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'Free College' Legislation: A Boon To Public Postsecondary Ed Companies?

Summary

Postsecondary educational expenses have increased by a rate beyond the rate of inflation for several years, supported by market demand.

"Free" college proposals may increase public postsecondary educational companies' top-line growth by removing price sensitivity considerations from a demand-elastic portion of the market.

Nonetheless, such a proposal could create a substantial cost obligation and increase college attendance among those who might benefit little from the experience and create inimical capital misallocations.

About 21 million students are expected to set foot on U.S. campuses in the coming days and weeks for the start of another academic year. By 2025, this is expected to increase by another 10% to over 23 million.

(Source: statista.com)

With more students facing burgeoning costs of attendance, this brings on more student debt. Over the past ten years, tuition and fees at four-year public universities have increased at a 3.4% year-over-year clip, outpacing the rate of inflation and the rise in personal incomes. (Private college costs tend to rise faster than those at public institutions.)

For the few public for-profit postsecondary education companies out there, such as Apollo (NASDAQ:APOL) and Grand Canyon Education (NASDAQ:LOPE), this should be a positive tailwind for the industry. LOPE has increased its top-line by 13% Y/Y since 2011 through a combination of tuition increases and steady student enrollment expansion. APOL has been less fortunate in its recent business prospects, embattled by a series of controversies regarding recruiting, marketing, and financial aid dealings. Consequently, the company was purchased through a syndication group of Najafi Companies, Vistria Group, and Apollo Global Management (no relation) for $1.14 billion. This amounts to $10 per share, pending the deal's close, down far below its $89 per share high in 2009.

Over the past thirteen years, student loan debt has gone up linearly at an unrelenting pace. Credit card debt has been virtually flat. Home equity loans peaked around the time of the financial crisis and have declined since, while auto loans were flat until 2011 before following a parallel trajectory to student loans. Since the beginning of 2003, student loan debt has ballooned from $250 billion to $1.26 trillion, or an increase of about 13% compounded annually.

(Source: wsj.com)

Naturally, how to remedy a potential looming student loan debt crisis has become an issue in the political sphere. One proposition has been to grant tuition-free college to students from families making below a certain income threshold. While the proposal could skew incentives to create economically imprudent outcomes, should such a plan come to fruition, I believe it could be a major boon to for-profit postsecondary ed companies poised to gain from it.

Regarding the growing student debt issue, I don't believe it's correct to demonize the debt itself. In theory, it should not be...


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