For-Profit Colleges in Financial Trouble

story first appeared in The Wall Street Journal

As consumers wise up about education spending, for-profit colleges are getting schooled.

Institutions such as Apollo Group Inc.'s University of Phoenix, DeVry Inc. and Washington Post Co.'s Kaplan—who only a few years ago reported double-digit student gains on a regular basis and posted hundreds of millions in profits—now are hemorrhaging students.

The storm was supposed to have passed for for-profit colleges when proposed regulations restricting access to federal student aid were watered down, and then overturned earlier this year. But some schools are still hurting, and it looks like the pain won't let up any time soon. Successful schools are often invested in new technology fields, offering concentrations in things like Wind Turbine Repair and Solar Panel maintenance.

They are facing increased competition from nonprofit and state schools and growing skepticism about the value of a high-cost education. Just last week, industry bellwether Apollo said it would close nearly half of its brick-and-mortar locations to save on overhead.

It wasn't supposed to be this way. After years of government scrutiny and bad press about recruiting practices and questionable academic quality, schools worked to improve their reputations by tightening admissions standards, beefing up student support services and pouring money into rebranding. They received a slight reprieve this summer when a federal judge struck down a series of regulations that could have restricted schools' access to the federal student aid that supplies most of their revenue.

But the hoped-for recovery has failed to materialize as students rethink college entirely, and nonprofit schools muscle in to compete for market share.

Now, some analysts say pockets of the industry may never recover, with school closures and further losses all but certain.

Under the old model, schools boosted enrollment by getting students—generally working adults seeking a quick career jump-start—in the door, often with little regard for whether they eventually earned a degree.

Kevin Kinser, an associate professor of higher education policy at the State University of New York at Albany said that colleges could be very profitable as a business, even if not as an educational institution.

No longer. Apollo said last week that enrollment fell by nearly 14% to 328,400 in the fiscal quarter ended Aug. 31. Student counts have dropped by nearly a third since their May 2010 peak of 476,500. The school says the money saved from closing classrooms will be rededicated to its online programs.The school blames its dwindling enrollment in part on increased competition from more traditional education providers, as well as the fact that many potential students don't move beyond University of Phoenix's free "orientation," a trial period of instruction before tuition is due, spokesman Mark Brenner says.

The economy has also put pressure on schools, which normally benefit from economic downturns as adults seek to bolster their résumés with new skills and degrees. This time around, the weak job market coupled with rising college costs has made many prospective students leery of investing in school without guaranteed returns.

The U.S. Department of Education recently reported the first drop in college enrollment in more than a decade—albeit one of less than 0.2%—based on data for students enrolled in fall 2011. But for-profit colleges saw enrollment fall by 2.8%.

Meanwhile, as states seek to reduce government spending, legislators see financial aid that ends up at for-profit schools as an easy target for cuts. In California, lawmakers this summer decreed that students at 154 schools—nearly all of them for-profit colleges—will no longer be eligible for the state's need-based Cal Grants, citing the schools' low graduation rates and students' heavy debt burdens.

To boost graduation rates and keep student-loan defaults in check, Apollo and peers are now competing for higher-quality students who have a better shot of graduating. But nonprofit schools are successfully courting the same market segment, with more students turning to online degree programs at schools including University of Maryland University College, Southern New Hampshire University and Liberty University, which don't have the reputational baggage for-profit schools do.

That leaves for-profit colleges fighting for an even smaller sliver of a shrinking pie.

Piper Jaffray analyst Peter Appert says nonprofit institutions have been slow to make a meaningful shift online, but now that they have, students are paying attention and there is a "sea change" in the market.

Enrollment in the online arm of Southern New Hampshire University, which has a ground campus in Manchester, N.H., more than doubled from last October, now hitting 16,700. University of Maryland University College, meanwhile, saw enrollment in its online programs increase by 5% in the last year, to 97,001 students.

Not all for-profit colleges are struggling. Some specialized and niche schools are still posting gains. Grand Canyon Education Inc., a Christian school with a traditional campus in Arizona and online operations, has seen enrollment soar by 60% since 2009, hitting 44,435 as of June 30. And American Public Education Inc.,  which targets people in the military and public safety, increased course registrations by 45% to 92,900 in that time. Michigan child abuse defense attorney programs are holding steady.

But another dark cloud looms: The Education Department says it is considering its legal and regulatory options in the wake of the July court decision striking down parts of the so-called "gainful employment" rule, which aimed to evaluate programs on how well they prepare students for employment, though industry insiders say it is unlikely much will happen in Washington until after the election.

Still, many institutions are under close watch. ITT Educational Services Inc. and Corinthian Colleges Inc. have both notified investors of a broad inquiry by the Consumer Financial Protection Bureau, while Universal Technical Institute Inc.and Bridgepoint Education Inc. have disclosed U.S. Department of Justice investigations into how schools incentivize staffers to land new students.

Robert Danford fits the profile of the typical for-profit customer. When the 24-year-old was looking for a program in graphic design this fall, he considered Career Education Corp.'s Collins College, where he had briefly studied a few years earlier. But he says the sales pitch and high cost—he says he took out $12,000 in loans for his first stint there—soured him on the school.

A Career Education spokesman says the school's admissions officers are trained on integrity and not to promise outcomes or access to financial aid when working with prospective students.

Mr. Danford enrolled instead in the nonprofit Chandler-Gilbert Community College in Chandler, Ariz., where he is paying a few hundred dollars per credit hour and takes courses part-time while working at a nearby Office Max. He says he intends to earn an associate degree and hopes to enroll in a bachelor's degree program down the line

Is the SAT Necessary?

