There Are Cracks Forming in the College Education Business
Unfortunately, one of the defining characteristics of the millennial generation is student debt. If you or someone in your family is a millennial, you've probably heard some variations of these staggering statistics.
There are 44.2 million Americans with student debt. Total student debt now stands at $1.42 trillion. The average 2016 college graduate started his or her professional career with $37,172 in debt. The average student loan payment for borrowers younger than 30 is $351 per month.
The problem only seems to be getting worse. The average 2016 graduate has roughly 6 percent more student debt than the average 2015 graduate. Even when adjusted for inflation, tuition rates at private universities have roughly doubled since 1990. In 2016, they ticked up another 2.7 percent on an inflation-adjusted basis.
While tuition rates continue to rise, the cost of a college education may have finally gotten to the point where it is discouraging students from going to college. The National Center for Education Statistics reports estimated total college enrollment numbers every two years. After peaking at 21 million in 2010, the total number of enrolled college students declined for the first time in 2012 to 20.6 million and then in 2014 to 20.2 million.
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College enrollment isn't the only crack forming in the higher education market. The student lending business may still be booming, but more and more borrowers are unable or unwilling to make payments. The Wall Street Journal reports that more than 40 percent of Americans with government student loans are behind on payments or have stopped making them at all.
At the same time, shares of for-profit college education companies such as Grand Canyon Education (ticker: LOPE), DeVry Education Group ( DV) and Strayer Education ( STRA) are all up between 21 and 45 percent in 2016. The stocks of student lenders SLM Corp. ( SLM), Navient Corp. ( NAVI) and Nelnet ( NNI) are doing even better, surging higher by 45 to 64 percent this year.
At some point, something has to give.
Michael Blattman, senior vice president of Collegiate Consolidation Services, believes that the student loan market will ultimately be resolved the same way the out-of-control U.S. mortgage market was in 2008.
"When students graduate with high debt levels and find employment at lower-than-anticipated starting salaries, a recipe for trouble is in order," Blattman says.
He predicts tuition rates will continue to rise because universities must make up for declines in state funding and alumni donations.
"What I see occurring is a capitalist effect in the university sector. What I mean is that many small and mid-level colleges and universities, particularly ones that are liberal arts-oriented, will cease to exist," Blattman says.
The end result would be far fewer colleges with much higher tuition rates.
Another outside threat to the current university model is technology. According to Bryan Alexander, founder of education technology consulting firm Brian Alexander Consulting, the rise of online learning and artificial intelligence-based teaching could provide future students with viable alternatives to university educations.
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"Online learning is improving rapidly in quality. While it might not be significantly cheaper than face-to-face learning, it is far more convenient, which means people are likelier to actually finish degrees," Alexander says.
"We should also look for more automation in learning. Programs like Duolingo are good at teaching certain topics. Over time we might see a growing amount of learning done with AIs and for less money."
But wide-scale changes may still be years down the road.
"Today, there are no viable and scalable low-cost alternatives to higher ed," Alexander says. "Massive open online courses have not impressed employers nor shaken higher ed's business models."
While college graduates continue to suffer under the weight of increasingly heavy student debt loads, Wall Street analysts see student lenders and for-profit education stocks as cash cows for investors.
Under President Barack Obama, the for-profit education industry has been feeling the heat from regulatory agencies such as the Consumer Financial Protection Bureau, the Federal Trade Commission and the Securities and Exchange Commission. Many students have complained that these schools mislead them about the value of their degrees and encouraged them to pile on student debt.
Popular for-profit company ITT Educational Services eventually filed for bankruptcy earlier this year after years of intense financial and operational scrutiny from regulators.
President-elect Donald Trump has repeatedly emphasized his intention to reduce government regulations on the business world. Credit Suisse senior analyst Trace Urdan is bullish on for-profit education stocks under Trump's leadership.
"There is not a single cause driving the strength in each of these names, but generally the sector has benefitted from the election of Donald Trump and the perception that the regulatory climate will generally improve for for-profit education stocks," Urdan says.
Urdan is particularly bullish on Grand Canyon.
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"We like Grand Canyon shares best because of what we expect to be sustained revenue and earnings growth and an acceleration in free cash flow as the company's cap ex spending comes down over the next several years," he says.
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