It has long been clear that an oily subgroup of for-profit schools were doing very well for themselves by recruiting students who had no real chance of graduating, pocketing their federal financial aid and leaving the students with valueless credentials — or none at all — and crippling debt.
According to the study, taxpayers poured about $32 billion into for-profit colleges in the most recent year — much of it spent on marketing or pocketed as profit. Meanwhile, 96 percent of their students were forced to take out loans, as opposed to about 13 percent in community colleges and 48 percent in four-year public colleges. A majority leave without degrees. And while the for-profit sector accounts for only about 13 percent of enrollment nationally, it accounts for nearly half the loan defaults.
The companies are clearly doing far better than the students. Publicly traded companies that operate for-profit colleges had an average profit margin of 19.7 percent, while paying an average of $7.3 million to their chief executives in 2009, the report says.
This is a politically charged issue, with the Democrats generally favoring tougher regulation and the Republicans favoring the for-profits as a useful alternative to overcrowded community colleges and important sources of vocational education. The good ones may be both. But too many of them look like nothing more than profit centers. Congress, which has largely been looking the other way on this issue, needs to rouse itself.
Wrapping up a two-year investigation of for-profit colleges
, Senator Tom Harkin
will issue a final report on Monday — a voluminous, hard-hitting indictment of almost every aspect of the industry, filled with troubling statistics and anecdotes drawn from internal documents of the 30 companies investigated.
According to the report, which was posted online in advance, taxpayers spent $32 billion in the most recent year on companies that operate for-profit colleges, but the majority of students they enroll leave without a degree, half of those within four months.
“In this report, you will find overwhelming documentation of exorbitant tuition, aggressive recruiting practices, abysmal student outcomes, taxpayer dollars spent on marketing and pocketed as profit, and regulatory evasion and manipulation,” Mr. Harkin, an Iowa Democrat who is chairman of the Senate Health, Education, Labor and Pensions Committee, said in a statement on Sunday. “These practices are not the exception — they are the norm. They are systemic throughout the industry, with very few individual exceptions.”
For-profit higher education has long been a politically divisive issue, with Democrats generally arguing that greater regulation is needed to prevent huge publicly traded colleges from plundering the Treasury for student financial aid while leaving students with crippling debt and credentials that are worthless in the job market. Many Republicans see such colleges as a healthy free-market alternative to overcrowded community colleges
, offering useful vocational training and education to working adults who will not attend more traditional institutions.
The Republicans on the Senate committee criticized the Democrats’ investigation for including testimony from Steve Eisman, the hedge fund manager who was one of the first to compare for-profit colleges to the subprime mortgage
industry; for making public the internal company documents that the committee gathered; for refusing to broaden the investigation to include abuses by nonprofit colleges; and for being what they said was a hostile partisan effort.
Over the last 15 years, enrollment and profits have skyrocketed in the industry. Until the 1990s, the sector was made up of small independent schools offering training in fields like air-conditioning repair and cosmetology. But from 1998 to 2008, enrollment more than tripled, to about 2.4 million students. Three-quarters are at colleges owned by huge publicly traded companies — and, more recently, private equity
firms — offering a wide variety of programs.
Enrolling students, and getting their federal financial aid, is the heart of the business, and in 2010, the report found, the colleges studied had a total of 32,496 recruiters, compared with 3,512 career-services staff members.
Among the 30 companies, an average of 22.4 percent of revenue went to marketing and recruiting, 19.4 percent to profits and 17.7 percent to instruction.
Their chief executive officers were paid an average of $7.3 million, although Robert S. Silberman, the chief executive of Strayer Education
, made $41 million in 2009, including stock options.
With the Department of Education seeking new regulations to ensure that for-profit programs provide training for “gainful employment,” the companies examined spent $8 million on lobbying in 2010, and another $8 million in the first nine months of 2011.
The bulk of the for-profit colleges’ revenue, more than 80 percent in most cases, comes from taxpayers. The report found that many for-profit colleges are working desperately to find new strategies to comply with the federal regulation that at least 10 percent of revenue must come from sources other than the Department of Education. Because veterans’ benefits count toward that 10 percent even though they come from the federal government, aggressive recruiting of students from the military has become the norm.
