Use access key #2 to skip to page content.

The Next Big Short? For-profit colleges are stealing your tax dollars. How long will they get away with it?

Recs

33

May 27, 2010 – Comments (15) | RELATED TICKERS: APOL , ESI , COCO

Several months ago I read Michael Lewis' latest book The Big Short (it's an excellent read for anyone who's interested in investing).  The book contains several story lines that follow a number of the smart investors who figured out early on that the U.S. housing market was going to collapse and profited handsomely from it.

One profiled  investors who impressed me the most was Steve Eisman.  He works for a hedge fund called FrontPoint Partners, which is essentially a group of funds that is overseen by Morgan Stanley.  Eisman is quite a character.  He was Meredith Whitney's mentor.  Enough background.  Needless to say I found the man impressive and I have been keeping my eye out for anything that he has to say.

Yesterday he made the first presentation that I have seen him give since The Big Short Was published.  He spoke at the Ira Sohn Investment Conference.  This is the same event that was mentioned in the fantastic book about David Einhorn's battle with Allied Capital, Fooling Some of the People All of the Time.  Other famous presentations made there include Bill Ackman's long case for the bankrupt General Growth Properties and Einhorn's short thesis for Lehman.

The following is a link to outstanding presentation that Eisman made yesterday courtesy of Market Folly:

Subprime Goes to College

It is definitely worth checking out.  The gist of the presentation is that for-profit colleges such as Apollo Group (APOL), ITT Educational Services (ESI), Corinthian Colleges (COCO), and Education Mgmt (EDMC) are screwing the government out of millions and millions of dollars by providing Title IV student loans, which are government guaranteed, to "students" who have almost no hope of ever repaying them.

These loans have accounted for more than 100% of the revenue growth at these fast-growing institutions.  Eisman used Apollo Group as an example.  In 2009 APOL's revenue increased by $833 million.  More than $1.1 billion of that, over 100%, came from federally-funded loans.  Guess how much of that money APOL spent on faculty and instruction...wait for it...$99 million.  As Eisman put it, only nine cents of every dollar in student loans provided by the government went to the actual education of students.

On its own, this situation does not appear sustainable, making these companies good short candidates.  However, there is an actual catalyst that could cause them to lose a huge chunk of their revenue already in the works.   It's called the "Gainful Employment" rule.  The Department of Education is rumored to be scheduled to introduce this proposal some time in the next several weeks.  This rule seeks to limit students' debt-service-to-income ratio to 8%.  It makes sense if one thinks about it...the government should only guarantee loans that students have a realistic chance of actually paying back.  What a novel concept.

If this new rule actually passed it has the potential to slice the revenue of public colleges by as much as half by the year 2011.  Ouch.

This great presentation has convinced me to add CAPS shorts to all of the four companies that I mentioned above.  Check it out, it's definitely worth a read.

Deej

15 Comments – Post Your Own

#1) On May 27, 2010 at 4:44 PM, chimpcontest (< 20) wrote:

I don't think I have ever run across a resume from one of these colleges.  It makes me wonder what type of degrees you can get.  It says there are 400,000 alumni for the U of Phoenix (APOL).  Where, Kazakstan?

I think I would rather wear a cowbell around my neck than a U of Phoenix alumni shirt.

Report this comment
#2) On May 27, 2010 at 4:56 PM, Seansonfire (38.35) wrote:

"I don't think I have ever run across a resume from one of these colleges.  It makes me wonder what type of degrees you can get.  It says there are 400,000 alumni for the U of Phoenix (APOL).  Where, Kazakstan?"

I bet they all work for Denny's or Waffle House.

Report this comment
#3) On May 27, 2010 at 4:59 PM, RonChapmanJr (76.02) wrote:

My wife teaches for one of these organizations.  They are definitely interesting places. 

Report this comment
#4) On May 27, 2010 at 5:33 PM, Option1307 (29.71) wrote:

Interesting presentation, thanks for sharing Deej.

Citron Research pointed this same scam out last year specifiically regarding APOL, they essentailly had the same conclusions. IMO it's just a matter of time before the gig is up and for profit education comes crashing back down. Maybe the new rumored Dept. of Ed. rule is the needed catalyst, time shall tell!

Report this comment
#5) On May 27, 2010 at 5:36 PM, blake303 (29.24) wrote:

I had the same idea a few weeks ago after watching this documentary on for-profit universities. There are a few more "schools" in the CAPS "Training Services" tag if you have room for additional shorts. 

Report this comment
#6) On May 27, 2010 at 6:17 PM, ElCid16 (96.10) wrote:

I'd like to second the recommendation on the documentary that blake303 mentions above.  It's available instantly on Netflix...

