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Free «For-Profit Education Industry» Essay Sample

Abstract

In the face of the sluggish global economic conditions and fragile job market, students flocked to education institutions to enhance their skills and increase their possibility of attaining jobs. As more and more employers require college degrees, the demand for education of working adults showed an upward momentum. Despite the prolonged stressful economic period following the global financial crisis of 2008-09, the US education service industry has performed well. (2012)

Unlike the public colleges and universities where the fund is fully channeled into school programs, scholarships and facilities, the for-profit education companies are structured not only to provide education but also deliver profits to its shareholders. Major portion of the for-profit education industry’s revenue comes from tuition or program fees. With the help of universities like Phoenix, DeVry and Kaplan, the for-profit education industry became massive revenue generator. Over the past two decades, the US for-profit education sector escalated rapidly and the sector’s growth has not only surpassed the performance of traditional nonprofit institutions but the entire higher education industry. Moreover, due to the transition of the US from a manufacturing based economy to service oriented economy, the US for-profit education industry witnessed substantial growth. (2012)

New federal rules were introduced in 2011 to crack down on the for-profit colleges and training programs. Federal Government’s regulation prompted the colleges to tighten their admissionstandards, which in turn led to a drastic drop in the student enrollments across the for-profit education industry. With the rise in controversies and multi-million dollar lawsuits, introduction of new set of regulations and increased scrutiny by the policymakers, the past two years have not favorable to for-profit institutions.

Despite the widespread fear of new federal regulation, the performance of for-profit education company’s shares peaked during June and July 2011. The for-profit education companies lost their market value in 2011, with Capella Education dropping 45% to $12.76, Strayer Education shares falling around 37% to $97.74 and DeVry slipping about 18% to $38.75. In spite of a substantial drop in the market price of many for-profit education companies, Apollo Group share’s price jumped 41% to $54.53 throughout the year (all shares’ prices as of 27-Dec-11). Moreover, the stocks of companies like Career Education and the Apollo Group plummeted sharply by 19% and 16% respectively during the first week of March 2012. Meanwhile, Apollo slashed its enrolment forecast for second quarter 2012.

For-Profit Colleges Quarterly Enrolment and Revenue, 2011 (11-Nov-11) vs. 2010

Institution

% Change in New Student Enrolment

% Change in Revenue

American Public University System

53%

35%

Apollo Group

-34%

-11%

Bridgepoint Education

27%

8%

Capella Education

-36%

-3%

Career Education Corp.

-22%

-18%

 

-23%

-17%

DeVry Inc.

-12%

-1%

Education Management Corp.

2%

2%

Grand Canyon Education, Inc.

N/A

10%

ITT Educational Services, Inc.

-14%

-10%

Kaplan Higher Education

-30%

-33%

Strayer Education, Inc.

-15%

-8%

 

Online Education – Avenues for Expansion and Diversification

The convenience and flexibility of online education has opened doors of opportunities for students across the globe. For-profit education industry is one of the essential driving forces behind the growth and innovation of online learning. With the growing diversification and increased scheduling flexibility, the online education and distance learning opportunities are expected to witness continuous expansion. With around 6.1 million students, the online degree programs hit an all time high in the year 2010. The enrolments for online classes almost doubled between 2007 and 2011, mainly driven by the stagnant economy, increasing competition in the job market and, also, strong online offerings from both public and private institutions.

Online education witnessed many ups and downs during 2010 and 2011. While a major proportion of psychology programs recorded declines in enrolment, the engineering programs(which has faced substantial decline in enrolment during 2010) saw remarkable improvement in 2011. 

In order to make education economically viable, geographically accessible and expanding the global higher education environment, online education has become an inevitable part. Besides, computers, smartphones, tablets and ever-evolving software capabilities are making the online education opportunities too convenient to ignore them. Moreover, by providing on-demand online learning, the employers not only retain skilled professionals but also increase employee satisfaction. For-profit, not-for-profit and public schools and universities are expected to continue their investment in distance learning and development of online programs to tap the growing demand.

Heightened Government Regulations – Cracks Down On For-Profit Education

Despite the fact that the for-profit colleges devote considerably less money towards training and instruction, the students at these institutions default on federal loans, at substantially higher rate in comparison to their counterparts at public universities. Thus, the for-profit education business model invokes similar characteristics as that of subprime housing and securitization the crisis.

The entire for-profit education industry received a bad publicity in 2010, when the United States Government Accountability Office (GAO) announced an investigation into the sector concerning the misuse of Federal Pell Grants. Besides many cases of fraud and media reports questioned the accreditations of private colleges as these institutions faced lower graduation rates in combination with higher student loan default rates.

A series of highly anticipated regulations were issued by Obama administration in June 2011 with the aim to crack down on for-profit education sector and other training programs. “Gainful employment”, a crucial element of the Government’s new rule aims to strip off federal financing from vocational programs that burden students with debts.  The for-profit institutions charge exorbitant amount of tuition fees and hire low-income individuals, which leave students saddled with excessive debts and, also, contribute towards federal student loan defaults. The gainful employment rule will come into effect from July 2012. According to the rule, to qualify for Title IV loan program, the for-profit education programs must satisfy at least one of the following three requirements:

1) Not less than 35% of the former students are repaying their loans;

2) Annual loan repayment must not exceed 30% of student’s discretionary income;

3) Estimated annual loan repayment must be less than 12% of his/her total income.

 
 
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The gainful employment legislation seeks to regulate not only the academic quality of the program but also the cost of the program. It is evident that these stringent regulations will continue to adversely impact on the enrolment trends in near term.

