This article is a guest contribution by John Thomas, at MadHedgeFundTrader.com.
Hedge funds have been circling for new carrion to devour in the next economic slowdown and have found a big fat target in the for-profit educational sector.
The industry is ripe for the taking. For two decades, for-profit schools have lured gullible students with inflated promises of impressive sounding degrees which they pay exorbitant tuition to obtain. In education’s version of the subprime crisis, creative financial aid departments obtain government loans to finance the entire program.
There are now over 2 million attending these institutions, accounting for 10% of all higher education in the US, and the profits that have poured in have been absolutely massive. Early investors rode the IPO train all the way to the bank. The problem arises when few students ever achieve these laudable goals.
According to government statistics, 55% of US college students obtain a degree within six years. At the University of Phoenix (click here for their website at http://www.phoenix.edu/ ), with 400,000 students, the largest for-profit university, only 36% meet this deadline, only 6% at some campuses, and a mere 4% of online students. Dropouts end up defaulting on loans that can amount to as much as $100,000 for incomplete bachelor’s degrees and up to $200,000 for advanced degrees.
It now looks like the gravy train is about to end. Secretary of Education Arne Duncan has promised a crack down on the industry, bringing in more regulation and prosecutions of deceptive marketing practices, where degree programs are sold like time shares. The leading accreditation organizations are also having second thoughts about the for-profits, where 95% of the instructors are part time and tenure is unknown. Complaints are rife about shoddy teaching standards and missing doctorates.
The government has funded $750 billion in student loans, and while 10% of public university loans go unpaid, the default rate at for profit schools is thought to be as high as 50%. Starve these schools of subsidized government funding, and their shares are history. And just try and get a job with one of these Mickey Mouse degrees.
Take a look at the top listed for-profit universities of Apollo (APOL), Capella Education (CPLA), and DeVry (DV).
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on the “Today’s Radio Show” menu tab on the left on my home page.
Copyright (c) June 4, 2010, MadHedgeFundTrader.com
