NEW YORK (TheStreet) – There's an old proverb: Give someone a fish, they'll eat for a day. Teach them how to fish, they'll eat for a lifetime.
The importance of a quality education has been and always will be at the center of humanity's hunger for progress. The most basic form of education is "learning from our mistakes."
To that end, it's a travesty that many unsuspecting students enrolled in for-profit educational institutions are learning a tough lesson of putting too much faith into those they've entrusted to teach them.
These so-called "private institutions" market themselves as offering a quality education and a better way of life. But as their profits grow they only leave their students wallowing in debt.
The growing popularity of these for-profit education outfits such as Strayer (STRA - Get Report), Corinthian Colleges (COCO) and Apollo Education Group's (APOL) University of Phoenix has been an important topic among consumers and U.S. lawmakers.
These institutions, which often charge much higher tuition than even community colleges, offer among other things convenient class locations, online degrees and high-paying job upon completion.
From 1990 to 2012 undergraduate enrollment at these schools grew at a faster rate than did enrollments at non-profit and public institutions, according to a study by the Institute of Education Science, which also found that enrollment at these schools increased by 634% -- jumping from 200,000 students in 1990 to 1.5 million in 2012.
These figures are astounding, especially considering during that same span enrollment at private non-profit institution grew by a mere 20%.
Stephen Hancock, an associate professor of Multicultural Education at the University of North Carolina at Charlotte, is not impressed. In a phone interview on Wednesday, he told me these schools were "nothing but scams." Hancock added that despite the outperformance in their enrollment, they offer little if any long-term value.
He says his university and other well-respected non-profit colleges with high entrance requirements aren't worried. This is because the demographic they target are not the students who would have otherwise qualified for enrollment at a traditional four-year institution anyway.
University of Phoenix, Strayer, Kaplan and several others declined to comment for this article. Emails sent to Corinthian Colleges, DeVry (DV), ITT Educational Services (ESI - Get Report) and Education Management Corporation (EDMC) were not immediately returned.
The Institute for Higher Education Policy (IHEP) conducted a study and their experts found a correlation between poverty and high-enrollment numbers at for-profit institutions. IHEP discovered those schools profited mostly on low-income students between ages 18 and 26 and whose total household income was near or below the federal poverty level.
By contrast, the IHEP determined this demographic is under-represented at the traditional colleges and universities. Schools such as Michigan State, Georgetown, Stanford, Georgia Tech and other state-sponsored schools are the ones a typical high school student dreams of entering upon graduation.
In a recent phone interview, Terra M. Kennedy, principal at Phillip O. Berry Academy of Technology in Charlotte, told me that she would not encourage her students to attend these schools unless it was "the last resort." Kennedy is in charge of a Title 1-funded school that services predominantly African-American students who are poor.
Kennedy added that these schools have "no problem targeting the poor and those with nowhere else to turn." She considers them "too expensive and deserve business detention." That's when they're not preying on military veterans and in some cases their families. This is because military veterans -- through congressional legislation -- are now eligible to receive 100% of their education costs from government-sponsored student loans.
University of Phoenix markets itself as the gold standard. According to its Web site, the school says "Whether you're seeking an associate's, bachelor's, master's or doctoral degree, we can help you reach your academic goal while you work -- and much sooner than you might expect." That students and working professional can further their education without sacrificing other aspects of their life is a good thing.
But what's the value of these advanced degrees?
I posed this question to Dr. Donald Fennoy, area superintendent at Fulton County Schools in Atlanta. In a phone interview he said while for-profit schools' degrees can open some doors, they can only take that student so far. "These degrees are not respected by those of us that went to traditional schools," Fennoy added.
These schools spend a significant portion of their funding and marketing on ways to bring in government subsidies by luring in any student. Their sub-par education credentials hurt students at a chance for competitive pay. Graduates learn quickly their degrees are worthless.
