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How The Surplus In Pell Grants Will Affect For Profit Educational Institutions

|Includes: ATGE, Corinthian Colleges, Inc. (COCO), ESI

When you hold a leadership position, almost all your actions will have an effect on the lives of the people you lead to one extent or the other. Being the President of the United States is one such position and there is no denying the fact that that the State of the Union address delivered by the President last week has caused a ripple effect in the country. In this article, I will examine the part of the State of the Union speech that addresses education and how it affects stocks of for profit institutions like Corinthian Colleges Inc. (NASDAQ: COCO), ITT Educational Services, Inc. (NYSE: ESI) and DeVry, Inc. (NYSE: DV).

Obama was quoted to have said "Through tax credits, grants, and better loans, we have made college more affordable for millions of students and families over the last few years. But taxpayers cannot continue to subsidize the soaring cost of higher education. Colleges must do their part to keep costs down, and it's our job to make sure they do. Tonight, I ask Congress to change the Higher Education Act, so that affordability and value are included in determining which colleges receive certain types of federal aid" when he was speaking on education.

I was then not surprised to find another piece of news based on a report from the Congressional Budget Office showing that the Pell Grant Program has a high probability of being at a surplus this year and next year as opposed to the speculations that most education grants would experience deficits and cuts. It can be remembered that the Pell Grant program was the object of many budget cuts and changes in eligibility requirements in the last year.

These changes were probably responsible for the 2.4 percent drop in students taking classes from Corinthian. The numbers fell from from 90,910 in 2011 to 88,688 in 2012. In fact, new student enrolments totalled 23,703 as opposed to 24,790 a year ago signalling a 4.4 percent reduction in enrolment rates. In addition, the enrolment in 67 percent of colleges in states like Alabama, Arkansas and Mississippi declined drastically with an additional 5000 students losing their Pell Grants and the same can be said for a many other for-profit colleges in the country.

However, the surplus in Pell Grant this year will surely see more students enrolling in college while also keeping returning students in schools. It is on this note that Corinthian Colleges, DeVry and others may experience an increase in enrolment rates, thereby causing a commensurate increase in revenue. It may interest you to know that Corinthian has three different campuses and also offers some degree programs online to its 88,688 students, while DeVry provides education to some 74,000 students in the United States and Canada.

Interestingly, the President has asked colleges to keep their costs down. Cost-cutting is one of the means by which companies can increase operational margins (for the benefit of shareholders); yet, there is limited extent to the cost-cutting that can be accomplished in the educational sector. Thus, I find it hard to understand how cost-cutting would not affect the quality of education received. Yet, we can all agree on the fact that government is being fair to the education sector by not making cuts in the education budget when it could close the tax loopholes that are benefiting the wealthy and special interest groups.