Earlier this week, the Accrediting Council for Independent Colleges and Schools (ACICS) finally released its Key Operating Statistics report for FY09 (6/30/09).  You can find the full report here.  The report includes a comprehensive overview of aggregate tuition, enrollment, and job placement statistics for all ACICS schools.  As of 6/30/09, ACICS accredited 733 higher education institutions, the vast majority of which are for-profit institutions.  ACICS is the largest national accrediting agency in the US higher education system based on total enrollment and number of schools.  Although the data reflects the state of ACICS accredited institutions nine months ago, we think the information provided has enhanced our understanding of operating trends in the sector and includes statistics that cannot be found anywhere else.  We have reviewed the ACICS Summary of Key Operating Statistics and wanted to share with you some of our key observations.

Not Surprisingly FY09 Was a Banner Enrollment Growth Year for ACICS Accredited Institutions

Total enrollments at ACICS accredited institutions increased a whopping 17.1% YOY in FY09 to just over 700,000 students. This was the fastest rate of growth generated by ACICS institutions since 2004.  Since 1997, total enrollments at ACICS institutions have only declined once on a YOY basis, which was in 2007.  Not only did total enrollments increase at a high rate, but average number of enrollments per institution also increased at double digit rate on a YOY basis.  Since 1997, average enrollment per institution has increased at a compound annual growth rate of 5.0%.

Source: PAA Research

Anyone Questioning the Counter-Cyclicality of Demand for Postsecondary Education Should Think Again

When viewed in the aggregate, the strong enrollment growth witnessed over the past 13 years by ACICS institutions overshadows the impact the economy has had on demand for postsecondary education.  In the past, we have argued that both demand for postsecondary education and the rate of tuition price increases are counter cyclical in nature.  Enrollment growth in the US higher education system in general, and for f0r-profit institutions in particular has benefited from powerful secular trends over the past 15-20 years that have led to steady growth.  However the magnitude of that growth has been enhanced during periods of economic weakness and diminished during stretches of rapid economic expansion.  It appears there still are investors and even operators within the for-profit postsecondary education sector that refute this view.  The latest enrollment data from the ACICS adds further credence to our thesis that enrollment growth is negatively correlated to job growth.  According to our analysis, the YOY change in total enrollments for ACICS institutions has a correlation of 0.75 with the unemployment rate over the past 13-years. As the chart below demonstrates, enrollment growth has accelerated during periods of economic weakness and moderated during periods of economic strength.

Source: PAA Research, ACICS, Bureau of Labor Statistics

Enrollment of “Ability to Benefit” Students Surges (ATB) – Did this Prompt Dept. of Ed. Scrutiny?

Over the past 9-12 months, the enrollment practices surrounding “ability to benefit” student has been called into question.  Here is a brief description of the “ability to benefit” program from COCO’s 10-K:

“Under certain circumstances, an institution may elect to admit non-high school graduates into certain of its programs of study. In such instances, the institution must demonstrate that the student has the “ability to benefit” from the program of study. The basic evaluation method to determine that a student has the ability to benefit from the program is the student’s achievement of a minimum score on a test approved by the ED and independently administered in accordance with ED (Department of Education) regulations. In addition to the testing requirements, the ED regulations prohibit enrollment of ATB students from constituting 50% or more of the total enrollment of the institution. “

The ability to benefit program has received a great deal of negative attention of late following a DOE mandated GAO investigation of testing practices utilized in the admissions process. As part of the 2009 Negotiated Rulemaking process the Dept. of Ed. has included provisions that would result in stricter oversight of the ATB program, and in particular the testing process.  Investors have known that COCO has the highest exposure to ability to benefit students, which represent 24-25% of the company’s total student enrollments. Some investors might be surprised how large the program has become as part of the total enrollment picture.  We think the overall growth in ATB enrollments might have been the impetus for the Dept. of Ed. to analyze the program more closely.

Total enrollments in the ATB program increased 33.5% YOY in FY09 at ACICS accredited institutions.  We estimate that total enrollment growth of ATB students has increased at a compound annual growth rate of 18.6% since 2001 at ACICS institutions.  Stated another way, 6.3% of the total student population at ACICS institutions enrolled through the ATB program as of 6/30/09.  It is important to note that many ACICS accredited institutions don’t enroll ATB students (think ITT Tech).  This implies that the concentration at some schools of these types of students is remarkably high.  Going forward, we anticipate the heightened scrutiny and tougher standards for the ATB program (we’re assuming all of the NegReg proposals on this issue will be enacted), will become an enrollment growth headwind for many ACICS accredited schools.

Source: ACICS

Program Costs Continue to Sky-Rocket, Potentially Adding Fuel to the Fire For Those in Favor of Gainful Employment

Thematically speaking, the current administration’s focus when it comes to higher education appears to be: access, accountability, and affordability.  The gainful employment proposal introduced as part of 2009 NegReg has become the “hot button” issue for operators in the for-profit education sector.  As we have argued many times in the past, current tuition policies are unsustainable and have diluted or destroyed the return on educational investment for many higher education students.  Students increasingly graduate with unwieldy debt burdens and as a result student loan default rates are likely to ratchet higher and higher.  In an environment in which the Dept of Education budgets for student loan default rates in excess of 45% for students attending for-profit institutions it shouldn’t come as a surprise that the administration might want to introduce policies that result in better student outcomes from a debt/income ratio perspective.

