Highlights:

• The first half of the hearing focused on the GAO report which hit yesterday and included videotape (here is a link to the video) demonstrating the fraudulent and deceptive marketing practices uncovered.

• Senator Harkin will be sending an information and document request to 30 for-profit schools tomorrow.  He is planning on holding another hearing in September to "get to the bottom of this."  He seemed most interested in graduation rates and churn rates but I would be surprised if he didn't ask about recruitment practices also. 

• Harkin also seemed interested in finding a legislative solution to this issue.  He described the Dept. of Education regulations on program integrity to be a good "first step" but expressed concern that regulations can be changed too easily by future administrations, using the "safe harbors" of incentive compensation as an example. 

• The accreditation process also will be coming under additional scrutiny too with Senator Franken, in particular, focusing his line of questioning on the issue of how well accreditors are ensuring that their rigorous standards are being adhered to.  

• I missed the first 30 minutes of the hearing but the committee "named names" of the colleges investigated in the GAO report (from Barrons): 

• Case 1:  University of Phoenix, Arizona
• Case 2:  Everest College, Arizona
• Case 3:  Westech College, California
• Case 4:  Kaplan College, California
• Case 5:  Potomac College, Washington, DC
• Case 6:  Bennet College, Washington, DC
• Case 7:  Medvance Institute, Florida
• Case 8:  Kaplan College, Florida
• Case 9:  College of Office Tech, Illinois
• Case 10:  Argosy College, Illinois
• Case 11:  U of Phoenix, Pennsylvania
• Case 12:  Anthem Institute, Pennsylvania
• Case 13:  Westwood College, Texas
• Case 14:  Everest College, Texas
• Case 15:  ATI Career Training, Texas

———————

Other notes that I scribbled down (hope to have a transcript up in 24 hours):

• Here is a transcript of the video provided at the hearing:  http://www.gao.gov/videofiles/gao-10-948t/gao-10-948t.txt with some statements made by admissions reps.:

• "You gotta look at it – I owe $85,000 to University of Florida. Will I pay it back? Probably not. I look at life a little differently than most people. I look at life as tomorrow is never promised."
• "Most doctors are walking around with over $250,000 in student loans…but it's workable, you know, it's really workable. And the…a lot of people have student loans…but the best thing about it, it's not like a car note, where if you don't pay they're gonna come after you."
• When a prospect wanted to learn more about financial aid, the admission supervisor had this to say before tearing up their application:  "So, honestly, I gotta tell you, I totally understand your concern, but I really, with all due respect, I don't believe you're ready to take that step, period. That paper could say $40,000. And in your situation, and at your stage in life, you should be ready to make your investment of time and money necessary to get you to where you should be at this point. But you’re not. And we're trying to help you get there and trying to help you… understand it, but there’s…What are you really afraid of? There has to be something more."

• GAO investigation showed that 6 of the 15 admission counselors would not provide financial aid information until the student had signed an enrollment agreement and paid an application fee.  Investigator said it It's not not hard to find fraudulent and deceptive practices; the big difference is the vast amount of money is coming from American taxpayers. 

• Isakson suggested that there should be a focus on enforcing current laws and asked what Dept. of Education was going to do to enforce Program Participation Agreements.  

• Sen. Burr made two comments:  Department of Education should look at elimination of incentives and their role in the willingness of counselors to break the law.  Also, rattled off statistics on graduation rates at both for-profit and non-profit institutions in his state. 

• GAO investigator's take on current oversight and enforcement regime:  "Given what we saw it looked like the "wild, wild west." 

• Sen. Mikulski referred to admissions counselors as "bounty hunters"  and described students encountering a "black hole of debt, disappointment and heartbreak."

• With several admissions counselors in the investigation recommending that prospects falsify their FAFSA, several senators recommended linking the FAFSA forms to the IRS database for verification purposes.

———————-

Panel 2

David Hawkins of the National Association for College Admission Counseling highlighted the information asymmetry between prospect and admissions counselor akin to the subprime mortgage industry which makes students vulnerable to being misled in the process.  Also highlighted the role of the "safe harbors" that were added to the incentive compensation ban as "effectively gutting" that ban and "providing a roadmap for institutions to circumvent the law as originally designed" and leading to these "boiler room sales tactics."

