The for-profit college industry, unlike the rest of higher education, is enjoying a financial tailwind that is only likely to improve in the next couple of years.
Enrollments this fall at nine major publicly traded college companies grew at a pace faster than the average annual rate of growth for the past three years, while profit margins for this year are projected to be higher than they’ve been since 2005.
And the grim financial outlook that has led to freezes on hiring and new construction at many nonprofit colleges isn’t having the same effect on the for-profit sector, which accounts for about 5 percent of all postsecondary enrollments.
If anything, many of the bad-news trends now roiling the economy—unemployment projections of 10 percent, state budget cuts, declining support for nonprofit institutions, even the near-collapse of the Big Three automakers—are likely to translate into even higher enrollments and higher profit margins for the companies.
“If this is not our moment, I’m not sure when it will be,” said Rene Champagne, chairman of the Career College Association and retired chairman and chief executive of ITT Educational Services Inc., after addressing more than 150 attendees at an investment conference the association held here on Tuesday.
While many experts have predicted that this recession, like previous ones, will result in higher college enrollments over all as laid-off workers return to school for retraining, many public and private institutions will be hard-pressed to accommodate them because their other sources of financing will be squeezed. Last month, for example, the California State University system said it would cap enrollment for the fall of 2009, even if it meant turning away 10,000 students, because it couldn’t afford to take them (The Chronicle, November 18).
New Loan Opportunities
Analysts from the Stifel Nicolaus investment bank, who also spoke at the conference, said the for-profit sector, by contrast, is well positioned to benefit from the inflow of new students. For one, changes in federal student-aid policies have made grants and subsidized loans more available, so more students can find the money to pay for the colleges’ programs.
Concerns about loan availability sent public companies’ stocks into a tailspin earlier this year, but they have since rebounded. “We’ve been trouncing the S&P,” noted Robert L. Craig, one of the analysts. As of November 28, the stock prices of nine major public higher-education companies were up by 4 percent for the year, compared with a 39-percent decline in the Standard & Poor’s 500.
Many of the colleges raised their tuition prices after the loan and grant limits went up.
And while students with poorer credit history are finding it harder to secure unsubsidized private loans because some lenders have left the market altogether, several of the for-profit college companies, including Corinthian Colleges Inc., have the resources to create their own loans and have been doing so. A survey by the association of its member institutions, released this week, found that 12 percent of respondents were offering loans to all students and 45 percent were offering loans to students who needed the money but couldn’t obtain a private loan. Seventeen percent of respondents said the average amount of their loan was less than $1,000, 15 percent said it was $1,000 to $2,000, and 6 percent said it was $10,000 or higher. Ninety-one association members representing 602 campuses responded to the survey.
Other factors also work to the for-profit colleges’ advantage. Over all, they have improved their efficiency on use of space, which means they have the physical capacity to handle enrollment growth, and they have honed their growing online-education programs to be more profitable.
The colleges, which are known to spend a lot of money on recruiting students, have also recently seen a slight decline in those costs. (The analysts said the companies’ average “student-acquisition cost” had declined from $3,475 per student in 2006 to $3,328 projected for this year.)
Jerry R. Herman, another Stifel Nicolaus analyst, said it appeared that the declining costs for advertisements in newspapers and on the Internet was a factor. With the turmoil in the automobile industry, the decline in advertising costs is likely to continue. Automobile companies have been some of the country’s top advertisers. If they, and recession-hobbled retailers, spend less, for-profit colleges, which now spend in excess of $1-billion a year on advertising, will find marketing themselves more affordable.
The colleges’ main concern about the economy is whether it will turn around quickly enough so that the students who enroll in programs that train them for careers in health care, information technology, business, and the culinary arts will be able to land jobs once they graduate. “Now’s the time to really shore up your activity with employers,” Mr. Champagne, the association’s chairman, told the college officials at the conference.
There is “clearly a tailwind,” said Mr. Craig. “The key is, for how long.”
