For-Profit Ed: Skin In The Game on Student Loans?

The for-profit education industry has been a favorite topic since YCharts began covering stocks and the financial markets, and the woebegone industry is facing yet another problem: legislation introduced by three Democrats in the senate that would push costs onto colleges, public and private, when a student defaults on an education loan.

Should the legislation be enacted, it’s safe to assume it won’t bury Harvard or M.I.T. in losses, but it could prove costly for the for-profit schools, whose students default more frequently than those at public and private/non-profit schools. And, as you’ll recall, the for-profit industry is heavily reliant on federal loans and grants.

The for-profit stocks – here we’re charting Apollo Education (APOL), Corinthian Colleges (COCO), DeVry (DV), Career Education (CECO), Education Management (EDMC) and Strayer (STRA) – have been all over the place during the past year.

APOL Chart

APOL data by YCharts

Of course, the regulatory troubles began years back and any recent rally must be viewed in the context of longer-term performance.

APOL Chart

APOL data by YCharts

Yes, we write about these stocks as a group but their business models and operations vary widely and before thinking of buying stock in any, you’d best unleash some financial advisor tools and read the 10-K and subsequent 10-Qs. There are lots of moving parts here.

The idea of forcing the schools – any schools, really – to have some financial skin in the game when students borrow to attend makes perfect sense. In many cases, the schools’ admissions people point the students toward borrowing programs, advise on the eventual job market for particular skills and lines of study, and overall give advice that results in indebtedness.

Uncle Sam has grown enamored of this “skin-in-the-game” notion, of course, and under the Dodd-Frank law moved to force mortgage issuers to retain some risk even as they sell the loans. As YCharts wrote recently, banks have fought those provisions and appear headed toward avoiding most of the risk retention that the government initially sought. Score 1 for lobbyists, 0 for taxpayers. If you own Wells Fargo (WFC), JPMorgan (JPM), Bank of America (BAC) or Citigroup (C), that was a win.

There’s no reason to think for-profit education companies won’t be as successful in their lobbying to either head off this latest bill entirely or water it down after passage. But the original effort to increase regulation of the industry that began a few years ago has, indeed, had an impact. And so one shouldn’t totally disregard this latest legislative move. From here, the biggest risk isn’t that the schools are forced to reimburse Uncle Sam for lots of loans gone bad. It’s that, knowing they might have to, they further tighten their enrollment practices and that causes their business to shrink further.

As YCharts has reported, for-profit enrollment declines have been significant. And they continued. In the fiscal fourth quarter ended August 31, Apollo saw its average degreed enrollment (you have to read the footnotes) plunge 16% to 301,100. How in the heck can Apollo have 300,000 students, you might ask? It has many campuses and also offers courses online. As you may have read, online education, also known as distance learning, has a short and already-checkered history:

As Apollo discovered, no students, no revenue.

APOL Revenue (TTM) Chart

APOL Revenue (TTM) data by YCharts

The for-profit stocks have been hit hard in recent years, so there have been prominent investors bargain hunting in the industry. As we said above, the industry is not without lobbyists and, in our view, it dodged a regulatory bullet when final regulations were adopted. In the end Uncle Sam didn’t have it in for the for-profits as much as some short sellers did. And, as we said when we launched out for-profit education coverage, betting your money that the federal government is going to act like a tough regulator of any industry is, well, often a bad idea. Despite whining by companies and their trade groups, under both Republicans and Democrats, the federal government is a relative pushover.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.



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