For-Profit Colleges: Another “Business Model” That Blew Up

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Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

Career Education, when it reported its quarterly financial results, shed more light on an industry that had ruthlessly taken advantage of quirks in the American way of funding higher education, and that, even more insidiously, had preyed on gullible prospective students who were desperately trying to better their lives. Then it handed the tab to the taxpayer who couldn’t say no. A perfect scam. And it contributed to a ruinous mountain of student loans [ Next: Bankruptcy for a whole Generation].

In the halcyon days of 2010, Career Education had $2.09 billion in annual revenues. Then a free-fall. By September 30, quarterly revenues hit $333 million. Enrollment was down 23%, in the health education category 41%. An additional 900 people will be laid off, on top of the previously announced 1,300. The company will “gradually” close 23 of its 90 campuses. Red ink is gushing, with no end in sight. The stock has plunged from $70 in June 2004 to today’s 52-week intraday low of $2.60.

“The inflection we all expected in the second half of the year has not and will not occur,” said CEO Steve Lesnik during the earnings call. But he proudly claimed that “we made tremendous progress in creating a culture of integrity and compliance.” That, after they’d gotten tangled up in all sorts of new “issues” this year, such as a Veterans Administration audit “involving housing allowances for online students.” Indeed!

Career schools—culinary, health, and art and design schools—were one of the hotspots for abuse. Career Education admitted, for example, that it had inflated job placement rates for its graduates. In March, it agreed to settle a class action lawsuit for $40 million, involving one of its subsidiaries, the California Culinary Academy here in San Francisco. Former students alleged that they’d been bamboozled into enrolling by its claim that 97% of graduates found jobs in the field.

Turns out, that number included graduates who were working as wait staff, baristas, prep cooks, and the like. The complaint further alleged that the college fabricated outright some job placement data. The company’s new job placement rates are mostly below 65%, thus below the minimum required by the Accrediting Council for Independent Colleges and Schools.

But the company is moving forward: “Our goal is to no longer put disproportionate emphasis on starts and population,” explained CEO Steve Lesnik. Enrolling as many students as possible to grab their financial aid is apparently no longer top priority. We’ll see.

Career Education is in good company. The largest player in the industry, University of Phoenix, which is owned by Apollo Group, is also getting hammered by scandals and declining revenues. Enrolment has plummeted from over 400,000 students to 328,000. To halt the bleeding, it shuttered 115 locations in 30 states.

Corinthian Colleges got hit as well. One of its specialties was the Ability-to-Benefit program, under which students without high school diploma or GED had been receiving student loans and grants to attend classes though they had virtually no chance of graduating. As of July 1, 2012, the government shut off the spigot.

Now scrambling to get back on that gravy train, the school is offering free GED preparation programs to high-school dropouts, expecting for “some portion of successful GED completers to enroll” in its institutions. And it’s trying hard to sign up new students to pocket their financial aid: marketing and admission expenses were about 25% of revenues.... “Our mission is to change students’ lives,” the press release said.

Corinthian Colleges is selling some campuses and shuttering others, particularly in California where the crackdown has become more aggressive. For a reason: the out-of-money state is trying to reign in the cost of its Cal Grants, a financial aid system that ballooned from $915 million to $1.6 billion in eight years.

These schools are facing tighter regulations all around. On the federal level, the Department of Education, for instance, banned incentives paid to admissions reps or recruiters for the number of students they hoodwinked into enrolling. Pressures are rising to get these schools to prioritize student graduation and job placement, rather than just grabbing financial-aid money. But, as the financial results demonstrate, that push blew up their entire business model.

In its dazzling manner, the for-profit post-secondary education boom left behind a long trail of wrecked dreams, unfinished or worthless degrees, wasted time, and a huge pile of student loans resting on the shoulders of people who were unable to find jobs in the fields they’d studied and who are now unable to pay back these loans. In the process, these outfits sucked up taxpayer-funded state and federal financial aid of all types and made early investors and executives rich. At their peaks, the stocks were picked up by mutual funds and were thus sneakily stuffed into well-diversified portfolios and 401k’s, as recommended by all of Wall Street. Because somebody has got to buy this stuff on the way down.

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