September 26, 2021

Federal judge rules Consumer Financial Protection Bureau lacks the authority to investigate for-profit-college accreditors.

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A federal judge on Thursday struck a blow to the Consumer Financial Protection Bureau’s recent foray into college accreditation, ruling that the bureau lacks the authority to investigate how accreditors approve for-profit colleges.

U.S. District Judge Richard J. Leon rejected the CFPB’sattempt to force an embattled national accreditor, the Accrediting Council for Independent Colleges and Schools, to turn over information about how it decided to approve several controversial for-profit college chains.

“Although it is understandable that new agencies like the CFPB will struggle to establish the exact parameters of their authority, they must be especially prudent before choosing to plow headlong into fields not clearly ceded to them by Congress,” wrote Leon, who was nominated by President George W. Bush. “Thus, having concluded that the CFPB lacks authority to investigate the process for accrediting for-profit schools, I am compelled to deny its petition to enforce civil investigative demand.”

Link to article

From the financial community Updated Sector Thoughts as Gainful Employment Saga Continues

william blair 2

Updated Sector Thoughts as Gainful Employment Saga Continues

Viewpoint: The second set of negotiations for “Gainful Employment 2.0” resulted in no
consensus, as expected, but rather a contentious few days between advocates with little
common ground followed by a decision to extend the rule-making sessions into December,
with the Department of Education agreeing to provide data and support for its proposed
student loan default and repayment metrics in the meantime. We believe that most
investors have begun and will continue to ignore the tail risk the rule presents to private
sector schools in light of the significant regulatory risk that is already embedded in the
stocks, the extended duration of the gainful employment negotiations (four years and
counting, with no potential program closures until 2019 or later), the increasing likelihood
of a successful legal or regulatory challenge from the private sector schools that would
block some or all pieces of the final rule, the numerous positive changes already made in
the sector to improve student return on investment and school regulatory profiles, and the
recent strength in fundamentals and associated recovery in the stocks

Where Do Things Stand With Gainful Employment?
The Higher Education Act (the governing document for postsecondary schools that access
the government’s Title IV student loan program) states that for-profit college (both
certificate and degree) programs and nondegree (certificate) programs at nonprofit
colleges must prepare students for “gainful employment.” In 2009, a few key staffers
(who are no longer involved in the process) at the Department of Education (Ed) saw big
enrollment and profit growth and anecdotal evidence of student abuse at for-profit
colleges and decided that something needed to be done. In a bit of an end-around attack,
they reinterpreted the simple phrase “gainful employment” into a set of rules that created
complex student loan debt-to-income and repayment thresholds for for-profit college
students, which, if not met, could result in a loss of access to Title IV loans (which
accounts for about 80% of the sector’s revenue).

In a perfect storm for the sector, the introduction of potentially game-changing regulation
coincided with peak U.S. unemployment (and the end of an increase in college
applications associated with these job losses); the lapping of significant Pell grant and
Title IV loan limit

expansions from 2007 to 2009; the tail-end of a dramatic spike in forprofit
school capacity, programs, and tuitions along with an influx of private equity
dollars into the sector; and the beginning of a national conversation questioning the value
of a college degree as student loan debt surged near $1 trillion.
With the threat of largely unquantifiable legislation and the associated change in the
playing field, the enterprise value for the 15 publicly traded companies in the sector
dropped from $46 billion in the first quarter of 2010 to $8 billion in late 2012 as new
enrollment declined and total enrollment and profitability followed (enrollment is down
roughly 30% from peak levels and operating margins are down from the mid-20s to the
low double digits). Not until early this year did the sector show signs of a recovery, with
starts inflecting toward positive (and turning positive for a third of the schools) on price
reductions and a tailwind from a bit more regulatory clarity, and an investor recognition
that the schools were adapting business models and the 30% of the market capitalization
that lay in net cash was safe. The stocks have outperformed the market by 60% this year.

