Coding Bootcamps and Higher Ed (1 of 4)

Batman and the Joker.  Good against evil.
David and Goliath.  Small versus giant.
Coding Bootcamps and Higher Ed? Friends or foes? Where do they intersect?

PART 1: A PRIMER

In the summer of 2017, Dev Bootcamp and Iron Yard, two of the more respected and thought-to-be successful coding bootcamp programs in the United States, both announced they were abruptly closing, citing financial models that were unsustainable. A flurry of speculation over the state of the industry ensued, including this post locally in Technically Philly questioning the landscape of coding programs across the Philadelphia region and the country.  Fast forward just one year to April 16th, 2018, and General Assembly, arguably the largest and most high profile bootcamp, is acquired for $413 Million by Swiss HR firm Adecco Group. GA’s press releases around the acquisition stated that the company was profitable with revenue of over $100 Million in 2017, adding to the confusion.

Over the past year, the national conversation has been centered on the murky quality of some code schools, and whether or not these for-profit, standalone bootcamps are pumping out truly qualified developers. The future for bootcamps may be much more complicated – and might actually have little to do with the quality of the coding programs. By gaining a solid understanding of the higher education industry (both for-profit and nonprofit), one might believe that the code schools are just a pawn in a much larger game. Any way you slice it, software developers are in high demand, and the talent gap is only worsening. Changes in regulation and industry activity in the past two years suggest a different path for bootcamp programs – and a broad understanding of who stands to win or lose is necessary to get an understanding of what may lie ahead in cutting edge workforce development.

HIGHER ED BACKSTORY

In 1965, President Lyndon Johnson passed the Higher Education Act, which created regulations “to strengthen the educational resources of our colleges and universities and to provide financial assistance for students in postsecondary and higher education”.  Specifically, Title IV of the HEA set rules for how Higher Ed institutions can provide access to Federal Student Aid (loans and grants).  These regulations have been in place for decades, but some have been loosely enforced until recently.

(If the Higher Ed Act sounds familiar, it’s because you’ve probably heard of Title IX of the HEA, which sets sexual discrimination regulations and has been in the news in the past few years related to transgender bathroom access.)

To comprehend how Higher Ed institutions make money you’ll need to navigate an incredibly complex set of rules that govern how a school, and a specific program within that school, is able to offer Federal Aid to its students. Here’s the very broad Cliffsnotes version:

First, a post-secondary school must become accredited by one of the approved accrediting bodies designated by the US Department of Education. Schools can operate without accreditation, but do not have access to the Federal Aid programs without accreditation. 

There a handful of approved accreditors in the US that only accredit for-profits. These are known as national accreditors. Regional accreditors oversee non-profits, and the country is divided into six regions with one accreditor for each region. A single regional accreditor oversees every school in their region, ranging from a community college to an Ivy League university, and everything in between.  

Each state’s Department of Education has different regulations too, and, as a rule of thumb, a school can’t operate without state approval, whether it’s an accredited school or not.  In Pennsylvania, most schools (or at least all of the recent coding bootcamps) start as a Private Licensed School, which can be an expensive and time-consuming process. PLS schools follow a strict set of guidelines set forth by the PA Department of Ed; some of which include the oversight of facilities, financial reporting, a standardized refund policy and the requirement of a surety bond to protect students from a sudden closure.

If a state-approved school wanted to become accredited (and therefore recognized by the Federal Department of Education), that school would go through a multi-year process with an accreditor, where that accreditor would approve curriculum for rigor and quality, among many other things. Many schools will start this process as a branch campus of another accredited school, and then eventually spin out as a new main campus on their own following a multi-yearlong and multi-step process. 

At the accreditor level, within the school, each individual program (i.e. software development, nursing, etc.) requires separate approval – not just for the program in general, but for the program to be offered at a specific location. Once a program is approved by the accreditor, the school then applies with the US Department of Education for Title IV approval for that specific program at a specific location(s). Once approved, the school has the ability to offer Federal loans and grants on behalf of the US Department of Education to students for the specific program at the designated location(s) only. The process of gaining state and accreditor approval, Federal Title IV approval, and independent status as a main campus can take as long as eight to ten years and might cost as much as $10 Million.

Now, just because your program has Title IV approval, doesn’t mean that your school can dish out Uncle Sam’s money without meeting and maintaining a few more requirements. Here’s where the rules haven’t always been strictly enforced. 

The students in each program must demonstrate Gainful Employment, or show that the student is working in his or her field of study and earning enough income to pay back the student loan debt. In theory, this regulation was meant to protect the government from lending money on programs that don’t prepare students for a career (where the students would not have the ability to pay the loan back). However, limited oversight over the past few decades - into the middle of the Obama administration - had meant that a student might borrow government dollars to earn a nursing degree but work as a cook after graduation without harm to the school’s (or the program’s) status. In 2012, President Obama’s Department of Education started enforcing these rules, and strengthened them further in 2015. More on that later.

Gainful Employment is measured by calculating a cohort’s Debt to Earnings ratio. A single definition of what constitutes a cohort is murky at best, which is one way that schools get around missing their GE numbers; for this data point, consider a cohort to be a group of students who enter a specific program at the same time. The estimated annual loan payment of a typical graduated student (prior to 2015) must remain below 20 percent of the student’s discretionary income, or 8 percent of total earnings. If the cohort’s average D/E number rises above the acceptable level, then the program loses Title IV eligibility. In other words, no more loan money to dole out, and only cash-paying students may enroll in the program going forward.
Two additional regulations are pertinent to how schools operate and will come into play later. The 90-10 Rule states that for-profit schools can’t receive more than 90% of their revenues from Title IV Federal Student Aid. This means that at least 10% of revenues must come from cash tuition payments. The 90-10 Rule was established to make sure that taxpayers aren’t the only ones keeping a school in business. The argument is, if at least a percentage of people are willing to pay cash for their tuition, then the rules of capitalism will apply and underperforming schools will lose customers and eventually fail. This rule applies only to for-profit schools and does not apply to nonprofit schools. *An exception to file away for later- tuition assistance through the GI Bill counts as a cash payment.

Finally, you should know about a Federal Financial Responsibility Composite Score. The composite score is filed along with audited financials each year and is meant to critique the overall financial health of the school. The complicated calculation combines scores from the primary cash reserve ratio, equity ratio and net income ratio. Understanding composite scores requires a strong accounting background, but you probably remember one fundamental rule from Accounting 101: to make a balance sheet work, Assets = Liabilities + Equity. The key take-away here is that without significant cash reserves, it’s very difficult to expand. Large long-term investments in property carry large liabilities that need an asset to offset. Without cash reserves on hand, a new cash investment may be necessary for growth. Unfortunately, a new investment could trigger a change in ownership structure, and changes in control often trigger halts on new programs or even full accreditation reviews by an accreditor – something which proprietary schools desperately try to avoid.

Brad Denenberg