DeVry Inc. (DV), ITT Educational Services, Inc. (ESI): Following the Money in For-Profit Education

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As a former teacher and son of a current university professor, I’ve always been interested in following for-profit education companies. By and large, this interest has led me to believe that staying away from the industry — as an investor — was the smart thing to do.

DeVry Inc.Yesterday, I showed how declining new student enrollments at DeVry Inc. (NYSE:DV), ITT Educational Services, Inc. (NYSE:ESI), Apollo Group Inc (NASDAQ:APOL), Corinthian Colleges Inc (NASDAQ:COCO), and Bridgepoint Education Inc (NYSE:BPI) coincided with dramatic drops in the share prices for all of these stocks. Even American Public Education, Inc. (NASDAQ:APEI), which showed an increase in new student enrollment between 2010 and today, saw its stock drastically underperform the market.

Today, we’ll be examining how each of these schools measures up against one of the most important rules in the industry.

The 90/10 rule
An enormous portion of the revenue that these schools receive comes not from students, but from federal government loans. Because these schools tend to focus on students who may have a hard time paying full tuition out of pocket, it makes sense that a lot of money is provided through Title IV federal funding.

At the same time, the government wants to make sure that the schools aren’t just siphoning away tax dollars to provide a piece of paper — a degree — to students who may or may not be benefiting from their college experience.

That’s why every school needs to derive less than 90% of its revenue from Title IV funding. If a school eclipses that benchmark, it’s put on probation. If it continues above the benchmark for a second consecutive year, the school loses its eligibility to receive Title IV funding. As you’ll see, that usually means a death blow for the school.

Here’s where the six schools I mentioned stood at the end of 2012, compared with the end of 2010.

Source: SEC filings. DeVry Inc. (NYSE:DV)’s data represents an unweighted average across all schools. Apollo Group Inc (NASDAQ:APOL)’s is representative of the University of Phoenix, which accounts for more than 90% of Apollo’s revenue.

There are a couple of key takeaways here. The first is that DeVry Inc. (NYSE:DV) and Corinthian Colleges Inc (NASDAQ:COCO) have done a good job at lowering the proportion of funds coming from Title IV. That’s especially important for Corinthian, since, combining all schools, the company was in danger of losing funding back in 2010.

The second takeaway is that American Public Education, Inc. (NASDAQ:APEI) and ITT Educational Services, Inc. (NYSE:ESI) showed alarming increases in Title IV funding, while Apollo Group Inc (NASDAQ:APOL) – parent company to the University of Phoenix — is in serious danger of violating the 90/10 rule.

Three important caveats
When it comes to calculating the 90/10 rule percentages, only Title IV funds are counted. Money from the Department of Defense — by way of the GI Bill — doesn’t count against a school.

That’s important to understand with American Public Education, Inc. (NASDAQ:APEI), which had spent the better part of its life as a school focusing solely on catering to active-duty and retired military personnel. Over the past two years, however, the school has reached out to nonmilitary students, and doing so has accounted for a gargantuan leap in public funding.

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