Bridgepoint Education (NYSE:BPI) is in the midst of a turnaround strategy that aims to correct the years of inadequate oversight and poor academic standards at its flagship online school, Ashford University. With increasingly daunting prospects for the entire for-profit industry, why isn't the weakest institution priced for its seemingly inevitable bankruptcy? The answer to that question maybe wrapped in one of Wall Street's biggest troubles, irrational exuberance. Investors may be hoping that Bridgepoint gets a buyout offer, like Apollo Education. But buyers of nearly defunct companies are hard to come by, and shareholders left holding out hope will be saddled with losses commensurate with those unlucky enough to have degrees from for-profit peers like Corinthian College and ITT Tech (OTC:ESINQ).
Bridgepoint Education will likely not exist this time next year. That may sound like an extreme hyperbole, but it a reality that every investor in for-profit education stocks should realize. The post financial crisis hyper-growth experienced by the industry is gone. New regulatory standards, increased political attention, and growing legal concerns will bring down Bridgepoint and many (but not all) of its peers.
Growth in the sector, and at Bridgepoint, was fueled by working class individuals seeking to find new career paths or young untraditional students looking to improve their life prospects. While both of these aspirations are admirable, students quickly learned that Bridgepoint's two online schools, Ashford University and The University of the Rockies, were providing subpar educational experiences and leaving an astonishingly large number of students without useful degrees. Since 2011, attendance at Ashford has declined by nearly half (44%).
(source: BPI 10-k 2010-15)
Even as Bridgepoint hires an army of prominent lobbyists to keep it from getting cut off from DoE title IV funding and VA GI funding, it is still facing a political storm. As the 2016 election reaches peak partisan fighting, Bridgepoint has found its way into the conversation. Several GOP senators have been forced to return campaign contributions from the company, while Democratic rivals have attacked their ties to the "Trump style" university that "targets single parents, veterans, and the elderly." Some people believe that all press is good press, but being called a fraud, on a near daily basis, is bad press for Bridgepoint.
With significant media attention on for-profits, even if not all of it is focused on Bridgepoint, the public is becoming increasingly aware that the entire sector is riddled with scams. Regulators, utilizing their newly created political capital, are seizing on the ability to take out the worst actors. The SEC has opened a formal inquiry into Bridgepoint and the DoE has started pulling funds from sub-par accrediting agencies. An examination of several risk factors should show investors that owning Bridgepoint stock is more of a gamble than a sound investment.
Federal and state regulators are beginning to seriously focus on the massive campaigns of misinformation put out by many for-profit schools. As a result, Bridgepoint has been on the receiving end of numerous state and federal inquiries from the SEC, DOJ, DoE, CFPB, and numerous state AG's.
Currently, and most pressing, remains the issue of accreditation for the purpose of federal funding, specifically GI Bill funding. Ashford maintained a physical campus in Iowa for many years, but management recently closed that campus as a cost savings initiative. This poorly thought out plan led the school to lose state accreditation from the Iowa State Approving Agency. Bridgepoint then attempted to get approval through the state of California (where the company is headquartered). After seemingly going nowhere, that application was dropped and the company currently maintains funding through a short term stay granted in legal proceedings by an Iowa court. Once the stay is lifted and the case resolved, Ashford will likely lose access to GI Bill funding. In anticipation, the school has already ceased enrolling new students under the program. GI Bill students represented up to 19.1% of Ashford's revenue in 2015, and represent one of the schools only growth areas, despite widely documented cases of abusive recruiting tactics that resulted in Ashford being banned from military bases.
Besides the loss of nearly a fifth of Ashford University's revenues, there is a more pressing issue with the GI Bill funds. They are almost entirely responsible for the company's compliance with The Higher Education Act. Under that law, schools must maintain at least 10% of revenues from sources other than DoE title IV funds. This is commonly referred to as the "90/10 rule." With GI Bill funding set to expire in the coming months, and the CFPB's recent injunction against Bridgepoint issuing internal loans, the company will no longer be in compliance with the 90-10 rule. Non-compliance will result in loss of all title IV funding in two years. This is the same scenario that bankrupted Corinthian College and ITT Tech.
One more thing of importance, the Department of Justice is looking into whether the company is in compliance with the Higher Education Act, so they will quickly notice if/when the company is cut off from GI Bill funding. While federal rules note that a college will lose title IV funding if in non-compliance of the 90/10 rule after two years, the DoE has the authority to step in prior to years, just as they did in the ITT Tech case.
So what are the chances Ashford will lose GI Bill funding? It's a near certainty. The school no longer has a physical campus in the state of Iowa, therefore it is entirely reasonable that the Iowa State Accrediting Agency would no longer accredit the school since it only has jurisdiction over Iowa based schools. California regulators do not seem particularly willing to sanction the school given its horrendous student outcomes and a generally more progressive ideological make-up of the states AG and regulatory agencies. That really leaves Ashford with few options short of opening a new campus in a friendlier state. The time crunch could make that challenging and cost prohibitive. Unless Bridgepoint pulls off a miraculous win in their court case, they will lose GI Bill funding and become non-compliant with the 90/10 rule. At that point, it is a mere inevitability that the school will be shuttered.
Under federal law, schools are forbidden from making material misrepresentations about certain elements of their operations or operational outcomes. Findings that a school knowingly misrepresented information to the DoE and/or students can trigger a revocation of title IV fund eligibility. Bridgepoint, on numerous occasions, has been found to have made material misrepresentations to students.
The Consumer Financial Protection Bureau, in September 2016, found Bridgepoint had committed "illegal student lending practices." The complaint notes that Bridgepoint knowingly instructed staff to lie to current and potential students. That finding alone would be enough for the DoE to cut off federal student aid.
At this point, there is no "smoking gun" that would undeniably result in Bridgepoint being shuttered. There is, however, plenty of smoke and if the age-old saying holds true, federal regulators are likely to find additional fire. With numerous state and federal investigations, a past mired in lawsuits, and student outcomes that rival that of already defunct online schools, the writing on the wall should be clear to investors; Bridgepoint will lose federal funding and thus go bankrupt.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.