Pell Grant Cuts Hurt For-Profit Colleges After 8-Fold Rise

For-profit colleges, led by Apollo Group Inc. (APOL)’s University of Phoenix, will be disproportionately hurt by cuts in the $30 billion Pell Grant program for low- income students.

Pell Grant aid to for-profit-college students grew almost eightfold in the past decade to $7.5 billion in 2009-2010, and now accounts for 25 percent of the funds, according to the U.S. Education Department. Apollo, the largest U.S. for-profit college with revenue of $4.8 billion, got $1 billion from the grants in 2009-2010, said Jarrel Price, an analyst at Height Analytics LLC in Washington.

Congress and the Obama administration are targeting the Pell Grant program for at least $1.8 billion in cuts as part of efforts to reduce federal spending. Publicly traded for-profit colleges receive on average almost 20 percent of their revenue from Pell Grants and will be hurt in a number of ways, said Bradley Safalow, an analyst with PAA Research in New York.

“The Pell Grant issue will be a direct hit to margins at a minimum, and an unquantifiable headwind for recruiting new students,” Safalow said yesterday in a telephone interview.

Pell revenue has risen at for-profit colleges because they serve low-income populations, and officials make sure that qualified students apply for and receive the grants, said Harris Miller, president of the Association of Private Sector Colleges & Universities, a Washington-based trade group.

Public College Comparison

More than 95 percent of eligible students seek Pell Grants at for-profit colleges, while less than half of eligible students at public, two-year community colleges apply for funds, according to a 2009 study by Mark Kantrowitz, publisher of Finaid.org, a website that provides information on financial aid.

“Our numbers are proportionate to our share of the lower- income population,” Miller said in a telephone interview.

Apollo declined to comment on the impact of Pell Grant cuts on its revenue. The grants are awarded to students, who determine how to spend their funds on direct and indirect costs of education, Manny Rivera, an Apollo spokesman, said in an e- mail.

The budget deal reached last week includes the White House’s proposed $1.8 billion reduction to the program, which is widely used by students at for-profit colleges. The feature, called “year-round Pell,” permits applicants to get two grants in one year. The accord must be approved by Congress and signed by the president to fund the federal government through September.

Year-Round Funding

For-profit colleges received $545 million in year-round Pell funds, or 32 percent of the total, last year, according to the Education Department. Public two-year community colleges, which enroll about 8 million students, or more than four times as many as for-profit colleges, got about $455 million in year- round Pell funding, or about 27 percent of the total.

The program was “much more costly than anticipated,” said James Kvaal, deputy undersecretary of education.

Republicans had proposed bigger cuts, reducing maximum yearly Pell Grants 15 percent to $4,705 per student. About 1.7 million people would have lost eligibility because the Republican plan would also tighten income-eligibility requirements, according to Finaid.org’s Kantrowitz.

“We need to make tough choices now to strengthen the program for students most in need,” said Representative John Kline, a Minnesota Republican and chairman of the U.S. House Education and the Workforce Committee.

More Cuts Ahead?

While the proposal to decrease the maximum grant died during budget negotiations, the push to slash Pell further will resurface next year, said Alice Bowie, also an analyst at Height Analytics.

“We’re worried about 2012 more than anything else,” Bowie said in a telephone interview. “This could be a harbinger of things to come.”

About 328,000 of Apollo’s students received Pell Grants last year, a 59 percent increase from 206,000 in 2008, PAA’s Safalow said. Students have become more wary of taking on debt, and the waning availability of grants may boost the difficulty of attracting new students, adding to marketing costs, he said.

Pell Grants, created in 1972 by the late Democratic Senator Claiborne Pell of Rhode Island, give as much as $5,550 annually to college students who complete applications and meet income criteria. While getting a quarter of Pell Grants, for-profit colleges enroll about 12 percent of U.S. students, according to the Education Department.

Internet links to college recruitment websites highlight the availability of Pell Grants. A hyperlink on a Google search page labeled “Pell Grants for Moms” takes readers to a college recruitment website. The website encourages applicants to fill out a form and work with an “education counselor.”

For-Profit Logos

The website, run by a company called classesandcareers.com, is dominated by information about for-profit colleges, including the University of Phoenix, the Washington Post Co. (WPO)’s Kaplan University, and Grand Canyon Education Inc. (LOPE)’s Grand Canyon University.

Classesandcareers.com is a subsidiary of One on One Marketing Inc., based in Levi, Utah. Grand Canyon has a marketing contract with the company, said Bill Jenkins, a spokesman. Michelle Pore, a Kaplan representative, declined to comment when reached by telephone. Apollo’s Rivera didn’t respond to a request for comment.

One on One Marketing has had relationships with for-profit colleges for several years, said Ashley Mullaney, a company spokeswoman. It uses banner ads, text ads and keyword searches to find students and matches them with programs “that have been popular with past potential students,” she said in an e-mail.

‘Not an Easy Vote’

For-profit colleges shouldn’t get Pell Grants, so the money can be used by students at more affordable public universities and colleges, said Charles Reed, chancellor of the California State University system with 23 campuses and 412,000 students.

“Why do we keep giving them Pell money?” Reed said in an interview.

Reed said he is concerned about the cuts to Pell because California Governor Jerry Brown, a Democrat, is slicing $500 million, or 18 percent, from the university system’s budget to reduce a projected $26.6 billion gap in the state’s 2012 finances.

Iowa Democratic Senator Tom Harkin, the education committee chairman who has investigated for-profit colleges, has called for tighter control of federal student aid. Illinois Senator Richard Durbin, a longtime Pell supporter, said institutions that receive Pell Grants should be examined more closely.

“I graduated from college and law school because I was able to borrow from the federal government, and I’ve been a knee-jerk vote for student aid because of that,” said Durbin, a Democrat, in a telephone interview. “Now that I’ve seen the abuses of for- profit schools, I’m not an easy vote.”

Corinthian’s Share

Pell Grants to students at nonprofit colleges more than tripled to $22.4 billion in the decade through the 2009-2010 award year, the Education Department said.

Corinthian Colleges Inc. (COCO) was the second-biggest recipient of Pell Grants among for-profit colleges in 2009-2010, receiving $510 million, or 29 percent of its $1.8 billion revenue from the grants, Height Analytics’ Price said. Kent Jenkins, a spokesman for Corinthian, declined to comment. Overall, as much as 90 percent of for-profit colleges’ revenue comes from federal funds, including Pell Grants and U.S. government student loans.

Phoenix-based Apollo rose 14 cents to $40.10 at 4 p.m. New York time in Nasdaq Stock Market trading. Corinthian Colleges, based in Santa Ana, California, gained 4 cents to $4.31. The Bloomberg U.S. For-Profit Education Index of 13 companies lost 0.2 percent.

Congress, the U.S. Department of Veterans Affairs, and attorneys general in Florida, Kentucky, Iowa and Illinois are investigating a range of issues at for-profit colleges, including recruitment, student-loan defaults, drop-out rates, and use of military funds for education. The Education Department is preparing to release rules that would tie colleges’ eligibility for federal student aid, including Pell Grants, to graduates’ incomes and loan repayment rates. For- profit colleges have lobbied to head off the rules package, called “gainful employment.”

To contact the reporter on this story: John Lauerman in Boston at jlauerman@bloomberg.net.

To contact the editor responsible for this story: Jonathan Kaufman at jkaufman17@bloomberg.net

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