This report was originally published on 9/30/09.

SF Weekly has published an article today about Corinthian Colleges and the broader for-profit education sector.  You can find the article here.  Overall the article appears to villify the for-profit higher education sector and COCO in particular for their receipt of federal stimulus dollars to help fund student tuition payments.  The article criticizes COCO’s business practices on a number of fronts, including:

• Aggressive enrollment practices and lax admissions standards
• High tuition rates
• Educational quality
• High default rates for its students and how the cohort default rate is a poor gauge of student loan outcomes
• Past regulatory issues
• The manner in which job placement rates are calculated

The article itself does not break new ground in its criticism of the for-profit education sector or COCO in particular (although the reporter did approach the California inspector general about some of these issues, to which Laura Chick responded “I am putting all recipients of stimulus spending on notice that not only am I going to be watching closely, but so will the US attorney, district attorney, FBI, and federal inspectors general.”).  More importantly, we think the article could draw greater attention to the sector and COCO.

We remain bearish on a few companies in the for-profit education sector for the following reasons:

1. At many schools and for some programs, “the more you learn, the more you earn” student covenant has been broken.  Tuition levels now approach, if not exceed the level at which a graduate can consistently service the student debt burden.  In short, we believe the return on educational investment for students attending some for-profit postsecondary institutions is questionable, if not outright negative due to high tuition prices and relatively low starting salaries upon graduation.  We think ESI is the biggest violator of the “more you learn, the more you earn” student covenant.  You can read more here.
2. Student cohort default rates for for-profit education institutions are poised to surge due to a combination of lax admissions standards, high priced tuition, low completion rates and rising unemployment.  We anticipate higher cohort default rates and potentially increased litigation could become the catalyst for greater political or regulatory scrutiny of the group.  We anticipate many schools will have cohort default rates in excess of 25% for FY08 and FY09 and could run the risk of losing access to Title IV funds in conjunction with the release of final FY10 cohort default rate data.  In addition, we think the transition to a 3-year calculation of cohort default rate could significantly impair the ability of many schools to enroll the highest risk students, which could substantially impact the business model of some operators in the space.  We think WPO and COCO have the greatest risk profile with regard to cohort default rates.

Outside of articles like that published today by the SFWeekly, we anticipate the release of preliminary cohort default data for FY08 could be a major negative catalyst for the group.  In addition, the transition to a 3-year cohort default rate is likely to be a game changer for many operators in the space.  You can read more of our thoughts on that issue here.  You can read more about our thoughts on COCO here, here, andhere.

As always, please act accordingly…