COVID-19: Boom or Bust for For-Profits?

A mixed picture is emerging of how for-profit colleges and the publicly traded companies that manage them have so far been impacted by the pandemic.

Past economic downturns significantly boosted enrollment at for-profit colleges, but if a countercyclical enrollment explosion is on the way, it hasn't materialized across the board yet.

Several for-profit colleges reported modest year-over-year enrollment increases in the second quarters of their fiscal years, which generally ran between March and June. The companies that own them boosted profitability, sometimes through careful cost management. That's important, because previously released data showed no sign of enrollment growth across all institutions in the spring of 2020.

Given how quickly the economic downturn happened, there may not be much impact on enrollment at for-profit higher education institutions for a few months, said Jeff Silber, an analyst at BMO Capital Markets Research. In the short term, lower-income students may be more worried about putting food on the table than completing Economics 101, he said.

“Historically we have seen countercyclical enrollment at for-profits, but because of the rough nature of the downturn, we may not see as much,” Silber said.

That said, demand for online education is growing, and students may start shopping for alternatives if their current nonprofit colleges provide unsatisfactory remote learning experiences.

“There’s a possibility we may see some decent enrollment numbers from these companies in the fall, but we’re still talking a very small percentage of the student population that is enrolled by for-profits,” Silber said. “The for-profit sector enrolls 5 percent of U.S. higher education students. That 5 percent is not going to increase to 20 percent. But I wouldn’t be surprised if for-profits gained back a little bit of that share this fall.”

The recession and pandemic is ultimately likely to increase student demand, said Trace Urdan, a managing director at Tyton Partners.

"But there hasn’t been anything in the second quarter that makes that obvious," he said.

Online for-profit colleges saw a lull in demand during March and April, which has since picked back up, Urdan said. This is in contrast to the surge in interest that nondegree online learning providers such as Coursera and edX saw early in the spring, which then leveled out. Viewed together, these online learning trends suggest some hesitancy among learners to commit to full degrees. But they also suggest overall interest in online learning is high and likely to persevere, said Urdan.

Results Vary by Company

Online for-profits lost ground to large online nonprofits in recent years, resulting in losses of tens of thousands of students at for-profit institutions such as Ashford University. Regulatory controls are much tighter on for-profits than they were a decade ago, and prospective students are wary of a sector that has been tarnished with accusations of predatory student enrollment practices.

Many publicly traded companies in the for-profit higher education sector have contracted significantly. Some of those that remain have attempted to diversify their income by moving into international education, nondegree online credentials or online program management and technology services.

At Ashford, for example, new enrollment was down 12.6 percent in the quarter ending June 30 compared with the same time last year. This was still “well ahead of our expectations for the second quarter of 2020,” said Andrew Clark, CEO of Zovio, Ashford’s parent company, in a recent investor call. He expects new enrollment to return to low single-digit growth in the third quarter of 2020.

Despite declining enrollment, Zovio turned a profit, reporting a net income of $7.2 million for the first six months of this year, compared with a net loss of $24.2 million in the same period last year, a period in which it acquired Fullstack Academy and TutorMe.com. The company cut its total costs and expenses by more than $37 million.

A reduction in the price of social media ads earlier this year helped to lower student lead-generation costs for degree programs. But student enrollment pipelines have been negatively impacted by strapped budgets at big companies. More than a third of students at Ashford University, for example, are enrolled through employer-assisted education programs, Clark said in the investor call.

Corporate partners began to cut tuition reimbursement programs as part of cost-saving measures to mitigate the financial impact of the pandemic earlier this year, Clark said. While some companies have since reinstated these programs, Clark expects “the velocity of new enrollments from this group to moderate in coming quarters.”

Zovio’s stock price rose by 28 percent on Aug. 3 when the company announced that the University of Arizona would acquire Ashford University, creating a new nonprofit institution called the University of Arizona Global Campus. As part of this deal, Zovio will continue providing services such as marketing, student recruitment, instructional design and technology.

“This is a monumental day for Zovio in our transition to a world-class education technology services company,” Clark said in the investor call. “Our strategic services agreement with the University of Arizona Global Campus will create a strong foundation from which we can pursue diversified growth, providing technology and services to other institutions, corporations and learners.”

Grand Canyon Education no longer owns Grand Canyon University but still manages the institution’s online programs through a services agreement.

