Rising Unemployment Spells Rising Profits for For-Profit Education Firms
The minutes of the Fed‘s late January Federal Open Market Committee (FOMC) meeting provide some grim reading. Fed members drastically lowered their expectations for U.S. economic growth in 2009 and 2010 and indicated a great deal of uncertainty as to the timing and strength of any recovery.
One of the most discussed issues: U.S. unemployment. The Fed’s latest outlook is for unemployment to rise to 8.5% to 8.8% from today’s reading of 7.2%. But even that projection may prove optimistic — some Fed members are projecting unemployment to peak near 10%.
#-ad_banner-# That’s bad news for the economy in general and for many market sectors. But there is one sector that has historically benefited handsomely during periods of rising unemployment.
Working-age adults face a number of risks in today’s market. Many will be laid off as companies seek to reduce their costs. But, even those that keep their jobs face the prospect of underemployment — they’ll take on lower-paying and less-skilled work just to get by.
But there is an alternative — many erstwhile job-seekers decide the recession is a great opportunity to return to school to learn a new trade or earn a more advanced degree. Some decide to quit work entirely to pursue an education while others simply attend part-time. The result: admissions tend to spike during recessions.
Our chart clearly shows that admissions at U.S. degree-granting institutions accelerated during the recessions of 1973/74, 1981/82, 1991, and 2001. While the Department of Education only offers data through the end of 2005, the agency is forecasting a near +16% jump in total admissions between 2006 and 2016.
For-profit education companies reporting to date indicate that this historical pattern is repeating again this year. The largest for-profit education firm in the U.S., Apollo Group (Nasdaq: APOL) recently announced that its admissions grew more than +18% year-over-year in its fiscal first quarter.
And there’s more. Growth in admissions is likely to be even stronger than normal during this recession thanks to massive spending on education from the government. The majority of students in U.S. universities use some form of student loan to finance at least part of their studies. In some cases, the government loans money directly to students and in others the loans flow through third-party lenders but are guaranteed by the government. The latter program, known as Federal Family Education Loan Program (FFELP), has been the main source of student loans for years.
In recent months, the government has ramped up its direct loan program, offsetting declining lending from private institutions, many of which are exiting the student loan business.
Even more importantly, the Term Asset-Backed Liquidity Facility (TALF) should benefit student lenders under FFELP. The TALF was recently expanded in size form $200 billion to $1 trillion. The fund allows the Fed to lend money to banks using “AAA”-rated asset-backed bonds as collateral. The list of appropriate bonds would include those backed by pools of student loans; since student loans are guaranteed by the government under FFELP, they’re typically rated triple A. And finally, the Department of Education has been authorized to buy student loans guaranteed under FFELP directly from thaloadd-party lenders.
#-editor_pick-# This has had the effect of increasingly liquidity in the market for securitized student loans. As a result, the availability of student loans remains strong despite the ongoing credit crisis that’s hampered access to just about every other imaginable form of credit. According to the Department of Education, total lending under FFELP grew +10% in the first nine months of 2008 compared to the same period in 2007 even as the credit crunch deepened.
And alongside federally subsidized student loans, the government also offers a host of tax breaks and financial aid for students. The so-called Stimulus package recently signed into law by President Obama included significant extensions of these credits and grants.
For example, the bill provided an additional $15.7 billion in funding for the Pell grant program. Pell grants provide needs based funding primarily to undergraduate students. Apollo Group gets about 10% of its revenues from Pell grants while Corinthian Colleges (Nasdaq: COCO) gets nearly one-quarter from the same source. The extension of Pell grants can provide a meaningful boost in affordability for students and a boost to revenue for the for-profits.
In addition to the Pell extensions, the bill also added additional funds for the Hope credit, a tax credit against qualified education and tuition expenses.