FOR-PROFIT

UNIVERSITIES

Harrison Garber
May 1, 2017
Introduction
The for-profit university industry in the United States is one that has come under close
governmental and public scrutiny in recent years. Despite extensive controversy, for-profit
universities continue to be a multi billion-dollar industry in the United States. This report
delivers an in-depth examination of the facets of this industry and its operations. This
examination will be beneficial when considering investment opportunities pertaining to the
industry. The components to be explored will be products and segments, marketing and
drivers, major players in the industry, industry challenges, opportunities, and threats, domestic
and international presence, and political intervention.

Industry Overview
The for-profit university industry is one raveled in controversy as it stands today. While being
an industry that takes in over $20 billion in revenue on the whole, its growth has decreased by
5.8% in the past 5 years, and is expected to decrease another 2.7% in the coming five years.
Questionable spending practices, uncertain quality of education, predatory marketing
campaigns, and the recent shutdown of major industry player ITT Tech have all contributed to
negative publicity and government examination surrounding the entire industry. The two
largest companies in the industry, Apollo Group and DeVry, have both felt the pains associated
with this recent negativity in regards to their profit and its annual decline. With high barriers to
entry and extreme competition, for-profit universities are fairly set in their ways. Although the
industry has an abundance of challenges to face going forward, it still has some potential areas
for growth. With an increasing amount of degree seekers, part-time programs are expected to
see greater usage. Furthermore, advanced online programs are likely to be used at a higher
volume both domestically and internationally (McCormack, 2016).

Products and Segments
Associates and Bachelors Courses
Two-year Associates programs constitute 21.2% of industry revenue, while four-year
Bachelors programs comprise 40.7% of revenue; thus, undergraduate programs easily make up
the majority of for-profit universities revenue (McCormack, 2016). Due to an increasing
number of high school graduates in recent years, undergraduate enrollment in for-profit
universities has increased. This augmentation comes from a surplus of students who pursue the
relaxed admission requirements at for-profit colleges when denied from public and private
institutions. Because of increasingly negative public press, the number of students enrolled in
full-time undergraduate programs in for-profit universities is expected to decline over the next
five years. However, one part of the industry expected to grow in the next five years is the part-
time undergraduate contingent (McCormack, 2016).

Masters and Doctorate Courses
Masters programs at for-profit universities, which comprise 22.9% of industry revenue,
typically entail one to two years of additional study beyond a Bachelors degree. Additionally,
these programs require a degree from an accredited university and acceptable scores on
professional admissions test such as the GMAT. With a greater number of people seeking
graduate programs, as well as a larger amount of college graduates in recent years, for-profit
masters programs have become more frequent and acceptable. Furthermore, the popularity of
these programs has continued to increase despite debates over their quality (McCormack,
2016).

Much like Masters programs, Doctorate programs require prior completion of the previous
levels of academics, and have core requirements such as a minimum GPA or applicable
experience. Doctorate courses comprise the smallest portion of industry revenue, at 15.2%
(McCormack, 2016).

Marketing Targets, Techniques, and Drivers
Target Markets
Marketing serves as perhaps the most critical component for the success of for-profit
university, especially in regards to the ability to recruit students. For-profit universities are able
and willing to spend immense sums of money in these recruitment efforts; for instance, in 2012
the University of Phoenix spent $400,000 a day on advertising, and in 2008 the same university
spent $130 million on advertising over one calendar year (Schade, 2014).

For-profit universities directly target vulnerable populations and demographics with their
advertisements. These populations include the underemployed, military personnel, low-income
students with no prior college experience, community college students, and minorities. While
these institutions or their pundits may argue that they are doing society a favor by aiming
recruitment efforts towards demographic groups who may not otherwise attend college, there
are often ulterior motives. Mainly, for-profit institutions look to take advantage of the
heightened amount of government-subsidized student loan money awarded to these at-risk
populations (Schade, 2014).

Marketing Techniques
The marketing strategies of for-profit universities center around the misrepresentation of data
in manners advantageous to the university. For instance, it is widely alleged that for-profit
universities manipulate job placement and wage date to create false impressions among
prospective students. More specifically, for-profit colleges integrate government data on job
projections into their recruitment materials in a way that blurs the line between what the
colleges can actually provide and what they promise. Using the data of what all students across
the nation can expect to earn in a given profession, for-profit colleges can deceive their
potential students as to what the return on investment for their degree can be (Abdul-Alim,
2017). Figure 1 below illustrates some of for-profit universities marketing techniques in
practice; in this ad, University of Phoenix directly gears its services toward military members.
Other advertisements contain members of minority groups on which companies focus.

