Education Stocks: Is Worst Over?

For-profit education companies have taken a pounding over the last few months. While bullish investors point to stable earnings and a growing need for vocational education, regulatory concerns have given the bears the upper hand.

At stake is the use of federally backed student loans to fund education which is supposed to create a stronger workforce. For-profit schools rely students having access to these loans — but for the most part the federal government isn’t happy with the results.

Drop-out rates have been much higher at for-profit institutions than their state-run counterparts, often leaving students saddled with significant debt (funded by the taxpayer) and with little or no advancement in career opportunities.

Regulators argue that even those who do graduate from many for-profit institutions are inadequately prepared to take on well paying jobs, and too many students like Carianne Howard (mentioned in Jack’s Economic Strip Mining post) are unable to find jobs in their chosen field with enough income to make a dent in their student loans.

The Agenda
The fundamental arguments against many of the for-profit education companies is disturbing enough. But looking a bit deeper into the situation, it is clear that the current administration’s agenda has some very strong incentives to continue to pressure the for-profit education industry.

First, it is imperative that students have access to federal loans. Without a federal guarantee, banks would be unwilling to lend to students who are typically not particularly credit worthy. The loan programs are very much stimulus programs and as more workers find themselves unemployed, student loans are yet another way for Uncle Sam to funnel cash to the citizens.

Secondly, individual states are struggling with budget issues across the board. Since for-profit education companies compete directly with state school systems, there is growing expectation that the administration would like to see more of the student funding be spent at the state level. The highly publicized arguments against for-profit schools have hurt the credibility of the industry and made it easier for the administration to move towards sending more of the funding to state schools.

Finally, a public backlash against “big business” coupled with growing anti-business sentiment in Washington makes for a perfect environment to withdraw funding for the for-profit schools. Whether right or wrong, there is significant risk of a large portion of education funding moving away from the private sector and towards the traditional state-run education programs.

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