By utilizing the money from government grants and student loans, the for-profit institutions have been paying lavish compensations to their executives for decades. Thus, the executive compensation is under government scrutiny as their grotesquely huge packages come from federal grants including Pell Grants, GI benefits, veterans’ benefits and Stafford loans under the Title IV government program. The average three-year default rate is estimated to be 22.4% at for-profit colleges, 6.7% at private non-profit colleges and 9.7% for public colleges. According to the US Department of Education, more than 40% of the student loans at for-profit colleges would be in default at some point during the life of the loan.

According to the U.S. Department of Defense, the for-profit colleges get almost one of every two military tuition dollars. These institutions received around $279.8 million out of the total $563 million spent on the program in 2011. With the aim to curb marketing of education programs to soldiers and veterans, the for-profit institutions are forced to depend less on federal money. Senator Richard Durbin introduced a bill Protect Our Students and Taxpayers (POST) to amend Title IV student’s assistance program of Higher Education Act 1965. The bill points changes to the sector’s important 90/10 rule and the new rule states that not less than 10% of for-profit college revenues would come from non-federal sources. By implementing various regulations, the U.S. Department of Education is making the industry players more accountable. The ramifications of federal regulations are still not known, it is anticipated that these rules would limit the enrollment growth thereby lowering the demand for education and training programs.

Soaring Tuition Fees – Ripple Effects on Students

Over the past few decades, one of the persistent factors in the US economy was relentless increase in the price of higher education. The US for-profit education industry is plagued with high loan default rates and low graduation rates. According to the US Education Department, the average cost of tuition and living expenses for a student at a for-profit college is $30,900 per year which is almost double the annual expenditure of $15,600 at public college and significantly higher than $26,600 spent at a private non-profit college. Though, the tuition rates are escalating worldwide, but in the US, the drastic budget cuts has led to a steeper escalation in tuition fees. The average tuition fees at four-year public universities rose by 8.3% Y/Y (according to the College Board) in 2011, which is more than twice the inflation rate. Soaring tuition costs were attributed to various factors such as decline in state funding, strong competition for providing best facilities and professors and over dependency on federal student loans. Moreover, the students are sensitive to rising tuition rates and are likely to postpone their decision for enrolment in for-profit institutions.  Family income along with the federal aid programs is not able to meet the mounting tuition bills. Thus, borrowing is the only recourse left with the tudents, resulting in unmanageable student debt and these economic insecurities have blasted hopes of better career for many students. However, President Obama has threatened the US colleges and universities to strip federal aid , if the institutions keep on increasing tuition fees.

Rising Quality: Intensifying Competition

Although the job market is showing signs of improvement, the job seekers in 2012 must be prepared for the fact that almost all sectors underwent the global economic and financial crisis in 2008 and early 2009. Moreover, the unemployment rate in the US is expected to sustain at the current level in near future.

At the time of enrolment, it’s difficult for the students to assess the quality of the university. This provides the university with an advantage to exaggerate its quality. The US federal programs such as Pell Grants and student loans would make the for-profit education companies accountable by linking the employment status and debt repayment rates to the former students. Thus, the new rules would help in distinguishing top-performing colleges from their hyped competitors.

Higher Education sector is coping with the issue of rising competition. As a result, of the Federal budget cuts, the competition between public and private are likely to intensify in near future. According to the recent study, the students from for-profit education institutions are hired at lower rates and earn comparatively less than their peers at public and private nonprofit institutions do. Low income students can seek higher education by means of a government-supported way i.e. Pell Grant. The funding for Pell Grant program has almost tripled in last three years and currently the Pell Grant is at $5,550 per year. The Budget cut would reduce the number of students qualifying for the Pell Grant programs. The increase in Pell Grants and other student loans would not only increase the affordability and accessibility but also improve overall competitiveness of the for-profit education industry.

 

Outlook

Though the golden era of the sector is over, we still expect long-term growth opportunities within the industry. We anticipate that the operating results of for-profit colleges will remain less favorable in near term due to continuous pressure from new regulations. However, fragile consumer demand, student loan funding pressure and extended high unemployment have tempered education demand leading to a sharp decline in the performance of the US for-profit institution over the past few quarters. Moreover, the companies are still combating the issues of student loan default rates within the industry.  Moreover, the rising regulatory scrutiny is likely to alter the industry landscape in near term. During 2011, both not for-profit and for-profit colleges and universities were under scrutiny and the sector is expected to be under microscope in 2012 and beyond. The US institutions are under increasing pressure to enhance operational efficiency, improve disclosure and limit the mounting tuition fees.

However, the final gainful employment rules were less stringent than the originally proposed regulations. New stringent government regulations on student loans and raised admission standards have taken a toll on enrolment. But still, the institutions are feeling the lingering impact of actions taken to combat the issues of for-profit education sector. As a result, the for-profit universities such as Apollo, Kaplan lowered their expectations for student enrollment and operating profit. Federal Government is largely responsible for huge chunk of reduction in student enrolments. In addition, the rising competition among the students is likely to create pressure on the tuition rates and marketing costs.

Normalized sales growth coupled with rapidly rising costs and marketing expenses are likely to pull back the margins of for-profit institutions. However, the increasing enrolment at some for-profit colleges indicates that the pressure over the industry is easing. Meanwhile, Obama administration has raised Title IV funding for students by 27% to $104 billion for 2012. According to the President Obama’s FY 2013 budget, a three-year $8 billion plan was proposed to expand career programs at community colleges.

However, the overseas for-profit education market is almost 8 times than the US market and thus it provides ample scope of growth opportunities. Growing middle class population and increasing participation rates particularly in Asia and Latin America boosts the demand for education. 

   

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