Education is Changing, Are You Ready?

Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Editor's Note: Contrary to reporting in a prior version of this post, Ashford University retains its accreditation, and did not recently lose it. The Fool regrets the error.

The higher education landscape is changing, and for-profit education providers could wind up with a failing grade. With costs skyrocketing, and students turning to the fast-growing field of free online education services, let’s see whether these traditional education companies look set to pass or flunk.

Free tuition for all?

Recently, a number of websites have popped up offering university level courses that are priced for perfection: They're free! Massive open online courses (MOOCs) such as edX or Coursera let individuals seeking knowledge expand on what they already know, or learn something new, at no charge. KhanAcademy is another website which offers educational videos on a wide variety of topics, including finance, physics, and government.

Although some of these programs offer certificates of completion that can be added to a resume, they do not offer the accredited degree most employers look for. But the landscape is changing, and great alternative solutions have been brought forward, including knowledge and skills tests. These tests would allow individuals to study using these free online resources, then demonstrate their mastery of a subject in a way that could be useful for potential employers.

For example, the Bloomberg Aptitude Test (BAT) is a skill-based test offered by the Bloomberg Institute for individuals interested in finance or investment banking. If finance does not suit you, Smarterer offers skills tests for over 500 subjects, ranging from social media to computer programming. 

More diplomas, bigger bills

Higher education is more prevalent today than ever before. This New York Times article and this census report show that, in 1940, only 5% of the American population had a bachelor’s degree. Today, that number is closer to 30%.

The percentage of those holding a graduate degree has also risen in the last decade, climbing from 8.7% to 10.9 %. But the percentage of individuals obtaining advanced degrees is not the only thing on the rise.

Since 1985, higher education tuition has grown 498%, compared to 114% for the Consumer Products Index.

<img src="/media/images/user_624/tuition-inflation_large.jpg" />


 The rise in tuition rates has drawn numerous companies into the for-profit education arena. Some have found success, while others have faced legal issues, low graduation rates, and falling enrollments. When it comes to education, grades are what set you apart. 

How for-profit educators measure up

Bridgepoint Education (NYSE: BPI) has already started to show cracks in its business. In October 2012, Bridgepoint announced that the Justice Department was investigating the company’s compensation practices for its admissions personnel. The company’s most popular school, Ashford University, was accused of spending more money to enroll new students than it did to teach them. Adding insult to injury, Ashford University was denied accreditation by the Western Association of Schools and Colleges in July 2012, although it remains accredited by the Higher Learning Commission. With its most popular school reapplying for accreditation at the Western Association of Schools and Colleges, Bridgepoint receives an “F”.

Strayer Education (NASDAQ: STRA) has not had the same legal issues as Bridgepoint, but its business is declining. This past November, it suspended its dividend. The company also announced it would raise its tuition prices by 3% effective January 2013. With the meteoric rise of tuition over the past 25 years, a graduation rate of only 15%, and a 5% decrease in enrollments, these two steps will not save the company. Because of this, Strayer earns a “D” for desperate effort.

Apollo Group (NASDAQ: APOL), the largest in terms of market capitalization, offers online and on-campus education services covering undergraduate, graduate, and doctoral levels of education. Through its University of Phoenix and Western International University campuses, Apollo serves more than 300,000 students worldwide. With the percentage of Americans holding university degrees at all-time highs, you might think Apollo’s business would be booming, but that would be incorrect. In January, the company reported a 15% decline in student sign-ups; the third quarter in a row to see falling enrollments. For that reason, Apollo Group receives a “D”.

DeVry (NYSE: DV) separates itself from the rest, having recently announced that its enrollments for medical students were up 12.7%. DeVry’s strategy of focusing its programs on high-growth industries, coupled with cost-cutting measures, shows a willingness to adapt to market and employment conditions. Because of its pragmatic approach to a changing landscape, DeVry earns a “B”.

 ITT Educational Services (NYSE: ESI) also reported a drop in enrollments, falling 11% in Q4 2012, and guided below analyst expectations for 2013. To make matters worse, ITT’s costs increased 30% over that same time period.  The weak economic situation and high unemployment rates may have a hand in this, but something else may be at work: massive open online courses. Due to its inability to control costs and reluctance to adapt to the changing environment, ITT receives a "D".

No more pencils, no more books...

The education landscape is changing rapidly and traditional education companies must adapt if they want to stay relevant. Unfortunately, I do not believe the future is very bright for these for-profit companies. Especially with rising tuition rates, the price of MOOCs just can’t be beat. The final nail in the coffin will be when businesses start to partner up with the MOOCs and offer a path to employment through their courses. When that happens, school’s out for good.

RoyalScribe has no position in any stocks mentioned. The Motley Fool recommends Bridgepoint Education. The Motley Fool owns shares of Bridgepoint Education. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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