April 24, 2014

New Gainful Employment proposed rules released:

gainful employmentNew Gainful Employment proposed rules released:

  • Programs must pass the following metrics to maintain federal financial aid eligibility:
    • The estimated annual loan payment of graduates cannot exceed 20 percent of their discretionary earnings or 8 percent of their annual total earnings; and
    • The programmatic cohort default rate cannot exceed 30 percent for 3 consecutive years.
  • The Department did modify 2 variables in the debt-to-earnings calculation:
    • 30 students must complete the program; the previous version only required 10; and
    • The amortization schedule is now 10 years for certificate and associate degree programs, 15 years for bachelor’s and master’s degree programs and 20 years for doctoral and first professional programs; the previous version provided a 10 year period for all programs.
  • Institutions must certify that all gainful employment programs meet applicable accreditation requirements and state or federal licensure standards.
  • Institutions must publicly disclose information about the program costs, debt, and performance of their gainful employment programs so that students can make informed decisions.

 

Link to Proposed Gainful Employment Rules: https://www2.ed.gov/policy/highered/reg/hearulemaking/2012/notice-proposed-rulemaking-march-14-2014.pdf  

2014 Annual EDU Advertising & Marketing Survey for Schools, Lead Providers, Call Centers & Agency’s You MUST participate to receive results!

2014 EDU advertising surveyIt’s that time, ForProfitEDU Industry Group’s 4th annual survey, in conjunction with Edufficient, one of the fasting growing EDU-specific Performance Marketing Agencies.

This survey has become a standard for the industry, bringing together Schools, Lead Providers & Agencies, helping to create an updated master list of industry service providers.

Link to survey: https://www.surveymonkey.com/s/2014edufficientforprofitedusurvey

Hundreds of screened participants help make this a valuable tool for all those who participate.

  • All participants are reviewed for accuracy & relevance to the industry.

 

  • You must complete 75% of the survey questions to qualify and receive results!

 

  • All requests for survey results from non-participants will be denied!

Service providers contact information must be accurate to qualify. Remember, schools will receive your contact information so they can contact you, so please double check for accuracy.

All School contact information (school name, your name, phone & email) is private and will not be distributed. Only vendor info will be made available.

Link to survey: https://www.surveymonkey.com/s/2014edufficientforprofitedusurvey

Between 2002 and 2010, the number of students enrolled in online courses throughout the U.S. grew 283 percent — from 1.6 million to 6.1 million

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The number of students in the United States enrolled in at least one online course has increased faster than overall enrollment growth in higher education, a new report from the state Comptroller’s office shows.

The report, released today by the Comptroller’s Offices of Research and Education Accountability (OREA), found that between 2002 and 2010, the number of students enrolled in online courses throughout the U.S. grew 283 percent — from 1.6 million to 6.1 million. Nearly one-third of all higher education students took at least one course online in 2011.

Link: http://www.dnj.com/article/20140129/NEWS/301290016/New-report-chronicles-growth-online-learning-higher-education?nclick_check=1&utm_source=linkedin&utm_medium=social&utm_content=3632454

 

LeadsCon Las Vegas 2014: Last Days to Save. Spotlight on Speaker David Pauldine President of Devry.

leadsconLeadsCon Las Vegas 2014: Last Days to Save. Spotlight on Speaker David Pauldine.   

This is it. The last few days day to SAVE $250 and take advantage of this exclusive $595 Partner Rate for LeadsCon Las Vegas 2014 (March 25 & 26, 2014 – The Mirage Resort & Casino).   Beginning Friday, January 10th, this offer will expire and rates will jump to $845. Book today using THIS LINK so you don’t pay more than you need to.  Please note that you must use the ID Code (LV14) and Apply to get the discount rate. 

Speaker David Pauldine Examines Online Education 
David Pauldine, President, DeVry University will be speaking on our “It’s All About the Jobs: Where Online Education and Placement Cross Paths“ session!  David will not just be focusing on examining the front-end customer acquisition, but also associating it with the positive outcome at the end of the funnel, which is getting the student educated and finding job placement for them. Learn more about David: http://bit.ly/1jXlM1h 

Looking for more great content? View the Full Conference Program.

Visit www.leadscon.com for more information

Discounted access to conference on Private Equity Investing in For-Profit Education Companies Only offered to For-Profit Education Industry Group Members

capital roundtableWe’re pleased to offer discounted admission to ForProfitEDU members at a preferred rate of $400 less than the standard rate.

