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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.

Republican Party insiders would love to blame their election losses on emerging demographic voting patterns. This excuse does provide cover for some Republican PACs, but Ron Paul eloquently points at other, more powerful reasons, writes Chriss Street. Read.... Romney Would Be President If He Picked Ron Paul As VP.

 

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Wed, 11/14/2012 - 12:33 | 2979999 ebworthen
ebworthen's picture

The government is going after for-profit schools because they are competition for State for-profit colleges and universities.

Government hates competition.

Wed, 11/14/2012 - 12:09 | 2979948 Shizzmoney
Shizzmoney's picture

The Frontline special on PBS did them in.

Once people realizes these "fake" degrees dont actualy get them jobs, the bubble burst.

The only thing propping them up.....is the government and the banks who give them loans.

Wed, 11/14/2012 - 11:12 | 2979698 moneybots
moneybots's picture

"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."

 

Enrolment should plummet to Zero.  I have read that 90% fail to graduate after 5 years.  The school does not exist to benefit anyone but the owners of the school.

 

 

Wed, 11/14/2012 - 09:57 | 2979403 El Viejo
El Viejo's picture

It's not the poor business model that killed them. It's the poor accreditation. (F)

Bailouts and subsidies for everyone! Have you noticed the number of lackluster businesses or even just lifestyles that are on TV now. Get a film crew and you can subsidize anything. When junk collectors and toy collectors are seen as geniuses we are in trouble.

 Too much emphasis on fluff and not enough on core values and Readin, Ritin and Rithmatic.

Thu, 11/15/2012 - 04:44 | 2983302 Parrotile
Parrotile's picture

Missed the "other" R - Ritalin . . . . .

Wed, 11/14/2012 - 11:37 | 2979812 Its_the_economy...
Its_the_economy_stupid's picture

I'm with you.

Antique Archeology "Pickers" spends 3 days on the road, buys $2500 worth of crap, "sells" it at a mark up of, ok lets be generous, 100% and the public walks away thinking that this is a viable busines model supporting 3 family units and a business location. Who remembers the piece of crap van the show started with?

StagfLAtion baby!  Everything you own is worth ZIP. Everything you need will be priced out of reach.

Bank on it.

Wed, 11/14/2012 - 10:00 | 2979384 Zero Govt
Zero Govt's picture

Debt finance and State-subsidy turns another sector to a steaming pile of garbage ...a bill grabbed by politicians and the buck/bill passed to the taxpayer... charming.

the non-stop scams of the biggest criminal gangland in every society, Govt

Wed, 11/14/2012 - 09:36 | 2979361 Mercury
Mercury's picture

 In the process, these outfits sucked up taxpayer-funded state and federal financial aid of all types and made early investors and executives rich.

Like many bubbles, maybe the problem is the easy credit, not the for-profit model. Clearly when U. Phoenix etc. delivers little value for its customer-students they are punished accordingly.

It's easier to build a business model around free money than tricking the market. After all, this is what most "non-profit" colleges have been doing successfully for years.

Wed, 11/14/2012 - 09:03 | 2979288 Downtoolong
Downtoolong's picture

Then it handed the tab to the taxpayer who couldn’t say no. A perfect scam.

Sadly, this seems to be the new model for business and business development everywhere. When you can’t get your customers to sucker for your product or service anymore, coerce their government into doing it for them. A few insiders get filthy rich in the process and everyone else pays for it.

There was a spot on 60 minutes last Sunday citing Alcoa and another small manufacturing company in Nevada. They claim to have many entry level job openings, but, can’t find workers with the specialized skills needed to perform them. The companies want the government to sponsor more programs and effectively subsidize the training. We see companies like Tesla and many of the new energy ventures trying to do the same with their development and market entry expenses which have been going on for ten years now.

Why? It’s all pitched under the guise of cooperation between the public and private sector, bla, bla, bla. But in reality, it’s just another form of forcing the public to pay for profits going to a chosen few. As the author so aptly put it, it’s a scam.

