Bill Alpert

School's out forever for the U.S. Department of Education, if the Trump administration has its way. Elon Musk's team of budget cutters was in the house this week, figuring out how to dismember the agency.

That may be welcome news to the for-profit education industry, whose worst ways have been restrained by the department's oversight.

Stocks such as Apollo Global Education, ITT Educational Services, and DeVry were Wall Street darlings some years back, until their undereducated students became the biggest defaulters on government-backed student loans. The Ed Department then stepped in to curb boiler-room sales practices, and condition government funding on gainful employment for their graduates.

Their ranks reduced by bankruptcies and buyouts, for-profit education stocks jumped at Donald Trump's election win. The president had been an industry insider, after all, when he sponsored the Trump University real-estate training school from 2004 to 2011. So Adtalem Global Education (which owns former DeVry schools) jumped 19% in the November election week, while Grand Canyon Education leapt 26%. They're now up 125% and 38%, respectively, in the last 12 months.

Trump is planning an executive order that would shut down Education Department activities that aren't written into federal statute, or move its oversight of student loans to the Treasury, according to a Tuesday report in The Wall Street Journal. By Wednesday, Musk's efficiency squad had gained access to the department's personal data on student grant recipients.

Barron's queries to the Education Dept. weren't answered. A White House official said: "The President plans to fulfill a campaign promise by re-evaluating the future of the Department of Education."

Trump's demolition plans dismay the department's admirers. "It's incredibly destructive to kids and ultimately to our country," says Arne Duncan, who served as Secretary of Education from 2009 to 2015. "The intent is really to destroy public education."

On Fox Business, White House press secretary Karoline Leavitt pointed to the National Assessment of Educational Progress scores, in which the department reported last week that 30% of 8th-graders and 40% of fourth-graders aren't proficient readers.

In addition to compiling that national report card and other statistics, the Ed Department oversees $1.6 trillion in federally guaranteed student loans, some $110 billion in grants for impoverished or disabled students, and enforces antidiscrimination in federally funded schools.

The agency has exercised oversight of for-profit educators as part of its administration of federal grants and loans for higher-education. That federal spigot supplied up to 90% of all revenue for the industry, as it quadrupled in size under the George W. Bush administration.

For-profit educators became hot stocks, but their gains for investors weren't matched by outcomes for students or taxpayers. Even though the industry enrolled just a tenth of postsecondary students, their dropouts and graduates accounted for a third of student-loan defaults. Student debt had been a scandal for all higher education, but for-profit grads had the least to show for it.

Marshaling data on student loans and graduate earnings, in 2011 the Obama administration Ed Department ruled that for-profit colleges would lose federal funding if too few graduates found "gainful employment." Federal regulators cracked down on the industry's high-pressure sales tactics.

In Trump's first term, his Ed Department repealed the industry's gainful-employment regulation in 2019. Joe Biden's department reinstated it in 2023, and increased financial disclosures for all colleges.

Given Trump's first-term precedent, the department's strictures on for-profit school funding seems unlikely to survive his reported plan to shutter its programs that aren't explicitly written into statute.

The Ed Department leaned on the industry in other ways. In 2018, Grand Canyon put its university into a nonprofit entity that pays for the company's services, to improve the school's appeal to applicants. The Biden Education Department disputed the bona fides of the nonprofit switch, and threatened Grand Canyon's loan access.

Grand Canyon took the department to federal court and in November, the U.S. Court of Appeals for the ninth Circuit ruled the department had used the wrong basis for determining the school's nonprofit status. The court remanded the case for a new determination by the department. Even if the agency survives Trump's ax, it is unlikely to maintain the Biden department's position in the dispute.

Other federal agencies also police the education industry, and those burdens may also lighten under the new regime. Grand Canyon is defending a suit filed in federal district court by the Federal Trade Commission, which alleges that school recruiters violated telemarketing rules.

Grand Canyon is fighting the suit and says in its filings that it only makes telemarketing calls "to individuals who have demonstrated interest in speaking to us about educational opportunities at Grand Canyon University, which are permitted by the rule."

Meanwhile, revenue have been growing at a better than 10% annual rate at both Grand Canyon and Adtalem, with operating-profit margins above 20%. BMO Capital Markets analyst Jeff Silber has followed the industry for nearly two decades and has a Buy rating on both stocks, as well as the smaller operator Strategic Education.

If the Department of Education has been a restraint on the for-profit industry's growth, that will end.

Write to Bill Alpert at william.alpert@barrons.com

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February 05, 2025 14:41 ET (19:41 GMT)

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