Have the For Profit Schools Peaked?

By Richard Veddder

I have heard some educrats in traditional not-for-profit education say that the "fad" for for-profits schools is peaking, that they remain a minor threat, but only that. They cite financial scandals, government investigations, falling stock prices of companies like market leader Apollo Group (University of Phoenix), the saturation in the market for specialized degrees for adult learners, etc.

It is true that this sector took some lumps, as all rapidly growing enterprises do somewhere along the way. At the beginning of this year, the price of Apollo stock was about half of what it had been two years earlier, and some other companies (e.g., Career Education, Corinthian Colleges) had also seen similar, albeit smaller declines.

But I think the sector is still very much in a growth mode, and Wall Street agrees. If you invested an equal amount of money at the beginning of this year in the common stock of seven leading companies (Apollo, Capella, Corinthian, Devry, ITT Educational Services, Strayer, and Career Education), you would have seen a 59.6 percent increase in the value of your investment --four times the growth in the Dow Jones Industrial Average. The poorest performing of these companies had over a 21 percent price appreciation. Apollo gained back a majority of the losses of the previous two years, and that company's enrollments (over 311,000 in May) are picking up again after a lull.

Moreover, I think we may be understating the robustness of the industry, because significant portions of it are run by privately owned, non-traded companies. The recent aggressive expansion of companies like Bridgepoint Education and Randy Best's companies are evidence of this.

The industry's medium term growth is likely in part because the major competition, the not-for-profits, for all their talk of change, are still doing pretty much the same old thing, albeit with slightly less excess. Tuition charges are still on average rising faster than inflation rates, fundamental efficiency changes are still elusive, and the incentives to grab a growing market for adult education are still somewhat muted in the not-for-profit sector (although these institutions are starting to put some market incentives into their non-traditional programs, particularly those on line). The University of Phoenix may not have much of a football team (it has none, of course), but it is laughing all the way to the bank.

Meanwhile, CCAP is trying to explore the growth of this industry more extensively, and Whiz Kid Jim Coleman is working with me on a significant study of that industry's growth, prospects, and characteristics relative to the rest of higher education.