• GAO found 32 violations of incentive compensation since 1998
• Here is history of incentive pay issue as posted earlier

Michael

, Executive Director, Accrediting Commission of Career Schools and Colleges, Arlington, VA
discussed the accreditation process including the triad system which includes federal and state regulators in addition to accreditors.  He described a multi-step process including student surveys, on-site visits, interim reviews and a robust compliant process.  He concluded by saying that ACCSC would look forward to working with Congress to strengthen the process.

Joshua

, former Admissions Representative, Alta College, Inc., Denver, CO described the daily grind of being on the front lines of selling on-line education to the masses.  He described being trained in a 7-step sales process, described the interview with a prospect as "psychological game" after initial training.  Prospective students are referred to as "leads."  He described the importance of "starts" with the focus on having a student in program for at least 14 days, after which the schools keeps the federal financial aid.   Described how one Asst. Director received  the "Best Liar award" at team celebration.  Also discussed the obfuscation behind the internal private loan program offered by Westwood including a) not to call it a loan but instead "Westwood would step in to help" b) need to pay $150 while in school (which didn't keep loan balance from increasing) and 3) 12% interest on the loans. 

———————–

Questions to panelists

• Compensating admissions directors based on students enrolled is common practice; what's wrong with that? 

Hawkins:  Since safe harbors, we have been collecting stories; lawsuits, media reports.  We have 10 pages of bullet summaries of this evidence.  There is no doubt in my mind because of safe harbors that there is preponderance of evidence that this is industry practice.  How much more evidence do we need?    There is significant need for counseling for low-income students and when you don't provide it they are at a disadvantage and when you give them misinformation…

• What are the rigorous standards used by accreditors to ensure schools only admit students that are accurately and fully informed?

McComis:  [This was the most pointed line of questioning with Senator Franken highlighting            the fact that three of the schools from the GAO investigation were accredited by ACCSC].  In          the end, McComis said that his commission will look to see if there is more they can do on              diligence [Later Sen. Harkin made the point that ACCSC made 629 on-site evaluations and            didn't find any substantial non-compliance while GAO randomly sampled 3 institutions and had          adverse findings at all of
them].  View full post on Student Lending Analytics Blog

• Kaplan:  "A Kaplan spokesman said in an emailed statement the company had
  initiated investigations at the two schools named by the GAO
  "immediately upon learning of the incidents" and has suspended
  enrollment at its Pembroke Pines, Fla., campus. Investigations at that
  campus and the Riverside, Calif., campus continue. The spokesman said
  Kaplan "will take all necessary actions" against employees violating
  the company's standards and code of conduct."

• University of Phoenix:  "An Apollo representative said the company has initiated an internal
  investigation and it, too, would take "immediate and decisive
  disciplinary action" if it finds employees in violation of policies
  meant to protect students."

• Career College Association:  "The Career College Association, a trade group, announced late
  Tuesday in response to the GAO's findings that it would enhance its
  top-down compliance training programs and institute a "mystery shopper"
  program immediately in the hopes of heading off some criticism.  "Even if the problems cited in the GAO report are limited to a few
  individuals at a few institutions, we can have zero tolerance for bad
  behavior," President and Chief Executive Harris Miller said in a
  statement. "We will continue to add to this 'zero tolerance' program
  until all such doubts about our sector are removed."

GAO: 15 for-profit colleges used deceptive recruiting tactics (Washington Post) had this reaction from WAPO executives (the Washington Posts owns Kaplan, one of the schools cited in the report):

"In a joint statement, Donald E. Graham, chairman and chief executive of
The Washington Post Co., and Andrew S. Rosen, chairman and chief
executive of Kaplan Inc., described the tactics revealed in the
videotaped interviews as "sickening."

"They violate in every way the principles on which Kaplan is run,"
they said in a statement posted on The Washington Post Co.'s Web site.
"The GAO and the Senate [Health, Education, Labor and Pensions
Committee] have done us a favor. We will do everything in our power to
eliminate such conduct from Kaplan's education institutions." 