Market Drivers
Overall, the drivers of the for-profit university market stem from the nature of education,
disposable income, and technology in the modern United States. On the whole, more and more
people are graduating high school in the US, which leads to more students in search of higher
education. Simultaneously, per capita disposable income has increased in recent years; thus,
the vulnerable groups targeted by for-profit colleges, such as minorities, who have historically
been less able to spend on higher education are now able to do so.

The expansion of technology and the internet in recent history has further transformed the way
non-traditional education can be attained. A large portion of current and future students of for-
profit universities can be instructed via online methods. Because so many of the students
attending for-profit universities are of the non-traditional variety, the main external
competition of for-profit universities comes from other alternative forms of higher education
such as junior and community colleges (McCormack, 2016).

Figure 1

Source: Musaconsulting.com

Major Players in the Industry
Apollo Group Inc.
Apollo Group Inc, better known as the operator of its top brand University of Phoenix, holds the
largest market share in the US for-profit university industry at 9.3%. The University of Phoenix
generated 84% of Apollo Groups fiscal revenue in 2015. In 2015 alone, there were 190,000
students enrolled at the University of Phoenix, with 110 locations across 40 states, the District
of Columbia, and Puerto Rico. The University of Phoenix earned 81% of its cash revenue from
tuition and aid deriving from federal loans. As illustrated in Figure 2, Apollo Groups revenue
has continually decreased over the past 5 years. For 2016-17, it is predicted that Apollo Groups
net income will drop below break even, after taking a 18.5% drop in revenue from 2015-16
(McCormack, 2016).

Figure 2


Apollo Group Inc. Financial Performance

Year Revenue % Change Net Income
($ million) ($ million)
2011-12 4771.0 NA 955.9
2012-13 4253.3 -9.7 676.3
2013-14 3613.9 -15.0 456.0
2014-15 2996.9 -17.1 355.0
2015-16 2566.3 -14.4 114.9
2016-17 2092.2 -18.5 -542.9


Source: IBISWorld Industry Report

DeVry Inc.
DeVry as an organization owns several for-profit universities, including its namesake DeVry
University, comprising an 8.2% market share. DeVry operates 90 campuses across North
America. Similar to most players in the industry, DeVry conducts a variety of undergraduate and
graduate programs and has seen a growth in its online course usage. Just as its competitor
Apollo Group, DeVry has seen its revenue decrease over the past five years, with its operating
income dropping into negative numbers as of 2015-16 (McCormack, 2016).

Industry Challenges, Threats, and Opportunities
Challenges
Perhaps the largest challenge to for-profit universities is overcoming the negative press and
resulting stigma that has arisen in recent years. While for-profits compose a small portion of
the overall education system in the United States, they took more than a quarter of federal aid
subsidies from 2010 to 2012, and accounted for more than half of all student loan defaults in
that same period (Foroohar, 2016). In 2005, the US Department of Education found that 72
percent of for-profit associates program graduates were earning less than high school dropouts
(Beaver, 2017). These statistics indicate that overall, graduates of for-profit programs are
earning less than their counterparts who attended other institutions, and thus are more likely
to default on their student loans.

The high default rate for-profit universities and lower overall earnings among for-profit
graduates, in addition to questionable spending practices by the institutions corporate
authorities raise concerns about the quality of education provided. Moreover, the graduation
rate at for-profit colleges is substantially lower than those of public and private universities, and
further brings into question the instruction standards. In 2012, 56% of public college students
and 65.4% of private students pursuing a bachelors degree full-time graduated within six years,
compared to 28.4% of for-profit students. Even more concerning is the same statistic at the
largest for-profit, the University of Phoenix, which weighs in at 9% (Schade, 2014).

Threats
New scrutiny towards the questionable practices of for-profit universities has placed the legal
standing of these institutions in jeopardy, especially in regards to their relationship with federal
loans. In August of 2016, the Department of Education barred ITT Tech from enrolling new
students who depend on federal aid while forcing them to warn their current students that the
universitys accreditation was in jeopardy (Mack, 2016). In September, the Department of
Education demanded that ITT Technical Institute boost its cash reserves; this then led to ITT
Techs subsequent declaration of bankruptcy. Since 2010, ITT Tech had collected $5 billion in
federal aid. Despite this immense influx of money, ITT tech could still not withstand heightened
regulations from the federal government (Foroohar, 2016). It is not hard to imagine that a
similar fate could be faced by other for-profit institutions should the federal government
choose to intervene.

