The Next Big Short – The For-Profit Colleges
President Obama has called for the U.S. to lead the world in having the highest percentage of college graduates by 2020. In a similar manner, President Clinton stated a key goal of his administration was to increase home ownership to millions of Americans. Both of these initiatives have a common revenue source…Uncle Sam. The now bankrupt Fannie Mae and Freddie Mac eagerly accepted President Clinton’s challenge and helped fuel the housing boom of the last decade. Financing to buy a home was made available to almost everyone, irrespective of their ability to actually repay the loan.
The internet colleges are the latest industry group whose primary source of income is funded or guaranteed by the federal government. And for many of these schools, their revenue is almost exclusively from federal grants and loans. More students, more money. All employ recruiters who essentially serve the same role as the mortgage broker for the home builders. Does anyone believe the feds are capable of monitoring the internet school recruiters (brokers) better than they did the mortgage industry?
The dropout rate and the student loan default rate of internet students makes the subprime defaults look modest by comparison. Well, the good news is Congress may be wising up. Memories of Barney Frank on You Tube defending Fannie and Freddie despite their deteriorating balance sheets may be keeping some legislatures up at night. The White House is backing off its lofty goals of a college degree in every pot, and recently announced it is pressing for increased oversight of recruiters (brokers). Congress announced it will hold hearings on how the for-profit schools use federal aid. All of this is very bad news for the internet schools, and their investors.
Check out the price action of the following publicly traded for-profit/internet schools over the past month:
June 1 June 29
The University of Phoenix (Apollo Group) 51 43
DeVry University 57 53
Kaplan (The Washington Post) 451 412
Capella University 84 79
Morgan Stanley’s Steven Eisman, who was described in Michael Lewis’ “The Big Short”, for warning investors early on about the subprime mortgage market, has said the following: “Until recently I thought there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task.”
Ouch.
Tweet