Under President Trump, For-Profit Schools Have Been on Fire -- Can It Last?

By Rich Duprey Markets Fool.com

Mining and metals, private prison operators, and energy companies are just a couple of the industries that have done well since Donald Trump was elected president on the premise that campaign promises for massive infrastructure spending or deregulation will be realized.

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The for-profit education market is no different, with many of the top names in the industry soaring immediately after election day and continuing to rise afterwards. As former President Obama's policies nearly drove the industry to the brink, and actually pushed a few over the edge, it's expected that a more business-friendly president -- and one who ran a for-profit school himself -- would lift the sector's stocks.

However, few industries have as much to prove as the for-profit education sector, and should they survive (let alone thrive), they will need to deliver on the promise that what they offer students will actually be good for them, not bankrupt them.

Image source: Getty Images.

Getting left back

The road downhill has been harsh for for-profit educators. Apollo Education Group's University of Phoenix, the largest for-profit school in the country, had some 470,800 students enrolled in a degree program in 2010, but by last month, enrollment had fallen 71% to just 135,900 students. And that number was down 23% from enrollment levels it had enjoyed a year ago.On Feb. 1, Apollo was taken private in a $1.1 billion deal.

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Corinthian Colleges was also once an industry high-flier. The second largest for-profit educator in the U.S., it had 110,580 students enrolled in its programs in 2010,but five years later, it was pushed into bankruptcy amid scandal, investigations, and declining enrollments. ITT Educational Services also went from 80,000 students seven years ago to just 35,000 last year before it went under.

Wearing a dunce cap

Image source: Getty Images.

Still, it's not as though the attack on the for-profit sector was completely unjustified. Having once enrolled around 10% of all the students in school at one time, the industry either (charitably) was unable to deliver on the promises it made to students, or (more nefariously) purposely tried to con them and the federal government to obtain ever-larger amounts of federal aid.

For-profit schools were long the target of critics due to high dropout rates, higher student loan default rates, alleged misuse of federal monies, improper marketing tactics, and more. The animus against the industry grew under the Obama administration, with the Education Department implementing tough gainful-employment regulations that mandated better assistance for students landing a job after graduation. Others, like Corinthian College, were charged with falsifying data.

And it's hard to argue that today's for-profit schools are appreciably better bets for students, even if the regulatory screws have been significantlytightened. Just last month, the Education Dept. released a list of 800 programs that were failing under its new debt-to-earnings rules, 98% of which were at for-profit schools (however,Harvard University was also on the list for its law school degree).

Graduating to the next level?

That was all before President Trump was elected, and the industry is now more hopeful that some of the excesses of the regulatory burden will be lifted. Among the biggest gainers since Nov. 8 are K12 (NYSE: LRN), which is up 19%;Strayer Education (NASDAQ: STRA), 35% higher;Grand Canyon Education (NASDAQ: LOPE), up 34%; DeVry (NYSE: DV), up 46%; and Career Education (NASDAQ: CECO), which has gained 19% (but had been 45% higher before reporting disappointing earnings).

Part of the reasoning is that Trump knows something about the for-profit education industry since he operated Trump University, although it was more of a real-estate seminar business. It ended somewhat ignobly with recriminations of fraudulent activity, and Trump settled lawsuits against the school for $25 million shortly after the election.

Also encouraging might be the new education secretary, Betsy DeVos, a primary education school choice and voucher advocate, but also one with investments in for-profit education, notably Laureate Education (NASDAQ: LAUR), which just went public this month.

Image source: Getty Images.

An industry that needs to earn its sheepskin

Even if the current administration isn't as adversarial as the prior one, the for-profit sector still has a lot to prove. As the Education Department data reveals, students are still graduating from school with a high level of debt relative to their earnings potential, and though default rates have come down across the board in recent years, they still remain at elevated levels.

For-profit schools should succeed because they teach skills that can be readily used in the marketplace -- they need to show that they have their students' best interests at heart, too. And investors ought to be concerned that despite their current high-flying status, the future remains uncertain for these companies.

Career Education recently reported its financial results showing that it swung from a profit last year to a loss as it discontinued a number of operations.They and the other for-profit operators may need to slim down further andexperience ongoing declines in enrollments before they can look like something more than a diploma mill.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.