For-Profit College Shares Tumble

NEW YORK — Shares of for-profit schools dove Thursday after a seemingly routine program review by the Department of Education reawakened fears of greater oversight – and lower profits – in the sector.

Several analysts also sounded warnings, concerned about their ability to sign up new students and access government-backed financial aid due to increased scrutiny.

Apollo Group Inc., which owns the University of Phoenix, the country's largest for-profit higher education chain, said on Thursday that the DOE is launching a review of how Phoenix administers federal financial aid. The announcement comes not even five months after the conclusion of another review which cost the school $1.8 million in repayments. The new review will cover the period from the 2009-2010 aid year up to the present.

Program reviews are fairly common, and the launch of a review doesn't mean a school has violated financial aid rules. Yet back-to-back reviews in the past would have unusual, said UBS analyst Ariel Sokol.

"The perception perhaps has been that the DOE.has been asleep at the wheel" regarding oversight of the schools, he said. "In that context, it's not surprising."

A Government Accountability Office report in August found misleading recruitment practices at 15 schools, which the DOE said it could use to act upon. Such reviews could result in fines or restricted access to government-backed financial aid, which makes up the bulk of the schools' revenues.

The University of Phoenix program review "is the initial evidence of an increased enforcement regime" at the Education Department, said Signal Hill analyst Trace Urdan in a research note.

Critics claim the schools are not helping students find better jobs and say enrollment counselors sign up many who are unprepared for higher education. When students drop out, they are still stuck paying back their student loans – unless they default, and then the bill goes to the taxpayers. Defaults on student loans, most of which are supplied by the government, have been rising throughout the recession.

One DOE proposal is called a "gainful employment" rule that could limit schools' access to federal financial aid if graduates' debt levels are too high or too few students repay loans. It was supposed to be announced by Nov. 1, but intense lobbying from the for-profit sector helped delay finalization until 2011. The DOE held a public hearing on the rule Thursday.

School chains, including Apollo, have been warning investors that they expect student enrollments to drop as they accommodate new rules.

Apollo shares tumbled $2.91, or 7.6 percent, to $35.56 in afternoon trading. Shares of Corinthian Colleges Inc. fell more than 11 percent, hitting a new 52-week low, after a downgrade from UBS. The company said that it may have to raise tuition or risk violating government rules on how much of its revenue can come federal financial aid. It also expects a big drop in new student enrollments.

DeVry Inc. shares dropped 4 percent, while Grand Canyon Education Inc., which was downgraded by Baird, fell nearly 6 percent. ITT Educational Services Inc. fell more than 3 percent, as did American Public Education Inc. Bridgepoint Education Inc., Capella Education Co., Strayer Education Inc., Career Education Corp. and the Washington Post Co., which owns the Kaplan school chain, all had share declines of 2 percent to 3 percent.

Education Management Corp. shares bucked the trend after a better-than-expected earnings report, rising $1.22, or 10.5 percent, to $12.95.

(This version corrects misspelling of analyst name.)

Comments

[John Horner]

09:59 AM on 11/06/2010

Not every activity belongs in the for profit sector. Armies, prisons and schools are some of the things which should not be a for profit enterprise.

[HazMat5]

09:24 PM on 11/05/2010

Richard Blum, DiFi's husband and UC regent, just took a hit to his stock portfolio!
Yes, you read that correctly a regent of the nation's largest public university system is also heavily invested in several for-profit diploma mills.

[carolina919]

06:02 PM on 11/04/2010

"Several analysts also sounded warnings, concerned about their ability to sign up new students and access government-backed financial aid due to increased scrutiny."

This is a scandal of immense proportions and though the "for profit" sector leads the way in abuses don't for a moment think that even reputable private and public universities don't also have issues. Students have been gulled into believing that a "college degree" is worth "whatever it costs" when the real aim has often been to push enrollment levels. Not all college degrees do yield a higher standard of living, especially when student incur crushing debt. Greater scrutiny is overdue. The opportunity to have government backed loans ought to be used judiciously and appropriately. Increased enrollment in public and many private schools also triggers additional outlays of local and state funds too. The bad economy may also be having an effect. All of a sudden students are taking a more critical look at their degrees or the prospects of getting one and realizing that it isn't always the "golden ticket" they've been told it was.