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Once havens for jobless, for-profit colleges now face own downsizing

- The Washington Times - Thursday, October 18, 2012

Already under constant fire from Capitol Hill Democrats screaming for tighter regulations, the for-profit college sector now has bigger problems on its hands.

Plummeting enrollment and steep declines in stock values have begun to reverse years of growth for schools that fashion themselves as no-nonsense, career-education alternatives to traditional higher education.

The latest example emerged this week when the University of Phoenix, the largest player in the for-profit world and the one with the greatest name recognition, announced that it would shutter 115 locations across the country, with at least one site in 30 states scheduled to close.

For the second quarter of this year, the university reported a 13.7 percent decline in new degree-program students. Its overall student population now stands at about 328,000, down from its high of more than 400,000.

Despite the grim news, industry leaders say the future of for-profits remains bright, and that the Phoenix move and others represent a "right-sizing" for the sector after rapid expansion during the Great Recession.

The economic downturn drove many out-of-work adults to search for inexpensive education in the hopes of re-entering the workforce with new skills, but that movement has begun to taper off, said Steve Gunderson, president of the for-profit trade group the Association of Private Sector Colleges and Universities.

"At the beginning of the recession, this sector grew incredibly, double-digit growth rates. That happened for a couple of years. Then all of a sudden, when the recession lingered, people said that 'until there are jobs available, I'm not going to take on the debt.' So enrollments have gone down," said Mr. Gunderson, a former Republican congressman from Wisconsin.

"They're making the appropriate adjustments based on market demand at the present time. Some schools expanded too much too soon, and now they're going back to a size that fits today's market."

Mr. Gunderson also acknowledges that the schools have become a hot political topic in Washington and on the campaign trail.

The Obama administration has cracked down on for-profits through new Education Department rules, and the Democratic Party platform states that they "often leave students buried in debt and without the skills for quality jobs and that prey on our service-members and veterans."

The Republican platform offers words of support to for-profits, saying they offer a worthy higher education alternative and ought to be expanded. Republican presidential nominee Mitt Romney has underscored the deep divisions between the two parties on the issue.

While politicians debate their merits, for-profits, including several in the Washington area, continue to struggle.

Phoenix's parent company, Apollo Group Inc., reported net income of about $75 million for the quarter that ended Aug. 31, compared with $188.6 million a year earlier.

Brands such as Corinthian, Kaplan Higher Education, Strayer and others also have reported drops in the number of new students. Overall, enrollment at for-profit schools dropped by 2.9 percent in 2011, according to federal figures.

Bloomberg's general for-profit-colleges stock index is down 48 percent in 2012.

Some financial analysts say the retrenchment isn't necessarily a bad sign and that for-profits' ability to downsize quickly demonstrates that the sector can become leaner and transform to fit students' needs much faster than traditional universities.

"Some of this is healthy. Anytime you get a high-growth industry, you do overshoot a bit," said Bruce A. Eatroff, a partner at New York City's Halyard Capital, a private equity firm specializing in education and other industries.

"But the for-profit sector is very analogous to Wall Street – they're not going to sit around with excess inventory. They're going to cut," he said. "The traditional schools are more like the auto industry. They're providing a very good product, but they're slow-moving entities."

Whatever its virtues, the industry also has taken a beating from congressional Democrats pushing a narrative that many for-profits are little more than scams raking in millions of dollars from American taxpayers while offering minimal educational value. Sen. Tom Harkin of Iowa has led that charge, having spent years producing reports and holding hearings on the perceived evils of the schools.

Many institutions, he contends, target students regardless of whether they are likely to graduate, with their sole aim to profit through federal Pell Grants and loans.

Mr. Harkin and others have pushed harsh crackdowns, and the Department of Education has laid out defined graduation rate and other goals that schools must reach to be eligible for federal student aid.

The negative publicity has taken a toll, though opinions differ on just how great it has been.

"It has had some impact. I don't think anybody can quantify it," Mr. Gunderson said. "I think the economy has more of an impact on enrollments than anything our detractors have said. It's an inside-the-Beltway story, that Harkin and [Sen. Richard J.] Durbin [of Illinois] are going after us."

With U.S. companies desperately in need of more skilled employees, for-profits' overall outlook remains strong, despite the public relations hits and the rash of bad financial news, Mr. Eatroff said.

"The industry itself, as a sector, has very good fundamentals," he said. "I would expect over the medium-term, the next three to five years, the industry will be quite fine."

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