Online-instruction leader to make key changes


Critics charge that for-profit schools are accepting unqualified students.
Critics charge that for-profit schools are accepting unqualified students.

In a move that might trickle down to the rest of the for-profit education market, the University of Phoenix—the nation’s largest provider of online college classes—says it will offer new students a free, three-week trial program to see if they are ready for its curricula and for online instruction in an effort to weed out those at risk of leaving school before earning a degree.

The announcement comes as the federal government ramps up its regulation of for-profit colleges and universities, an industry that critics say preys on many students and leaves them with hefty debt loads and meager job prospects.

But Apollo Group Inc., the company that runs the University of Phoenix, says this change—and others the company will make as it seeks to comply with new federal guidelines—likely will result in fewer opportunities for lower-income students.

The university also says it will take a big hit to enrollment—and its bottom line—as it tightens its admission practices.

The number of lower-income students enrolled at for-profit colleges has surged in the past few years. Big advertising budgets drew those trying to bolster their resumes as a hedge against high unemployment. But critics claim the schools are not helping students find better jobs, and they say enrollment counselors sign up many who are unprepared for higher education and for online instruction. When these students drop out, they are still stuck paying back their student loans.

Defaults on student loans have been rising, sticking taxpayers with the bills. So the government has proposed regulations that could limit for-profit schools’ access to federal financial aid if their graduates’ debt levels are too high or if too few students repay loans.

Besides offering new students a free trial program to see if they are ready for its University of Phoenix curricula, Apollo Group says it no longer will pay its counselors bonuses based on how many students they enroll.

“Now, they have to slow down enrollment and be less active in targeting these students. They have to go back to the more traditional students who are working adults,” said Matt Snowling, an analyst at FBR Capital Markets.

The Phoenix-based company also is monitoring 30,000 conversations every day between its employees and prospective students after a government report showed some for-profit colleges engaged in allegedly deceptive recruiting practices.

It is trying to attract more employer-sponsored students in its classrooms and to its online college classes—and it likely will end up with a wealthier student body.

“There’s going to be fewer associate students. Generally, associate students tend to be a lower-income demographic,” said BMO Capital Markets analyst Jeff Silber.

But the tighter admissions standards come at a cost. Apollo said it expects the number of new students enrolling in its programs to drop 40 percent in the next quarter, and the company withdrew its profit outlook for next year.

The news sent chills throughout the industry as investors worried that other for-profit schools would issue similar forecasts.

Stocks tumbled across the sector, led by Apollo, which dropped $11.50, or 23 percent, to $38. Education Management Corp., DeVry Inc., Corinthian Colleges Inc., ITT Educational Services Inc., Career Education Corp., and Strayer Education Inc. all fell by double-digit percentages. Shares of newspaper publisher Washington Post Co., which gets the majority of its revenue from the Kaplan school chain, slumped 9 percent.

Apollo, the first of the sector to report quarterly results, also warned that it is close to maxing out how much revenue it can receive from federal financial aid resources.

Industrywide, for-profit schools get about 83 percent of their revenue from government-backed loans and federal Pell Grants, which go to lower-income students. Federal regulations cap that amount at 90 percent. If a school exceeds that limit for two years in a row, it might lose access to federal financial aid.

Apollo said it expects to top that level in 2012. Because the government only covers a certain amount of tuition, Apollo said it might have to raise tuition to reduce the percentage of aid it receives and stay within the 90-10 requirement.

That scares Joslin Jade Ellis, a stay-at-home mom from Prince George’s County, Md., and a student in the University of Phoenix’s online college classes. Her tuition is now covered entirely by a federal Pell Grant and other financial aid.

“It’s important for anyone who wants to go to college to at least have that shot,” said Ellis, who is taking health administration courses. “A lot of families can’t afford to send their kids to college, at least in this economy. And now, no one will even look at your resume unless you have some sort of college background or a degree.”

Former University of Phoenix student Glenn Moscoso finds the prospect of tuition increases alarming.

“In this economy and job market, isn’t raising tuition adding debt to a no-guarantee job market?” said Moscoso, who in April earned a master’s degree in education.

Moscoso, 40, said he chose the school because it didn’t require him to take the Graduate Record Examination, or GRE. He said he took out $19,000 in federal student loans and so far has not found a job—in part, he said, because of limited opportunities in his field, adult education.

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