How will crackdown hurt for-profits?

Amy Scott Oct 22, 2010

How will crackdown hurt for-profits?

Amy Scott Oct 22, 2010


Kai Ryssdal: Here’s a rare instance of government regulation having an almost immediate impact in the marketplace. Congress, as you may know, has been looking into for-profit colleges. Lawmakers and the White House want restrictions on federal financial aid to places like DeVry and the University of Phoenix. Well, the for-profits start reporting their profits in the next couple of weeks. We got a preview not long ago when the University of Phoenix warned enrollment could drop as much as 40 percent, in no small part because of government regulation.

From the Marketplace Education Desk at WYPR in Baltimore, Amy Scott reports.

Amy Scott: Shares of for-profit colleges have plunged by as much as 50 percent in the last year, as investors flee amidst a slew of bad PR and the threat of tougher oversight.

Analyst Trace Urdan at Signal Hill says education stocks have been trading in line with payday lenders. They took a hit when Congress overhauled financial regulations.

Trace Urdan: The market has decided that these universities are the equivalent of payday lenders, and that’s how they’re being valued right now, which is extraordinary because they used to trade at a premium.

To the industry’s critics, it’s an apt comparison. They see for-profit colleges as predators, loading up low-income students with debt they can’t pay. The Obama administration has proposed rules that would cut federal aid for programs whose graduates aren’t likely to earn enough to pay off their loans. Urdan says the latest stock decline was fueled by one company’s efforts to get ahead of the regulations.

Apollo Group, which owns the University of Phoenix, said recently it’s tightening admissions standards and will no longer pay enrollment counselors based on how many students they sign up. Investors didn’t like it a bit.

Urdan: What they’ve suggested is that the days of enrolling six or seven students with the hopes of hanging onto one are over. And they’re really looking to be much more like a traditional school. And in the short term that creates a tremendous amount of uncertainty.

Analysts aren’t expecting such dramatic news from DeVry or Corinthian or the other companies reporting in the next few weeks.

Pauline Abernathy is with the Institute for College Access and Success, a student advocacy group. She says in the long run investors in these companies may have to settle for smaller profits.

Pauline Abernathy: What students will see will be higher quality programs at charges that they can afford to repay. Shareholders may have to start no longer expecting a 37 percent rate of return year after year.

The Obama administration has delayed finalizing the so-called gainful employment rules until next year. It’ll hold public hearings next week.

I’m Amy Scott for Marketplace.

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