much better job opportunities. That's why college that is for-profit is now becoming their best option.

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