Coding Bootcamps and Higher Ed (3 of 4)


So now that you have a basic overview of how the coding bootcamp and for-profit college worlds operate from a regulatory and financial perspective, let’s examine where they intersect.

To recap, code schools began in 2011, were completely unregulated, and growth was significant. By 2014, bootcamps like General Assembly and Galvanize had raised serious venture capital ($60-$70 Million) and had expanded rapidly. Overall, the industry had grown to over 100 schools in more than 60 cities. In the next 2 years, a dozen other schools raised respectable venture capital rounds, ranging anywhere from a few million dollars to $10 Million. The schools with some investment dollars quickly expanded to multiple cities, but, by the end of 2014, states began regulating bootcamps and expansion slowed. In one fell swoop, states like California tried to shut down the 8 largest programs, and successful bootcamps began spending their profits on lawyers and accountants instead of growth. Other states began adding costly regulations on even the tiniest of bootcamps; setting course refund policie and requiring that bootcamps add expenses like computer labs and librarians. With already ultra-tight margins due to high curriculum and instructor costs, growth stalled. Valuations dropped significantly, and the influx of venture capital all but stopped. *More on the economics of bootcamps in a future post.

At the very same time, for-profit Higher Education was in a death spiral. Student results continued to worsen. Debt loads continued to increase, and 90-10 ratios were getting too close for comfort.

In 2014, Kaplan, one of the largest for-profits in the country, purchased Dev Bootcamp for $7 million. 

In April 2015, publicly-traded Corinthian Colleges failed, leaving 16,000 students without a home. 15 of those students sued, asking the US Department of Education to discharge their loans, citing a law called Borrower Defense. This negative publicity was enough to push the Obama Administration to strengthen regulation and enforcement again, lowering the amount of acceptable student loan repayment from 30% of discretionary income and 12% of total income to 20% and 8%, respectively. In essence, this meant that students would now need to make more money to pay back their debt, otherwise the school would be violating the Gainful Employment regulations.

Next, in July 2015, Apollo Education Group, parent company of University of Phoenix, bought a 62% stake in Iron Yard for $15.9 million.  2016 brought more acquisitions. NYCDA was purchased by Strayer University for an undisclosed sum. Capella Education bought Hackbright Academy for $18 Million in April of 2016, and a month later purchased Dev Mountain for $20 Million.

Each acquisition of an unaccredited, cash-pay bootcamp had a serious effect on the 90-10 ratio of the Title IV-eligible proprietary school. For every dollar in cash revenue, the colleges had the ability to take on $9 more in grant and loan revenue. And after years of unchecked growth, the largest of these schools had the process of targeting students down to an exact science. Their growth was only hindered by the 90-10 ratios that capped the amount of fuel they could add to their admissions advertising spends. Now, with the 90-10 cash boost from the recently devalued bootcamp acquisitions, the for-profits could return to investing in the much higher margin programs they knew best.

On August 25, 2016, the prior year’s data on ITT Tech was released. It brought the school’s composite score below 1.0. For reference, 1.5 is the minimum safe number. The US Department of Education banned ITT Tech from accessing Title IV for their students unless the school put up a letter of credit for $247 Million - 40% of the previous year’s student aid revenue. When news broke, ITT’s stock plummeted 35%, and any available credit the company had immediately dried up, leaving ITT unable to come up with the cash. By September 6, 2016, all 136 campuses of ITT closed, leaving 42,000 students in the dark. Immediately, a plan for loan forgiveness under the Borrower Defense rule was set in motion. 

Fast forward to January 31st, 2017. President Trump nominated Betsy DeVos as Secretary of Education. Given Trump’s politics, it was widely assumed across the education industry that Obama-era regulations might not be enforced. For the next four months, little was heard from the Department of Education and no one knew for sure what was going to happen. As a result, there was next to no M&A activity in the bootcamp world.

After months of speculation, it came as no surprise that, on June 14th, 2017, Education Secretary Betsy DeVos announced that the Trump administration would be rewriting the Obama-era rules designed to protect student loan borrowers - specifically Gainful Employment and Borrower Defense. A new committee was set to begin work in July 2017. New Borrower Defense regulations were set to go into effect July 1, 2017. (New rules were delayed until December 2017. At that time, roughly 16,000 claims were pending. The new rules issued in December 2017 set a tiered debt relief schedule based on comparing a student’s earnings to that of their peers in the same Gainful Employment- regulated program, rather than a set percentage of income).

On July 14th, 2017, Kaplan announced that it would be closing Dev Bootcamp, which it had acquired three years earlier. Less than a week later, on July 20th, the Iron Yard announced that it would close all 15 campuses and cease operations after teaching out the remaining cohorts.

In April of 2017, during the four months of speculation at the beginning of the Trump administration, non-profit Purdue University made an interesting move, acquiring for-profit Kaplan University for $1, plus 12.5% of future revenues. 

Why would Purdue want Kaplan? Purdue is a non-profit; the university is not beholden to 90-10 or Gainful Employment regulations. 

The acquisition gets Purdue a plug and play, online program, plus 15 campuses and 32,000 students - essentially buying Purdue an established, revenue producing adult education program (typically a revenue source at large non-profits) at no upfront cost. Kaplan’s owner, privately-held Graham Holdings Company, gets a cash annuity, and the ability to hedge any regulatory risk that may or may not be coming in the future.  

*More on the Edcelerant model and university adult education in a future post.


Brad Denenberg