Apr. 6, 2015 7:35 AM ET
Disclosure: The author is short APOL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
- Apollo Educational Group has plummeted since its earnings report.
- Connection between Wall Street and Main Street demonstrated in decline of for profit educational institutions.
- Private groups funding selective college students will succeed with new student loan bubble.
Student loan debt, in the United States, has reached troubling heights accounting for the second highest form of consumer debt behind mortgages. With the federal debt at $16.7 trillion, student loan debts represent 6% of the overall national debt. The first victim of this precipitous rise has been for-profit educational institutions. On March 31, 2015 – Apollo Educational Group (NASDAQ:APOL) announced the relocation of its San Francisco team to Phoenix, Seattle, Chicago and Dallas. An informed source has revealed that 75 staffers in the Apollo Marketing staff will lose their jobs. The move comes after announcing that its revenues and enrollment both sank roughly 14% in its last quarter compared to a year ago. The stock plummeted nearly 30% following the news. The Apollo Educational Group is a prime short opportunity, but investors should also take note of private funds exploiting this growing crisis and making huge gains.
Apollo Educational Group and Student Loan Debt:
Five years ago, Apollo Educational Group had a total of 460,000 students, it has more than halved since then with current enrollment reported at 213,000. With the rest of the economy seemingly improving and Wall Street hitting record highs, the disconnection of main street and Wall Street is evident in the plummeting of Apollo Educational Group’s stock and the stock of its peers.
College graduates are struggling with the fact that degrees from even prominent institutions do not guarantee meaningful employment. The economic policy institute has found that a total of 16.8 percent of new graduates are “underemployed,” meaning “they’re either jobless and hunting for work; working part-time because they can’t find a full-time job; or want a job, have looked within the past year, but have now given up on searching.”
With the struggles of college graduates from state and private (non- profit) institutions, it is not difficult to see why young adults have become disillusioned with the prospects of enrolling in for profit institutions that have even less chance of leading them to gain employment. More and more college graduates are working jobs that do not even require a college degree. A study by Mckinsey that has been corroborated by the Bureau of Labor Statistics found that 48% of employed U.S. college grads are in jobs that do not require a college degree. Therefore, many recent graduates have found themselves working low-wage jobs that make it exceedingly difficult to pay back their loans.
Besides the obvious short opportunity for Apollo Educational Group and its peers, a savvy investor could try and take advantage of growing student debt by investing in private lenders that cherry-pick students based on prospective degree, background, university and several other factors.
Private lenders will see an even greater increase in opportunity with the flurry of sales of government-guaranteed student loan assets by large financial institutions: Wells Fargo & Company revealed it has transferred its $9.7 billion Federal Family Education Loan Program (FFELP) portfolio to held-for-sale during the second quarter.
Groups like CommonBond have already made more than 150 million in loans to current students and graduates of more than 700 graduate degree programs at more than 190 schools. In addition, a VC-backed company, SoFi (for Social Finance), has refinanced more than $1 billion in student debt held by 13,500 graduates of 2,200 schools, making it the largest refinancer in the market.
According to a Forbes report, “both now offer five-year fixed-rate refinancing that ranges from 3.625% to 5.99% (depending on their judgment of a student’s creditworthiness); ten-year fixed rates of 4.74% to 6.625%; and a buffet of longer-term and adjustable-rate loans. SoFi estimates that its average borrower this summer refinanced $71,000 in debt and will save nearly $12,000 in interest over the life of a ten-year loan.”
SoFi is extremely stringent in who they accept to receive loans making default an extremely unlikely occurrence. Also, SoFi requires a borrower to have a job or a job offer in hand while also looking at respective salary and credit scores. Currently, SoFi claims that it has not had a single default and, in addition, that it will work with borrowers to land a job one has lost at no fault of their own.
Young adults have an extremely difficult decision when it comes to higher education. Attending a four-year college, no longer guarantees one a solid job out of college. Job prospects resulting from a for profit institution are much grimmer and have led to the mass exodus of students.
With colleges continuing to raise tuition costs, students will continue to take more and more loans allowing groups like SoFi and CommonBond the ability to pick the best of a growing loan pool. Investors should be on the lookout for the IPO of SoFi in 2015.