WAPO also highlighted the fact that most of the companies investigated were the largest in the industry [representing almost 43% of the 1.8 million students enrolled in for-profits]: 

"Many of the largest for-profit entities were named among the 15 sites
targeted by GAO investigators: University of Phoenix, with more than
400,000 students; Argosy University, part of the 136,000-student
Education Management Corp.; Kaplan College, part of the 119,000-student
Kaplan Higher Education operation owned by The Washington Post Co.; and
Everest College, part of the 110,000-student Corinthian Colleges."

Lawmakers Focus Ire on Accreditors for Abuses at For-Profit Colleges (Chronicle of Higher Education) noted the failings of oversight and enforcement at the Dept. of Education and accreditation bodies: 

"The rest of the hearing focused on assigning blame for the abuses.
Pressed by lawmakers, Mr. Kutz faulted the Education Department, saying
it has failed in its oversight of the sector. While there are
regulations in place to protect students from misleading and aggressive
sales, they're not being enforced, he said.  "It certainly seemed like a wild, wild West out there," he said,
urging government regulators to step up their monitoring of for-profit
recruiting and to punish colleges whose employees violate the rules…

As for the accreditation process, here is one exchange that the Chronicle captured: 

"Do you think maybe your rigorous standards aren't rigorous enough?" asked Senator Franken, of Minnesota.

"I believe the standards themselves are rigorous," Mr. McComis
replied. "In these cases, the schools' compliance with the standards
fell short."

Asked by Senator Harkin why the accreditor hadn't found problems at
the three institutions, Mr. McComis replied that the accreditation
process isn't designed to catch "the sort of fraud the GAO has alleged."

"We don't secret shop," he said. "So in the normal course of an evaluation, I'm not sure we'd find those occurrences."

That answer appeared to infuriate Mr. Harkin, who said it was "apparent to me that we need a hearing on accreditation."

Senator to Review Accreditation of For-Profit Colleges (NY Times) highlighted Harkin's call for a focus on the accreditation process: 

"As part of the expanding Congressional scrutiny of for-profit colleges, Senator Tom Harkin announced at a hearing on Wednesday that he plans to examine their accreditation process…Mr. Harkin questioned Michale McComis, executive director of the
Accrediting Commission of Career Schools and Colleges, about why his
group had found so few violations over the last two years in more than
600 visits to institutions it accredits when the Government
Accountability Office found problems at every one it visited."

'Tight' Rules Sought for For-Profit Colleges (USA Today) noted that some lawmakers are seeking a more comprehensive look across all types of higher education institutions: 

"Some lawmakers called for an expanded exploration to include practices of traditional non-profit public and private colleges.  "The for-profit sector should not be examined in a vacuum," said Sen. Mike Enzi, R-Wyo."

Ironic that on the day of the Senate hearing about misleading recruiting tactics, Career Education filed an 8-K with the SEC that contained the following (from Wall Street Journal, emphasis is mine): 

"Career Education said in a filing with the Securities and Exchange
Commission Wednesday that the government's recommendations could
"materially and adversely affect our business," with proposals
regarding recruiter compensation, gainful employment, the definition of
a credit hour and liability for making misrepresentative statements
having the most potential impact."

For-Profit Colleges Hit with Claims of Fraud, Aggressive Recruiting (Christian Science Monitor) provided details of the testimony of the former recruiter at Westwood College:

"Another witness at the hearing was Joshua Pruyn, who spoke about
working as an admissions representative for Alta College Inc. in
Denver. He was trained in sales tactics, including interviewing
students to find the “pain points” in their lives that could be used to
pressure them to enroll, such as worries about being in a dead-end job.
Misleading potential students to make enrollment targets was standard
practice and was rewarded with incentives such as trips, he said.

Mr.
Pruyn quit after nearly 6 months. The final straw, he said, was
discovering that students who wanted to withdraw and clearly would
eventually dropout (including a military person who was called up for
active duty) were pressured to stay enrolled for at least 14 days
because after that point, the school could keep federal money that the
student had been awarded."

