Are For-Profit Universities Under Attack From Proposed Regulation?

This March, the Department of Education proposed new regulation calling for career preparation programs to prove that they are "[preparing their] students for gainful employment in a recognized occupation, and the conditions under which these educational programs remain eligible under the Federal Student Aid." In short, career prep programs need to prove that they are able to place graduates in jobs related to their fields of study. Programs that do not meet federal standards will lose access to federal student aid dollars. The prospect of losing access to federal student aid will impact for-profit universities the most. Taxpayer money derived from Pell grants and federal loans can account for up to 90% of the revenue at for-profit universities. Without this money, many for-profit universities will be forced to close.

In light of this proposed regulation, what does it mean for the finances of for-profit universities University of Phoenix's parent Apollo Education Group , DeVry Education , and Grand Canyon University ?

Apollo tries a different light
During Apollo's April earnings call, CEO Greg Cappelli commented on the new proposed regulation. He said Apollo shares the Department of Education's goals "of ensuring students receive quality education for their investment, and are fundamentally committed to providing appropriate student protections including transparency which supports informed decision-making." However, he cautioned that the new proposed regulation may have unintended consequences, and that Apollo would voice its position on the Department of Education creating regulations that "apply equally and equitably to all students at all situations." 

Even with the proposed regulation looming, Apollo has taken steps to prepare for its possible implementation. First, Apollo has reached out to 3,000 employers to help tailor Apollo's programs toward employers' needs. Second, Apollo hired University of Michigan's CFO Tim Slottow as its new president. As University of Michigan's CFO, Slottow was able to grow the endowment up to $8.4 billion. If he can mirror that feat, a larger endowment would limit Apollo's dependency on federal funds. Finally, Apollo has expanded globally, either opening or expanding in the U.K., Mexico, Chile, India, and Australia. By growing its international markets, Apollo would be less exposed to the vagaries of the U.S. markets and regulation. 

However, Apollo is facing challenging times as of late. Its second-quarter numbers for new degreed enrollments fell 16.5% from the prior year to 32,500, with total enrollments down 17% year over year to 250,300. The reduction in the student population has hit the educator in revenues, which was down 19% year over year to $679 million. While Apollo has used pricing incentives to attract more students, it has resulted in getting less revenue from each student, as the revenue per student went down 5.6% year over year. 

Fortunately, Apollo's 2011 three-year cohort default rate, which is a percentage of a school's borrowers who enter repayment on a certain loan during a federal fiscal year (Oct. 1 to Sept. 30) and default prior to the end of the next one to two fiscal years, has fallen from 26% to 19% according to the Department of Education. Its improvement of cohort default rates show that a growing percentage of Apollo's students are able to make their payments when they leave school. 

DeVry's take
During DeVry's February earnings call, CEO Daniel Hamburger declined to comment specifically on the proposed regulation, but added:

What I can just say, generally, is we think that regulations in higher education are a good thing as long as they're the right regulations. And those would be, basically, one set of rules for all colleges and universities. And those rules would be based on 2 -- that would rest on 2 basic pillars: one is hold us accountable for the outcomes and the other is hold us accountable for best practices and professional practices ... And if those rules are applied to all colleges and universities, I think we'd have a very strong accountability framework in higher education that we and I'm sure many others would sign up to. 

DeVry is also facing challenges. Its revenue for the first six months was $942.2 million, down 3.9% from the same period last year. At its largest campus, DeVry University's November 2013 new undergraduate enrollments decreased 12% to 4,824 compared to 5,482 the previous year, with total undergraduate students down 11.7% to 43,726, versus 49,515 the previous year. Financially, there was a ray of good news: as of Dec. 31, 2013, DeVry's cash and cash equivalents increased 21% to $262 million. It did not report its cohort default rate when it announced its financials in February. 

While DeVry has an expanding program in Brazil, DeVry has focused its strategies on health care programs and corporate restructuring. Regarding its health care programs, DeVry has three nursing schools in the pipeline for fiscal 2015, adding to its 13 current nursing campuses. Its American University of the Caribbean School of Medicine completed a new $30 million academic building. As for its restructuring efforts, Devry plans to bring in its Carrington College California and Carrington College together, which would combine 17 campuses into one regionally accredited institution, reducing expenses by $3 to $4 million. Whether DeVry's strategies will improve its financial results remains to be seen. 

Grand Canyon digs deep
Unlike the other two, Grand Canyon did not comment on the regulations. Also unlike the other two, Grand Canyon had stronger financial results. In its February fourth-quarter statement, Grand Canyon's net revenue for the year ending Dec. 31, 2013 was $598.3 million, up 17% from the prior year. As of Dec. 31, 2013, Grand Canyon's enrollment was 59,658, up 14.1% from an enrollment of 52,292 in Dec. 31, 2012. Furthermore, its 2011 three-year cohort default rate is even better than Apollo's, at 15.9%, and down from last year's rate of 19%. 

Also unlike the other two, Grand Canyon focuses more on getting quality admitted students. It raised its minimum GPA requirement to 3.0 for admissions, with the average GPA of incoming students at approximately 3.4. Of Grand Canyon new students, 50% will be studying science, a more promising degree in terms of future employment. Interest has even extended to its athletics, with Grand Canyon's women's basketball winning over 20 games in their first year in Division 1, and men's basketball selling out every home game with a TV contract to cover the games. 

What does it all mean
Both Apollo and DeVry have made statements regarding the proposed regulation, noting that while both are willing to work with the Department of Education, there is a fear of the regulation's unintended consequences. A closer look Apollo's and DeVry's financial situations show other challenges, as both of their enrollments and revenues have fallen recently. The additional pressure of the Department of Education's regulations would just add to the long list of obstacles.

On the other hand, Grand Canyon has focused on improving its admissions and visibility. That has resulted in more impressive financials as compared to Apollo and DeVry, and hardly any concern with the proposed regulations. Out of the three, Grand Canyon would be my chosen for-profit university for investors.

Say goodbye to "Made in China"
For the first time since the early days of this country, we're in a position to dominate the global manufacturing landscape thanks to a single, revolutionary technology: 3D printing. Although this sounds like something out of a science fiction novel, the success of 3D printing is already a foregone conclusion to many manufacturers around the world. The trick now is to identify the companies -- and thereby the stocks -- that will prevail in the battle for market share. To see the three companies that are currently positioned to do so, simply download our invaluable free report on the topic by clicking here now.

The article Are For-Profit Universities Under Attack From Proposed Regulation? originally appeared on

Johnny Chen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story