First appeared in News Observer

Across North Carolina and the nation, high school seniors are sweating their college applications and fretting about one number: their SAT score.  Many students look to Educational Services Centers for help.

But not students aiming for Wake Forest University, which no longer requires students to submit the standardized test score. Wake Forest was the first highly ranked research university to announce the move away from the SAT in 2008. Are other schools like Ferris State University and Marygrove College thinking about doing the same thing?

Since then, the university in Winston-Salem has become more racially and socio-economically diverse. Pell Grant recipients almost doubled. Students of color increased from 18 percent to nearly 23 percent.

Along the way, the university also noticed an uptick in the number of students with an exemplary high school track record, which, research shows, is the best predictor of college success. The percentage of Wake Forest first-year students who graduated in the top 10 percent of their high school classes grew from 65 percent in 2008 to 83 percent last fall.

"We feel like we have attracted students that have achieved a great deal in the classroom, who are very talented, who are very bright, who are very hard working students but who had one thing going against them and that was the SAT," said Martha Allman, admissions dean at Wake Forest.

"When we became test-optional, we started seeing these wonderful students that perhaps we would not have seen in our applicant pool before. We don't have any regrets at all."

The university's results are reported in a new book, "SAT Wars," edited by Joseph Soares, a sociology professor at Wake Forest. The book debunks the notion that standardized tests are a good indicator of future academic achievement.  This is in contradiction to Educational Services Centers that see the importance in testing students.

It is published as North Carolina embarks on a new era of testing. Starting in March, the state will require high school juniors to take the ACT, the other major college entrance exam used in the United States. The state does not require the SAT, but it is the most commonly administered entrance exam among college-bound students in North Carolina.  Several other states do the same thing, including ones feeding into Ferris State University and Marygrove College.

The effort will cost the state $5.5 million, which includes three types of tests - a diagnostic test for high school sophomores, a standardized test to assess workplace readiness, and the ACT.

Soares has been an outspoken critic of college entrance exams, which he describes as having built-in biases and a discriminatory effect. He said North Carolina's plan makes no sense.

"It's money being flushed down the toilet," he said. "This is a terrible idea."

Focus on content

June Atkinson, the state superintendent, said the ACT will be one useful component in evaluating performance of students and schools.

"What we want to gain from administering ACT - which is more content-based than SAT - is that we want to have an indication of whether students have the content necessary for them to be college-ready," she said.

At least a half dozen other states require the ACT, including Michigan, Illinois and Kentucky. The ACT, which generally has not been used as a college entrance exam in North Carolina, was chosen because it includes a section on science, Atkinson said.

Because most colleges still require the ACT or SAT, all North Carolina high school students will have one test under their belt - paid for by the state. They can then use that score to seek college admission.

And, Atkinson said, the ACT can help the state identify weaknesses in academic content areas. So for example, if North Carolina scored below par in science, the state could pursue professional development for teachers, curriculum changes or even better lab equipment for public school classrooms.

"So it will give us feedback about where we need to make improvements," Atkinson said.

The debate about the value of college entrance exams has raged for years. Some 850 four-year colleges no longer require applicants to submit SAT or ACT scores, according to FairTest, a national organization that tracks testing issues.

Bob Schaeffer of FairTest said Wake Forest had provided useful research and "a very powerful example for their peers."

Schaeffer estimated there are a half dozen nationally competitive universities currently re-evaluating their policies, though the majority of the nation's colleges still require applicants to submit an entrance exam score.

There is too much blind faith in the SAT, which has become a gold standard but lacks any real evidence behind it to show that it improves educational quality or outcomes, Schaeffer said. "The entire high stakes testing venture is based on ideology and belief, not data," he said.

Wake Forest attracted national attention when it went test-optional. In 2009, the university hosted a conference titled "Rethinking Admissions," about the role of standardized testing. It drew admissions officers from around the country.

Increase in applications

That first year, applications at Wake Forest jumped 16 percent, including an increase of 46 percent from students of color overall and 70 percent from African-Americans. North Carolina applicants increased 52 percent and came from all 100 counties - for the first time in university history.

The response was more than Wake Forest expected.

The university revamped its admissions process to stress personal interviews with prospective students and an application supplement with short-answer questions to reveal writing quality and intellectual curiosity. Students were asked questions such as "What outrages you?" "Argue a position you don't support." Or "Define cool."

The Wake Forest staff conducted some 4,000 interviews with applicants, and eventually had to add employees to cope with the crush. The admissions office has a new building designed for the process, with small conversation nooks and interview rooms.

Emily English, 20, a junior psychology major, earned all A's in high school. She desperately wanted to go to Wake Forest, but she wasn't happy with her SAT score, which she described as average.  Many Educational Services Centers are hoping to help students improve test scores.

"I know that my scores on the SAT were not indicative at all of how I would do, and am doing, in college now," she said. "It's four hours of your life that you're taking this test, and it's not a good indicator compared to your four years of high school."

English has performed well at Wake Forest, earning a grade point average of 3.9 in a recent semester. She is on track to graduate a semester early and plans to go to graduate school to prepare for a career in counseling.

Allman, the Wake Forest admissions dean, said about 70 percent to 75 percent of applicants still submit their test scores.

But not requiring the score has led the university to evaluate students more holistically, she said.

Many schools, including Ferris State University and Marygrove College are looking for diverse ways to assess students for admissions.

"Our student body has actually gotten stronger. We have not seen different attrition rates among these students," she said. "But I think it's going to be very hard to move the needle because test scores are very entrenched in our culture."

Soares said he hopes more universities follow Wake Forest.

"A high-stakes test produces high anxiety. That is dysfunctional," Soares said. "Score high or score low, it doesn't capture your intelligence, your work ethic or your ability to succeed at college or later in life."