Defending Market-Funded Schools
Occupationally I write about for-profit education companies for Wall Street investors. For two years the sector has been engaged in pitched battle defending itself against an onslaught of (some fair, and much more unfair) criticism from the mainstream press, Senators Harkin, Durbin, Sanders, and Franken, and from an unprecedented level of new regulation from the Obama administration. It's a complicated an all-consuming battle that I have largely avoided dragging into Ricochet but the gist of it is this:
For-profit schools have been quite successful in employing commercial marketing practices to expand access to higher education among working adults who range from 20-something high school grads training to make $14/hour working in a medical clinic, to white-collar professionals looking to complete their BA, or pick up an MBA while still working full-time.
On the surface, this is the ostensible goal of the federal higher education student loan program: encouraging the American workforce to upgrade its skills in order to remain competitive in the workforce. The trouble is that working adult students have complicated lives and a greater propensity to drop out of school before completing their program of study. This can leave them ironically worse off rather than better off as they now owe student loans but still have no degree.
Consumer advocates and the Obama administration are concerned with the plight of these students. The Senators I mentioned above are also concerned about the profits that these companies earn benefiting from the government loan program. Both groups would probably prefer to see working adult students attend state-funded schools that have lower, subsidized tuition so that when students drop-out the state picks up the tab and the student is no worse for wear. But as we all know, states have no more money and are actually in the process of reducing their subsidies for higher education.
The critics are not all wrong and there is plenty of blame to go around. On the surface, you would think that what is effectively a Federal voucher program would work efficiently and students would spend their dollars at the best institutions. Yet the outcomes data from all schools is unclear and not obviously available and the buyers admittedly are often unsophisticated. Furthermore, the government offers so many programs to avoid repaying loans that some students can go for 8 years before they run out of programs to avoid repayment. This means that that consequences of default are fairly obscured from prospective students.
The administration's proposed regulatory approach (still not final and the subject of some intense political wrangling between Sect'y of Education Arne Duncan and incoming House Education Chair John Kline) will likely lead to more restricted access and stronger efforts to help likely unsuccessful students self-select out of the process earlier (not entirely a bad thing) but will also dictate prices for programs and have the effect of shutting down programs and limiting choice.
Needless to say, none of this has been great for the publicly-traded stocks in the sector which have traded down since President Obama was elected. I am prevented from offering any sort of stock advice in this forum so please do not ask, but I would happily discuss the public policy implications if anyone is interested.
Also -- you can watch me (12/21) on CNBC debate the investment merits of the sector with CNBC personalities Erin Burnett, Herb Greenberg and PAA Research's Brad Safalow:
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May '10
Re: Defending Market-Funded Schools
Will record this and watch with interest, Trace. Have been more focused on K-12 issues but am now looking more closely at post-secondary options for students and wasn't certain how the for-profit sector fits into that picture.
Congratulations on the national exposure - have you been on CNBC before today?
May '10
Re: Defending Market-Funded Schools
Diane
Congratulations on the national exposure - have you been on CNBC before today? · Dec 21 at 10:21am
Yes, it's not nearly as glamorous as it sounds. It's very difficult to say anything intelligent in 2 minutes on these shows. This one could be different though because it will be more of a debate and CNBC itself has taken an interest in bashing the sector. Thx.
Jun '10
Re: Defending Market-Funded Schools
Can you get me an autographed picture of Erin Burnett?
Jul '10
Re: Defending Market-Funded Schools
Trace Urdan
Diane
Congratulations on the national exposure - have you been on CNBC before today? · Dec 21 at 10:21am
Yes, it's not nearly as glamorous as it sounds. It's very difficult to say anything intelligent in 2 minutes on these shows. This one could be different though because it will be more of a debate and CNBC itself has taken an interest in bashing the sector. Thx. · Dec 21 at 10:54am
Trace, I don't have cable (heck, I don't even have broadcast). Can you direct us to where we can watch you online afterwards?
Re: Defending Market-Funded Schools
Ditto, Kenneth -- Trace, I just landed in NY and checked into my hotel, and missed your smashing victory on CNBC. (I'm just assuming....)
Can you post a link as soon as one becomes available?
May '10
Re: Defending Market-Funded Schools
I've done this enough times that you would think I would be better at the "15-seconds... go!" moment. But Rob can tell you the fact that I didn't start shouting makes this a terrific coup:
http://www.cnbc.com/id/15840232?video=1705707990&play=1
Jul '10
Re: Defending Market-Funded Schools
You looked fabulous, Trace. Given the he-said-she-said 15-seconds format, I don't know what value the viewers got out of the thing.
But you looked fabulous.
Sep '10
Re: Defending Market-Funded Schools
Trace, I thought you powned Brad quite well. I was very impressed with, with, with....
I'll be right back, I just noticed Diane's wearing the black cocktail dress and earrings that I'm going to paw for awhile.
Jul '10
Re: Defending Market-Funded Schools
Good show, Trace.
So, you're an ebitDA rather than an Ebitda kind of guy, eh?
You coastals, the last two letters aren't always the important ones.
Edited on Dec 21, 2010 at 7:58pmOct '10
Re: Defending Market-Funded Schools
Trace, this is tangential, but this issue really gets me going. Every time I hear about the government getting more involved in education I cringe. Are these numbers wrong?
Edited on Dec 22, 2010 at 9:33amMay '10
Re: Defending Market-Funded Schools
Lo Fon: Trace, this is tangential, but this issue really gets me going. Every time I hear about the government getting more involved in education I cringe. Are these numbers wrong? · Dec 22 at 9:29am
Edited on Dec 22 at 09:33 am
No Lo Fon -- The point is exactly correct and valid. The only caveat I would note is that much of that increase in federal spending gets sent back to the state in block grants. So part of the discussion should be the amount being spent in general relative to performance. But there is certainly a valid "local control" discussion as well.
I think the most damning fact is how inconsequential an impact this enormously expanded bureaucracy has had on anything anyone cares about related to education. If you could see like I do the nonsense that comes out of the Department on a daily basis, the speeches and conference attended by Department officials -- the plain silliness -- you would be appalled.
Jun '10
Re: Defending Market-Funded Schools
Trace, do for-profit schools have ACT, SAT thresholds and review HS or college GPA's. Do they have pre-admission counseling to discuss the level of commitment and to insure that the prospective student understands the difficulty of the course they have undertaken? How would their admission practices change if they were required to remit back 50% of the student loans paid in tuition for unsuccessful students?
May '10
Re: Defending Market-Funded Schools
Like community college and many subsidized HBCUs, they are nearly to a one open access institutions which means that they generally require a high school degree and a fairly simple aptitude test. The degree of counseling is a subject, as I'm sure you can imagine, of considerable debate.
The proposed rules are sufficiently onerous that even in advance of their imposition, they are having the effect you describe. Several schools have instituted "orientation" programs in an effort to help students self-select out in advance. This is a particular issue online where many people underestimate the scale of the commitment.
The only problem I would foresee with your proposal Pilgrim is that you would give the schools an incentive to lower their standards in order to ensure completion, making them diploma-mills. The risk-sharing needs to come instead around defaults and that has been floated as an idea by some. The only problem now is that the environment is so toxic that it is hard to imagine Congress being able to work anything out.
But the imposition of some sort of risk sharing around loan defaults is not a terrible solution at all -- if done carefully and well.