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A Foot in the Door

Not enough credit is given to generational psychology and the way it shapes economics, politics, and culture.  Kelsey is on the leading edge of the Millennial Generation, children who were born during the prosperous late 80’s and 90’s, and are now coming of age during a time of crisis and turmoil.  Collectively, they are very different from the prior generation, Gen X, and even more different from the Baby Boomers before them.  I know this newsletter goes out to a lot of Boomers (and their predecessors, The Silent), so hopefully you folks will find the perspective fresh and interesting.

May 16, 2009 snuck up on me, and before I knew it I was sitting alongside fellow University of Nevada, Reno graduates.  Graduation day crept up before many graduates were, or even got the opportunity to be, prepared.

Despite the excitement and optimism in the air, many students’ attitudes toward graduating were not so.  Graduating means it’s time to make a decision: continue the expensive path towards a higher level of education, or enter the frightening job market and try to make something of oneself.  Conversations of graduates’ plans streamed up and down the isles as we waited to receive our diplomas.  An overwhelming amount of “I don’t knows” and “I’ve been looking for a job for months” were what these hardworking students had to answer.  According to the National Association of Colleges and Employers (NACE) that’s what nearly 80% of recent college graduates who are actively looking for a job had to answer.  The thought of ‘not knowing’ led to a tremendous amount of stress and fear upon graduates.  This created a sense of nervousness and skepticism, which actually lingered in the air on graduation day.

I said that many gradates didn’t get the opportunity to get prepared, and by this I mean that desirable jobs simply weren’t seeking applicants, and if they were, interviews were rarely given.  Consequently, the opportunity to prove oneself was out of the picture.  According to the NACE, employers say they will hire 22% fewer college graduates this year than last year.  At the same time, colleges are expected to see record numbers of graduates in 2009.

Despite the fact that there are limited jobs available, we graduates never gave up.  We aren’t graduates that tried once, got turned down and didn’t pick ourselves back up again.  We tried relentlessly, but not one employer gave many of us graduates the opportunity.  Collectively my generation has an abundance of pride, and it takes a great deal of discouragement and failed attempts for one to admit that they graduated and now work at Macy’s or Olive Garden.  Actually, it wasn’t until graduates couldn’t financially survive that they surrendered to working as a hostess after dedicating so much time and effort throughout college.

Perhaps we, the Millennial Generation, felt too entitled to a decent job with benefits upon graduation and that’s why it is so hard to settle for less.  Perhaps the realization that our dream jobs are not even open to applicants is what brought on the fear and anxiety.  That feeling of entitlement quickly vanished as the job market began to crash, and more graduates prepared themselves to fail rather than succeed in finding this so called ‘deserved’ job.

There were many reasons why May 16 brought graduates uneasiness: our desire to be a part of a team and the subsequent fear of being left behind, not being able to meet the requirements employers demand, and the idea of being out in the ‘real world’ without being able to provide for oneself.  These fears now place two choices in front of us: more school or enter the workforce, each of which place great financial burdens on young individuals (especially if the job received is not financially up to ones expectations).

Here’s a little insight as to what is going on in most graduates minds – I say “most” because I need to point out that, although the number is low, there are those who did find and receive a job that they enjoy and also receive adequate pay in order to make ends meet.  According to Mimi Collins, director of communications for the NACE, a very small number of the class of 2009 college graduates did have jobs secured by the time they graduated and hiring rates were expected to drop even lower.  So there is a good chance these fears will apply to 2010 graduates as well.  For the sake of explaining the general feelings graduates experience, I will focus on those who did not find a job with benefits and a suitable income by the time graduation crept up.  After all, they are the overwhelming majority.

First of all, I think it is safe to say that it is extremely important to Millennials to not only make something of oneself, but to be part of a team, whether that team is a business or some other formal organization.  Collectively, we don’t have the desire to individually enter a job of choice, climb up the totem poll, and make oneself rich.  To us it is more than that.  Yes, everyone strives for the lifestyle in which they do not have to worry about finances.  Yes, we all want to be able to afford the trips, and the homes we have always dreamed of.  Our generation of graduates may enter the workforce individually, but the prize is not to succeed individually, but rather to be part of the team that succeeds and reaches all these goals with the help of one another.

