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For-profit colleges have had a rough year. Strengthened federal regulations, bad press and a slumping economy have led to steep declines in new student enrollments at most of the publicly traded institutions -- a dip of 42 percent for Kaplan Higher Education, for instance, compared to last year.

Revenues are also mostly down -- way down. And the industry probably has yet to hit bottom, according to recently released corporate earnings statements. But observers said a few for-profits that have taken the biggest hits, particularly Kaplan and the University of Phoenix, have done so at least somewhat voluntarily, and could be in better shape down the road than a few of their peers that are sticking to established business models.

Kaplan and Phoenix are trimming back their incoming classes to become more selective. Both institutions recently began new programs that make it easier for unprepared students to leave without taking on debt, and for the universities to show them the door.

“It has cost us some financially,” Matthew Seelye, Kaplan’s chief financial officer, said of the institution’s debt-free trial period, which is called the Kaplan Commitment. “We ultimately do believe it will be a differentiating factor.”

Financial analysts and even critics of the for-profit industry praised the Kaplan Commitment, as well as the free, three-week student orientation Phoenix began as a pilot last year and later put in place for large numbers of students.

Jerry R. Herman, who analyzes the for-profit-college sector for the investment firm Stifel Nicolaus, said the two companies had taken an innovative approach to improving student outcomes. He said other for-profit institutions have begun programs with similar retention goals, and that the enrollment shake-up could be good for the industry.

“This is in some ways a very painful process,” he said, “but a very helpful one as well.”

If It's Not Broken

Generalizing about for-profits is tough. Each college serves at least slightly different student markets and, as a result, faces a differing set of complex challenges. And there have been exceptions to the declines in new students, most notably the American Public University System, which this week reported a 53 percent increase in new student enrollment, compared to last year.

For the most part, however, the industry’s rapid growth has ground to a halt. And fast enrollment gains, which for years fueled revenue and made for-profit education companies hot properties on Wall Street, probably aren’t coming back any time soon.

For-Profit Colleges' Most Recent Quarterly Enrollment and Revenue, 2011 vs. 2010

Institution % Change in New
Student Enrollment
% Change
in Revenue
American Public University System 53% 35%
Apollo Group -34% -11%
Bridgepoint Education 27% 8%
Capella Education -36% -3%
Career Education Corp. -22% -18%
Corinthian Colleges -23% -17%
DeVry Inc. -12% -1%
Education Management Corp. 2% 2%
Grand Canyon Education, Inc. n/a 10%
ITT Educational Services, Inc. -14% -10%
Kaplan Higher Education -30% -33%
Strayer Education, Inc. -15% -8%

Source: Stifel Nicolaus and SEC filings; most recent fiscal quarter

Over the last year or so, most of the major for-profits have changed their view of their target student market, to varying degrees. Companies that previously sought out lesser-prepared students, and made lots of money on them, now believe those students come with regulatory risks that outweigh potential payoffs.

The Apollo Group Inc., Phoenix’s holding company, and Kaplan were among the worst in courting students with slim odds of graduating, said Stephen Burd, a frequent critic of the industry and the editor of Higher Ed Watch, a blog published by the New America Foundation.

But Phoenix and Kaplan are leading the way in having accepted that they need to change, Burd said, and their intentional enrollment sacrifices show a long-term approach that has often been lacking among for-profit colleges.

“Everything’s been about quarterly earnings and not what’s good for the company over all,” he said.

Of course, cutting back enrollment comes with risks, too. And nobody knows for sure when the bleeding will stop at Kaplan or Phoenix.

Before recent scrutiny and the recession, the business model that many for-profits copied was that of Phoenix, with its voracious enrollment growth. These days most companies are trying to find a way back to stable, modest growth, said Kevin Kinser, an associate professor of education at the State University of New York at Albany who studies for-profit institutions. They must also find out how to keep more students on track to earn credentials, he said, and neither goal will be easy.

Kaplan, Phoenix and a few others who have seen plummeting numbers of new students, like Corinthian College (23 percent) and Capella Education (36 percent), may soon find their way to the "new normal," Kinser said. "They are probably relatively close to bottoming out."

Not all for-profits are blowing up their business models. Analysts say DeVry Inc. and ITT Educational Services, Inc., have largely stuck to how they have recruited and retained students in previous years. Neither institution has adopted trial periods, for example.

With 136 campuses, the ITT Technical Institutes have a physical presence that makes a trial period less effective. That's because students who walk onto a campus are typically more serious about enrolling than those who just visit a website. And ITT's relatively narrow technical focus helped it avoid the lure of chasing growth that for-profits with broader offerings were able to pursue. So the company has less of a market correction to deal with, but its new enrollments and revenue are also down this year.

