For-Profits Losing to Better-Rated, Cheaper State Schools

Keri Trimble, a 33-year-old employee at a utility call center, was shopping for an online college so she could take classes at night and on weekends.

Trimble rejected Apollo Group Inc. (APOL)’s University of Phoenix, the dominant player in the market for selling Internet degrees to working adults. Instead, she chose Arizona State University’s program, which typically charges almost 30 percent less.

“The cost was outrageous” at the for-profit school, said Trimble, who lives in Sacramento, California. “I didn’t think that graduating from the University of Phoenix would give me the respect that comes with a degree from a traditional four-year college.”

Competition from state universities’ expanding online programs is pummeling for-profit colleges, once among the fastest-growing U.S. industries. The companies, including University of Phoenix and Washington Post Co. (WPO)’s Kaplan chain, are closing campuses as enrollment and stock prices plunge. With outstanding student loans totaling $1 trillion, some potential customers are turning away from the schools out of concern about cost and quality.

It’s a potent threat because publicly traded for-profit colleges drew 59 percent of their enrollment last year from online-only students, according to estimates from Deutsche Bank AG. At the University of Phoenix, the figure was three-quarters.

Duke Online

More than 80 percent of the U.S. population will have access to less expensive online programs from their own state universities by the end of next year, up from 62 percent this year, predicted Paul Ginocchio, an analyst at Deutsche Bank in San Francisco. As many as a third of those students would have gone to a for-profit college if the alternative didn’t exist, he said.

Private universities are also invading the online arena. Last week, a group including Duke, Vanderbilt and Brandeis universities, said it would offer online classes for credit. Harvard University and the Massachusetts Institute of Technology are offering courses free online. For now, they don’t grant credit or count toward degrees.

Along with the competition, for-profit colleges’ have suffered damage to their reputations. In the past two years, the schools, which can receive as much as 90 percent of their revenue from federal student grants and loans, have faced scrutiny from President Barack Obama’s administration, Congress and state and federal prosecutors. The schools use high-pressure sales tactics to mislead applicants about costs and job-placement, leaving them with government loans they can’t repay, investigators have said.

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Sen. Tom Harkin points at a chart during a news conference in the Capitol Visitor Center to unveil a report critical of for-profit colleges on Monday, July 30, 2012. Close

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Photographer: Bill Clark/CQ Roll Call via Getty Images

Sen. Tom Harkin points at a chart during a news conference in the Capitol Visitor Center to unveil a report critical of for-profit colleges on Monday, July 30, 2012.

Industry Slump

For-profit college stocks fell after Republican presidential challenger Mitt Romney, who had called for less regulation of the industry, lost to Obama.

Phoenix-based Apollo, the largest U.S. for-profit college company, is down 65 percent this year, among the worst performers in the Standard & Poor’s 500 Index. The shares fell 5 percent to $18.63 at the close in New York, its lowest price in almost 12 years.

Twelve of the 13 for-profit college companies tracked by Bloomberg have suffered stock declines this year, with more than half down at least 50 percent. The exception: Grand Canyon Education Inc. (LOPE), which operates a traditional campus in Phoenix with a Christian focus alongside its online program.

State universities’ online programs offer cheaper degrees from better-known institutions. Arizona State charges $442 per credit hour for an Internet bachelor’s degree, or about $11,000 a year including fees, according to the school. University of Phoenix typically costs about $585 per credit hour, or about $15,000 a year.

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US President Barack Obama speaks during the Arizona State University commencement ceremony at Sun Devil Stadium in Tempe. Close

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Photographer: Jim Watson/AFP via Getty Images

US President Barack Obama speaks during the Arizona State University commencement ceremony at Sun Devil Stadium in Tempe.

Cheaper Degrees

Prospective students attracted by affordable tuition have boosted enrollment at the University of Florida’s online program by 10 to 15 percent a year to 7,000 currently, said Andy McCollough, an associate provost. Florida residents pay $147.49 per credit hour, or $5,000 a year, including other fees. At Western Governors University, with 37,000 students, enrollment is jumping at a 40 percent annual clip, according to Joan Mitchell a spokeswoman for the Salt Lake City-based nonprofit online college. It charges about $3,000 for a six-month term.

