Across the board for-profit colleges are taking a hit as lower admissions due in part to tougher federal regulations have hammered the educators’ bottom line. Among the hardest hit has been Corinthian Colleges (NASDAQ: COCO) which, as of June 30, 2011, operates 122 colleges with 93,457 students in 26 states and the province of Ontario, Canada. In their most recent quarter COCO saw net income collapse, spiraling 90% to $3.4 million compared to $33.9 million a year ago. It’s not hard to identify the cause, new student enrollments dropped 27.3% during the quarter while total student enrollment for the fiscal fourth quarter fell 15%. COCO didn’t do themselves any favors when they increased tuition and when that was coupled with their efforts to comply with federal regulations regarding the prevention of student loan defaults the outcome was disastrous.
Now the question is can COCO come up with a formula that can get them back on track? The company has already begun to expand program offerings, created a broader online presence, and opened more schools but it could take some time before they see the desired results. Those results certainly won’t be coming in the first quarter according to COCO which has forecasted yet another loss for the current quarter, which ends in September.
This could become a constant theme for COCO as they struggle to come up with a viable means of meeting the government’s new “gainful employment” rule that cuts off financial aid funds for schools whose students carry too much debt.
Historically COCO has attracted “ability to benefit” (ATB) students, those individuals who have not received a high school diploma but are able to pass a test for admission. While that proved to be a great way to boost enrollment it quickly presented a serious problem. As acknowledged by COCO in their recent quarterly filing, “The majority of students at our colleges rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses.”
Unfortunately ATB students come with a serious drawback, they represent a higher risk population who complete their programs at a lower rate and default on their student loans at a higher rate than high school graduates. Well the federal government has grown tired of the defaults and has threatened to cut off financial aid funds for schools whose students carry too much debt; that will be determined by a three-year default measurement period. If an institution’s former students’ default rate on guaranteed loans (the “Cohort Default Rate”) equals or exceeds 25% for three consecutive years, the institution may lose participation eligibility in the guaranteed loan program and its students would be denied access to the guaranteed loan program.
That threat was enough for COCO to stop enrolling ATB students into their U.S. Everest and WyoTech institutions on September 1, 2010, and obviously the financial effect of that move is evident. In June 2011 COCO resumed enrolling ATB students on a more limited basis, pointing to the success of their default prevention initiatives, but it’s pretty apparent that the decision to open their doors was based on financial necessity. COCO described the impact of the recent crackdown in their recent 10-K, “We believe that continued regulatory uncertainties, and the potential impact of new regulations, particularly regulations regarding gainful employment, have had a sustained negative impact on our stock price and current fair value.”
The impact on share price has been obvious as they dipped to a 12-year low of 1.57 on August 23, 2011 after hitting a high of 4.37 to start the week. Despite the historic fall shares have edged their way higher, holding around the 2.15 – 2.35 range but that is still far below the 50-day moving average of 3.62 and 200-day moving average of 4.37.
What shouldn’t be forgotten is that federal loans aren’t the only financial aid available to students; the government also awards Pell Grants, which don’t have to be repaid, to the low-income students that make up the majority of for-profit schools’ customers. These Pell Grants have also proven to be a tremendous benefit to COCO’s bottom line but those grants are now being targeted in the recent debt deal, meaning it’s possible that the government will cut funds for the Pell Grants.
To make matters tougher for COCO, they are not only fighting with other for-profit colleges, they are now finding that many people are simply choosing to attend community colleges that offer more affordable tuition rates. The reality is the economic climate has forced prospective students to consider just how much debt they want to carry and when the local community college is providing more affordable courses they become the first choice.
While the road ahead for COCO looks rough Jack Massimino, chairman and CEO of the company stated, “We navigated through a number of challenges in fiscal 2011 and made progress in several areas. We continued to focus on student completion, and we assisted a record number of graduates in finding jobs in their fields of study. In the area of regulatory compliance, we developed and implemented a new compensation program for front-line admissions and student finance representatives and expanded our disclosures related to completion, placement and program costs.”
Even with Massimino’s optimism COCO has predicted new enrollment will drop as much as 25% for the current period despite their willingness to admit ATB students, their initiatives to target more high schools, and their expansion of online programs.
The problem facing COCO and other for-profit colleges is the fact that the government is breathing down their neck. They want accountability and results for the students taking out guaranteed loans and if these for-profit schools can’t help their students find jobs and pay back those loans then the money is going to shore up. If that happens COCO will find itself in a world of hurt as they have already acknowledged that the majority of their students are dependent upon those loans.
