State universities’ online offerings cut into for-profit institutions’ bottom line

John Hechinger / Bloomberg News /


Published Nov 21, 2012 at 04:00AM / Updated Nov 19, 2013 at 12:31AM

Keri Trimble, 33, an employee at a utility call center, was shopping for an online college so she could take classes at night and on weekends.

Trimble rejected Apollo Group’s University of Phoenix, the dominant player in the market for selling Internet degrees to working adults. Instead, she chose Arizona State University’s program, which typically charges almost 30 percent less.

“The cost was outrageous,” said Trimble, of Sacramento, Calif. Also, “I didn’t think that graduating from the University of Phoenix would give me the respect that comes with a degree from a traditional four-year college.”

Competition from state universities’ expanding online programs is pummeling for-profit colleges, once among the fastest-growing U.S. industries. The companies, including University of Phoenix and Washington Post Co.’s Kaplan chain, are closing campuses as enrollment and stock prices plunge. With outstanding student loans totaling $1 trillion, some potential customers are turning away from the schools out of concern about cost and quality.

It’s a potent threat because publicly traded for-profit colleges drew 59 percent of their enrollment last year from online-only students, according to estimates from Deutsche Bank. At the University of Phoenix, the figure was three-quarters.

More than 80 percent of the U.S. population will have access to less-expensive online programs from their own state universities by the end of next year, up from 62 percent this year, predicted Paul Ginocchio, an analyst at Deutsche Bank in San Francisco. Up to a third of those students would have gone to a for-profit college if the alternative didn’t exist, he said.

Private universities are also invading the online arena. Last week, a group including Duke, Vanderbilt and Brandeis universities, said it would offer online classes for credit. Harvard and the Massachusetts Institute of Technology offer courses free online, though they don’t count for credit or toward degrees.

For-profit colleges have also suffered damage to their reputations. In the past two years, the schools, which can receive as much as 90 percent of their revenue from federal student grants and loans, have faced scrutiny from President Barack Obama’s administration, Congress and state and federal prosecutors. Investigators have said the schools use high-pressure sales tactics to mislead applicants about costs and job placement, leaving them with government loans they can’t repay.

For-profit college stocks fell after Republican presidential challenger Mitt Romney, who had called for less regulation of the industry, lost to Obama.

Phoenix, Ariz.-based Apollo, the largest U.S. for-profit college company, is down 64 percent this year, among the worst performers in the Standard & Poor’s 500 Index.

Twelve of the 13 for-profit college companies tracked by Bloomberg have suffered stock declines this year, with six down at least 50 percent. The exception: Grand Canyon Education, which operates a traditional campus in Phoenix with a Christian focus alongside its online program.

State universities’ online programs offer cheaper degrees from better-known institutions. Arizona State charges $442 per credit hour for an Internet bachelor’s degree, or about $11,000 a year including fees, according to the school. University of Phoenix typically costs about $585 per credit hour, or about $15,000 a year.

Prospective students attracted by affordable tuition have boosted enrollment at the University of Florida’s online program by 10 to 15 percent a year to 7,000 currently, said Andy McCollough, an associate provost. Florida residents pay $147.49 per credit hour, or $5,000 a year, including other fees. At Western Governors University, with 37,000 students, enrollment is jumping at a 40 percent annual clip, according to Joan Mitchell, a spokeswoman for the Salt Lake City-based nonprofit online college. It charges about $3,000 for a six-month term.

For-profit schools have revolutionized customer service, letting students call and sign up in as little as 48 hours, then attend convenient campuses or online programs, said Phil Regier, dean of Arizona State online, whose enrollment has climbed to 7,000 from 200 in August 2009. Now, traditional schools are starting to offer the same approach.

“It’s not an infinite market,” Regier said. “A lot of our students would have gone to a for-profit. I don’t know why students would go to for-profits once we get as good at customer service. Their brands are not as good, and they tend to be more expensive.”

Apollo says its programs often cost less than private, not-for-profit colleges as well as state universities’ nonresident tuition. Last month, the University of Phoenix announced it would freeze tuition for all currently enrolled students and prospects who sign up by June.

“We are tremendously competitive,” said Mark Brenner, an Apollo senior vice president.

Apollo excels at helping job-hunting students, Brenner said. The University of Phoenix has established relationships with 2,000 corporations, including Verizon Communications, Wal-Mart Stores and Adobe Systems.

Those company ties haven’t stopped the bleeding at Apollo. Enrollment at the University of Phoenix has plunged 30 percent to 328,400 students since August 2010. Apollo is shutting 115 locations, including 25 campuses, and eliminating 800 jobs over the next year.

In September, Kaplan said it stopped enrolling students at nine campuses and is folding four others into nearby locations.