Wall Street has treated DeVry harshly over the last three months, after recent earnings came in below expectations.

The company has attributed enrollment and revenue declines largely to the economy and having cut back its advertising because of increasing ad costs. Its leaders say growth will return soon.

“We are confident that what we are seeing now is a near-term discontinuity in the long-term growth trend,” Daniel Hamburger, the company’s president and CEO, said in a news release tied to its latest report of earnings. “Our confidence is bolstered by the fundamental need for career-focused education both in the United States and in emerging markets, and by the strong value proposition we offer our students.”

Some analysts aren’t so sure. Brandon Dobell, with William Blair & Company, said DeVry has been slower than other companies to understand what is affecting its new student enrollment and retention.

“They’re lying at the feet of the economy,” Dobell said.

Paying for Quality

The federal government is probably responsible for the biggest chunk of enrollment reductions at for-profits. New gainful employment regulations and, to an even greater extent, rules prohibiting incentive compensation for student recruiters, have encouraged for-profits to be less aggressive in pursuing and churning through unprepared students.

“They had models that encouraged recruiters to enroll as many students as they could,” Kinser said

Among for-profits, Capella has generally catered to more academically qualified students. But competition for those students is heating up across the industry. As a result, Capella must spend more to get the word out to potential students. The company's marketing and promotional costs are up more than 13 percent this year.

"We continue to see increased pricing on quality inquiries and a reduction in the number of quality inquiries," company officials said in an October earnings report. "Therefore, we anticipate a greater need for marketing tests, increased brand spending, such as traditional media including television advertising, and selectively applying tools such as scholarships, in our marketing efforts."

The prolonged economic downturn is also clouding the sector's outlook. Students are more sensitive to expensive tuition rates and are more likely to delay their decision to enroll in a for-profit. They are also more likely to drop out because of financial problems. As a result, lower cost for-profits have fared better, including American Public University and Bridgepoint Education.

For-profits have also taken a beating in the news media, harming their reputations. As a result, industry executives know a business strategy based on rapid growth has become bad PR, and might not fly anymore.

In a call with investors last fall, Apollo executives discussed looming challenges, and mentioned their limited rollout of a three-week orientation for students, which the company later expanded. (The program is required for all applicants who have previously earned fewer than 24 college credits.)

The new orientation and changes to admissions advising “are the right things to do from a student and long-term business perspective,” said Brian Swartz, Apollo’s senior vice president and chief financial officer, on that call. “We expect that the implementation of the initiatives, together with the effect of other challenges the proprietary industry is facing, will adversely impact our operating metrics and financial results.”

He was right. Enrollment at Phoenix is down 19 percent compared to last year, according to an October earnings statement. New student enrollment decreased about 34 percent.

An 11 percent dip in Apollo’s net revenue was “primarily the result of the operational changes and initiatives it has implemented to more effectively support students and improve educational outcomes, as well as the broader competitive environment,” according to a company news release.

Analysts generally agreed with that assessment. Jarrel Price, of Height Analytics, said in a written statement that Apollo is now attracting higher-quality students, citing as evidence the shrinking percentage who must participate in the orientation program.

The rate of decline in Apollo’s new student enrollments is slowing, and Price predicted the company would see an increase in new students by early next year. Investors have taken note, and the company's share price has risen since the beginning of October.

Reduced Access

Kaplan launched its Kaplan Commitment last year. Under the program students can opt out at any point during their first five weeks of classes without having to pay anything other than an application fee. The institution may also deem that students are not ready to officially enroll.

Unlike the Phoenix orientation, which is aimed at ensuring that students are ready for college-level work, Kaplan students are in credit-bearing classes during the trial period.

The Kaplan Commitment has been expensive. New enrollments are down 47 percent this year, a decline that would have been 36 percent without the program, company officials said last week. Furthermore, Kaplan’s higher education revenue was down by about $234 million for the first six months of this fiscal year, a decrease of 24 percent. The trial period accounted for about $27 million of that decline, according to the company.

Seelye said about one in four students washes out during the trial period. Of them, 60 percent leave because Kaplan has counseled them to do so after determining that they are not performing well enough, even if they want to pay to stick around.

“We don’t have to do that,” Seelye said. He called the Kaplan Commitment a “good deal for our students” that will help Kaplan improve its overall academic performance.

Those enrollment shifts come with some regrets for the company, however. Kaplan serves nontraditional students, many of whom do not make it through the trial period. Some of those students might have been able to eventually succeed in the past, but the current environment makes it too risky for Kaplan to take a chance on them.

“It disappoints us greatly to” ask students to leave, Seelye said. “We want to provide access, but we don’t want to do so blindly.”

(Note: This article has been updated from an earlier version to correct erroneous numbers for Kaplan Higher Education's enrollment and revenue.)

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