View full post on Student Lending Analytics Blog

Two states have formalized their fixed-rate private student loan products for 2010-11:

• Vermont Student Assistance Corporation (VSAC) is offering a private student loan with fixed rates ranging from 6.9% to 7.75% [dependent on repayment option selected] and fees ranging from 0% to 5% [dependent on credit scores].  Applications will be available in early August. 

• Maine Educational Loan Authority (MELA) is offering a private student loan with a fixed rate of 7.75% and a 4% guarantee fee.  Interest payments are required during the in-school period.

Several lenders have recently tweaked (or announced an upcoming change) the range of interest rates on their private loan products (each dropping below the 4.0% level as the minimum or "as low as" interest rate on their loans):

• Discover reduced the minimum starting interest rate on their variable-rate private loans to 3.75% (from 4.25%).  This is Discover's first change to interest rate ranges since June 1st of last year.

• Chase will be reducing their minimum starting interest rate on their variable-rate private loans to 3.94% (from 4.14%).  Chase has changed their interest rate ranges on several occasions this year (note that some of the changes were driven by an increase in LIBOR during the year):
• • Pre-March 1st:  4.40% to 9.75%
  • March 1st:  4.15% to 8.75%
  • July 1st:  4.14% to 9.79%
  • As of August 6th:  3.94% to 9.79%

And in other news…

In late July, the New York Post reported that Sallie Mae had hired Goldman Sachs to help it explore "options."  The company has made no secret that they are carefully evaluating their restructuring options (from New York Times):

"According to The New York Post the student lender hired Goldman Sachs
to advise on a sale or spinoff of its student-loan servicing business
and its $145 billion government-subsidized loan portfolio.  The company is also mulling the possibility of converting part if
its platform into a traditional deposit-taking bank, The Post said."

Citibank's Student Loan Corporation reported a 40% decline in private loan originations in the quarter ending June 30, which is traditionally a seasonally slow quarter.  For 2009-10 academic year, Student Loan Corporation originated close to $900 million in private loans, a 47% reduction from the 2008-09 academic year.  I also came across an article citing a banking analyst, Dick Bove, who expressed this opinion of whether Student Loan Corp. would be sold:

"The ability to sell Student Loan at this time is nil," he said, noting
that perhaps in two or three years, after the financial markets settle,
a sale may occur."

View full post on Student Lending Analytics Blog

The Federal Student Aid Data Center site updated figures last month for Pell Grants.  Here are stats on recipients, grants and average grant size for the past four years with annual changes in the right hand columns:

————————————

Observations:

• The 61% growth in Pell Grants to an annual figure of $29.4 billion was driven by both a 30% increase in recipients to 8.23 million and a 23% increase in average grant size to $3,566.  The maximum Pell Grant for the 2009-10 academic year was $5,350.  The maximum grant is $5,550 for the 2010-11 academic year.

• With NCES estimating that 18.4 million students would attend two year and four-year institutions in fall 2009, that would mean almost 45% of those in attendance received a Pell Grant for 2009-10.  If you assume 100% of students at proprietary schools are Pell-eligible, that suggests that about 1 in 4 students at public and private non-profits are Pell-eligible. 

• For those wondering how the percentage of recipients and grants broke out by sector, 63% of grant recipients and 62% of the grant volumes came from students at public institutions with for-profits next at 25% of recipients and dollar value of grants (Recipients and Grants in Millions):

View full post on Student Lending Analytics Blog

• At 22.1% in 2008-09, the proprietary sector is nearing their two
  decade high of 24.2% share of federal student loan volume which they
  reached in 1990, just prior to the Nunn report and the ban on incentive compensation in 1992. 

• In the decade where this ban on incentive compensation was weakened through the introduction of twelve "safe harbors" in 2002,
  the percentage of federal loans going to proprietary schools has grown
  from 12% in 2000 to 22.1% in 2008-09.  I can't prove causality, but it
  is interesting to note that in the period following the ban from 1993
  to 2000, the proprietary sector's share of the federal loan market,
  despite annual gyrations, remained almost unchanged from 11.5% in 1993
  to 12.0% in 2000.   