The Capital Roundtable is presenting a full-day conference on Private Equity Investing in For-Profit Education Companies.
Date: Thursday, January 16, 2014
Time: 8:00 am to 5:00 pm

Place: The New York Athletic Club (180 Central Park South, New York, NY)

If you are interested in attending, act fast as these usually get sold out fast. The last conference had record attendance.

For The Discounted rate you MUST Contact:
Hallie Watson phone: 212.832.7300 or email hwatson@capitalroundtable.com

Discounted access to conference on Private Equity Investing in For-Profit Education Companies Only offered to For-Profit Education Industry Group Members conference date: 01/16/14

Link to event info: BUT you MUST use email or phone above for discount!!!
http://www.capitalroundtable.com/masterclass/Capital-Roundtable-Private-Equity-Education-Conference-2014A.html

No Resolution for Gainful Employment, as Expected

ed_mn_logoUpdate from William Blair’s Timo Connor

• On Friday, December 13 the final Gainful Employment 2.0 hearing ended with no
resolution, as expected. With no consensus from negotiators on what the rules
should look like, the Department of Education (ED) will proceed unilaterally in
publishing final rules. The ED has until November 2014 to get them published in
the Federal Register in order to go effective in 2015.
• We believe recently released draft rules will be weakened significantly in the
final version, much like they were when Gainful Employment 1.0 rules were
published in 2011 (e.g., debt-to-income thresholds were increased from 8% to
12%).
• We believe that no matter what the final rules look like, they are likely to face
significant legal and legislative challenges from the industry and legislative
supporters of the industry. We note that Gainful Employment 1.0 rules were
challenged in court, and a federal judge struck down the rules on the basis that
some of the quantitative thresholds were “arbitrary.” We also note that a
Republican House is largely supportive of the private-sector colleges and could
mount a legislative challenge of gainful employment through the ongoing Higher
Education Act reauthorization process or through the budget process by
challenging the funding of ED.

In addition, gainful employment data is reported on a multiyear lag, and we
believe that significant changes to improve student ROI made by private-sector
schools over the past few years will greatly improve regulatory metrics over
time. While we continue to expect regulatory scrutiny of the sector, a gradually
narrowing range of potential negative regulatory outcomes should support
multiple expansion for the postsecondary stocks in the coming years.

Recapping the Gainful Employment Process
ED held a series of Negotiated Rule-Making hearings this fall discussing draft gainful employment rules. The first three-day
session began Monday, September 9, the second three-day session began November 18, and the third and final one-day
session took place on December 13.
• The previous iteration of the rule, finalized in 2011, was challenged by an industry group and vacated in 2012 by a
federal judge who found the metrics “arbitrary,” so ED was forced to start the process over. Because no consensus was
reached by the negotiating panel, ED will move forward with new rules, which would likely go into effect in 2015,
potentially eliminating Title IV student loan eligibility for programs at some schools in 2019 and beyond.
• The draft language, though very similar to the prior rule, appears more onerous for the sector this time around;
however, the initially proposed rules from the previous gainful employment NegReg were watered down significantly
in the final language, with debt-to-income ceilings rising from 8% to 12% and repayment floors falling from 45% to
35%, for example.
• In particular, the use of “and” rather than “or” forces the schools to pass all metrics, not just one; the re-introduction
of a “caution zone” for programs close to failing; the elimination of an extended debt amortization schedule for
bachelor’s and graduate programs; and the elimination of a transition period in which generally higher BLS incomes
could be substituted for actual earnings are negative changes for the schools in the space. The table at the end of this
note offers the details on the new rule and the school’s debt-to-income and CDR exposures.

