July 20, 2009 / 6:06 PM / in 8 years

Obama's community college plan no threat to for-profits

5 Min Read

<p>U.S. President Barack Obama waves as he walks on the South Lawn of the White House in Washington July 18, 2009, before his departure to Camp David.Yuri Gripas</p>

BANGALORE (Reuters) - President Barack Obama's $12 billion community college initiative could have an impact on the fortunes of for-profit education companies that offer associate degrees, but analysts say funding for the program is not big enough to make much difference.

Obama's 10-year program, unveiled last week, focuses on associate and vocational degree programs at government-funded community colleges and is aimed at getting people back to school and have them ready for "21st century jobs."

Analysts said the program for community colleges could make them more competitive against firms such as Apollo Group Inc, Corinthian Colleges, ITT Educational Services Inc and Lincoln Educational Services Corp.

However, they said the amount of money earmarked for the program would result in only a marginal increment in budgets for community colleges and have a small impact on these companies in the short term.

The for-profit education industry, already concerned with the increased scrutiny on the companies by the Department of Education under the Obama administration, was keeping its fingers crossed over Obama's proposed revamp of the education sector, fearing it could disadvantage them against state-funded colleges.

"We would be more cautious on the market-funded sector had President Obama added another zero to the proposed $12 billion targeted for community colleges," analyst Ariel Sokol of Wedbush Morgan Securities said.

Analyst Trace Urdan of Signal Hill said, "I think, in general, though the amount of money is very large in the aggregate, it really amounts to only about a 3 percent increase in total operating budgets for community colleges."

In the for-profit sector, companies such as Apollo, Corinthian, ITT and Lincoln mostly offer non-degreed vocational programs and associates degrees, which have gained popularity as they offer flexibility to students looking to retool their skills in a tough economy.

Apollo's Axia programs, for instance, which offer online fast-track graduation, have been a sweet spot for the company in the last few quarters.

Analysts say community colleges lack facilities and flexibility that companies like Apollo offer.

"One of the reasons Apollo was successful with its two-year programs was they make it so easy for someone to continue to work full time and enroll in school," Urdan said. "Community colleges are not good at that. They have a more rigid schedule."

"We think for-profits will continue to outshine community colleges on student support services, flexible schedules, and lower teacher to student ratios," J.P. Morgan Securities' Andrew Steinerman wrote in a note dated July 14.

However, if the dollars are applied to making these programs more successful, at some level it could eat into Apollo's business, Urdan said.

Some Gain?

Obama's initiative to increase the number of graduates in the United States is likely to have little bearing on companies such as Strayer Education Inc, Capella Education and Grand Canyon Education.

These universities are more focused on bachelors, postgraduate or doctoral degree programs.

However, some say increasing the number of community college graduates could result in more students chasing bachelor's degrees offered by companies like these.

"We think that government's first endorsement of the online delivery, coupled with an associated market expansion, will reflect well on the for-profits, specially Strayer," J.P. Morgan's Steinerman wrote in a note.

"Capella has an important role to play in making President Obama's vision for higher education a reality," Michael Offerman, president emeritus of Capella University, said in an email.

DeVry Inc and Universal Technical Institute Inc applauded the president's initiative, saying it bodes well for higher education.

Online Links

The president's proposal also includes a plan to put $500 million toward online courses and materials, including free online courses that would be openly available.

"Considering the online market was about $12 billion in 2008, that is not a big impact," Jeffrey Silber of BMO Capital Markets said.

"It is my understanding that for-profit providers may be eligible to participate in this," Silber said.

It is premature to speculate at such an early stage on how this initiative will impact students' decisions on post-secondary education, a Universal Technical Institute spokeswoman said.

Credit Suisse, however, said in a note dated July 15 that although the execution risks associated with the president's plan are high, it increases the risk that growth of the community college system's capacity could hurt for-profits' enrollment growth and pricing power in coming years.

Editing by Saumyadeb Chakrabarty and Anil D'Silva

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