Boston University conducted a study and found students who graduate from for-profit institution are less likely to get a job than those who graduate from a non-profit school. The study also found that where for-profit graduates do get a job, they are paid far less than their traditional counterparts.
Dr. Laura W. Perna, executive director of the Alliance for Higher Education and Democracy, told me there needs to be a broader societal debate. She was more diplomatic, saying, "There's a place in our society for these institutions. But not in their current constructs."
Perna's organization, which specializes in areas such as governance, quality assurance, institutional and management practices, understands what is needed to fix the moral dilemma of these institutions.
Credits from these colleges can't be transferred to mainstream colleges, and many employers don't recognize these for-profit degrees as legitimate, leading many students to default on their loans because they can't get a job.
Students, like other consumers, are willing buyers of the schools' services. I want to make it clear that I don't believe all of these schools are necessarily villains. Some actually do great things in education while using public funds.
But in a for-profit industry that relies so heavily on the government as its largest customer, there need to be stricter policies and quality-control mechanisms. Isn't the customer always right? Sadly, this is a lesson lawmakers have yet to learn.
However, the U.S. Department of Education has taken notice.
Secretary of Education Arne Duncan has these institutions on high alert. These schools now have to prove, under the gainful employment rule, that they are helping students land jobs in their field of study upon graduation. This federal mandate became necessary because students at for-profit schools account for roughly half of all student loan defaults, even though they only make up around 12% of college students.
Even more egregious are the colleges' predatory enrollment practices. These schools know low-income and poor high school students will have a hard time paying for their education without some form of scholarship or federal aid.
The U.S. Government Accountability Office (GAO) conducted an investigation on 15 for-profit institutions and found four colleges encouraged fraudulent practices and that all 15 institutions "made deceptive or otherwise questionable statements to GAO's undercover applicants."
For instance, in order to qualify for federal aid, undercover applicants were encouraged to falsify their financial aid forms. That was when admission staffs weren't pressuring to applicants to sign contracts. This is the only way applicants were allowed to then speak with a financial adviser about financing options. There's the moral dilemma.
All of that said, students, consumers and investors have a responsibility to understand what they are getting into. It was the same issue with the mortgage loan crisis of 2008. Consumers wanted to buy homes and banks wanted to sell mortgages. Everyone was happy until the bubble burst and the finger pointing began.
The gainful employment rule is a step in the right direction. But stricter regulations to prevent fraud are still lacking. What's more, some of these institutions are listed on the stock exchanges, allowing unsuspecting investors to support them.
The schools' lack of consumer transparency is one thing. That it can be compounded by a lack of investment disclosure is appalling.
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates APOLLO EDUCATION GROUP INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate APOLLO EDUCATION GROUP INC (APOL) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its solid stock price performance, largely solid financial position with reasonable debt levels by most measures and attractive valuation levels. However, as a counter to these strengths, we also find weaknesses including deteriorating net income and feeble growth in the company's earnings per share."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Compared to its closing price of one year ago, APOL's share price has jumped by 65.67%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, our hold rating indicates that we do not recommend additional investment in this stock despite its gains in the past year.
- APOL's debt-to-equity ratio is very low at 0.06 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.33, which illustrates the ability to avoid short-term cash problems.
- The gross profit margin for APOLLO EDUCATION GROUP INC is rather high; currently it is at 59.03%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 8.25% trails the industry average.
- APOLLO EDUCATION GROUP INC's earnings per share declined by 16.9% in the most recent quarter compared to the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, APOLLO EDUCATION GROUP INC reported lower earnings of $2.20 versus $3.19 in the prior year. This year, the market expects an improvement in earnings ($2.34 versus $2.20).
- The company, on the basis of change in net income from the same quarter one year ago, has underperformed when compared to that of the S&P 500 and greatly underperformed compared to the Diversified Consumer Services industry average. The net income has decreased by 17.4% when compared to the same quarter one year ago, dropping from $79.95 million to $66.03 million.
- You can view the full analysis from the report here: APOL Ratings Report