I say, if a company can’t afford to train its employees to do a job, it’s not a real job, and they’re not really in business.

Wed, 11/14/2012 - 11:31 | 2979789 Its_the_economy...
Its_the_economy_stupid's picture

@Downtoolong

 

+1000

Wed, 11/14/2012 - 10:42 | 2979604 NEOSERF
NEOSERF's picture

Similarly note AMF bowling going bankrupt with between 100M and 500M in debt to thousands of note holders.  There comment is that this bankruptcy will allow them to get out from under and grow again.  Who do they think they are kidding??!!...just another form of Ponzi where you spend each year looking for "investors" with silly notions of how bowling is going to change lives and slowly over a decade build up debt to ridiculous levels again before cleaning it out.  Some of these "investors" rely on these companies for their own livlihood so they extend credit to keep the illusion of cashflow for their own bank loans...Banks and others need to get smart and demand operating profits to get the next portion of a loan.

Wed, 11/14/2012 - 10:32 | 2979566 Village Smithy
Village Smithy's picture

Agreed. You want them then you train them. Then they get exactly the training required. No middleman required, no taxes to pay middleman required, and the training is always up to date. I read an article suggesting that university tuition should be free because it's an almost "mandatory requirement" for so many entry level positions these days. The truth is that it's only required because the applicant pool is totally oversupplied. The situation is being pushed by supply, not pulled by demand.

Wed, 11/14/2012 - 09:55 | 2979438 El Viejo
El Viejo's picture

Saw the excellent 60 minutes piece.

Competition forces businesses to sluff off their responsibilities and focus on pure profit. We live in the era of selling your souls.

Wed, 11/14/2012 - 10:47 | 2979620 Mercury
Mercury's picture

No, free money from the government incentivizes companies/organizations to game the system instead of focusing on producing something that actually provides value.

Wed, 11/14/2012 - 08:52 | 2979281 ejmoosa
ejmoosa's picture

And how many decades before a non-porift colllege blows up?  Oh that's right, it will stay afloat with taxpayer dollars...

 

If for profit companies fail, then the system works.  It's only when they are kept in business by government that we have major issues.

Wed, 11/14/2012 - 07:46 | 2979168 shovelhead
shovelhead's picture

The Dept. of Corrections still has the best free education system going but the failure rate is high.

Most new students find the orientation classes a real pain in the ass.

Wed, 11/14/2012 - 07:33 | 2979159 max2205
max2205's picture

I miss Sally Struthers pushing tech training. At least you knew it was both funny and pathetic AND the govt wasn't backing the cost

Oh the way glen miller played, those were the days.

Wed, 11/14/2012 - 10:43 | 2979606 NEOSERF
NEOSERF's picture

Won't be long before Sally and others are making videos asking for money for starving US kids..

Wed, 11/14/2012 - 07:07 | 2979131 MiniCooper
MiniCooper's picture

Exactly the same is happening in the UK - only we are about 5 years behind the USA on this scandal.

The Labour Government converted all the old Polytechnics (technical colleges offering vocational courses) into 'new university' status. They then allowed all the proper old fashioned high quality universities and the new universities to start charging fees. Students were told to take a loan from the Student Loan Company. We took that idea straight from the US 'Sallie Mae' model.

As a result, all universities expanded the number of courses dramatically to hoover up as much of this new money as possible. The proper old fashioned universities still do offer decent courses but vast numbers of students are now coming out of the 'new universities' with worthless degrees and huge debts and no job. It will be national scandal in years to come. Universities here in the UK are still quasi public bodies and not fully commercial so I am sure much of this student debt will eventually be written off. 

Put simply, many students were seriously misled and the top managers and vice chancellors at the top of universities all raked off huge salary increases. The Labour Govt meanwhile was happy to move part of public spending onto young students as a tax on their future earnings when they repay the loans. Problem is that jobs dont exist.

