The education sector has been viewed as a safe, defensive play in recessionary times. After all, people who are laid off need to get retrained. There is also a long-term demographic trend that has favored education. Total enrollment in degree-granting higher education institutions is projected to grow by about 1-2% a year for the next decade according to the U.S. Department of Education.
 
The publicly traded for-profit higher education institutions that primarily serve older, working adult population have been growing. Over the last decade these institutions have increased their share of the total U.S. enrollment from 1% to almost 9%. One reason is that the for-profit schools also emphasize innovative methods, such as on-line learning and computer-assisted learning programs. After all, this keeps labor costs down.

On-line teaching/learning vs. campus-based classes is the growth edge in education and has gained acceptance by employers. No wonder many of the publicly-traded education stocks are near all time highs. But this recession may be different. With private colleges closing right and left, traditional institutions will be much more aggressive in cost cutting and more flexible in program design going forward. This means more competition for companies like Apollo.

Apollo, founded in 1976, operates as the University of Phoenix, the largest private university in North America with 200 campuses and an enrollment of almost half a million students. APOL offers more than 100 degree programs in online and classroom settings. The school markets to working adults who want to complete degrees or earn advanced certificates in their professional field.

Shares of APOL have performed remarkably well, up more than 100 times since inception. By some measures, however, there is a bubble in higher education in the U.S. due to easy credit. Tuition and fees have risen over 400% since 1982, three times the growth of median family income. Due to the recession, student loan defaults are now up 43% in two years.

APOL gets more than 90% of its funding from federal student financial aid loans and grants and although its graduates have a good record of payback, we think easy student loan money may soon be a thing of the past. Total student debt now stands at $500 billion, having doubled in 10 years. If we are headed for a new normal, education is going to take a hit.
 
Meanwhile, for the second time this year, the SEC is looking into Apollo’s revenue recognition practices. The new probe, announced this week, comes from the SEC's enforcement unit. Meanwhile, the company took an $80 million charge for a pending litigation settlement relating to a whistleblower suit. For-profit schools are prohibited from paying recruiters and counselors based on head count since this may result in unqualified students being admitted and paid-for by federal student loan funds.
 
We think the education sector will undergo a major revision and house cleaning over the next decade. No doubt the publicly-traded outfits will be leading the change process, but their competitive advantages will probably be eroded. Apollo looks like the most at-risk kid in the class.