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Shares of for-profit colleges tumble

Investors flee the sector after Apollo Group predicts a plunge in enrollment, citing the U.S.' attack on high student loan defaults.

October 14, 2010|By Walter Hamilton, Los Angeles Times

Shares of for-profit education companies plunged Thursday after industry leader Apollo Group Inc. shocked Wall Street by predicting a sharp drop in enrollment amid growing government pressure in the industry.

For-profit colleges have encountered harsh criticism in recent months from regulators and lawmakers, who say the schools admit poorly qualified students who drop out at high rates and rack up enormous government-guaranteed loans that they have trouble paying off, leaving the tab for taxpayers. The sector faces proposed new rules designed to reduce the number of students who default on their debts.

The announcement from Apollo, which runs the University of Phoenix chain, raised concerns that the industry's troubles are deeper than feared and that the government measures could force companies to revamp their business models.

In a conference call late Wednesday, Apollo executives said that instead of concentrating on increasing total enrollment, the company now would focus on attracting qualified students with the best chances of graduating.

That shift and other factors could cause enrollment of new students to drop more than 40% this quarter from a year earlier, the company said. The company also withdrew its earnings forecast for this fiscal year.

"People knew enrollment was going to decline, but my jaw dropped when I heard that number," said Jeff Silber, an analyst at BMO Capital Markets in New York.

Apollo's stock sank $11.50, or 23%, to $38. Santa Ana-based Corinthian Colleges Inc. tumbled $1.23, or 20%, to $4.79. DeVry Inc. was off 17%, ITT Educational Services Inc. slid 14% and Strayer Education Inc. declined 13%.

The industry grew strongly in the last decade by luring students who had uncertain academic prospects but could still qualify for federal financial aid, said Kevin Kinser, associate professor of education at the State University of New York at Albany.

"They're recruiting students who might not have thought about going to college before seeing the ubiquitous University of Phoenix ads every time they turn on their computer," he said.

The schools' recruitment efforts got a boost from the recession as students sought a haven from a brutal employment market.

But the U.S. Department of Education has proposed limiting the amount of financial aid available to students at schools whose graduates end up with excessive levels of debt or have a high default rate. For-profit colleges get the bulk of their revenue from such aid.

Now the companies may instead target mid-career workers seeking to upgrade their skills to help themselves advance professionally, Kinser said.

Another criticism of the schools is that they are too aggressive in recruiting students to replace the large number who drop out.

Apollo also said in its statement that it would no longer pay bonuses to recruiters based on the number of students they enroll. Critics have said the bonuses give recruiters an incentive to mislead potential students by overstating graduates' job prospects and understating their debt loads.

walter.hamilton@latimes.com

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