The Profits of Education – How University of Phoenix and other For Profit Schools Survive and Over Charge Students because of Government Backed Loans. Billion Dollar Growth Industry yet what is the Benefit to Society?

Over the last couple of years, I’ve seen the for profit education system plaster the airwaves with advertisements that seem to come on during the part of day when most are working or very late at night.  Now clearly in this current recession you have to wonder how an institution is making money when it seems most places are fighting just to stay afloat.  The ugly secret of course is that one of the biggest beneficiaries of this recession is the for profit education system.  As many states are cutting back classes on state schools and raising fees, the for profit system has found a niche.  Target those that are underemployed or sick of their job since that is a large part of the population.  But how will these people pay?  That is where the U.S. government and taxpayer dollars step in and leads us into our story.

For profit schools have become a multi-billion dollar industry over the last 15 years:

The biggest player in the group is Apollo Group Inc. which many of you know as the University of Phoenix.  They operate other for profit schools but the University of Phoenix is their cash cow.  We’ll focus our energy on this school since it is the largest and most profitable of the for profit system:

Since 1995 when APOL was trading for $1, the stock has risen to $64 or an 8,462 percent increase.  The current market cap of Apollo Group is $9.96 billion.  Revenue for the company has steadily grown and actually saw a nice jump in 2009 thanks to the recession and massive amounts of marketing:

Source:  Apollo Group 2009 Annual Report

Now the report tries to emphasize their diversification but in reality the bulk of revenues come from one source, the University of Phoenix.  Student enrollments have been brisk and growing as people that are dealing with this recession seek the convenience of online classes and also more flexible hours.  Also, state schools that are cheaper and carry more bang for their buck don’t have sophisticated marketing arms like the for profit system.  But what really is the purpose of the degree for most?  They want to ensure gainful employment.  Yet that isn’t usually the outcome for most.  In the 175 page annual report, nowhere do we see median income of graduates.  It makes you wonder why if that is probably the biggest objective of most that are shelling out thousands of dollars.  Or are they?  We’ll get into that soon but you are actually subsidizing this multi-billion dollar corporation.

Clearly the bulk of revenues come from the University of Phoenix (UofP).  Of $3.974 billion in revenues $3.766 billion (94%) come from UofP.  So it is safe to use Apollo Group and University of Phoenix interchangeably.  Enrollment for degree programs exploded in 2009 across all degrees:

In 2009 443,000 people enrolled into one of their programs.  Yet what is interesting is we are told that only 9,000 people graduated from the UofP in the last year of reporting data.  Try searching for the word “attrition” in the 175 page report and good luck finding it.

You will also have a hard time finding the actual cost of the program anywhere on their advertisements.  You would think this would be available since their marketing strategy includes:

“Internet Marketing

Broadcast and Print

Direct Mail

Sponsorship and Advertising

Stadium Naming Rights – Arizona Cardinals Stadium

Relationship with Employers

Referrals”

Yet no price tag.  We also don’t get the median wage of graduates.  It is all about getting people into the program.  But if we find out that many people that enroll don’t have money, how are they paying for it?  The U.S. taxpayer through government loans:

Read that above paragraph carefully.  The only way these schools can operate is by using 86% of government backed loans and grants.  The student loan market has exploded in the last 15 years:

What happened in the housing market has also occurred in higher education.  Easy access to cheap debt has allowed anyone and anybody to take out massive amounts of debt to pursue anything even if they are unable to pay.  This is reflected in the massive default rates of for profit schools:

These numbers are off the charts and one would expect that 2008 and 2009 data will be higher.  But look at 2006.  A 27 percent default rate for Western International University.  We are talking about subprime student loan borrowing here.  That is why you do not find the word attrition in the report.  Attrition means people falling out of the system once enrolled.  The Higher Education Act has a “90/10” rule which basically means that people enrolling in these programs need to put 10 percent in cash and the rest can be borrowed.  Doesn’t this sound like the toxic mortgage mess that inflated the housing bubble?  As we have seen above, UofP pushes this ratio to the limit.

But with government giving easy access to loans, this has inflated the cost of education as well:

Source:  NY Times

Over the last 30 years the biggest inflation has been seen in the education sector even outpacing healthcare costs if that can be believed.  Part of this has to do with the massive amount of loans in the market.  And as we have seen in the above chart, many of the too big to fail banks are in this game as well.

The New York Times has a great article on this topic.  UofP isn’t the only school living off of government cheese:

This seems to be the status quo.  Some fascinating quotes in the article:

“If these programs keep growing, you’re going to wind up with more and more students who are graduating and can’t find meaningful employment,” said Rafael I. Pardo, a professor at Seattle University School of Law and an expert on educational finance. “They can’t generate income needed to pay back their loans, and they’re going to end up in financial distress.”

And isn’t this probably the main reason why people pursue these degrees?  At least that is the message conveyed in their advertising.  Let us see what is told to people in the trenches:

“They tell people, ‘If you don’t have a college degree, you won’t be able to get a job,’ ” said Amanda Wallace, who worked in the financial aid and admissions offices at the Knoxville, Tenn., branch of ITT Technical Institute, a chain of schools that charge roughly $40,000 for two-year associate degrees in computers and electronics. “They tell them, ‘You’ll be making beaucoup dollars afterward, and you’ll get all your financial aid covered.’ ”

Ms. Wallace left her job at ITT in 2008 after five years because she was uncomfortable with what she considered deceptive recruiting, which she said masked the likelihood that graduates would earn too little to repay their loans.”

$40,000 a year seems steep for an associate degree that you can get at your local community college for a few thousand dollars.  The average annual cost for these for profit schools is $14,000.  The glamorous hard pitch sale doesn’t meet up with the actual reality or even results for that matter:

“Jeffrey West was working at a pet store near Philadelphia, earning about $8 an hour, when he saw advertisements for training programs offered by WyoTech, a chain of trade schools owned by Corinthian Colleges Inc., a publicly traded company that last year reported revenue of $1.3 billion.

After Mr. West called the school, an admissions representative drove to his house to sell him on classes in auto body refinishing and upholstering technology, a nine-month program that cost about $30,000.

Mr. West blanched at the tuition, he recalled, but the representative assured him the program amounted to an antidote to hard economic times.

“They said they had a very high placement rate, somewhere around 90 percent,” he said. “That was one of the key factors that caused me to go there. They said I would be earning $50,000 to $70,000 a year.”

Some 14 months after he completed the program, Mr. West, 21, has failed to find an automotive job. He is working for $12 an hour weatherizing foreclosed houses.

With loan payments reaching $600 a month, he is working six and seven days a week to keep up.”

So you have someone that went into debt for $30,000 and is unable to find work with his degree.  Now, he is paying $600 to service the debt.  In fact, education in these cases can be extremely damaging to your financial health.  And again, the problem is the government making these loans here.  No one will dispute an education is important but when you have an unregulated market, just look at what happens in the banking sector.  All of a sudden it isn’t the company that produces the best result that wins but the one that can suck in the most people even if they do it with deceptive practices.  Do you think banks would make these loans?  Of course not.  But they sure will allow the Federal government (aka you) to make these loans for programs that have high costs and low return.

If people had to pay out of their own pocket these schools would be gone.  And this story is true with subprime lending and even other aggressive toxic waste loans.  In the end, the lure is promising but the end result is financially disastrous.

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