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For-Profit Education Dominoes Start to Fall

Thursday, 14 Oct 2010 | 10:07 AM ET

If investors in for-profit education companies didn’t get the risks associated with the group before Apollo Group reported earnings last night, they just got hit over the head with a two-by-four.

degree and cash
Mike Kemp | Getty Images
degree and cash

Apollo , through its University of Phoenix, is widely regarded as the most influential of all for-profit education companies.

The headline last night was that it withdrew 2011 guidance.

But among the real attention grabbers as it braces for new rules from the education department:

—It's eliminating enrollment quotas for admissions counselors.

—It's reducing the use of third party markerters.

—The company said new degreed enrollments next year could fall by 40%.

As a result of all this, Apollo says it doesn't believe its operating profit will grow again until some point in 2012.

And here's the shocker: Apollo says it may need to raise tuition prices more often than the usual once-a-year to be in compliance with so-called 90/10 loan limits set by the government. According to 90/10, for-profit education companies can’t get more than 90% of their revenue from government-backed student loans.

Perhaps most importantly, none of this includes the impact of gainful employment rule changes, which have been delayed a year. Unlike other new rules expected to be signed in several weeks, the gainful-employment changes could affect eligibility for government student loans.

All of this should have a cascading effect on other companies that report soon, including to ITT Education, Strayer Education, Education Management and Corinthian Colleges.

The thing to watch with all of them is any comment about enrollment starts. (This was a question I saw the Education Management CEO attempt to duck at a recent industry conference.)

And as I’ve been reporting, and Apollo has confirmed, those starts should be expected to tumble.

Final point: Apollo blamed “negative media” for some of its business problems.

My take: Media simply reported what was going on. And what's going on is an industry whose business model is experiencing a hard reset. No way to put a positive spin on that.

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