Hi, Could you please answer this question?
Thank you very much.
* If prospective students could no longer use government programs to finance their studies, what implications would this have for the University of Waterloo's business model?
How would the change affect the risk profile of the incoming students?
\fSince the 1970s, a bachelor's degree had become a more common requirement for employment in America's increasingly skill-based economy. While the U.S. college-age population increased by roughly 25 percent between 1970 and 2010, college enrollment grew by nearly 250 percent over the same period. In the coming decade, it is estimated that 60 percent of new jobs will require more than a high school diploma. One of the innovations that helped fulfill the growing demand for higher education was for-profit educational services companies. These companies primarily focused on employed learners who sought accredited degrees through programs that allowed flexibility around their work schedules. One of the most profitable companies in the for-profit education sector was Omega Group, best known for its largest subsidiary, the University of Waterloo.Omega Group Omega Group was one of the world's largest private education providers, offering both online and on-campus programs at the undergraduate, master's, and doctoral levels. Omega operated educational institutions in the United States, the United Kingdom, Mexico, and Chile, but its U.S.-based subsidiary, the University of Waterloo, represented approximately 91 percent of the company's net revenue in fiscal year 2012. Founded in 1976, by 2012, the University of Waterloo had grown to become the largest private university in the U.S., with an enrollment of over 350,000 students. Over 67 percent of students attending the University of Waterloo in 2012 were women, and approximately 50 percent were minorities. Omega's business model relied on low costs and a predictable inflow of revenues. It kept costs low by employing part- time and adjunct faculty as instructors, providing classroom facilities but no student housing, and building a scalable online educational delivery system. The cost of tuition of the schools operated by Omega, however, remained relatively high when compared to other public colleges. For example, tuition cost for a Bachelor of Science in Business at the University of Waterloowas $74,500. The same degree at the University of Arizona cost $44,200. Federal Student Financial Aid Programs In addition to for-profit educational services companies, increased college enrollment was facilitated, at least in part, by the U.S. government's decision to support various grant, loan, and work- study programs to help students pay for tuition and other education-related expenses. These programs were administered by the Department of Education under legislative authority provided by Title IV of the 1965 Higher Education Act. The Department of Education was created in 1867 with the primary role of collecting information on schools to help establish effective school systems. Federal aid to higher education began in 1890 with the passage of the Second Morrill Act. The end of World War II, however, led to a significant expansion of federal support in this area. The 1944 "GI Bill" authorized the Department of Education to provide financial assistance that would ultimately send almost 8 million World War II veterans to college. In the years that followed, additional federal student financial aid programs were established, such as Stafford Loans and Pell Grants.As the U.S. government became more actively involved in helping students pay for higher education, it established regulations to ensure that loans made to students were likely to be repaid. Specifically, any educational institution with a two-year cohort default rate greater than or equal to 40 percent in any given year or greater than or equal to 25 percent for three consecutive years would be ineligible to participate in Title IV programs. In addition to addressing concerns about student loan defaults, federal regulations also explicitly targeted for-profit educational services companies, focusing on their sources of revenue. For-profit educational services companies had been increasingly successful over time in securing a disproportionate share of federal funding for higher education. While for-profit schools accounted for only 10 percent of higher-education students during the 2009-2010 school year, they received 25percent of available funding from the Department of Education. (See Exhibit 1 for the top 10 for- profit recipients of Title IV funding during the 2010-11 school year.) Funding from the Department of Education was limited to certain eligible institutions. One of the regulations in this area was the 90/10 rule, which stated that any for-profit educational institution would be ineligible to participate in Title IV programs, if for two consecutive fiscal years it derived more than 90 percent of its cash-basis revenue for eligible tuition and fees from Title IV programs.' (Exhibit 2 provides historical information on 90/10 percentages for the University of Waterloo.)Exhibit 1 Top 10 For-Profit Recipients of Title IV Funding during 2010-2011 School Year 6,000 5,037 5,000 4,000 $ in millions 3,000 2,000 1,274 1,108 1,145 847 915 1,000 745 564 610 659 Grand Canyon Capella Argosy Walden Strayer ITT Technical Kaplan Ashford Devry University of Waterloo University University University University University Institute University University UniversitySigns of Trouble In the wake of the 2007-2009 financial crisis, many began to question the value of higher education. Skyrocketing tuition had grown by almost five times the rate of inflation since 1983 and had resulted in students taking on ever more debt. Toward the end of 2012, student-loan debt in the U.S. approached $1 trillion dollars. At the same time, diminished job prospects due to relatively weak economic conditions caused student-loan delinquencyes to rise, with student loans accounting for a higher percentage of household debt over 90 days past due than credit cards, mortgages, auto loans, and home-equity loans. While many blamed the financial crisis for high student-loan default rates, others pointed to another culprit: for-profit higher education. Differences in student outcomes had emerged between for-profit and not-for-profit schools. The three-year student-loan default rate for the 2008-2009 cohort of students was 8 percent at private not- for-profit schools and 11 percent at public not-for-profit schools, but it was 23 percent at for-profit schools. Of students who enrolled in for-profit schools in 2008-2009, 54 percent left without a degreeor certificate by mid-2010. The rates of loan defaults by students were closely related to the number of students leaving the institution with no degrees (See Exhibit 5 for historical information on two- and three-year student-loan default rates for the University of Waterloo). The Department of Education tracked the number of students who defaulted on their student loan, ie., the student failed to make payments within 3 years of entering repayment, which usually begun 6 months after leaving the program. Schools were encouraged to institute various default management programs for students by The Department of Education. Omega Group, like many other institutions, contracted with the General Revenue Corporation (GRC) to "cure" students who were approaching defaults. Internal documents of Omega indicated that nearly all cures were accomplished by putting students into temporary deferments or forbearances. The additional interest accrued during the forbearance period was added to the principal loan balance.Statistics like these helped corroborate stories of aggressive marketing tactics and deficient curricula that had dogged the for-profit higher-education industry for years. They also reinforced the negative reputation of for-profit educational services companies. Upon the release of a 2012 U.S. Senate report on the findings of a two-year investigation into the for-profit higher-education industry, Senator Tom Harkin (D-IA) commented, "In this report, you will find overwhelming documentation of overpriced tuition, predatory recruiting practices, sky-high dropout rates, billions of taxpayer dollars spent on aggressive marketing and advertising, and companies gaming regulations to maximize profits. These practices are not the exception-they are the norm; they are systemic throughout the industry, with very few exceptions." For-profit educational services companies had long been a darling of Wall Street analysts, who pointed to factors such as robust growth, a strong business model with great margins, and solid balance- sheet metrics in their "buy" ratings. However, all of this began to change in 2009 as bad press and regulatory scrutiny took their toll, souring market participants on for-profit educational services