The Department of Education has proposed regulations to eliminate the safe harbors and go back to the earlier ban on incentive compensation.  Following the GAO report and hearing, University of Phoenix in a press release today indicated that they would be making the following changes to their compensation plans:

"In addition, as previously announced, beginning November 1 of
this year the University plans to roll out a new student counselor
compensation framework, which has been in development and testing for
more than a year…A firm decision to change the way counselors are evaluated and
compensated, including a commitment to completely eliminate admission
targets as a component of compensation."

Three questions:

• What will the admissions counselors compensation be based upon (and what behaviors will this compensation structure encourage)?  As anyone who has managed salespeople knows, they respond to incentives!
• Will competitors be following suit with compensation changes or just waiting until they are forced to when the new regulations take effect?
• How sharply will enrollment growth decline as a result of the new compensation structures (and all the negative publicity swirling in the sector)? 

View full post on Student Lending Analytics Blog

Item 8.01 Other Events.


Today, Apollo Group, Inc. (the "Company") announced that it has received a
request for information from the U.S. Senate Committee on Health, Education,
Labor and Pensions relating to the Committee's ongoing hearings relating to
for-profit colleges receiving Title IV student financial aid. The request seeks
information to more accurately understand how the Company uses Federal
resources, including how it recruits and enrolls students, sets program price or
tuition, determines financial aid including private or institutional loans,
tracks attendance, handles withdrawal of students and return of Title IV dollars
and manages compliance with the requirement that no more than 90% of revenues
come from Title IV dollars. The request also seeks an understanding of the
number of students who complete or graduate from programs offered by the
Company, how many of those students find new work in their educational area, the
debt levels of students enrolling and completing programs and how the Company
tracks and manages the number of students who risk default within the cohort
default rate window.

In furtherance of this, the Committee has requested that the Company provide
information about a broad spectrum of the Company's business, including detailed
information relating to financial results, management, operations, personnel,
recruiting, enrollment, graduation, student withdrawals, receipt of Title IV
funds, institutional accreditation, regulatory compliance and other matters. The
Company intends to cooperate with the Committee and to work with the Committee
to provide the requested information in a manner that does not compromise the
Company's sensitive proprietary operating and other information.

The Committee has requested that the Company produce a portion of the
specified information by August 26, 2010 and the remainder of the information by
September 16, 2010.

View full post on Student Lending Analytics Blog

"It is no secret that the career education sector is under attack by short sellers, trial lawyers, self-styled consumer advocates, and some traditional academics. Although they should know better, these critics use anecdotes to generalize and to make sweeping condemnations of our sector. They seize on admittedly flawed government data to make the most extreme statistical arguments. They exploit the same small cadre of so-called third party experts to generate critical comments. And they recycle old news to give currency to new allegations. In short, they twist the truth to serve their self-interest."

August 4, 2010:  From Career College Association press release "GAO Report Deemed Deeply Troubling:"

"The Career College Association (CCA) said the
recent findings of a Government Accountability Office (GAO) report on
admissions and financial aid practices at several private sector
colleges and universities is deeply troubling and, notwithstanding
multiple safeguards that schools already take, and the oversight
provided by the “triad” of federal and state regulators and
accrediting  bodies, it will institute a series of immediate steps
to help its members assure full compliance with regulations and
accreditation requirements in all areas.

"Even if the problems cited in the GAO report are limited to a
few individuals at a few institutions, we can have zero tolerance for
bad behavior,” said CCA President and CEO Harris N. Miller. 
“As educators, our commitment must always be to put students
first, even if that means taking action against individual employees or
institutions that color outside the lines.  We understand that
employees can make mistakes, but it is up to employers to take the set
of comprehensive and multifaceted preventative and corrective actions
that minimize the risk of such problems and correct those that
occur. 

