Will Obama Kill For-Profit Education?

After posting gains on election day, for-profit education stocks are joining the rest of the market and suffering massive losses on Wednesday. Shares of industry bell weather Apollo Group (NASDAQ:APOL) have dropped over 7.5 percent in afternoon trading, as investors realize that President Barack Obama may be no friend of privatized education.

ITT Educational Services (NYSE:ESI) is down over 10 percent in the afternoon and Career Education Corporation (NASDAQ:CECO) is down over 8 percent, among others.

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Ostensibly, it would seem like Obama is an ally to the industry. Higher-education initiatives and federally insured student loans mean more people paying more money to go to more college. Winding down wars mean veterans coming home and looking for education on the Post-9/11 GI Bill. Many people are heading back to school in the absence of work, hoping education will place them in a new job. All of these students mean plenty of tuition revenue for the for-profit education industry.

In theory, at least. In reality, Apollo Group tanked as much as 19 percent when it slashed its revenue forecast for the fiscal year and announced that it would be closing several locations. These hardships are in no small part thanks to Obama’s tough policies on the industry.

In July, a U.S. Senate committee published a massive report criticizing the for-profit education industry. As a whole, the industry was failing to educate students and place them in jobs. The report uncovered predatory and disingenuous marketing tactics. Bridgepoint Education (NYSE:BPI) has been brought under investigation by the Department of Justice for its recruitment practices, where recruiter compensation was allegedly linked to the number of students enrolled.

While superficially, it may seem like a fine thing to lock recruiter compensation to recruitment numbers, the system falls apart when the colleges in question aren’t actually providing the services they promised. DeVry (NYSE:DV) and Corinthian Colleges (NASDAQ:COCO) have been battered by the Gainful Employment  Act, which is designed to reveal organizations that burden students with debt — i.e. convince them to come to school with promises of job placement — while insufficiently training them for employment.

Now that he as four more years, Obama is unlikely to give up on trying to clean up the education system. Industry insiders seem to have been aware of this during the campaign season. An unprecedented 70 percent of donations from the for-profit education industry went to Republican candidates in the most recent election cycle. This is in stark contrast to 35 percent given to Republicans in the 2008 cycle when Obama ran for his first term.

In particular, Obama has cracked down on predatory marketing practices targeted against veterans. Veterans are more likely to attend a vocational school after college, which are largely for-profit. Government investigations discovered a number of instances where schools were falsely representing themselves as being affiliated with the government in order to attract veterans and service members who could pay for education through the GI bill.

While the gainful employment act has yet to be implemented in full, Obama is sure not to let up the pressure on the industry. The coming years could see a fundamental shift in how publicly-traded, for-profit colleges juggle their often backwards, split-obligations between students and shareholders.

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