Sunday, November 20, 2016

For-Profits, Phase Three

In the week after Donald Trump became the president-elect, stock prices of several major for-profit colleges rallied.  Is that a signal of a return to their halcyon days?

I’m guessing they’ll regain momentum, but in a different direction.  They won’t just try to wind the clock back to 2006 or 1999.  Too much has changed.

The first major phase of for-profits in the US, which lasted until the 1980’s, involved finding industry niches that most of higher education ignored, and building on those.  These are the bartending, cosmetology, and truck driving schools.  DeVry actually started to train people to work and repair movie projectors.  The schools were typically small, owner-operated, and unaccredited.  They awarded certificates that may or may not have been useful in local job markets.

The second major phase -- which started in the 1980’s but really took off in the 1990’s -- involved two major changes: “going public” and getting accredited.  Accreditation allowed access to federal financial aid, and put them in direct (if initially unnoticed) competition with community colleges and lower-tier state colleges.  “Going public” (meaning, issuing shares of stock) allowed access to private investment capital far beyond merely reinvesting profits.  Stock prices don’t just reflect profits; they reflect expected future profits.  If you can sell the future, you can cover the present quite well.  

Accreditation became possible as the line between vocational and traditional higher education blurred.  It’s one thing for a “secretarial” school to teach typing.  But as typing moved into word processing, and gradually into CIS, the distinction between what traditional colleges taught and what for-profits taught got harder to discern.  The gates were harder to keep.  Eventually, some of the for-profits -- Phoenix and DeVry, most notably -- got accredited by the HLC, which is the same agency that covers the University of Michigan and Northwestern.  

The combination of access to Federal student aid and access to private investment capital allowed the sector to grow quickly.  And it grew while the non-profits were stagnating and failing to produce enough jobs for its own grad students.  That gave the for-profits a ready supply of faculty.  That wouldn’t have been true in the 1960’s, but it was very true in the 1990’s.  

For a while, the for-profits had an amazing run. At their peak, degree-granting for-profits had nearly a tenth of the entire undergraduate market in America.  Their ads blanketed daytime television.  In some cases, for a while, they even did a decent job of placing their graduates.  In the late 90’s, if you taught telecom, your major driver of attrition was employers hiring students away before they completed their programs.  For-profits also fit nicely into a popular political tale about the superiority of the private sector.

Phase two came to an end with the one-two punch of the Great Recession and the Obama administration.  The Great Recession eviscerated their placement rates, and the Obama administration wasn’t keen on spending public money on what looked increasingly like profiteering.  Stock prices took a hit as regulatory scrutiny exposed fraud, and the story they sold of never-ending growth crashed into enrollment declines.  When they couldn’t sell a future anymore, many of them collapsed, and others either trimmed their sails or went private.

The Trump administration offers the prospect of much lighter scrutiny once again, which would reduce some pressure.  And years of economic expansion that it inherited from the Obama administration has improved the job market, thereby likely helping with placement rates.  But reputational damage is real, and the non-profits have become much more competitive.  The strategy of being like them but more efficient is unlikely to work again, given that they’ve undergone decades of both assessment-driven improvement and financial austerity.  They’re lean and mean, too.  That opening has closed.

My guess is that phase three will involve investors looking for returns in the higher education market looking less at aping existing colleges and more at doing almost everything else.  If Phoenix was the paradigmatic for-profit of phase two, Pearson may be the paradigm for phase three.  Or maybe Ellucian.  Pearson and Ellucian aren’t accredited directly and, as far as I know, don’t plan to be.  Instead, they offer services to accredited institutions -- whether for-profit or non-profit -- and make money there.  The market for students is intensely competitive; the market for textbooks or ERP systems, much less so.  Investors go where they think the future will be.  

Of course, my guess involves an assumption that community and state colleges will continue to exist, and to be viable options for most students.  If that turns out not to be true, all bets are off.  Though I’d caution any fiscal conservatives -- who might find the “the market is always right” narrative intuitively appealing -- that for-profits are actually far more expensive than community colleges.  At a certain point, you have to choose between fiscal responsibility and conservative ideology.  They crash into each other.  And eventually, reality has a way of asserting itself.

And so it shall.  In the meantime, I wouldn’t get too worked about stock prices.  As the old joke goes, I predict they will fluctuate.