For-profits losing to better-rated, cheaper state schools

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Keri Trimble, a 33-year-old employee at a utility call center, was shopping for an online college so she could take classes at night and on weekends.

Ms. Trimble rejected Apollo Group Inc.'s University of Phoenix, the dominant player in the market. Instead, she chose Arizona State University's program, which typically charges almost 30 percent less.

"The cost was outrageous" at the for-profit school, said Ms. Trimble, who lives in Sacramento, Calif. "I didn't think that graduating from the University of Phoenix would give me the respect that comes with a degree from a traditional four-year college."

Competition from state universities' expanding online programs is pummeling for-profit colleges, once among the fastest-growing U.S. industries. The companies, including University of Phoenix and Washington Post Co.'s Kaplan chain, are closing campuses as enrollment and stock prices plunge.

It's a potent threat because publicly traded for-profit colleges drew 59 percent of their enrollment last year from online-only students, according to estimates from Deutsche Bank AG. At the University of Phoenix, the figure was three-quarters.

More than 80 percent of the U.S. population will have access to less expensive online programs from their own state universities by the end of next year, up from 62 percent this year, predicted Paul Ginocchio, an analyst at Deutsche Bank in San Francisco. As many as a third of those students would have gone to a for-profit college if the alternative didn't exist, he said.

Private universities are also invading the online arena. Recently, a group including Duke, Vanderbilt and Brandeis universities, said it would offer online classes for credit. Harvard University and the Massachusetts Institute of Technology are offering courses free online. For now, they don't grant credit or count toward degrees.

Along with the competition, for-profit colleges' have suffered damage to their reputations. In the past two years, the schools, which can receive as much as 90 percent of their revenue from federal student grants and loans, have faced scrutiny from President Barack Obama's administration, Congress and state and federal prosecutors. The schools use high-pressure sales tactics to mislead applicants about costs and job- placement, leaving them with government loans they can't repay, investigators have said.

For-profit college stocks fell after Republican presidential challenger Mitt Romney, who had called for less regulation of the industry, lost his election bid.

Phoenix-based Apollo, the largest U.S. for-profit college company, is down 58 percent this year, among the worst performers in the Standard & Poor's 500 Index.

Twelve of the 13 for-profit college companies tracked by Bloomberg have suffered stock declines this year, with six down at least 50 percent.

Pittsburgh-based Education Management Corp. is down 84 percent this year.

The exception: Grand Canyon Education Inc., which operates a traditional campus in Phoenix with a Christian focus alongside its online program.

State universities' online programs offer cheaper degrees from better-known institutions. Arizona State charges $442 per credit hour for an Internet bachelor's degree, or about $11,000 a year including fees, according to the school. University of Phoenix typically costs about $585 per credit hour, or about $15,000 a year.

For-profit schools have revolutionized customer service, letting students call and sign up in as little as 48 hours, then attend convenient campuses or online programs, said Phil Regier, dean of Arizona State online, whose enrollment has climbed to 7,000 from 200 in August 2009. Now, traditional schools are starting to offer the same approach.

'"It's not an infinite market," Mr. Regier said. "A lot of our students would have gone to a for-profit. I don't know why students would go to for-profits once we get as good at customer service. Their brands are not as good, and they tend to be more expensive."

"We are tremendously competitive," said Mark Brenner, an Apollo senior vice president.

Still, enrollment at the University of Phoenix has plunged 30 percent to 328,400 students since August 2010. Apollo is shutting 115 locations, including 25 campuses, and eliminating 800 jobs over the next year.

The grim news is a far cry from 1995 through 2010, when enrollment at publicly traded for-profit companies rose about 14 percent a year, according to Peter Appert, an analyst at Piper Jaffray & Co. in San Francisco.

"In the old days, they would take anyone who was breathing," Mr. Appert said. If they dropped out after a semester or two, so what? You've collected your money."

education - businessnews


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