Thu, 11/15/2012 - 04:58 | 2983318 Parrotile
Parrotile's picture

And to add  to the insult, many of the "former Polytechnics" provided a far better standard of degree than the equivalent Universities, with comparable (or better) research performance too. It used to be said that an Upper Second from a Polytechnic was equal to a First from many "Major" Universities, and having had experience of both types of Institution, I can fully agree with this.

There were a few "bad" polytechnics, but there were MANY EXCELLENT ones too, many who really deserved "University" Status moreso than many of the "Red Brick" Universities (and I include Birmingham - the first of the "Red Bricks" in that particular category. Great buildings, plenty of money, but lecturing let down by far, far too much internal politics).

Wed, 11/14/2012 - 03:14 | 2979010 Kickaha
Kickaha's picture

This is such an easy problem to fix.  

Make the college a co-signer on every student loan.

Wed, 11/14/2012 - 10:11 | 2979490 Zero Govt
Zero Govt's picture

How about a free market in education?

like everything else Gov, and its public-private scams, get up to it does not porgress while getting increasingly extortinate. That's the 2 primary hallmarks of a monopoly system

Wed, 11/14/2012 - 03:13 | 2979009 onebir
onebir's picture

Also, there's MOOCs:

http://www.huffingtonpost.com/impatient-optimists/what-are-moocs-and-why-ar_b_2123399.html

The traditional for-profit model is dead (& likely the online variant too).

Wed, 11/14/2012 - 02:44 | 2978979 Peter Pan
Peter Pan's picture

Never has so much money been spent with so little to show for it. It was just a good way for certain people to make money and for the unemplyment numbers to be reduced for a while.

Wed, 11/14/2012 - 02:13 | 2978955 archon
archon's picture

McDollars for McDegrees

Wed, 11/14/2012 - 02:02 | 2978939 ebworthen
ebworthen's picture

State Universities and Colleges are little different than private ones.

Look for the next blowup to come at the State Higher Education level; long overdue at that.

Wed, 11/14/2012 - 00:47 | 2978839 Clowns on Acid
Clowns on Acid's picture

Can you say "money printing" ? The rest is just blather.

Wed, 11/14/2012 - 02:05 | 2978945 Breaker
Breaker's picture

I don't see many differences between the author's criticism of for profit schools and most public education systems. Both grab ruthlessly for the spigot of federal money that is flooding the system with dollars. At least a public company has to reveal its finances in their 10-Q's. Try to get meaningful financial information out of a State University sometime.

The problem is the ocean of federal money. Rent-seekers will always belly up to the trough. For-profit piggies and not-for-profit pigges are both piggies wearing different colored hats. And it's a double hat-trick for the feds. They get to be great guys with the loan program--vote your dependency today! And, they get a whole generation of students in debt to the feds and without jobs when they graduate. How will that power be used? Wisely? Get the federal government out of education, completely.

Wed, 11/14/2012 - 02:10 | 2978952 ebworthen
ebworthen's picture

Exactly.

Higher Affirmation ("Education") of any stripe are dream factories.

Wed, 11/14/2012 - 00:24 | 2978793 Seasmoke
Seasmoke's picture

University of Phoenix has a nicer stadium than any college in the country. Take that Notre Dame.

Tue, 11/13/2012 - 23:31 | 2978672 P.T.Bull
P.T.Bull's picture

Am I the only one who finds the non-profit college business the bigger scam? The crackdown on for profit schools is just protectionism for the so-called non-profit institutions who have the same problem of over-loaning and over-promising student's career options.

Wed, 11/14/2012 - 04:13 | 2979043 Lord Koos
Lord Koos's picture

"Non profit" indeed, while tuition rates outpace inflation by about 300%.  Meanwhile they pay the TA's a pittance to actually teach the classes, while the tenured professors advance their careers by writing papers.

Thu, 11/15/2012 - 19:43 | 2986168 Dr. Sandi
Dr. Sandi's picture

Sounds to me like you're implying that government is a scam.

Naughty, naughty.

