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October 24, 2012

For-Profit Colleges Get Schooled

Sector Suffers as Students Turn Back to Traditional Institutions

By MELISSA KORN

As consumers wise up about education spending, for-profit colleges are getting schooled.

Institutions such as Apollo Group Inc.'s University of Phoenix, DeVry Inc. and Washington Post Co.'s Kaplan--who only a few years ago reported double-digit student gains on a regular basis and posted hundreds of millions in profits--now are hemorrhaging students.

They are facing increased competition from nonprofit and state schools and growing skepticism about the value of a high-cost education. Just last week, industry bellwether Apollo said it would close nearly half of its brick-and-mortar locations to save on overhead.

It wasn't supposed to be this way. After years of government scrutiny and bad press about recruiting practices and questionable academic quality, schools worked to improve their reputations by tightening admissions standards, beefing up student support services and pouring money into rebranding. They received a slight reprieve this summer when a federal judge struck down a series of regulations that could have restricted schools' access to the federal student aid that supplies most of their revenue.

But the hoped-for recovery has failed to materialize as students rethink college entirely, and nonprofit schools muscle in to compete for market share.

Now, some analysts say pockets of the industry may never recover, with school closures and further losses all but certain.

"The decision to enroll is becoming a lot more deliberative," says Jarrel Price, who covers for-profit colleges for Height Analytics in Washington.

Under the old model, schools boosted enrollment by getting students--generally working adults seeking a quick career jump-start--in the door, often with little regard for whether they eventually earned a degree.

"You could be quite profitable as a business even when you weren't successful as an educational institution," says Kevin Kinser, an associate professor of higher education policy at the State University of New York at Albany.

No longer. Apollo said last week that enrollment fell by nearly 14% to 328,400 in the fiscal quarter ended Aug. 31. Student counts have dropped by nearly a third since their May 2010 peak of 476,500. The school says the money saved from closing classrooms will be rededicated to its online programs.The school blames its dwindling enrollment in part on increased competition from more traditional education providers, as well as the fact that many potential students don't move beyond University of Phoenix's free "orientation," a trial period of instruction before tuition is due, spokesman Mark Brenner says.

The economy has also put pressure on schools, which normally benefit from economic downturns as adults seek to bolster their résumés with new skills and degrees. This time around, the weak job market coupled with rising college costs has made many prospective students leery of investing in school without guaranteed returns.

The U.S. Department of Education recently reported the first drop in college enrollment in more than a decade--albeit one of less than 0.2%--based on data for students enrolled in fall 2011. But for-profit colleges saw enrollment fall by 2.8%.

Meanwhile, as states seek to reduce government spending, legislators see financial aid that ends up at for-profit schools as an easy target for cuts. In California, lawmakers this summer decreed that students at 154 schools--nearly all of them for-profit colleges--will no longer be eligible for the state's need-based Cal Grants, citing the schools' low graduation rates and students' heavy debt burdens.

To boost graduation rates and keep student-loan defaults in check, Apollo and peers are now competing for higher-quality students who have a better shot of graduating. But nonprofit schools are successfully courting the same market segment, with more students turning to online degree programs at schools including University of Maryland University College, Southern New Hampshire University and Liberty University, which don't have the reputational baggage for-profit schools do.

That leaves for-profit colleges fighting for an even smaller sliver of a shrinking pie.

"The market is crowded, highly competitive and increasingly commoditized. If you don't have a differentiated offering, you are in deep trouble," says Piper Jaffray analyst Peter Appert.

Mr. Appert says nonprofit institutions have been slow to make a meaningful shift online, but now that they have, students are paying attention and there is a "sea change" in the market.

Enrollment in the online arm of Southern New Hampshire University, which has a ground campus in Manchester, N.H., more than doubled from last October, now hitting 16,700. University of Maryland University College, meanwhile, saw enrollment in its online programs increase by 5% in the last year, to 97,001 students.

Not all for-profit colleges are struggling. Some specialized and niche schools are still posting gains. Grand Canyon Education Inc., a Christian school with a traditional campus in Arizona and online operations, has seen enrollment soar by 60% since 2009, hitting 44,435 as of June 30. And American Public Education Inc., which targets people in the military and public safety, increased course registrations by 45% to 92,900 in that time.

But another dark cloud looms: The Education Department says it is considering its legal and regulatory options in the wake of the July court decision striking down parts of the so-called "gainful employment" rule, which aimed to evaluate programs on how well they prepare students for employment, though industry insiders say it is unlikely much will happen in Washington until after the election.

Still, many institutions are under close watch. ITT Educational Services Inc. and Corinthian Colleges Inc. have both notified investors of a broad inquiry by the Consumer Financial Protection Bureau, while Universal Technical Institute Inc. and Bridgepoint Education Inc. have disclosed U.S. Department of Justice investigations into how schools incentivize staffers to land new students.

Robert Danford fits the profile of the typical for-profit customer. When the 24-year-old was looking for a program in graphic design this fall, he considered Career Education Corp.'s Collins College, where he had briefly studied a few years earlier. But he says the sales pitch and high cost--he says he took out $12,000 in loans for his first stint there--soured him on the school. "They were telling me everything I wanted to hear to get me in the door," he says.

A Career Education spokesman says the school's admissions officers are trained on integrity and "not to promise outcomes or access to financial aid when working with prospective students."

Mr. Danford enrolled instead in the nonprofit Chandler-Gilbert Community College in Chandler, Ariz., where he is paying a few hundred dollars per credit hour and takes courses part-time while working at a nearby Office Max. He says he intends to earn an associate degree and hopes to enroll in a bachelor's degree program down the line.

Write to Melissa Korn at melissa.korn@wsj.com