“Grand Canyon University online had 87,959 online students as of June 30, 2020, and in the quarter just completed, new students grew in the high teens, while total students grew 8.2 percent year over year,” said Brian Mueller, president of Grand Canyon University and CEO of Grand Canyon Education, in a recent investor call. “We have definitely seen an acceleration of working adult students enrolling in our programs online. As this acceleration has taken place, the percentage of students that are studying at the graduate level has gone up.”

American Public Education, which owns American Public University, American Military University and the Hondros College of Nursing, reported that new enrollment was up by an impressive 30 percent at its institutions -- particularly driven by increased demand for nursing education at Hondros. This "largely organic" enrollment growth reflected "recent grants to military students, increased online demand, and enhanced visibility of American Public University System value," wrote Silber in a recent analysis. Net income for the company increased from $4.9 million for the quarter ending June 30, 2019, to $6.7 million for the same quarter this year.

Adtalem Global Education, the company behind Chamberlain University, Ross University School of Medicine and the American University of the Caribbean School of Medicine, also reported strong enrollment growth in its nursing programs in a May investor call. The company is scheduled to release earnings for its fourth quarter and full 2020 fiscal year Tuesday.

The American InterContinental University reported new student enrollment growth of 118.8 percent for the second quarter of 2020 ending June 30, compared to the same quarter last year. But this is explained by the institution's recent merger with Trident University International, which parent company Perdoceo purchased last year. Perdoceo, formerly known as Career Education Corporation, also owns Colorado Technical University, which saw a more modest new student enrollment increase of 4.5 percent.

Total enrollment at Strayer University grew by 6 percent year over year for the second quarter ending June 30, from 50,713 to 53,782 students, according to earnings figures released by parent company Strategic Education. But new enrollment was down 4 percent. Capella University, also owned by Strategic Education, saw a slight increase in enrollment from 38,979 in the second quarter of 2019 to 39,341 in 2020. Strategic Education on July 29 announced plans to acquire Laureate Education’s Australia and New Zealand academic operations for $642.7 million.

While Strategic Education is expanding internationally, Laureate Education, which manages Walden University, seems to be taking the opposite approach -- focusing on Latin America, the U.S. and increasing its liquidity. Laureate’s chief financial officer, Jean-Jacques Charhon, reported that the company’s revenue was more or less flat in the first half of this year, with new enrollments at Walden growing by 3 percent in the last quarter.

Historically, for-profit higher education companies have started to build up their cash reserves ahead of U.S. presidential elections -- particularly when there is a possibility of moving from a Republican to a Democratic administration, as Democrats look less favorably on the for-profit sector, Urdan said. Many companies want to diversify their income away from a reliance on Title IV federal financial aid and have invested in nondegree credentials or international education, he said.

Some of the most well-known for-profit colleges are online, but there are many for-profit colleges with ground-based programs, particularly those offering vocational training. The Universal Technical Institute and Lincoln Educational Services both offer automotive training that relies heavily on hands-on instruction. Both faced the challenge of pivoting to remote instruction this spring.

“When the pandemic forced us to close campuses in March, our team set out to proactively manage our operating costs,” said Scott Shaw, CEO of Lincoln Tech, in a recent investor call.

By asking landlords for assistance in lowering rents, freezing all travel and new hires, and asking campuses to be prudent with expenses, the company was able to turn a loss of $3.1 million in the second quarter last year to a net income of $783,000 this year.

“We continue to believe that with the dramatic rise in the unemployment rate and the increasing realization that many of the unemployed won’t have jobs to come back to once the nation’s economy is fully reopened, demand for our programs will increase even further as it has in past economic downturns,” said Shaw.

More students have enrolled at Lincoln’s 22 campuses this year than last year, said Shaw. But he predicts a large-scale enrollment boost won’t happen until later this year. Since June 2019, Lincoln has increased its student population by 7.5 percent, around 800 students. This excludes approximately 700 students who took temporary leaves of absence as a result of COVID-19.

“During the last recession between 2007 and 2010, we saw consistent increases in leads, enrollments and student population that peaked two and a half years after recession started,” said Shaw. “Given the dramatic and unprecedented rise in unemployment during the past five months, we continue to imagine a much faster ramp-up in our student population beginning in the fourth quarter of this year and continuing into 2021.”