It is belonging to something bigger than each of us alone that we yearn for.

Millennials get gratification not only by feeling as though they are a part of a team, but that we are helping the whole to succeed.  So what does this create in new graduates minds?  A constant fear that we are going to be left behind, that we aren’t going to be a part of something bigger than ourselves.  This fear becomes much more real when one cannot seem to find an opportunity to become a part of a team or an employer that will offer a chance to prove oneself.  According to the United States Department of Labor unemployment among college graduates had increased tremendously due to the economic recession, with the number of unemployed graduates with a bachelor’s degree increasing by 136 percent since 2007.  This has resulted in more than 2.2 million college graduates in the United States that are currently unemployed.  That’s 2.2 million college graduates that are living this fear daily and countless others that are frightened, and doing everything possible to not become part of this statistic.

These millions of graduates haven’t been given that opportunity to be a part of a team.  And as many are trying to pay off college loans, newly graduated individuals do not have what it takes financially to create their own team.  This is difficult because positive, entrepreneurial spirit is something the Millennials are recognized for.  Many of us graduates would love to build our own organizations; we just need to get some experience and cash flow before this is possible.

All we need is a foot in the door.

Employers are obviously aware of the economic conditions and how many people are desperate for a job.  Therefore, they are demanding a candidate of true quality, as I believe they should regardless of economic times.  But today more than ever, employers are requiring an additional qualification which does leave us graduates fearful: experience.

Many employers’ definition of a ‘quality’ employee is changing and a higher level of experience is becoming a mandatory part of that equation.  There are two different types of employers who emphasize two different qualities: one emphasizes experience above all else, while the other emphasizes character.  And it’s the overwhelming amount of employers who value experience over character that worry graduates.

Every job lists the qualifications required.  Fair enough.  Where today’s graduates have a hard time believing this is fair is when the requirements will in no way be relaxed in order to allow a high-character, hard-working new grad to get their foot in the door.  We hear, “your application will not be reviewed if the following qualifications are not met in full.”  These words are not only discouraging, but they’re plastered on almost every job posting!  Newly graduated individuals who decide to enter the workforce obviously do not have “two years prior experience.”  We perhaps have a little, but two years is usually the standard, and how is one to get these two years if everyone requires it before starting?

On the other hand there is the employer who values character, and is willing to give the employee the experience and train them where needed.  This is the type of employer every current graduate hopes to find.  Not only do I, as a current graduate, like to see these types of employers, but I do think these employers have a better chance at getting the desired “quality” employee that they’re seeking.  Seeking this type of employee can result in finding an employee who is not stuck with bad habits picked up from another job, but one who can be trained and molded in the exact way the employer would like them to be.  Our generation is resilient but also adaptable.  As an employer, when teaching new employees how a job should be done, I imagine it to be a whole lot easier with an employee willing to learn rather than a stubborn (though more experienced) employee locked in their old ways.

Employers should take advantage of the qualities they can find in Millennials: our eagerness, our “be the best you can be” attitude, our ability to skillfully multitask, our “I’ll look it up” as opposed to “I don’t know” approach to problem solving, and our desire to receive guidance and instruction.

Once we are given the opportunity, we are out to make our employers proud.

But sadly, most employers demand the experience and would rather the “sure” bet on  one who already knows how to do the job, instead of taking a chance on someone who could be, and wants to be, a more valuable long-term asset to the team.

The biggest fear of all is graduating and being sent out into the “real world” with the thought that you are unable to provide for yourself.

First of all, it is necessary to determine what is important to us graduating Millennials.  Jeff recently spoke to a group of students at UNR.  He opened the presentation with two scenarios that both he and I believed might describe some general values of students nearing graduation.  Students were asked to choose which scenario they would like to find themselves in a few years after graduation:

When I, as a new graduate, looked at these two scenarios it did not take long to respond that I would much rather be living scenario A.  Apparently my values are in line with about ¾ of students at UNR, because that’s how they responded too.

