The DAK Group – Middle Market Investment Bankers

For-Profit Education’s Path Forward

As Published in Inside Sources.

For-Profit Education’s Path Forward.

The Trump administration has announced that training programs will have until July 1 to appeal to the Department of Education for reconsideration of compliance under current gainful employment and revenue reporting guidance.

The for-profit education sector sees this as a sign that the administration will lift the heavy regulatory burden that threatens to crush the sector. However, the debate over the regulatory burden ignores the financial weakness of the for-profit education sector that has been severely harmed by high-profile abusive practices and failures.

The health of the U.S. economy depends on a productive for-profit educational system. Although each incoming president invariably pledges to be the “education president,” community colleges and other public educational institutions are not producing the skilled workers needed by the economy. Unlike countries such as Germany, the United States lacks an effective vocational training system, and the importing of workers is a political hot potato.

The private sector has been successful in creating “boot camps,” but these are expensive and confined largely to the niche tech market. Ideally the for-profit sector should be the training ground for student job readiness.

Many of the woes of the for-profit educational sector were self-inflicted. Deceptive sales and marketing practices led to scandals, and since 2009 enrollment and profitability have declined. Enormous chains such as Corinthian Colleges, Education Management Corporation and ITT Technical Institute have collapsed.

The government’s response was draconian. The Department of Education imposed onerous conditions on a bid for the company that owns the University of Phoenix. The Obama administration moved to shut down a primary accreditor of for-profit colleges. Hundreds of for-profit institutions will be driven out of business if this approach is continued.

The sector’s “strategy” seems to be confined to hoping that it can successfully lobby the administration to lighten the regulatory burden. However, even if President Trump takes pity on the sector, the long-term prognosis is not positive; the financial degradation of the sector is advanced.

Data on enrollments and economics show this, but I also know it firsthand. Representing foreign buyers looking to enter the market, I have looked extensively at possible targets. The prospects were underwhelming. The targets lacked long-term, and often even short-term, viability — their operations were characterized by rapidly declining revenues, plummeting student enrollment, unrealistic projections, probation with accreditors and even regulatory non-compliance as yet undetected by the authorities.

It is not easy for the sector to “fix” itself. It’s very difficult to restructure troubled for-profit institutions; Chapter 11 of the Bankruptcy Code is not really viable because colleges lose access to federal financial aid funds if they file under Chapter 11. The absence of realistic bankruptcy scenarios discourages sophisticated turnaround activity. To the detriment of the sector, restructuring activity has been largely confined to piecemeal operational improvements and “fire sales.”

There is a path forward for the industry, though. Blending in-person instruction with creative uses of online media is the way of the future. New learning tools fueled by technology can significantly improve teaching and student retention.

For-profit schools need to use these tools, revise their curricula and rethink their preparation of students for jobs.

However, much of the industry is characterized by a “mom and pop” model that lacks the funding and expertise to implement such changes. The proprietors are overwhelmed not only by regulatory demands but also by the technological advances and outlays needed to revamp their pedagogy.

Rational consolidation would enable institutions to develop the expertise and have the financial resources to implement tools that are already available and will continue to be developed. Ideally, for-profit colleges should be proactive and not wait for government intervention. Those that are far-sighted will look for consolidation opportunities available from both U.S. and foreign sources.

Realistically, however, government regulation will be needed to drive rational consolidation, which would lead to sustainable growth. It would be advisable for the administration to avoid veering from the draconian current regulations to a laissez faire deregulation that is likely to bring back the abuses of the past and mask the sector’s financial weakness. A nuanced approach would ease regulations such as “red tape” restricting mergers but would retain safeguards against predatory practices.

The for-profit education sector needs a nuanced regulatory framework so that the U.S economy can benefit from a workforce that possesses the requisite training. The future of the sector, and the U.S. economy, depends on whether the Trump administration restructures the troubled for-profit education sector by fostering rational consolidation. The stakes are high.


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