What the Market Wants

The shares of most for-profit higher education companies tumbled yesterday following the release of quarterly earnings information by Apollo Group, the parent company of the University of Phoenix. Apollo sparked the sell off by announcing that new student enrollment could fall as much as 40 percent over the previous year.

Normally, a drop in enrollment is a bad sign of a college that is incapable of attracting students and could be in financial trouble. Colleges in trouble with their accreditors frequently shed students, as do those with a history of problems.

But look more carefully at what Chas Edelstein, the co-chief executive officer had to say (emphasis mine):

Nevertheless, the initiatives we are undertaking are in the best interest of our student and we are committed to these efforts.
To be clear, we are not focusing on maximizing new student enrollments, rather the initiatives that we are focused on are directed at attracting prepared students and providing them with an outstanding experience. The intended outcome of successful implementation of these initiatives is a more experienced student mix with higher retention rates over time.

…

Since our borrowing tool was implemented in 2009, we’ve seen the number of students who take out maximum amount of debt, declined from approximately 90% to 60% to 70% and we’ve continued refinement of our approach to marketing, which has resulted in a notable reduction in the use of third-party lead generators, which allow us to maintain better control over student messaging and to ensure accurate information is being provided to students.

So let’s get this straight. Apollo implements a new orientation program that both acclimates students to higher education and ensures that they are serious about pursuing an education. It works to keep borrowing down and also tries to be more upfront about information to students. As a result, the number of new degree students drops, but the overall quality of what’s left is significantly better.

And the response of the markets is “sell, sell, sell.”

The whole situation underscores how for-profits have to walk a tight rope of balancing their responsibility to students and their fiduciary responsibility (in the case of publicly traded companies) to maximize revenue for shareholders or investors. That’s because the way you maximize revenue is by getting as many students in as possible, regardless of their level of interest or academic qualifications.* This creates the inherent tension between doing what you can to get students versus doing a good job with the students you have–something I wrote about during the U.S. Senate hearing on enrollment practices.

In recent history, that tension has almost always sided with the desires of investors. And that’s why better regulation matters. The Apollo representatives noted in their call that a large part of what drove some of their enrollment tightening was federal pressure. All the various things described in the conference call are good activities to undertake if you care about your students and want them to do better. In fact, many of them are exactly the same things that a nonprofit or public college does when trying to improve its own graduation rates. The fact that investors didn’t see this as a positive development speaks volumes about how the market’s priorities and what’s best for students aren’t the same thing.

*I don’t give any credit to the Charles Murray line of argumentation, but there’s a difference between accepting students with not even a high school degree versus having some minimum standard of what constitutes college ready.

Tagged as: Apollo Group, For-Profit Higher Education, University of Phoenix