University of Phoenix cuts back

The University of Phoenix grew to 400k students in its heyday, but the last couple of years have been tough; WSJ reported this week that Phoenix is now down to 328k, a 20% drop.  As in any other business facing reduced demand, the for-profit university now is cutting back on capacity.  Phoenix will close 25 of its main campuses and another 90 satellite learning centers.  Share prices for the Apollo Group, which owns Phoenix, dropped 22% upon the announcement. 

Why has enrollment dropped so much?  The tough economy has to be part of the story; students are strapped budget wise and fewer companies are providing tuition benefits.  For-profits also are dealing with unfavorable publicity as the public becomes more aware that completion rates are much lower than at not-for-profit schools. 

A less-well-publicized federal bailout

When you hear the words "federal bailout," most people think about big banks, big auto companies, AIG, or Fannie and Freddie.  Yet another debt crisis is brewing and it is not receiving any attention from the mainstream media: student loans at for-profit schools.  WSJ reports that candidates for associates degrees at for-profit schools are twice as likely to take out loans and their debt is nearly twice as high as candidates for these degrees at nonprofit and public schools.  Many for-profits receive more than 80% of their revenue from federal loans. 

The Department of Education is considering setting a minimal loan repayment rate for schools, perhaps around 45%.  Some big players could be in big trouble if this ends up being the rule; Capella has a repayment rate of 40%, Kaplan 28%, Strayer 25%, and Phoenix is right at 44%.  Of course we all know who is on the hook for the portion of the federal loans that the students do not repay. 

To their credit, the for-profits have developed a market by making higher education more accessible to the public at large with their decentralized campuses and online courses.  Established institutions of higher education could learn from the entrepreneurial approach of some of these schools.  NC State is currently exploring ways to make its MBA program more accessible. 

Regulation can play a useful role in this situation, especially rules that require full disclosure of data on graduation, student placement and loan repayment rates.  This would allow students to better decide for themselves what opportunities are best for them. 

Here comes the Jack Welch MBA

Famous ex-CEO, best selling author, sought-after speaker and media celebrity Jack Welch has decided to launch his own online business school. An investor group (Welch has a 12% stake according to the Wall Street Journal) is buying a bankrupt private school in Cleveland that was well on its way to losing its accreditation. Welch and his wife Suzy (former editor of Harvard Business Review) will help plan the curriculum and recruit faculty. Welch also will record a weekly video for students.

Privately-owned online schools such as the University of Phoenix have captured a significant share of the MBA market. Their appeal has been based largely upon convenience and relatively low cost. As the director of a face-to-face MBA program that costs about 50% more than the advertised price of the Welch MBA, is this going to keep me up at nights?

Maybe. I think the key factor will be the success (or lack thereof) that Welch U has in attracting faculty. Suppose Jack opens his checkbook and gets a team of superstars to be his lecturers: Michael Porter for strategy, Jeremy Siegel for finance, etc. Also suppose he keeps it open and pays enough to attract solid faculty from mid-tier business schools to actually engage with students on challenging assignments and projects. These might be recently retired faculty whose CREF accounts look like mine. At some scale you might be able to deliver this degree online for $21,600 and make a decent ROI.

The other side of the coin: what if Welch decides his own personal star power is enough of a draw and sticks to the other aspects of the Phoenix business model? Hard to see how he beats Phoenix at its own game; he has to change the game by adding more value than his name.

At NC State we tell prospective MBAs to evaluate all programs based on (1) what they will learn in the classroom (which is more than listening to a lecture) and (2) what connections they will make with faculty, fellow students, and alumni that they can leverage for the rest of their careers. I am skeptical that Welch U will compete very well on the former dimension and very, very skeptical that they will make any effort regarding the latter.

A word of warning to all prospective Welch U faculty: don't end up in the bottom decile of the student evaluations; Jack originated the "rank and yank" personnel policy at GE!