View full post on Student Lending Analytics Blog

The witness list for the hearing include:

Panel I

• Gregory

  Kutz

  
  , Managing Director, Office of Forensic Audits and Special
  Investigations, U.S. Government Accountability Office, Arlington, VA

Panel II

• David

  Hawkins

  
  , Director of Public Policy and Research, National Association for College Admission Counseling, Arlington, VA

• Michale

  McComis

  
  , Executive Director, Accrediting Commission of Career Schools and Colleges, Arlington, VA

• Joshua

  Pruyn

  
  , former Admissions Representative, Alta College, Inc., Denver, CO

Ahead of the hearing, the Government Accountability Office released this report today: 
Download GAO_ForProfits_Marketing

Here is a summary of their findings in the report titled, Undercover Testing Finds Colleges Encouraged Fraud and Engaged in Deceptive and Questionable Marketing Practices:

"Undercover tests at 15 for-profit colleges found that 4 colleges encouraged fraudulent practices and that all 15 made deceptive or otherwise questionable statements to GAO’s undercover applicants. Four undercover applicants were encouraged by college personnel to falsify their financial aid forms to qualify for federal aid—for example, one admissions representative told an applicant to fraudulently remove $250,000 in savings. Other college representatives exaggerated undercover applicants’ potential salary after graduation and failed to provide clear information about the college’s program duration, costs, or graduation rate despite federal regulations requiring them to do so. For example, staff commonly told GAO’s applicants they would attend classes for 12 months a year, but stated the annual cost of attendance for 9 months of classes, misleading applicants about the total cost of tuition. Admissions staff used other deceptive practices, such as pressuring applicants to sign a contract for enrollment before allowing them to speak to a financial advisor about program cost and financing options. However, in some instances, undercover applicants were provided accurate and helpful information by college personnel, such as not to borrow more money than necessary."

Here is a description of the schools their undercover agents visited:

"To determine whether for-profit college representatives engaged in fraudulent, deceptive, or otherwise questionable sales and marketing practices, we investigated a nonrepresentative selection of 15 for-profit colleges located in Arizona, California, Florida, Illinois, Pennsylvania, Texas, and Washington, D.C. We chose colleges based on several factors in order to test for-profit colleges offering a variety of educational services with varying corporate sizes and structures located across the country. Factors included whether a college received 89 percent or more of total revenue from federal student aid according to Department of Education (Education) data or was located in a state that was among the top 10 recipients of Title IV funding. We also chose a mix of privately held or publicly traded for-profit colleges."

So, according to their report, 100% (or 15 out of 15 of the for-profit colleges they investigated) made deceptive or otherwise questionable statements to applicants (is it fair to just consider it a few bad actors now?)  So, wondering what these statements were? 

• On accreditation: 
• • "A representative at a college in Florida owned by a publicly traded company told an undercover applicant that the college was accredited by the same organization that accredits Harvard and the University of Florida when in fact it was not. The representative told the undercover applicant: “It’s the top accrediting agency—Harvard, University of Florida—they all use that accrediting agency….All schools are the same; you never read the papers from the schools.”
• On graduation rates:
• • "Nine schools did not provide graduation rates either during our in person visit or on their Web sites. For example, when asked for the graduation rate, a representative at a college in Arizona owned by a publicly traded company said that last year 90 students graduated, but did not disclose the actual graduation rate."
• On future employability:
• • A college owned by a publicly traded company told our applicant that instead of obtaining a criminal justice associate’s degree, she should consider a medical assisting certificate and that after only 9 months of college, she could earn up to $68,000 a year. A salary this high would be extremely unusual; 90 percent of all people working in this field make less than $40,000 a year, according to the BLS.
• On financial aid:
• • "Six colleges in four states told our undercover applicants that they could not speak with financial aid representatives or find out what grants and loans they were eligible to receive until they completed the college’s enrollment forms agreeing to become a student and paid a small application fee to enroll."
• On program duration and cost:
• • "Representatives from nine colleges gave our undercover applicants deceptive or otherwise questionable information about the duration or cost of their colleges’ programs."

Another interesting finding in the report described what happens to prospects who provide data about themselves on lead generation websites focused on education (hint:  if you are feeling lonely and want to get LOTS of calls sign up on one of these sites):

"Within minutes of filling out forms, three prospective students received numerous phone calls from colleges. One fictitious prospective student received a phone call about enrollment within 5 minutes of registering and another 5 phone calls within the hour. Another prospective student received 2 phone calls separated only by seconds within the first 5 minutes of registering and another 3 phone calls within the hour. Within a month of using the Web sites, one student interested in business management received 182 phone calls and another student also interested in business management received 179 phone calls."

