Did the For-Profit College Bubble Just Go Pop?

The University of Phoenix's awful quarterly results might be a sign of things to come.

Is higher education a giant bubble? I'd argue that it's probably not. But for-profit higher education just might be, and today we could be witnessing it pop.

Last Tuesday, Apollo Group Inc., the corporate parent of the University of Phoenix, unloaded a round of hellacious news on its investors. The company's fourth quarter net income -- essentially, its profits -- had fallen 60 percent from the year before. The number of new students enrolling had slumped by 13 percent, and yet costs were up. To try and stanch the bleeding, management announced it would shutter more than half of the school's brick and mortar campuses and lay off almost 5 percent of its staff.

Its stock plummeted by 22 percent the next day, and has continued falling since.

As the Wall Street Journal's Melissa Korn reports today, the University of Phoenix is far from alone in its troubles. Buffeted by bad press and aggressive regulators, the major for-profit colleges have tried to heal their images by toughening up admissions standards and devoting more resources to educating students. But the industry's reputation for leaving graduates (not to mention dropouts) deeply in debt and struggling for employment may nonetheless be coming back to haunt it. In 2011, when overall college attendance dropped 0.2 percent, for-profits saw their headcount slide by almost 3 percent, ending a decade-long run of growth in which enrollment had roughly quadrupled. The recent trouble at the University of Phoenix suggests those problems might be accelerating.

The billion-dollar question is whether this is a momentary downturn as the industry adjusts to a new reality of greater oversight and savvier students, or if it's the beginning something more profound -- a bubble's big burst. It's still too early to pin down a definitive answer. But there's reason to think this is more than just a blip.

For the last decade, for-profit schools have ridden a unique set of circumstances to profitability. The percentage of Americans enrolling in college continued to rise and the enormous population bomb known as Generation Y began graduating high school. States continued cutting back on higher education funding per student, and so classrooms at inexpensive community and four-year colleges began filling up to capacity. With the help of aggressive recruiting, and an early embrace of online technology that made them appealingly convenient for working adults, for-profit schools were able to capture students that the traditional, non-profit schools were missing, as well as some people who otherwise probably never would have (nor should have) stepped foot on a college campus. When the recession hit, even more Americans took shelter from the nightmarish job market in the classroom.

In short, these schools were set up to succeed, even if students in their classrooms failed.

As the job market has improved, the enrollment boom seems to have leveled off. And unlike traditional colleges and universities, this poses a problem for the for-profit industry, especially public companies like Apollo, Strayer Education Inc., and the Washington Post Co.-owned Kaplan, which need to demonstrate consistent growth to investors. The pie of potential customers has stopped naturally expanding at just the moment that these schools have decided to push for higher caliber students. That means lower enrollment and, with it, lower revenues.

At the same time, nonprofit schools such as Southern New Hampshire University and University of Maryland University College (UMUC) have started moving in on their turf. As the WSJ's Korn notes, UMUC saw enrollment in its online courses grow 5 percent during the last year, to 97,001 students (University of Phoenix, the largest for-profit, has about 328,000). The college offers relatively inexpensive tuition to in-state students and military veterans, and if other states create schools like it, it would further corrode the for-profit industry's student base. By 2020, the Department of Education expects total college enrollment to grow by 2.5 million. But if convenient nonprofit options continue to sprout up, it's not likely that many of those new students will choose to lay down $10,000 or more a year to get a degree from a school that spends more on marketing than career counseling.

The key is competition. It's misguided to think of higher education on the whole as a bubble, because there's no sign yet of employers losing their taste for college graduates. Quite to the contrary, it's never been more important to have a diploma if you want to make it in the job market. And while the free, massive open online courses from platforms such as Coursera and edEx are extremely exciting, it's not clear yet that they'll become a credible replacement for a traditional college education in the eyes of companies. In short, people don't have a choice other than to keep paying for their educations, at least for the near future. But they can choose not to pay the price for a for-profit degree if there's an option that's better, cheaper, and readily available.