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The outlook brightens at career colleges as economic pressures spur more workers to seek specialized training
Fifth in a multipart series on the business of college
The Keller Graduate School of Management isn't one of the country's highest-ranked or best-known providers of MBAs, and most students heading for business school haven't even heard of it. Yet it is one of the largest part-time graduate programs in the country, with roughly 12,000 students enrolled. Keller is a college of DeVry University, a profit-making school owned, along with three other learning institutions, by DeVry (DV), headquartered in Oakbrook Terrace, Ill.
After several years of struggle following the dot-com crash, DeVry—one of the largest publicly held higher education companies in the U.S.—has made a strong comeback. On July 30, DeVry said it would acquire privately held U.S. Education Corp., which owns two allied health colleges, for $290 million. Devry's stock has rebounded from the low 30s a year ago to the mid-50s.
While for-profit schools as an industry suffer from a legacy of recruiting violations and continuing concerns about instruction quality, they account for 7% of post-secondary enrollment, according to a recent report by JPMorgan analyst Andrew Steinerman. They served 2.8 million students in the 2006-07 school year in degree and non-degree programs and are challenging community colleges for students who want to develop specific workforce skills. No longer content with novices in computer technology and seekers of entry-level business certificates, the for-profits are now racing to stake claims in such growth industries as health care.
Broad Savings and Flexibility
Wall Street has taken notice. During economic downturns, professional training becomes more attractive to students, making publicly traded education companies like DeVry, Strayer Education (STRA), Corinthian Colleges (COCO), the Apollo Group (APOL), ITT Educational Services (ESI) and Cappella Education (CPLA) more appealing to investors. Shares of for-profits slumped during the fall and winter over concerns about the availability of student loans, but in many cases have bounced back.
"Given the current economic weakness, we find the education services stocks to be a timely relative safe haven with favorable intermediate-term prospects," Steinerman wrote in his July 25 report. "In addition to avoiding many costs of a traditional university (tenured professors, decentralized curriculums, dorms, and large physical libraries), for-profit schools usually are also more nimble at identifying which programs will be profitable and in demand."
Steinerman noted that for-profit colleges are well-positioned to responded to shortages of skilled workers and can produce good operating margins. On the other hand, the impact of government regulation and the outlook for student lending remain wild cards. The high price of gasoline, which affects students' ability to get to class, is another threat to enrollments.
Congress' recent passage of the Higher Education Opportunity and Affordability Act, which President George W. Bush is expected to sign, stands to help career colleges better compete with traditional private and state schools. Harris Miller, CEO of the Career College Assn., which has 1,400 members, said the bill requires private schools to report more of their cost and pricing data—something publicly traded career college corporations are already compelled to do—and will help level the playing field. "Making them report makes a fundamental statement," says Miller. "Policy makers don't believe in self-regulation anymore; they don't believe in schools saying 'Just trust us.'"
Target: Community Colleges
For-profits also tout their ability to focus on providing graduates that the job market needs. For example, with its purchase of USEC, DeVry intends to capitalize aggressively on growing national demand for health care professionals, said CEO Daniel Hamburger. "We're responding to this huge un-met need," Hamburger said. "Government-run and government-funded schools tend to not have the resources to respond."
Champions of the career-college model hope they will pull market share from community colleges, which are usually less expensive than for-profit schools, but at least by one measure, have inferior outcomes. The U.S. Department of Education's National Center for Education Statistics reported that by June 2006, 34% of students in for-profit certificate and associate-degree programs in the 2003-2004 school year had graduated within three years of enrolling, during which time only 14% of students in public two-year colleges had graduated.
Community college advocates say the comparison with for-profits is unfair because community colleges serve a wider range of students whose goals vary, and the schools provide a much broader education. Furthermore, they say, the associate degrees offered by career colleges aren't worth as much as a community college degree. "They are accredited by somebody, but not by the regional accrediting bodies most universities are," says Norma Kent, a spokeswoman for the American Association of Community Colleges, adding that this can hinder students who wish to proceed toward a bachelor's degree. "Most often, those credits will not transfer."
Kent also argues that limiting education to strictly vocational skills won't help students compete in the job market long-term. "If you look at what employers say is important, they say they need someone to be able to think on their feet," she says. "That means they need a broad-based education."
But the Career College Assn.'s Miller says that perceptions about for-profits will eventually change." In this day and age, people are saying, 'why did I pay $60,000 for Johnny and Suzie to go to school, and now they're back on my couch? What's the return on my investment?' Traditional schools are feeling a lot of pressure."