This data is a fair generalization of the values of Millennials: most of us are not expecting, or wanting to lead an extravagant lifestyle straight out of college.  When one approaches graduation, ‘providing for oneself’ brings many expenses to mind: housing, food, car, gas, phone, utilities, car insurance, health insurance, etc.  In addition to these expenses, one will factor in a little fun money, student loans, as well as amounts one wishes to save (if values are in line with scenario A).

In each scenario, it is assumed that one is provided with some sort of health insurance plan from their employer.  Presently, this is not the case with many jobs.  Generally, graduates get dropped from their parents’ health plan at graduation date.  Because of its large cost and importance, I would say health insurance is a main stressor that hangs over graduates heads (especially because many new graduates incomes are not even what scenario A suggests).  A report that came out last year by the Commonwealth Fund shows that 34% of college graduates will spend time in which they are uninsured in their first year following graduation. Two-thirds of these young college graduates who do not have health insurance had gone and will go without needed medical care because it costs too much.  Talk about living life with only the bare minimums!

This, once again, proves that the majority of Millennials are not looking to lead extravagant lifestyles.  Even essentials are being bypassed.  The above list of expenses I mentioned includes necessary costs (beside ‘fun money’ which many would argue actually is).  Even this frugal lifestyle is hard to budget with the wages many graduates are receiving, and the thought of not being able to provide oneself with these bare minimum essentials is terrifying.   But stepping up to face this fear is part of what our generation is all about.

The bottom line is that graduates today have to make the choice to either enter the workforce in rough times, or continue school.  All of these factors are constantly in our thoughts, but the bitter truth is that either choice puts up a startling financial burden on young individuals.

For graduates that do decide to enter the workforce today, their wages are permanently impacted.  Lisa Kahn, a Yale School of Management Economist, explains the long-lasting loss in wages that individuals encounter when they graduate from college during a recession as this.  Kahn found that with each percentage point the unemployment rate rises, graduates of that time earn 7% to 8% less during their first year of employment.  Economic research shows that this negative effect continues for up to 15 years!  These unfortunate graduates still earn 4% to 5% less by their 12 year out.  I mentioned earlier that employers say they will hire 22% fewer college graduates, but they are also paying those they do hire less.  Between 2002 and 2007 the inflation-adjusted hourly wage for men ages 25 to 35 with bachelor’s degrees fell 4.5%.  For the typical woman, inflation-adjusted wages fell 4.8%.  Now, deep in the recession, the average starting salary for graduates who do receive jobs has dropped another 2.2% from this time last year, according to NACE.

On the other hand, many gradates are deciding to continue school and enter a graduate program.  According to the most recent numbers from the Council of Graduate Schools, Graduate applications were up 8% nationwide.  Schools such as Northwestern University and Harvard are currently tracking double-digit increases.  According to Kahn’s further research, college graduates who went to graduate school instead of the job market during the early ’80s recession didn’t suffer the same wage losses.  Therefore, it seems a good decision for graduates of this recession to continue school.

From a current graduate’s standpoint, additional school requires a lot of money that most of us do not have.  The thought of entering or going further into debt often does not seem like a wise choice.  In addition, the thought of now having to completely provide for oneself does not make this option look any better.  When someone of a common graduates’ age adds up the costs I spoke of earlier (without much income) it often seems impossible to continue graduate school directly after graduating with a bachelors.  For many, this financial burden is one that cannot be taken on right away.

With all of these thoughts constantly running around and stomping through our minds, we were forced to face graduation and make a decision; ready or not.  Without knowing we have a secure job or even the opportunity to get one, many graduates threw their hats in the air with more of a “here goes nothing,” rather than a “confident to conquer” attitude.

Getting your foot in the door can change it all and our generation is as determined as ever to make this happen.

