College Debt Bubble Update: Apollo Comes Back Down to Earth

Discussions of a bubble in rapidly rising tuition costs and student debt levels have been circulating in financial communities for quite some time. Now, the latest earnings report from the owner of the largest for-profit college in the United States sends another clear signal that there is a serious problem building in the education industry.

After Tuesday’s closing bell, Apollo Group (NASDAQ:APOL) reported ugly financial results for its fiscal fourth quarter. The parent company of the University of Phoenix announced that income from continuing operations came in at $52.6 million (46 cents per share), compared to $189.7 million ($1.38 per share) a year earlier. This represents a 72 percent plunge in only one year. Excluding special items, income still tumbled 69 percent to $58.6 million.

The world’s largest private education provider also said that net revenue for the fourth quarter totaled $996.5 million, representing an 11 percent decrease from the previous year. Apollo cites lower enrollment for the dismal results, and plans to cut about 800 jobs to reduce expenses. Apollo will also shut down 25 campuses and 90 student resource centers. Enrollment in the University of Phoenix Degreed program fell almost 13.8 percent to 328,400. Meanwhile, the New Degreed program saw enrollment decline 13.7 percent compared to the same period last year.

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While the poor numbers from Apollo may be blamed on a number of things, there is no denying the increasingly large burden that comes with college debt and a lackluster job environment. It may be difficult to find, but there is a limit to how much debt students can take on before reaching their breaking point. Earlier this year, it was reported that the total amount of student debt outstanding surpassed $1 trillion towards the end of 2011. Over the past two decades, the percentage of American households with outstanding student debt has more than doubled from 9 percent in 1989 to 19 percent in 2010, according to a Pew Research Center analysis. The report also finds that a record breaking 40 percent of all households headed by someone younger than the age of 35 are saddled with student debt, representing the most indebted age group.

Shares of Apollo were taken out to Wall Street’s playground and beaten down to a pulp. On Wednesday, shares plunged 20 percent to reach a fresh 11-year low, just under $22. In comparison, shares traded above $80 in early 2009. It was the company’s biggest decline in two years and the results also impacted other names in the education industry. Shares of Career Education (NASDAQ:CECO) and DeVry (NYSE:DV) fell 2.5 percent and 5.2 percent, respectively. Meanwhile, ITT Educational Services (NYSE:ESI) and Corinthian Colleges (NASDAQ:COCO) dropped 7.9 percent and 8.9 percent, respectively.

Apollo also gave reasons for investors to close the book on shares in regards to forward guidance. The company expects revenue for fiscal 2013 to come in at between $3.65 billion and $3.8 billion, well below analysts’ estimates of $4.06 billion.

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