Shorting For-Profit Education - Marketing Costs Under Scrutiny

I caught an interesting higher education segment this week on CNBC's Squawk Box. Jim Chanos, president of an investment firm, questions the value of for-profit degrees that leave students with onerous amounts of debts and little empirical evidence that these degrees make students more employable. According to Chanos, most of for-profit revenue stems from government guaranteed loans, up to 75-85% of Title IV assistance. Chanos speculates that more government scrutiny is coming on the high marketing costs of for-profit education.

While I don't get caught up in the philosophical debate of 'quality', for-profit institutions provide a model for making education accessible for students by removing external and internal barriers to enrollment. That's not a bad thing.

The education segment begins 58 seconds into the clip.

Comments

[Sean Gallagher]

Hi Tim, thanks for calling attention to this, certainly provocative. I didn't get the impression that Mr. Chanos (featured in the video) is particularly informed about the business models, revenue streams, or outcomes of either for-profit institutions or their non-profit peers. The question of outcomes and debt levels applies equally to non-profit and for-profit institutions, while it is certainly true that the for-profits spend many times the amount that non-profits due on marketing (20% compared to 5-10%, and $4 billion as an industry - single schools may have $100 million budgets compared to traditional schools with http://nces.ed.gov/pubs2008/2008022_3b.pdf

So, the for-profits are in the same general range as the non-profits on instructional spending. And, if they are able to educate students at a lower cost - i.e., more efficiently - is that necessarily a bad thing? (so long as the quality and outcomes ARE there)

While the for-profits are spending vastly more of their revenue/budget on marketing, the non-profits are equally using student tuition (and thus Federal financial aid dollars) to subsidize scientific research, facilities, sports teams, etc. Why are public universities cutting back on student aid and laying off staff while continuing to build stadiums and pay football coaches millions of dollars?

The suggestion appears to be that the government would dictate to institutions that accept Title IV funding how much they can spend on marketing, student services, etc.: I just don't see that happening.

Many for-profits have taken the lead in focusing on employment outcomes(and for vocational schools, this is a particular focus of national accreditors). If Mr. Chanos or others want to question the quality of the education, I would suggest focusing more on retention/completion, and professional outcomes such as earnings after graduation, relative to total debt. The average graduate of Williams or Tufts may very well end up with a higher debt load than a graduate of ITT or Capella.

Scrutinizing the value proposition or value added and efficiency of higher education is the right line of thinking for today's times, but picking on the for-profits isn't the answer. The argument made by Chanos and others is explicitly as a criticism to short the stocks - raise concerns among investors and push the price down to make money.

The "Transparency by Design" initiative, which aims to educate consumers on outcomes and has participants from both the non-profit and for-profit side is an innovative step in the right direction for higher education:
http://www.presidentsforum.excelsior.edu/projects/transparency.html

[Sean Gallagher]

Interesting, it appears part of my earlier post was cut off. The second paragraph should have included the following data published by the U.S. Dept of Ed, via NCES, which is what the URL referenced.

Total % of Expenditures on INSTRUCTION, by institution type:
- Private, for-profit:26%
- Public, non-profit: 29%
- Private, non-profit: 33%

[Tim Copeland]

Hi Sean, thanks for your insightful comments. As you indicate, always follow the stream of money to understand motivations.