Source: The Draconian

Details of Department of Education Negotiated Rulemaking Proposals Leak Out – Incentive Comp and Program Affordability Changes Would Have Large Implications

The U.S. Department of Education (DOE) distributed its first round of proposals to the negotiated rulemaking panel on Monday on Program Integrity Issues in the higher education space.  The initial hearings for this year’s negotiated rulemaking sessions were held from November 2-6.  You can find more details on the initial hearings and the schedule for subsequent hearings here .  As a reminder here are the 14 issues which the Department of Education planned to address as part of the Program Integrity negotiated rulemaking sessions:

It is a long list. Many of these issues are highly controversial and regulatory changes would likely have large implications on the earnings prospects for many of the publicly traded for-profit education providers. As part of the negotiated rulemaking process the Department of Education provides a list of proposed regulations following the first session.  Those proposals will then be discussed and debated at the second session which will be held next week. The Department of Education will then issue revised proposals, which will be discussed and debated the week of January 25th, 2010.  We expect that final regulations will be introduce sometime in the Summer/Fall of 2010 for enforcement starting in 2011.

The Department of Education has yet to release the full Program Integrity regulation proposals on the Federal Register  or the Negotiated Rulemaking homepage , which would normally be the place to find relevant information to the negotiated rulemaking process. However, the folks at insidehighered.com  have provided links to regulatory change proposals on three of the issues:  Incentive compensation (Issue #4), gainful employment (Issue #6), and misrepresentation of information to students (Issue #3).  We have reviewed the proposals.  One thing should be very obvious – the orientation of the Department of Education towards the for-profit education sector has shifted dramatically.  This is not to say that the DOE wants to villify operators in the space, but it is clear that they want to reel in what could be perceived as excesses and lax regulatory compliance in the sector.  We think the proposals, if passed could have far reaching implications on the earnings profiles of COCO , ESI and WPO .  Please keep in mind that these are just proposals and in some cases could be “watered down” during the negotiated rulemaking process .  Below we discuss our thoughts on the DOE’s proposed regulatory changes on three of the Program Integrity Issues.

For as long as we have been following the for-profit education sector, “incentive compensation”, or the notion that enrollment counselors should not be compensated exclusively based on the number of students they enroll, has been a source of great controversy.  The initial regulations were included as part of the Higher Education Act of 1992 during a time when cohort default rates exceeded 25% nationally.  The spirit of the initial regulation was to crack-down on “diploma mills” where students that could “fog a mirror” were being enrolled.  Cohort default rates rapidly declined and 100’s of for-profit education institutions closed.  There is no question that the initial regulation was effective in curbing excess in the space.

Ten years later, the Department of Education created a series of “safe harbors” that allowed schools to increase compensation to enrollment counselors and recruiters under profit-sharing plans and salary increases as long as they were not based “solely” on the number of students enrolled.  Between 1992 and 2002, a number of for-profit education companies grew to achieve national scale. Their lobbying influence increased and student loan cohort default rates were at record lows.  The argument was made that the operators in the space were subject to repeated lawsuits (as they still are today) related to violation of the incentive compensation provisions and that the language was not clear on what compensation policies could be allowed.  In theory the safe harbors that were created enabled companies in the space to establish clear compensation policies for its enrollment counselors and recruiters.  The creation of the safe harbors did not eliminate the controversy surrounding the space and many companies such as APOL , COCO, ESI and WPO have been subject to qui tam actions over the past 4-5 years related to incentive compensation.  It is a difficult issue to address effectively.  While we think that those enrollment counselors that are effective should earn more than those that are not, it’s also clear that the safe harbors provide too much wiggle-room for operators in the space to foster an “aggressive” enrollment culture.

Here is the specific language from the DOE:

The proliferation of Internet based lead-generators has been a boon for the for-profit education sector.  Internet based lead costs are still considerably lower on average than those for other media sources. Internet-based lead generation has been a favorable operating margin tailwind for operators in the sector for the past 5-7 years.  For-profit education providers are some of the largest advertisers on the Internet.  There are many for-profit postsecondaryeducation providers that have structured cost-per-action/enrollment agreements with lead generators.  Based on the language above, it appears the DOE wants to address those operators specifically.  Does this mean that cost-per-action arrangements will be banned? As the proposal is currently worded, it certainly seems that way.  This could have much broader implications on the growth trajectory of several operators in the space, much more so than the elimination of the other safeharbors in our opinion.

We expect that for-profit education providers and the Career College Association will attempt to fight this proposal “tooth and nail”. Based on the manner in which the DOE worded their proposal it appears it could be an uphill climb.

