Earlier this week, the Federal Reserve announced that consumer credit rose for the fourth consecutive month—this time, by $16 billion. This was more than double the median forecast, which called for an $8 billion hike in consumer credit. And the bulk of the increase—$15.2 billion—was thanks to a surge in non-revolving debt, especially student loans.
With so much money flowing into higher education, could there be a buying opportunity here? To answer this question let’s take a look at some of the nation’s largest for-profit higher education companies. We’ve all seen the commercials from Strayer Education Inc. (STRA), DeVry Inc. (DV) and Apollo Group Inc. (APOL)—which runs the University of Phoenix. These companies typically cater to nontraditional students looking to boost their career prospects. According to the Department of Education, a staggering 93% of students attending for-profit schools take on debt to finance their education, with the average loan totaling over $17,000.
And while the jury is still out on whether for-profit institutions truly address some of the market failures left by conventional public and private non-profits, when it comes to my Portfolio Grader system, these schools don’t make the grade:
- Apollo Group has hit rock bottom in terms of sales and earnings growth and buying pressure has grinded to a halt. Analysts expect sales to drop 13.7% this quarter and earnings to plunge 56.9%. APOL is an F-rated sell.
- DeVry is a similar story, with the consensus calling for a 39.1% drop in earnings this quarter. Despite its history of beating earnings estimates, institutional investors won’t touch this stock, and that’s thanks to its poor operating margins. DV is a D-rated sell.
- Strayer also strikes out on buying pressure, as shown by its F-rated Quantitative Grade. Because its sales and earnings prospects are so terrible, not even its 7% dividend yield could entice me to buy. STRA is a D-rated sell.
One reason that these institutions may be struggling is because so many of their students default on their loans. For a number of reasons, for-profit schools account for nearly half of all federal loan defaults. This has drawn the scrutiny of several federal agencies, so for-profits will likely see more rules imposed on them to help reduce the default rate. So while the for-profit education model may be a tempting one for investors, I recommend that you stay away.