The Wall Street Journal's "Heard on the Street" column(subscription required) presents a strong bearish case for the for-profit educational providers -- companies such as University of Phoenix operator Apollo Group (NASDAQ: APOL) and ITT Educational Services (NYSE: ESI).
Sallie Mae (NYSE: SLM), a major provider of student loans, has tightened up its lending practices, and that could make career education less affordable for a lot of students.
According to the Journal, "The problem is that the schools will likely struggle to sustain their growth rates because of the tight lending environment and the slower-growing economy. If students have a tougher time borrowing, they may need to pay more out of their own pockets. But if their job prospects are looking rocky, or if they are worried they could be laid off from existing jobs, they won't want to shell out the tuition themselves."
But there may be another element to this that could make the outlook even more bleak for these companies, many of which have a lackluster reputation due to run-ins with regulators and questions surrounding their reporting and the value of the services they provide. Students attending career colleges are also thought to be at greater risk for default.
But here's another rub: Massachusetts' Democratic Governor Deval Patrick has proposed making two-year colleges free for all students -- a move like that would be devastating to the for-profit colleges. If that comes to pass in Massachusetts, or if other states make similar, less radical efforts to lower the cost of two-year colleges, for-profit colleges could see enrollment plummet.
Investors in these stocks will want to keep a close high on the political climate.
Reader Comments (Page 1 of 1)
2-05-2008 @ 3:23PM
Josh Grinstead said...
One thing all schools, school systems, and education corporations should definitely not do is wait for government intervention or help from institutional banking. Government action will be far too slow to affect the short term, and the market is far too shaky for commercial banking to offer loans to sub-prime candidates—now and for the foreseeable future. Schools large and small are summoned to fill the void previously covered by private lending. But that’s no small hole. Industry insiders estimate that private loans cover on average 20% - 50% of student tuition depending on a school’s state, course of study, tuition, program length, and demographic.
The good news is there are ways to mitigate these challenges: endowments, school-based scholarships, employee reimbursement plans, direct-to-employer partnerships, extended payment plans (EPP), fellowships, work-study programs, school-employee scholarship funds, articulation agreements, the use of financial services partners, alumni contributions, and other creative solutions will all come into play. But it comes down to smart alternative student financial planning.
Options that will most likely play into student financing in the short-term are the use of third-party accounts receivable servicing to cost-effectively keep receivables high; the employment of extended payment plans on a more widespread basis to manage the tuition gap; and the use of recourse loans (for private institutions these are used as a cash flow tool and to maintain a good cash position; and for public education corporations these are used to maintain solid quick ratio and current ratios to keep stock prices peaked).
Recourse loans, and the ability to select which students are good candidates for such plans, will be invaluable in times of capital investment and situations where spending is needed for marketing campaigns. Schools will have more control over which students can be approved and much greater control over their fiscal fortunes by properly implementing such options. There is risk, but there are also best practices and actions that can minimize this risk and turn recourse loans into a viable part of student planning, growth, and fiscal solvency.
The important thing to remember is that schools and education corporations large and small can take control of their destiny and turn crisis into opportunity by smartly utilizing the right cocktail of the aforementioned alternative funding resources. Where there’s a will there’s a way—and if schools are willing to challenge conventional wisdom, think creatively, think long-term instead of quarter-to quarter, leverage risk with opportunity, and invest in their students as an investment into themselves, they will find gold at the end of the rainbow for all.