In the four years since gainful employment rule-making was introduced, Ed negotiated a set of harsh debt-to-income and
repayment draft rules in 2010, introduced a much softer final rule in 2011, released supporting data in 2012 that saw most of
the schools pass the tests with flying colors on surprisingly strong debt-to-income metrics, and then later in 2012 saw a
private sector college lawsuit strike the rule down on a federal judge’s view that Ed’s proposed repayment metric was
“arbitrary.”
Ed went back to the drawing board and began another round of negotiated rule-making in fall 2013. Ed’s most recent
proposal, as in 2010, was a set of harsh debt-to-income and loan repayment standards. A (likely softened) final rule is
expected to be released late in 2014 with the rules going into effect in 2015. At-risk programs could be eliminated in 2019 and
beyond.
Is There Risk for the Stocks?
Unlike in 2010 and 2011, when education stocks hung on every move from the Department of Education and legislative
opponent Senator Tom Harkin (D-Iowa) and 10% moves on policy speculation were a frequent event, over the past year, the
stocks have become immune to policy noise, good or bad. We note that attendance from both the buy- and sell-side at the
latest round of negotiations was a fraction of that seen in previous rounds. In many ways, the stocks have been left for dead
and remain uninvestable in the eyes of many long-only investors who were burned by the sector in past years. In that context,
we remain long-biased on the space, and note that:
1. New enrollment is gradually improving, with a third of the stocks in the space growing starts, a third in the down
single-digit range, and the rest getting “less worse.”
2. Most schools in the space have increased the value proposition of their degrees through brand-building efforts,
stronger retention and graduation, improved job placement rates, price cuts, enrollment restrictions like mandatory
orientation, low-ROI program elimination, and even money-back policies on first classes.
3. Public colleges have increased prices in real terms in excess of 5% annually over the past decade, and the increases
have continued despite declining enrollment, offering for-profit schools a bit of a price umbrella.
4. Most schools in the space have moved out (either partly or entirely) of the lead aggregator channel, which has
sometimes produced low quality student inquiries and at times resulted in high dropout rates (churn).
5. Retention increases at the schools have been largely masked by the graduation “bubble,” a result of the large incoming
classes of students in the 2008 to 2010 period reaching the end of their tenure at the schools, but these retention
gains should eventually allow total enrollment to grow well in excess of new enrollment and produce strong
incremental margins even on moderate top-line growth.
6. “Halo” schools like Grand Canyon University (LOPE $44.15; Outperform), which offers a traditional ground campus
and Division 1 athletic programs, and Capella University (CPLA $64.30; Outperform), one of the highest-quality online
degrees in the country (as recognized by its accreditor), are repairing the sector’s image among both policy-makers
and investors.
7. Many schools in the space have cut significant cost out of the business, but the magnitude of the cost cuts has varied
widely, leading us to believe there is significant further cost-cutting potential and margin leverage ahead for many
schools.
8. The potential range of negative regulatory outcomes has narrowed significantly, with the focus on gainful
employment and 90/10 (a legislative effort to exclude military funding dollars from the 10% of nonfederal money
required by this ratio) resulting in a much more manageable set of outcomes than the wide range of a few years ago
(with proposed marketing spending or even operating margin caps).
9. The sector trades at just over six times EBITDA, a significant discount in a market where inexpensive stocks are
increasingly hard to come by.

But we note that from an operator’s perspective, gainful employment still presents substantial risk—in its most punitive form,
the proposed rules could result in the closure of more than 10% of for-profit programs and likely costly changes even to
passing programs. While we believe most management teams remain in a holding pattern and are not making any operational
changes in the near term, we believe the rulemaking

Link to full report: https://www.rdocs.com/getrdocnologin.asp?p=144937

Timo Connor, CFA

William Blair & Company, L.L.C.

Default management creates a big shift in default rates between 2 and 3 years.

Education Department data released last month shows that rates at nearly all institutions rose when measured for three rather than two years, as federal law will soon require.  Duh… Yet at 243 colleges, or about 8 percent of the 3,168 degree-granting institutions The Chronicle examined, the three-year rate was at least 15 percentage points higher than the two-year rate, a substantial increase, how is that a surprise???  Of those, 83 percent were for-profit colleges We would wager that most loan portfolios would show an increase in defaults when compared to a longer period of time.