Historically, there has been a great deal of controversy surrounding the job placement rates that many operators in the for-profit education sector use for standards of accreditation and for marketing purposes.  Questions surrounding what constitutes employment in a student’s respective field of study have existed since we have been following the sector.  Skeptics argue that job placement rates are vastly over-stated and have enabled companies in the sector to continue to enroll students based on the promise of a higher earnings profile that has a lower likelihood of occuring than the job placement data would suggest.

As part of its first round of regulatory proposals, the DOE chose not to address the issue of gainful employment and how placement rate statistics should be effectively monitored and calculated. However, the DOE has introduced a mechanism which we think could be far more onerous for operators in the space – tuition caps based on educational value added or student debt burdens . 

As long-time followers of our research know, we have been focused on educational affordability and the dwindling, if not outright negative return on educational investment for students attending schools owned by ESI.  You can read more detail here .  The entire sector has always been supported by the notion that “the more you learn, the more you earn”.  Over the past several years, aggressive tuition price increases have diluted the return on educational investment for many programs offered by for-profit postsecondary education providers.  During his years in the private sector, undersecretary Shireman focused on expanding access to higher education and affordability.  The DOE’s proposal to provide an alternative to a “gainful employment” regulatory mechanism appears to reflect Mr. Shireman’s focus on achieving favorable returns on educational investment.  Here is the specific language:

We have argued for some time that free-market forces would eventually introduce increased elasticity of demand into the higher education space.  We have already started to see growing signs of a mind-shift among consumers towards the cost of higher education.  The DOE has taken this a step further. There is no question, that a student allocating 20% of their gross income towards student loan payments is at an incredibly high risk of default, as is the case of many of the associate degree graduates at ESI.   Tuition pricing trends are unsustainable.  We were stunned to hear management of ESI indicate on their 3Q09 earnings conference call that they planned to increase tuition another 5% in 2010.  Based on the placement rate and average starting salary statistics that the company has provided, there is absolutely no fundamental justification for a tuition price increase.  We would argue that ESI needs to reduce tuition in order to restore the affordability equation.  It appears the Department of Education agrees.  Under option 2, in order to comply with a 5% debt/income threshold, based on our estimates ESI would have to reduce tuition in excess of 65%!  ESI is not the only company that would be greatly effected under this proposal.  It is more difficult to determine the impact of Option 1 given that we don’t know all of the CIP codes and BLS wage data that would be used to determine “value added”, but rough estimates suggest that the reductions to tuition required under that type of regulation would be meaningful.

How likely is this proposal to be adopted? It is difficult to say, but it is clear that the Department of Education is focused on affordability and educational outcomes, which would suggest greater scrutiny of for-profit education providers with higher priced programs for the foreseeable future.

The DOE has introduced a number of proposals that would reign in practices in the sector that could mislead a student about the following topics:

The DOE seeks to explicitly establish which practices are not allowed rather than have broad language that bans general misrepresentation to prospective or existing students.  Transfer of credit has been a long-standing issue in the for-profit education sector. In the past, some former students have made allegations that an enrollment counselor or admissions representative suggested that credits from one particular institution would transfer to another. Very few traditional institutions accept credits from for-profit institutions.  The DOE wants to address the manner in which credit transferability is addressed in conversations with prospective and existing students head-on.  Additionally, the DOE has included language that would limit the manner in which operators in the sector could represent employment prospects for graduates of their programs. It appears the DOE is concerned that some marketing campaigns present an unrealistic view of employment prospects upon graduation to prospective students.

In general, we think the proposals for Issue #3 related to misrepresentation would not result in an immediate change to operating policies in the sector, but would provide the DOE with greater regulatory oversight enforcement tools in the future.

We are looking forward to reading the rest of the proposals from the DOE. While our short thesis on COCO, ESI, and WPO is not necessarily predicated on a change to the regulatory framework, it’s becoming increasingly clear that the DOE has adopted a more aggressive regulatory tact.  The negotiated rulemaking process will take many months to complete, but the DOE’s initial proposals represent a “shot across the bow” for the entire sector.  In an environment in which educational outcomes and affordability become paramount, we think the shares of COCO, ESI and WPO could continue to see downside.

As always, please act accordingly….

Source: Please Act Accordingly