• The schools have already begun adapting to potential rules by freezing or cutting tuitions or the number of credits
required for graduation as well as reducing exposures to low-salary fields like criminal justice or certain fine arts
studies, while also screening out unprepared students who are more likely to default or not repay loans. As a result,
we believe regulatory metrics will likely improve in the years leading up to the instatement of any potential rules.
• We believe the political climate has shifted significantly since the gainful employment NegReg process began in 2009,
and believe there is more political support for the private-sector schools, particularly among Republicans, who now
view further ED regulations as anti-business. Although NegReg remains a non-legislative process, Congress controls
funding for ED, and we believe the rules are significantly more likely to be softened than toughened following this
fall’s sessions and the ensuing public comment period. We also note that the schools successfully appealed the prior
rules and are likely to appeal again, so it could be a lengthy process to put the rules in place (if they’re put in place at
all).
Source: Timo Connor, CFA William Blair & Company, L.L.C. Link to report

Draft Gainful Employment Data Noisy, as Expected

gainful employmentViewpoint: Draft “Gainful Employment 2.0” data from the Department of Education (ED)
released on December 11 was predictably noisy for the private sector colleges, but we
continue to believe that the final rules are likely to be significantly weakened and will
face significant legal and legislative challenges. In addition, we note that gainful
employment data is reported on a multiyear lag, and believe that significant changes to
improve student ROI made by private sector schools over the past few years will greatly
improve regulatory metrics over time. While we continue to expect heightened
regulatory scrutiny of the sector, a gradually narrowing range of potential negative
regulatory outcomes should support multiple expansion for the postsecondary stocks in
the coming years.
Key Points (supporting data tables located at the end of this note):
• Individual institutions were not identified, but ED’s data indicated that 13% of all
programs would fail the proposed metrics and an additional 7% of all programs
would be caught in the debt to income “caution zone,” requiring debt-to-income
improvement. This compares unfavorably with the 6% of all programs that
would have failed under the 2011 final rule (“Gainful Employment 1.0”).
• Six percent of programs would fail the debt-to-income standards, the same as in
the 2011 rule.

Fourteen percent of all programs would fail (exceed the 30% default threshold)
the recently introduced program-level cohort default rate (pCDR) metric. We
note that 8.3% of the failing programs belong to not-for-profit colleges (for
which certificate programs are subject to gainful employment regulations). Notfor-
profit colleges account for 17.1% of the total population of reported default
rates, so the proportion of failing programs is roughly half of that of private
sector colleges, but still meaningful enough to ring alarm bells among
constituents of not-for-profit colleges who, to this point, have largely viewed
gainful employment as a “for-profit issue” only. We believe pCDR will ultimately
be an out for schools (included as an “or” rather than “and” metric in the final
rules).
• The concept of a repayment rate threshold, introduced before the last set of
hearings, was eliminated in this draft. We believe providing quantitative support
for the “right” level of repayment will prove challenging for ED, particularly in
light of ED-approved programs like loan forbearance, deferment, hardship, or
income-based repayment, which encourage students to delay or reduce loan
payments. We are uncertain if a repayment threshold will be included in the final
rule, but if so, believe this will also be an “or” metric.

Recapping the Gainful Employment Process
On December 11, ED released a third draft of gainful employment rules for this fall’s negotiated rulemaking (NegReg) sessions.
The first three-day session began Monday, September 9, with a panel of experts discussing draft rules; the second three-day
session began November 18; and the third (and likely final) one-day session will take place on December 13.
• The previous iteration of the rule, finalized in 2011, was challenged by an industry group and vacated in 2012 by a
federal judge who found the metrics “arbitrary,” so ED was forced to start the process over. If no consensus is reached
by the panel, ED will move forward with new rules, which would likely go into effect in 2015, potentially eliminating
Title IV student loan eligibility for programs at some schools in 2019 and beyond.
• The draft language, though very similar to the prior rule, appears more onerous for the sector this time around;
however, we note that the initially proposed rules from the previous gainful employment NegReg were watered down
significantly in the final language, with debt-to-income ceilings rising from 8% to 12% and repayment floors falling
from 45% to 35%, for example.
• In particular, the use of “and” rather than “or” forces the schools to pass all metrics, not just one; the re-introduction
of a “caution zone” for programs close to failing; the elimination of an extended debt amortization schedule for
bachelor’s and graduate programs; and the elimination of a transition period in which generally higher BLS incomes
could be substituted for actual earnings are negative changes for the schools in the space. The table at the end of this
note offers the details on the new rule and the schools’ debt-to-income and CDR exposures.