Oh, I neglected to mention the fraud that several of the schools encouraged the applicants to commit by falsifying their FAFSA:  

"Four of the 15 colleges we visited encouraged our undercover applicants to falsify their FAFSA in order to qualify for financial aid. A financial aid officer at a privately owned college in Texas told our undercover applicant not to report $250,000 in savings, stating that it was not the government’s business how much money the undercover applicant had in a bank account….An admissions representative at another college told our undercover applicant that changing the FAFSA to indicate that he supported three dependents instead of being a single-person household might drop his income enough to qualify for a Pell Grant [I hate to think that this is one explanation for the 60% increase in Pell Grants]…"

So, if ever there was a report screaming out about the need for "Truth in Educating",
this would appear to be it.  How can a student make a significant
investment of their time and money (accumulating much debt in the
process) without such basic information as graduation rates, placement
rates, program costs and accreditation?

One other interesting chart in the report (found on page 18) lists program costs for the for-profit schools visited and compares these costs to private and public non-profit schools in the area.  Cost is only one factor to consider when comparing education programs.  Here is a great project for a non-profit to pursue:  create a comparison site allowing those interested in pursuing higher education to compare statistics for for-profit and non-profit educational institutions on a program-by-program basis (the Minnesota project I highlighted in this post is a good model).  Who is up to the challenge? 

———————–

How did the stocks of for-profit educators react to this reports release?  Share prices were down 4-5% for the leading for-profits: 

APOL	4:00PM EDT	44.81	2.33	4.94%	3,864,809		Basic Chart, Message Boards, Key Statistics, more…
DV	4:03PM EDT	52.24	2.26	4.15%	1,682,187		Basic Chart, Message Boards, Key Statistics, more…
ESI	4:02PM EDT	78.89	3.74	4.53%	1,630,096		Basic Chart, Message Boards, Key Statistics, more…
COCO	3:59PM EDT	8.74	0.51	5.51%	4,235,610		Basic Chart, Message Boards, Key Statistics, more…

———————-

Related stories:

• Inside Higher Ed:  Congress's Secret Shopper summarized the report this way:  "Undercover investigators posing as students found that employees at
  all 15 for-profit colleges visited for the investigations made
  “deceptive or otherwise questionable statements” to students about
  accreditation, graduation rates, employment outcomes, program costs or
  financial aid.  At four institutions visited, admissions or
  financial aid officials encouraged students to submit fraudulent
  financial information in order to qualify for federal aid, the GAO says
  in its report."

• Chronicle of Higher Education:  Undercover Investigation Finds Widespread Deception in Marketing by For-Profit Colleges had the following summary:  "A government investigation of 15 for-profit colleges found that
  student recruiters at four of the colleges encouraged undercover
  "applicants" to commit fraud and that representatives of all 15
  colleges made deceptive, or otherwise questionable, statements to the
  applicants.

  The Government Accountability Office's
  report on the investigation, which will be made public at a U.S. Senate
  hearing on Wednesday, describes instances in which recruiters and
  admissions officers encouraged students to falsify their financial-aid
  forms and misled them about the colleges' costs, accreditation
  statuses, and graduation and job-placement rates."

• Wall Street Journal:  GAO Finds Deceptive Practices At For-Profits provides this insight about what schools may have been part of investigation:  "BMO Capital Markets analyst Jeffrey Silber said in a note Tuesday that,
  while no specific schools were named, based on the data provided, BMO
  believes two are owned by Apollo, two by Corinthian and one by Washington Post Co.'s Kaplan Inc. Mr. Silber further noted that the schools weren't accused of fraud, but rather of misleading marketing."

• Associated Press:  Sector Snap:  For-Profit Education Shares Tumble

View full post on Student Lending Analytics Blog

Observations:

• Overall, federal loans (Stafford, Parent PLUS and Grad PLUS) grew 18% to $77.8 billion through the first three quarters of 2009-10. 
• GradPLUS loans grew 34% to $4.4 billion over this period, while Parent PLUS loans grew 16% to $8.0 billion.  
• Stafford loans, the most prevalent federal loan program with 84% of
  disbursements, saw 16% and 18% increases in subsidized and unsubsidized
  loan programs respectively for the first three quarters.
• Applying this 18% growth figure to the 2008-09 disbursements of $85.2 billion (from FSA Data Center site) yields incremental volume of $15.3 billion for the 2009-10 academic year. 