Opportunities
When defending the presence of for-profit universities in the United States educational system,
there are several points which institutions could use to defend their continued operations. First
most, the fact that for-profit universities draw so much money from federal student loans can
be supported by the lack of endowments among for-profit schools. Second, for-profit
institutions can reiterate above all else that their courses openly accept people who may not
otherwise be able to attend college (Bienen, 2010).

If for-profit universities can correctly navigate the stigma associated with their institutions, they
can attempt to weather the storm of negative press they currently face. It is likely that
institutions across the industry will have to face heightened governmental regulations;
however, there is a chance that under President Trump investigations into the financial
operations of for-profits could be eased. This is possible because Trump himself has had legal
issues concerning his Trump University program, which was similar to for-profit colleges.

Lastly, the most direct opportunities for growth in the industry lay in its online and part-time
sectors. With a greater number of degree seekers present and the continual growth of online
education, flexible options for higher education like those found online and part-time at for-
profits could prove lucrative.

Domestic Performance and International Presence
Domestic Financial Performance
In the years following the recession, revenue hit a substantial spike in the for-profit college
industry, as people were willing to attend or go back to school in the face of poor employment
prospects. The revenue of for-profit universities is almost entirely based upon the payment of
federal student loans; from 2012 to 2013, 90% of full time students at for-profit schools
received some type of aid. The recipients of these loans who are also attendees of for-profit
schools default on their payments disproportionally compared to their counterparts at public or
private institutions. This high default rate, coupled with heightened government scrutiny, has
led to a negative perception of for-profits and hampered the industrys growth potential
(McCormack, 2016).

International Presence
As it stands, most universities are domestically owned and operated. Domestic revenue
represents about 90% of DeVrys total revenue, although it has campuses in multiple countries
abroad. However, with increased use of the internet for higher education, and a demand
abroad for American-style education, there exists potential for international revenue
(McCormack, 2016). One obstacle to this international growth, however, is that student loans
may not be as obtainable in other countries as they are in the US. Because so much of for-profit
colleges revenue comes from US federal student aid, it is unclear how exactly for-profit
institutions can acquire income overseas.

Political Intervention
Many for-profit colleges are owned by venture capital firms or other groups whose primary
aims are to make a profit, and not necessarily to provide the education they promise.
Moreover, most of the profit for these schools use student aid as their primary source of profit,
and have used Title IV aid to exploit vulnerable populations as opposed to making college more
accessible to them (Caterino, 2014). During the Obama administration, there were several
proposals made to help confront these issues. The Gainful Employment Rule was a proposal
that would have measured for-profit and vocational school students debt compared to their
incomes after program completion. If there was too much of a discrepancy, these institutions
would have been ruled unqualified to receive federal aid. Another proposition was the
tightening of the 90/10 Rule, which states that for-profit colleges can receive at most 90% of
their revenue from student loans (Schade, 2014). While President Obama aimed to enforce
more regulations upon for-profit colleges, it is unclear if President Trump will continue this
legacy.

Summary
The for-profit university industry, although previously successful and lucrative, has come under
increased governmental examination and negative public opinion as of late. High student loan
default rates, poor job placement, and insufficient education are present among many
graduates of for-profit programs. Furthermore, many institutes have been accused of deceptive
marketing and malpractice. With the recent governmental tightening of regulations on, and
subsequent bankruptcy of ITT Technical Institute, it is uncertain how other for-profit
institutions will interact with the government in the coming years. The two largest market share
holders are both projected to incur net losses in the next fiscal year. Overall, a turbulent recent
past filled with negative publicity has dampened the outlook of the for-profit education
industry.

 References

Abdul-Alim, J. (2017). Profiting from lower ed. Diverse. Retrieved from EBSCOhost database.

Beaver, W. (2017). The rise and fall of for-profit higher education. Academe. Retrieved from
EBSCOhost database.

Bienen, H. (2010). In defense of for-profit colleges. Wall Street Journal. Retrieved from
ProQuest database.

Caterino, B. (2014). Lowering the basement floor: from community colleges to the for-profit
revolution. New Political Science. Retrieved from EBSCOhost database.

Foroohar, R. (2016). What comes after for-profit colleges Lehman moment? Possibly an
education crash. Time Magazine. Retrieved from EBSCOhost database.

Mack, J. (2016). ITT Tech shutting down all campuses nationwide. USA Today. Retrieved from
EBSCOhost database.

McCormack, R. (2016, November). IBISWorld Industry Report 61131b. For-Profit Universities in
the US. Retrieved from IBISWorld database.

Schade, S. (2014). Reining in the predatory nature of for-profit colleges. Arizona Law Review.
Retrieved from EBSCOhost database.