Wednesday, December 15, 2010

Colleges That Recruit Veterans Garner Profits and Scrutiny

There was an in-depth story on the front page of yesterday's NYT about how for-profit colleges (many of which we are shorting in the hedge funds I manage) have profited immensely from the Post-9/11 G.I. Bill – in some cases, genuinely helping vets, but FAR too often exploiting them with high-pressure sales pitches, leaving them with few benefits and huge debts.  The last part is really the key: community colleges that serve similar students are pretty lousy overall, so the for-profit ed industry likes to trumpet that its results are slightly less bad (what a sales pitch: "We suck less!"), but what it never mentions is that the tuition charged by for-profit schools is MASSIVELY higher so students end up with significantly higher debt and thus have a much tougher row to hoe to earn enough to pay off the debt.  For example, in 2009, the average student at a non-profit school received $3,744 in Pell grants and loans vs. $13,247 (3.5x higher) at for-profit schools.  Multiply this by many years of study and the difference is enormous.


Why is the tuition at for-profit institutions so much higher?  It's not because they're spending more to provide a better education; rather, it's necessary to cover huge marketing expenditures, salaries, and profit margins.  Here is the data for 2009 for Apollo Group (which we're short), which receives 89% of its revenues from Title IV loans and grants (up from 48% in 2001): "Instructional costs and services" were a mere 40.3% of revenue, while "Selling and promotional" expenses were nearly $1 BILLION, equal to 24.2% of revenues, resulting in operating profit equal to 26.2% of revenues.  Plus the top five executives at Apollo had total comp of $72 MILLION in only three years from 2007-09.  What a business!  (For managers/owners anyway – not so much for students and taxpayers.)


Hedge fund manager Steve Eisman (who is also shorting the sector) had it right in his 6/24/10 Congressional testimony (; here's a link to the slides he presented a month earlier:


One major reason why the industry has taken an ever increasing share of government

dollars is that it has turned the typical education model on its head. And here is where

the subprime analogy becomes very clear.


There is a traditional relationship between matching means and cost in education.

Typically, families of lesser financial means seek lower cost institutions in order to

maximize the available Title IV loans and grants – thereby getting the most out of every

dollar and minimizing debt burdens. Families with greater financial resources often seek

higher cost institutions because they can afford it more easily.


The for-profit model seeks to recruit those with the greatest financial need and put them

in high cost institutions. This formula maximizes the amount of Title IV loans and grants

that these students receive.


With billboards lining the poorest neighborhoods in America and recruiters trolling

casinos and homeless shelters (and I mean that literally), the for-profits have become

increasingly adept at pitching the dream of a better life and higher earnings to the most

vulnerable of society.


But if the industry in fact educated its students and got them good jobs that enabled them

to receive higher incomes and to pay off their student loans, everything I've just said

would be irrelevant.


So the key question to ask is – what do these students get for their education? In many

cases, NOT much, not much at all.


…The bottom line is that as long as the government continues to flood the for profit

education industry with loan dollars AND the risk for these loans is borne solely by the

students and the government, THEN the industry has every incentive to grow at all costs,

compensate employees based on enrollment, influence key regulatory bodies and

manipulate reported statistics – ALL TO MAINTAIN ACCESS TO THE



In a sense, these companies are marketing machines masquerading as universities. And

when the Bush administration eliminated almost all the restrictions on how the industry is

allowed to market, the machine went into overdrive.


…Let me end by driving the subprime analogy to its ultimate conclusion. By late 2004, it

was clear to me and my partners that the mortgage industry had lost its mind and a

society-wide calamity was going to occur. It was like watching a train wreck with no

ability to stop it. Who could you complain to? -- The rating agencies? – they were part

of the machine. Alan Greenspan? – he was busy making speeches that every American

should take out an ARM mortgage loan. The OCC? -- its chairman, John Dugan, was

busy suing state attorney generals, preventing them from even investigating the subprime

mortgage industry.


Are we going to do this all over again? We just loaded up one generation of Americans

with mortgage debt they can't afford to pay back. Are we going to load up a new

generation with student loan debt they can never afford to pay back. The industry is now

25% of Title IV money on its way to 40%. If its growth is stopped now and it is policed,

the problem can be stopped. It is my hope that this Administration sees the nature of the

problem and begins to act now.


But if nothing is done, then we are on the cusp of a new social disaster. If present trends

continue, over the next ten years almost $500 billion of Title IV loans will have been

funneled to this industry. We estimate total defaults of $275 billion, and because of fees

associated with defaults, for-profit students will owe $330 billion on defaulted loans over

the next 10 years.


Colleges That Recruit Veterans Garner Profits and Scrutiny

for-profit institutions that seek out veterans.
Published: December 8, 2010

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