For-profit schools have revolutionized customer service, letting students call and sign up in as little as 48 hours, then attend convenient campuses or online programs, said Phil Regier, dean of Arizona State online, whose enrollment has climbed to 7,000 from 200 in August 2009. Now, traditional schools are starting to offer the same approach.

’Tremendously Competitive’

“It’s not an infinite market,” Regier said. “A lot of our students would have gone to a for-profit. I don’t know why students would go to for-profits once we get as good at customer service. Their brands are not as good, and they tend to be more expensive.”

Apollo says its programs often cost less than private, not-for-profit colleges as well as state universities’ non-resident tuition. Last month, the University of Phoenix announced it would freeze tuition for all currently enrolled students and prospects who sign up by June.

“We are tremendously competitive,” said Mark Brenner, an Apollo senior vice president.

At the same time, Apollo excels at helping job-hunting students, Brenner said. The University of Phoenix has established relationships with 2,000 corporations, including Verizon Communications Inc. (VZ), Wal-Mart Stores Inc. and Adobe Systems Inc. (ADBE), he said in a telephone interview.

For now, those company ties haven’t stopped the bleeding at Apollo. Enrollment at the University of Phoenix has plunged 30 percent to 328,400 students since August 2010. Apollo is shutting 115 locations, including 25 campuses, and eliminating 800 jobs over the next year.

Washington Post

Career Education Corp. (CECO), a college chain based in Schaumburg, Illinois, is closing 23 campuses and cutting 900 jobs. Earlier this month, Strayer Education Inc. (STRA) said it won’t pay its $1-a-share quarterly dividend in 2013.

In September, Kaplan said it stopped enrolling students at nine campuses and is folding four others into nearby locations. This month, the Post said it expects “to incur significant additional restructuring costs” in the fourth quarter and next year because of Kaplan.

The grim news is a far cry from 1995 through 2010, when enrollment at publicly traded for-profit companies rose about 14 percent a year, according to Peter Appert, an analyst at Piper Jaffray & Co. in San Francisco.

“In the old days, they would take anyone who was breathing,” Appert said in a phone interview. If they dropped out after a semester or two, so what? You’ve collected your money.”

Dropping Out

That approach sparked abuses, according to a July report by the Senate Committee on Health, Education, Labor and Pensions, led by Iowa Democrat Tom Harkin. The committee examined 30 education companies over two years.

The companies, which received $32 billion in federal financial aid in 2009-2010, are a poor investment of taxpayer money because they spend more on marketing than instruction, cost more than comparable programs elsewhere, have high drop-out rates and account for almost half of all student-loan defaults, even though they enroll only one in 10 students.

The report found “overwhelming documentation of exorbitant tuition, aggressive student recruiting and abysmal student outcomes,” Harkin said. For-profit colleges disputed many of the findings and said their students struggle because they tend to be working adults from lower-income families.

‘Healthy’ Competition

Now, as fewer students sign up at for-profit schools, many low-income and minority students may skip college altogether, undercutting a societal goal of “open access” to higher education, said Steve Gunderson, president of the Washington-based Association of Private Sector Colleges and Universities, which represents for-profit colleges.

Both Apollo and Kaplan have instituted programs that let students try out courses before committing, to weed out those who won’t complete them.

At the University of Phoenix, about 20 percent choose not to attend after its orientation -- a free three-week workshop -- often because they felt unprepared or didn’t have the time to complete the program, Apollo’s Brenner said.

The company also introduced a financial-planning program this month to let students know how much they will pay monthly on their student loans after they graduate.

As students become more price-sensitive in a weak economy, “the competition has accelerated in higher education in a way that’s very healthy for students,” Brenner said.

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

To contact the editor responsible for this story: Lisa Wolfson at lwolfson@bloomberg.net

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