Wed, 11/14/2012 - 01:09 | 2978877 Dr. Sandi
Dr. Sandi's picture

But the non-profit schools aren't spending 25% of the tuition on recruiting students.

Except the football programs, of course.

Tue, 11/13/2012 - 23:22 | 2978659 pndr4495
pndr4495's picture

Saaaay , wait a minute , isn't there such a place as a library , a free institution ? A well stocked library is a valuable asset to have in order to educate oneself.  Heaven forbid , though  , one cannot get a degree from a library. Libraries are in the real education business , while colleges and universities are in a pay to play scheme.

Tue, 11/13/2012 - 23:34 | 2978678 P.T.Bull
P.T.Bull's picture

Libraries are governmental institutions. I noted our local library refused to accept book donations involving christian topics. Its impossible to find a new murder mystery written by a man, or indeed a mystery that does not comprise liberal memes--except for older books. The library is another didactic tool of statism and victim worship.

Wed, 11/14/2012 - 04:09 | 2979041 Lord Koos
Lord Koos's picture

Well then just read your bible and be happy.

The libraries where I live have rules about where the books for lending can be soutced.  They only accept book donations if they can resell them at library fund-raisers. Maybe the Christian stuff doesn't sell as well as it used to, kind of like in the recent election.

Wed, 11/14/2012 - 01:11 | 2978880 Dr. Sandi
Dr. Sandi's picture

Libraries are locally staffed and locally administered. If yours sucks, you DO have the power to go slam your fist on a few desks and be heard. Unlike the federal crap.

Wed, 11/14/2012 - 02:22 | 2978961 archon
archon's picture

I wouldn't count on libraries in this day and age - librarians are essentially trained undercover political activists.

Wed, 11/14/2012 - 10:06 | 2979474 Birdmandaddy
Birdmandaddy's picture

I can see who voted Jeff Boss for president....

Wed, 11/14/2012 - 03:48 | 2979030 mkhs
mkhs's picture

Political activists? I thought they worked with DHS.

Tue, 11/13/2012 - 23:23 | 2978658 SoCalBusted
SoCalBusted's picture

Graduates realized that they would make more money off of the various government "assistance" programs than by actually working (if they could find a job with their newly minted diploma).

Tue, 11/13/2012 - 23:21 | 2978655 Joebloinvestor
Joebloinvestor's picture

They just need to put together a winning football team.

Wed, 11/14/2012 - 00:11 | 2978771 willwork4food
willwork4food's picture

GIVE IT TO 'EM PENN STATE!!!

Oh, wait..

Wed, 11/14/2012 - 01:08 | 2978875 Dr. Sandi
Dr. Sandi's picture

Penn State, State Pen. It's all the same guys. But should they be locked up together? Sounds risky to SOMEBODY.

Wed, 11/14/2012 - 01:23 | 2978899 willwork4food
willwork4food's picture

What?

Thu, 11/15/2012 - 19:41 | 2986165 Dr. Sandi
Dr. Sandi's picture

I'm saying you don't want to be a rookie tight end at Penn State. That's all.

Tue, 11/13/2012 - 22:52 | 2978569 are we there yet
are we there yet's picture

Over the last half century colleges have tried to help the financially disadvantaged, ethnically disadvantaged, intellectually disadvantaged, gender disadvantaged, handicapped disadvantaged, and with government school loans that can not be defaulted on for students that should not be in college.  Yes, The business model is broken.

Wed, 11/14/2012 - 11:23 | 2979747 AnAnonymous
AnAnonymous's picture

The enlarging of the consumer base is part of the 'for profit' business model.

It is all 'american' business style, as suggested by 'american' economics.

Wed, 11/14/2012 - 15:31 | 2981016 akak
akak's picture

The enlarging of the roadside nightsoil base is part of the Chinese Citizenism doing-your-business model.

It is all Chinese Citizenism public crapping doggy-style, as suggested by traditional fecalnomics of Chinese Citizenism fabled past.

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