YET, the college showing the biggest gap was Professional Business College, a private nonprofit institution in New York City, where the difference between the two-year rate and the three-year rate was more than 30 percentage points.

Link to article: http://chronicle.com/article/Many-For-Profits-Are/126689/?sid=wb&utm_source=wb&utm_medium=en

Is the growth in EDU demand starting to slow?

Some very interesting data coming in which may lead to the conclusion that the growth rates may be slowing.  While the industry is still growing and at rates which would make most extremely happy, the percentage growth may be showing some signs that it’s leveling out a bit.

Department of Education Conference Call

Department of Education Conference Call

The (DOE) Department of Education held a conference call on Friday that didn’t really clarify any potential upcoming regulatory changes.

Deputy Undersecretary Robert Shireman basically repeated what was published in The Federal Register.

In essence they intend to convene a committee to develop & propose regulations to maintain and/ or improve program integrity in the Title IV, HEA programs

Shireman did not explain the specific reasons which prompted these meetings, other than wanting students to

have access to college and good quality post-secondary education that serves

students and taxpayers.  He stated a couple of times that the DOE wanted and is seeking input regarding potential changes

The real question is: Is this a lead in opportunity for the Obama administration to come up with significant changes with the ability to say that they were proposed to them rather than taking ownership of leading the charge? 

The good news is that Shireman did not attack the utility of for-profit institutions or their role in providing quality education.

He basically said that there are effective schools and less-effective schools in every sector, so the focus needs to be on quality regardless of sector.

Low cost/tuition online schools…they have been growing, what are your thoughts of long term prospects?

There have been a number of entrants into the online degree space whose tuition are at significantly lower price points than the majors.  Some of these have seen tremendous enrollment growth over the last year to two. In addition, they have remained (in many cases) extremely profitable.  What are your thoughts on these low price providers?  How do you think they will fare long term?  Will they be able to continue to grow with the high marketing/lead costs? 

Growth continues to look strong in for-profit industry

After speaking with many analysts and marketers it seems like the positive growth is continuing into the second quarter. Lead volume & enrollment growth seem to have continued from the first quarter. Lots of continued interest in investing into the for-profit arena is always a great sign. The only negative area has been the stock prices for many of the public’s. Are you seeing the same continued growth.

EDU stocks trading at low prices & multiples

Take a look at the EDU stocks, now looks to be a good time to buy in at good prices and at multiples as low as they have been in a while.  With all the bullish discussion of late the EDU sector has taken a hit.  With people/investors being short sighted and thinking, hey if this is the beginning of a recover, we need to get out of those counter cyclical edu stocks now as they will surely go down…  Our thoughts are with what Samuel Clemens once wrote: Let us be thankful for the fools, but for them the rest of us would not succeed!  Sure the sheer volume of the selling and shorting may bring these stocks a little lower, but watch them continue to grow, continue to be profitable, and continue to be strong companies…. and ultimately their stock prices will continue to go higher.

Whens the next wave of acquisitions comming?

I have heard a few rumors but wanted to see what you think. 2002-2003 was suck a massive year for acquisitions but we haven’t seen a boom year (regarding acquisitions) since. Whose ripe for the picking?  Whens the next roll-up coming out?  There are so many nice mid-sized private for-profit schools out there just lining up for the picking…

As expected Apol exceeds expectations, yet analysts still fear

For its fiscal second quarter, Apollo Group reported earnings of $0.77 per share, $0.12 better than the First Call consensus of $0.65.

Revenues rose 26.3% year-over-year to $876.1 million, topping the consensus estimate of $865.5 million.

Contributing to the growth was a 20.4% year-over-year increase in degreed enrollment to 397,700.

With all of this good news the stock is down $12.00

 Why?

  • Fear of increasing bad Debt
  • Fear of increasing marketing costs…even though TV costs are down and online leads have remained consistant
  • Fear that growth at this scale cannot continue at this pace
  • Fear of management changes…even though that is to be expected with a new leader.

Since bad debt has increased for UoP, the market also pounded ESI as when it comes to bad debt fears, they are the one most feared followed by CECO & COCO.

How bad do you think the bad debt will be?