Here are the numbers (all dollar amounts in billions):

View full post on Student Lending Analytics Blog

• Continued declines in their private loan originations.  While a seasonally slow quarter (the quarter that sets the tone for the academic year for private loans occurs this quarter ending in September), the Smart Option originations were still below company expectations with a 43% drop.
• • From conference call:  "We originated a disappointing $219 million in private credit loans in the quarter, compared to $387 million in the Q2 of 2009, as loan demand remains low.").
  • • For the last twelve months, Sallie Mae's private loan originations have dropped over 52% to $2.3 billion in private loans compared to $4.9 billion in the 2008-09 academic year period.  This $2.3 billion figure was mid-point of SLA estimates in January. 
    • Company continues to point to external forces (from conference call):  "Private loan demand continues to be impacted by increased federal loan limits, more students applying for federal loans, and students switching to lower-cost institutions."

• Company investments in marketing for private loans not paying off yet:
• • From conference call:  "On the DTC side and the consumer deposit side, we’ve had, we did spend a significant amount of dollars investing in that space this year. With private loan demand begin relatively low we certainly did not get the results we would have expected or would have liked to see in the direct to consumer marketing for private loans."
  • • I also wonder what impact the new preferred lender regulations have had since schools seem much less likely to be posting lender lists for their students.

• Company seems to loosening up credit standards somewhat as average FICO scores and cosigner rates have fallen:
• • 2Q 2010 conference call:  "Loans underwritten in the quarter remain of very high quality, with an average FICO score of 735, and 77% of the loans we made had a co-borrower."
  • 1Q 2010 conference call:  "Loans underwritten in the quarter remained at very high quality with an average FICO score of 740 in 85% of the loans made had a co-borrower.
  • 4Q 2010 conference call:  "The loans underwritten in the quarter had an average FICO score of 747 and 88% of loans made had a co-borrower."

• Charge-offs for private loans remain stubbornly elevated and the company raised their loan  loss provision for the year by $100 million to $1.3 billion reflecting higher than expected defaults (an earlier SLA post from January indicated that this increase in provision was likely).  
• • Here are the loan chargeoff figures for the last six quarters, which show a decline on a year over year basis but clearly not as significant a drop as the company had forecast since they had to raise their provision:
  • • 1Q 2009:  $297 million
    • 2Q 2009:  $362 million
    • 3Q 2009:  $443 million
    • 4Q 2009:  $298 million
    • 1Q 2010:  $284 million
    • 2Q 2010:  $336 million

• Company has continued the practice of granting immediate forbearance to delinquent borrowers which minimizes delinquency figures and forbearance figure
• • From 2Q 2010 earnings supplement:  "As of June 30, 2010, 1.5 percent of loans in current status were delinquent as of the end of the prior month, but were granted a forbearance that made them current during June 2010.
  • • This brings the total to almost $3.0 billion of delinquent loans that have received this benefit over the past two years

• Continued uncertainty regarding the structure of the company in a post-FFELP world:
• • From 2Q 2010 conference call today:  "I’ve advised shareholders that they’re likely to see some remaking or restructuring of the company in coming months, and I think I’ve said within the next year. That’s been described as a spin-off or sale…Well, we’re closing in on that. The Board and management have made very good progress in its deliberations…you will hear from us before the end of the Q3 about the directions that we’re taking."
  • • Company made recent announcement about moving their headquarters to Delaware. 

So, in summary, investors (who hate uncertainty) are left wondering about three items:  a) the prospects for the Smart Option Loan (a key to future growth and profitability of Sallie Mae), b) the stubbornly high loan default rates and the company's inability to provide accurate guidance on them and c) finally what the company's structure will be in the post-FFELP world.  Stay tuned….

Related articles:

• Bloomberg:  Sallie Mae Tumbles as Student-Loan Originations Drop
• Reuters:  Sallie Mae Falls on Higher Reserve, No Restructure Plan

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