Report this comment
#7) On May 27, 2010 at 6:50 PM, MichaelMolenaar (< 20) wrote:

I remember reading in the local paper that a nearby town's zoning commisioner got his MBA from the Uni. of Phoenix. The town has less than 3,000 people.

Report this comment
#8) On May 27, 2010 at 7:43 PM, guiron (21.54) wrote:

U of Phoenix is somewhat popular in rural areas where an MBA from there is better than nothing at all, particularly in poor areas where people can't afford to leave their families and go off to college. At least that's the way it seems in my experience. But they're way overpriced. The idea of providing distance learning to adults is going to generate a lot of money in the coming decades, but the pricing is way out of whack with the schools you mention.

Report this comment
#9) On May 27, 2010 at 10:33 PM, gman444 (28.68) wrote:

Great find, Deej.  Ominous for all colleges...

Report this comment
#10) On May 27, 2010 at 10:40 PM, starbucks4ever (97.05) wrote:

"As Eisman put it, only nine cents of every dollar in student loans provided by the government went to the actual education of students."

I doubt the figure for Harvard would be any different. 

Report this comment
#11) On May 28, 2010 at 7:07 AM, TMFHelical (98.84) wrote:

Deej,

Off topic to the short candidates, but on the subject of education in general, I've had Clayton Christensne's book 'Disrupting Class' on  the wishlist for awhile but haven't picked it up yet.  If it is like his other works, it is likely quite insightful.

http://www.amazon.com/Disrupting-Class-Disruptive-Innovation-Change/dp/0071592067

Zz 

Report this comment
#12) On May 28, 2010 at 8:24 AM, Superdrol (96.74) wrote:

Unfortunately I am going to have to disagree with Mr. Eisman.  The concept behind what he is saying is sound, however; I think he is still missing the macro view on the economy.  A lot of manual labor jobs has been and will continue to be outsourced to countries like China, Mexico, and India, etc......this has been occuring and I believe will continue to occur.  From a macro longer-time horizon, I still believe that education, profit or not will continue to thrive, and if this is what Eisman claims he will be waiting for quite some time.

 

As time continues for the US to continue to grow and be competitive in the global market, the demand for higher education will continue and be demanded.  The Government also has stated, Obama has, that continued job training for folks who have been affected in the depression (let's call it really what it is) to enhance their job skills.  Also the depression that we are experiencing has affected all job levels white collar to blue collar.

 

The areas to continue to experience growth in the future will be primarly be technology, biotechnology, and healthcare.

 

The days of a union boy pressing a button making 6 figures are done and should have never occured to begin with.

This depression has and will continue to force permanent fundamental changes moving into the future.

 

Honestly, it's a good presentation, but I'm not really impressed overall.

Report this comment
#13) On May 28, 2010 at 8:39 AM, russiangambit (29.27) wrote:

I know 2 people with Universtiry of Phoenix degrees. They are OK. But I doubt the degrees themselves are a benfit to them as such. One of the main draws of these schools is ability to study remotely or in the evenings.

I like the concept of remote education. It is very hard when you already have a job and a family  and a working spouse just get up and go somewhere for 2 years to get a degree. And I think it is unnecessary in many cases. A lot of people can study remotely just as well.

But it needs to be quility remote education.

Report this comment
#14) On May 28, 2010 at 9:58 AM, chimpcontest (< 20) wrote:

Remote killing your friends online in call of duty is a great concept, I don't see the same value proposition by being in a remote online classroom, especially w/ internet porn streaming onto your PC simultaneously.

Your better off going to the nearest university and buying text books or going to the library and self studying.  At the end of the day having an education vs. having knowledge are two different things.

Report this comment
#15) On May 28, 2010 at 3:40 PM, Option1307 (29.71) wrote:

Superdrol

Unfortunately I am going to have to disagree with Mr. Eisman.  The concept behind what he is saying is sound, however; I think he is still missing the macro view on the economy... From a macro longer-time horizon, I still believe that education, profit or not will continue to thrive, and if this is what Eisman claims he will be waiting for quite some time.

I don't think Eisman is arguing against education, or saying that it will not coninute to be popular/importnat going forward. Rather What he is arguing is that companies like APOL are crap and their numbers are being puffed up by government loans to students that will never ever have a chance of paying these loans off. Thus, taxpayers are essentially getting screwed (yet again)all in the name of huge profits for theseforprofit education comapnies.

Eisman is arguing that once the government cracks down on this obvious abuse of governemnt students loans, APOL etc. will have their revenue and profit drastically cut.

Report this comment

Featured Broker Partners


Advertisement