For-profit education is in the news again lately, thanks to the President-elect’s recent $25 million settlement of Trump University lawsuits*.

Most of the attention falls on shortcomings under two disclosure topics as defined by SASB: Quality of Education & Gainful Employment, and Marketing & Recruiting Practices.

Either of these Social Capital issues for Education is substantial enough for its own full article. However, the importance of both derives from the same source: for most publicly traded education institutions, the majority of revenue relies on Title IV funding — federal student aid in the form of loans or grants.

Public funds, public eye

This dependence on public funds guarantees scrutiny from both government and media. This attention has brought to light practices and problems that may keep institutions from fulfilling their most basic function: readying students for gainful employment.

This isn’t just a function of quality instruction, which may seem the most obvious product a school can offer. Along with a set of metrics specific to marketing/recruitment,  SASB’s industry brief suggests considering “the following direct or indirect performance metrics:

Graduation rate;
On-time completion rate;
Job placement rate;
Debt-to-annual earnings rate and debt-to-discretionary earnings rate; and
Program cohort default rate.”

Exploring the performance gap

Compared with public institutions, for-profit universities on average have a higher dropout rate, lower job placement rate, higher debt-to-earnings rate, and more loan defaults.

Part of this performance gap may be attributable to the more inclusive admissions standards of for-profit universities. They serve a valuable function in the education world, where “enrollment demand exceeds the capacity of state-funded non-profit institutions,” making education more accessible to “non-traditional demographics, e.g., working students and non-recent high-school graduates,” and educating “a larger percentage of minority, disadvantaged, and older students.”

Clearly there’s great public benefit in the availability of for-profit education. Just as clearly, too many students fail to derive personal benefit. An incomplete education and an unpayable loan leaves them worse off than before.

Some may be thinking, aren’t students ultimately responsible for what they get out of their education? Aren’t they responsible for their agreements? What’s the big deal?

What IS the big deal?

Lawsuits and loss of accreditation, that’s what. Legal costs are nothing to sneeze at; for a school dependent on Title IV funding, loss of accreditation is the kiss of death, and — worse — may also destroy even their top students’ eligibility for licensing or employment in their industry.

Many of these lawsuits focus on fraudulent practices in marketing and recruitment. They allege that defendant schools overpromise and underdeliver in both education/instructor quality and graduates’ likelihood of career placement, and that schools recruit unqualified students who are unlikely to benefit from the instruction … assuming they can even complete it. (The collision of these issues is when schools budget more per student on advertising and recruitment than on instruction itself — considered a leading indicator by SASB for risky business.)

Schools targeted by these lawsuits face potentially high legal costs and possible complete revenue loss. At the least, they (and those performing poorly on the metrics above) are likely to lose public favor, resulting in reduced demand and revenue.

An education on success in education

The SASB brief tells us, in short, that these institutions should focus on improving student outcomes. 

The brief even provides a case study in how to improve both metrics and revenues … and many, many more examples of how not improving on these metrics directly or indirectly affects the bottom line. Simply put, the key issues measure a school’s success; a low ESG score may indicate that the school isn’t fulfilling its obligations to students and investors.

 

* Footnote: Though these issues may have been noted in the Trump University lawsuits — and though SASB’s 2014 research brief called out Trump University by name — TU isn’t a good case study for these issues because 1. it was privately owned, not publicly traded; 2. it did not accept Title IV funding; 3. it was never an accredited university.


Profit & Education is part of our series, ESG Key Issue of the Week. Tune in weekly for new installments.

You’ve heard a lot of buzz about how ESG can help make good investments, but many investors still misunderstand the how and the why.

Environmental, social, and governance data has material value. Simply put, ESG helps reveal how well a particular company is run, how it relates to its stakeholder base, how it manages its risks for the long term, and so on.

The key issues, as outlined by the standards boards, include some obvious ones — for instance, energy management clearly tracks quantifiable costs — and some that at first glance may not seem to promise immediate benefit to the company’s bottom line.

Find out why each of those ESG issues has been recommended for a particular industry based on materiality. Every week we’ll translate another one into plain language. Stay tuned!

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