The schools have already begun adapting to potential rules by freezing or cutting tuitions or the number of credits
required for graduation as well as reducing exposures to low-salary fields like criminal justice or certain fine arts
studies, while also screening out unprepared students who are more likely to default or not repay loans. As a result,
we believe regulatory metrics will likely improve in the years leading up to the instatement of any potential rules.
• We believe the political climate has shifted significantly since the gainful employment NegReg process began in 2009,
and believe there is more political support for the private sector schools, particularly among Republicans, who now
view further ED regulations as anti-business. Although NegReg remains a nonlegislative process, Congress controls
funding for ED, and we believe the rules are significantly more likely to be softened than toughened following this fall’s
sessions and the ensuing public comment period. We also note that the schools successfully appealed the prior rules
and are likely to appeal again, so it could be a lengthy process to put the rules in place (if they are put in place at all).

 

Timo Connor, CFA

William Blair & Company, L.L.C.

link to report

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.

Key Points From the Fourth Day of Gainful Employment 2.0 Negotiations

Timo_Connor

Key Points From the Fourth Day of Gainful Employment 2.0 Negotiations
The fourth day of negotiations for gainful employment 2.0 offered little news or common
ground from the public- and private-sector college participants, and we expect the
Department of Education to proceed with unilateral action and produce a set of studentloan-
debt-to-income-and-repayment thresholds that will look similar to the first version
of gainful employment, released in 2011 but subsequently struck down by a federal judge
following a private-sector industry appeal.
Key Points
• Consensus remains unlikely to be reached through negotiation given the wide gap
between the private sector and public college representatives in attendance. Both
sides appeared to be positioning as if they expect the Department of Education (ED)
to proceed on its own in writing a final rule, particularly given the wide variance in
the draft rules proposed thus far and the lack of data and objectivity supporting the
process to date. We believe ED remains committed to releasing a final rule in 2014
that will go into effect in 2015. While it is unlikely that ED will combine gainful
employment rule-making with Higher Education Act (HEA) reauthorization, we
believe private-sector participants (with Republican support) will likely mount both
a legal challenge of the rules as well as a legislative challenge through the HEA
reauthorization process, which began in October but will likely take years to finalize.
• Public college advocates in particular appear more interested in derailing the
negotiating process than reaching a consensus, likely because they view a
unilateral approach to rule-making by ED in the likely event consensus is not
reached through negotiation as a positive scenario for most public colleges.
• Private-sector advocates, realizing their voice is being largely ignored at the
negotiating table, are pushing for a broadening of the rule to include all colleges
and are trying to raise questions on the legitimacy of ED’s major assumptions and
the quality and availability of the data supporting these assumptions. This is the
likely foundation for a formal legal challenge.
• Advocates of community colleges, for which certificate programs are subject to
gainful employment rules, appear to be gradually realizing that these rules could
harm their schools as well, and we expect this realization to become a potential
sticking point for ED in implementing a punitive rule (closing even a few
community college programs would be politically unpopular).
• The major wrinkle in the latest proposals from ED is the reinclusion of student loan
repayment metrics, which were included in the final rule proposed in 2011, but not
in the initial draft rules for gainful employment 2.0, released in August.
November 18, 2013

Based on commentary in the hearings today, we believe ED is now focused on including some form of a default/repayment metric as well as a debt-to-income metric. We note that the repayment test included in the

previous set of rules did not withstand legal review and was the major reason the initial set of rules was overturned,
so we are a bit surprised ED is heading back in this direction and believe it will need to show stronger quantitative
support for the metric to withstand another legal challenge.
• We believe the rules will likely be softened in the final iteration, as they were the first time around, with ED unlikely to
want to go through another extended legal battle with the private-sector colleges. And even though rule-making is not
a legislative process, a take-no-prisoners approach seems unlikely given the administration’s continued focus on
increasing the number of college graduates in the United States and the damage to the private sector that has already
been inflicted by the threat of the rules (enrollment is down 20% to 30% across the sector).

Author:  Timo Connor,
William Blair & Company, L.L.C.

Timo Connor, CFA, joined William Blair & Company in 2010 and focuses on education services and technology. Previously, he worked as a fixed-income analyst at Bank of America and BNY Mellon. Mr. Connor received a B.A. in economics from Northwestern University.

Gainful Employment negotiated rule-making is rescheduled for November 18-20, 2013

dept of education

The U.S. Department of Education has announced that the second session of gainful employment negotiated rulemaking is rescheduled for November 18-20, 2013. The negotiated rulemaking committee will convene from 9:00 am to 5:00 pm on each of the three days of the session at the Department’s offices on 1990 K Street, N.W. in Washington, D.C.

The Department postponed the second session, originally scheduled for October 21-23, 2013, because of the shutdown of the Federal government.

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