The latest average tuition and fees data for five of the most popular associate’s degree programs at ACICS institutions will only add fuel to the fire of those who are focused on gainful employment-type regulations.  Here are the quick highlights on the rate of increase from FY06 to FY09 in total program costs (tuition and other fees) for five of the most popular associate’s degree programs offered by ACICS institutions:

• Business administration – 9.1% CAGR
• Medical assisting – 7.6% CAGR
• Computer networking – 6.4%
• Criminal justice – 9.8%
• Culinary arts – 7.1%

Over the same time period average starting salaries for graduates of these programs increased at a rate of 1-2% annually.  Obviously these trends are unsustainable and students are increasingly likely to graduate with unwieldy debt burdens as a result of aggressive tuition policies.

Source: PAA Research

Did the Average Job Placement Rate for Graduates of ACICS Institutions Really Increase From FY08 to FY09?  Perhaps Not

According to the ACICS, the average job placement rate for its institutions INCREASED from 71% to 74% from FY08 to FY09.  Please read that again.  Even though the unemployment in the US jumped over 4% over the same time frame and 6.6 million jobs were lost in those 12-months, the job placement rate increased?  What?

Source: ACICS

The notion that the average job placement rate at ACICS institutions increased during the worst economic downturn of the past 70-years sounds a bit unbelievable.  Interestingly enough when we analyzed the ACICS job placement data over the past 13 years we found that the correlation with the unemployment rate and change in non-farm payrolls is less than you would think. According to our analysis the correlation between the placement rate and the unemployment rate has been -0.41 over the past 13-years, while the correlation between the change in non-farm payrolls and the placement rate has been 0.48.

Source: PAA Research

The analysis would still suggest that the placement rate should have declined precipitously for FY09.  The question remains: how were ACICS accredited institutions able to increase their job placement rate from FY08 to FY09? The short answer is: maybe they didn’t.  There are several factors that lead us to question the integrity of the job placement data as provided by the ACICS, including:

• Anecdotally, we know that the job placement rate declined by a large amount from 2008 to 2009 at publicly traded companies that own ACICS accredited schools.  ESI, COCO, and others witnessed a meaningful reduction in the placement rate for its graduates.  ESI and COCO alone comprise a significant percentage of the total number of schools and graduates for ACICS, which would imply that job placement rates at other institutions increased by a larger amount than the overall average.  Not likely.
• We have been unable to reconcile the job placement rate for FY09 as calculated by the ACICS.  The ACICS calculates the job placement rate using the following formula: (graduates placed in a field of their study + graduates placed in a related field)/(graduates and completers – those unavailabe for placement).  Included in those unavailable for placement are students that are in the military, have health reasons (pregnancy/other), and matriculate to another academic program.  Despite our best efforts we cannot replicate the ACICS job placement rate with the data provided in the Summary of Key Operating Statistics.
• For an unknown reason, the ACICS reduced the number of institutions captured in its job placement rate calculation.  As of 6/30/09, there were 733 institutions accredited by the ACICS. However, in its calculation of the job placement rate the ACICS only used data from 668 institutions.  In years past there has never been a discrepancy between the number of institutions accredited by the ACICS and that used for the job placement calculation. Only 30 new institutions were added between FY08 and FY09, so that cannot explain the discrepancy.  It is conspicuous to say the least.

There are two measures we look at that might serve as a better barometer of the success of ACICS institutions in finding job placement rates for their students.  The first we call “pure job placement”, which is simply the number of students placed in their field of study divided by graduates minus those unavailable for placement.  According to our analysis, the “pure job placement” declined from 66.6% in FY08 to 61.0% in FY09.

Source: PAA Research

The second measure we look at is the total number of graduates or completers that were “not employed” as of the end of the measurement period.  According to the ACICS data the percentage of graduates that were not employed as of the end of the measurement period increased from 18.4% in FY08 to 20.7% in FY09.  Both of these metrics indicate that underlying job placement declined as you would expect it to during a period of profound economic weakness. We’re still not certain as to how the ACICS arrived at a placement rate of 74% for FY09, but the uncertainties surrounding its calculation cause us to question the integrity of the information.

Matriculation Rates Have Accelerated During the Downturn – This Could Pose Significant Problems for Companies Like APOL in the Future

When APOL reported its 2Q10 results, we wondered aloud how the company would be able to sustain total enrollment growth if it was reducing new student start growth at Axia.  In theory, the only way in which the company could continue high single digit to low double digit total enrollment growth given the sharp decline in associate’s degree starts would be through a sharp increase in the matriculation rate of associate’s degree students to bachelor’s degree programs.  Certainly enrolling a higher quality student at the outset should enhance the matriculation rate, however we think cyclical factors will play a  huge role in the rate at which student matriculate to higher level degree programs. If jobs are available, students will leave school, if they’re not, they will stay.  Simply stated, APOL management is banking on employment remaining weak, otherwise the matriculation rate for associate’s degree students could actually decline which would result in much slower growth for bachelor’s programs and total enrollments.

The obvious question in light of APOL’s strategic shift to focus on enrolling higher quality associate’s degree students and then to matriculate them into bachelor’s degree programs is: how counter cyclical are matriculation rates?  The data from the ACICS implies that matriculation rates sky-rocketed in the past year due in large part to the weak economy.  As the chart below demonstrates, the number of graduates that elected to pursue a higher degree program increased 54% YOY from FY08 to FY09 and accounted for 8.0% of total graduates in FY09 (up from 5.9%).  Any stabilization the labor market could represent a significant enrollment growth headwind for companies like APOL over the next several years.

Source: ACICS, PAA Research

Although the data captured in the Summary of Key Operating Statistics for ACICS institutions is now more than 9-months old, we think it offers unique insights into the broader trends impacting the for-profit education sector.  On the surface, some investors might be encouraged by the strong headline number for job placement for students graduating from ACICS accredited institutions.  However, we would argue that the counter-intuitive nature of the data and the uncertainty surrounding its calculation could lead some to question its integrity.

As always, please act accordingly….