• Defining the Associate Degree Market
• Growth Drivers for Associate Degree Programs
• Profitability Metrics
• Online Strategy in Associate Degree Programs
• Important Disclosures

Postsecondary Associate Degree Programs: The Next Frontier for For-Profits?

Associate degree programs are likely a driver of future volume growth for the for-profit sector. Several of the publicly held for-profit providers (most notably Apollo Group [APOL] through its Axia College) have been increasing their exposure to associate degree programs. While the market opportunity is sizable (fall 2005 enrollment of 6.6 million at two-year schools, which specialize in associate degrees, second only to the 8.8 million enrolled at four-year schools), this strategy does come with a number of risks, in our view.

Enrollment at two-year schools is expected to grow at a slower rate than that at four-year schools. While the difference may not be dramatic (13.3% versus 19.7% total growth through fall 2014 according to the National Center of Education Statistics [NCES]), it continues the trend of relatively slower growth that has been apparent since fall 2002. However, some prior NCES projections have proven to be conservative, and, if history is any guide, for-profit providers would outpace the market and an aggressive entrance could actually accelerate overall enrollment growth at two-year schools.

In our view, for-profits face a sizable competitive disadvantage - price. Annual tuition at two-year schools, especially at public institutions, which enroll roughly 94% of two-year school students, is much less expensive than at any other type of school within postsecondary education. This especially holds true for in-district or in-state students, where the average annual
tuition ($2,105 and $2,502 in fall 2005, respectively) is a fraction of the $11,483 average at for-profit two-year schools.

Yet for-profits may have some competitive advantages in this sector. As these public institutions typically face limited funding, most do not have the marketing budget to aggressively attract new students. In addition, as two-year schools have the lowest graduation rates within the postsecondary sector, for-profits may have more resources to focus on academic support and other tools to improve performance in this area.

Moving "downscale" may reduce profitability metrics. If a company specializing in four-year (and/or graduate) programs moves into the associate's market, it would likely see reduced revenues per student, higher attrition (drop-out) rates, and lower graduation rates (we believe APOL's experience to date is a case in point). In addition, the shorter length of stay would also diminish near-term visibility, in our view. We also believe (and have the data to show) that enrollment growth at two-year schools is more countercyclical (i.e., more volatile before, during, and after a recession) than that at four-year schools; this may be an advantage for those investing in this sector solely for that reason, however.

An online focus could offset some of these negatives. An online platform is inherently more profitable than a classroombased one, thereby minimizing some of the negatives cited above. However, APOL's first-mover advantage and sizable market share (in a fragmented market) may limit the upside for other entrants. In addition, while most public institutions may not have the funding to develop and market an online platform, even if only a small handful of them do (we have already seen a number of state consortium models develop), they could be formidable competitors to the for-profit sector.

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Disclosures