DeVry Inc. (DV), American Public Education, Inc. (APEI): The Student-Debt Debacle in For-Profit Education

I’m taking time this week to dive deeper into the for-profit education industry. Back in February 2011, I told readers why I was staying as far away from the industry, as an investor, as possible. Since then, the biggest industry players are drastically underperforming the market.

So far, we’ve focused on two factors to account for this poor showing: lower new student enrollment numbers , and high reliance on government funding. Today, we’ll focus on other important metric: the number of former students whose debt payments go into default in the three years following their time at school.

Understanding the rule
If you think about it, college is supposed to be an investment in one’s future. Though it can get very expensive, the training you receive is supposed to provide you with what you need to make a living in the world.

One way to measure whether or not a college is succeeding in this respect is to see if students are able to pay back their loans. It is especially disheartening to see high levels of default on student loans because — unlike other forms of debt — student loans cannot be wiped off your slate by declaring bankruptcy.

The government has recently changed how they measure this metric. In the past, it used to check for the percentage of students who default on loans in the two years following their exit from school. Recently, that timeline was changed to three years — all but guaranteeing that default rates would go up (at least, they certainly can’t go down if covering the same time frame).

The Department of Education states, “No sanctions will be applied to schools based on the three-year rates until three annual rates have been calculated.” That’s because sanctions are levied against schools that have cohort default rates above 30% for three consecutive years. So far, we’ve only got one reading on three-year default rates, from 2009 to 2012. Here’s what it looks like.

Source: U.S. Department of Education. *Represents core DeVry Inc. (NYSE:DV) schools. **Represents University of Phoenix. ***Represents core Everest schools.

The first thing to note is that all of these numbers, regardless of whether they fall below the 30% threshold, are alarming. Among public schools, the average default rate is 11%, and among private institutions, it is 7.5%.

Think about what these numbers really mean: Anywhere from a fifth to a third (excluding American Public) of all students are unable to repay their debts to the federal government. The schools got their money up front; it’s the taxpayers — and the former students — who are left to foot the bill.

Ironically, I think the trends will start to reverse themselves as default rates come out in future years. Because the government started clamping down on recruitment practices after 2009, schools were likely more careful with who was let in, meaning students will have been more likely to stay out of default.