The amount of available federal student aid is large and growing. The Apollo Group, which operates the University of Phoenix, the largest for-profit college, got $1.2 billion in Pell grants in 2010-11, up from $24 million a decade earlier. Apollo got $210 million more in benefits under the Post-9/11 G.I. Bill. And yet two-thirds of Apollo’s associate-degree students leave before earning their degree.
On Sunday, William Pepicello, president of the University of Phoenix, sent its 350,000 students a long e-mail warning of the criticism, and extolling the value of a Phoenix education.
On average, the Harkin report found, associate-degree and certificate programs at for-profit colleges cost about four times as much as those at community colleges and public universities.
And tuition decisions seem to be driven more by profit-seeking than instructional costs. An internal memo from the finance director of a Kaplan nursing program in Sacramento, for example, recommended an 8 percent increase in fees, saying that “with the new pricing, we can lose two students and still make the same profit.” Similarly, the chief financial officer at National American University wrote in an e-mail to executives that the university had not met its profit expectation for the summer quarter, so “as a result” it would need a midyear tuition increase.
Many of the for-profit colleges, the report found, set tuition at almost exactly what a student could expect in maximum federal aid, including Pell grants and Stafford loans. According to a Bridgepoint Education document, when a new $400 “digital materials fee” would make students pay more than would be available from federal aid, the chief executive frantically wrote an e-mail to the finance officer to complain that the change was going to cause a “shortfall.” And documents from Alta Colleges mention restructuring schedules “so we can grab more of the students’ Stafford.”
Furthermore, the report found, recruiters are often encouraged to avoid directly answering questions about costs and instead emphasize that with federal aid, student will pay little out of pocket. And costs are not easy for students to determine. A former Westwood College recruiter explained that prospective students were told that the cost was $4,800 per term, but not that there were five or six terms a year rather than the usual two or three.
At many schools, students learned only after the fact that their credits would not transfer to another college or university or qualify them for the professional licensing they sought.
Students at for-profit colleges make up 13 percent of the nation’s college enrollment, but account for about 47 percent of the defaults on loans. About 96 percent of students at for-profit schools take out loans, compared with about 13 percent at community colleges and 48 percent at four-year public universities.
Colleges with very high loan default rates in the two years after graduation (now changing to three years) lose their eligibility for federal student aid. As a result, the report found, many of the for-profit colleges try to move students having trouble with repayment into deferral or forbearance until they are past the years the government monitors.
For-Profit Colleges Only a Con Man Could Love
Barbarians in the Ivory Tower
Bobby Ruffin Jr. was only 14 when a recruiter from Ashford University
, Michigan, boy thought he'd clicked on a link promising help finding money for college. It was actually just a lead generator for the for-profit, online school's sales staff.
Courtesy Barmak Nassirian
Barmak Nassirian, former official with the American Association of Collegiate Registrars and Admissions Officers: “Overadvertise, oversell, overcharge, and underdeliver. They found a system where the pitch goes to one guy and the bill to someone else.”
Courtesy Chris Pantzke
Iraq-war veteran Chris Pantzke ran up $26,000 in debt and burned through an additional $65,000 of his GI Bill benefits with almost nothing to show for it at the Art Institute of Pittsburgh.
At the time, Bobby was an A student. Hoping that homeschooling would deliver something better for their son, his parents had pulled him from the troubled Detroit schools. He told the recruiter that he wanted to be a doctor. She assured him that Ashford could be a stepping-stone to that dream.
Never mind that he was only in the eighth grade. "She said, 'You'll be working toward a degree as a medical doctor, so when you do graduate high school, you're almost there,'" Bobby says today. "I'm like: 'This is great. I'm going to talk to my mom.' And she's like: 'No, I wouldn't tell your parents because that would take away from the shock when it happens. If I were you, I'd complete the program, and when graduation comes around, let them know. Mom and Dad will be super excited.'"
Admission to Ashford requires a high school diploma or equivalency. So when it came time to fill out the financial-aid forms, the recruiter told Bobby to claim that he'd already graduated. He objected, but she insisted "the loan-processing company will go back and correct everything." Still, he left the graduation date blank. Someone filled it in, because Ashford was soon receiving federal-student-loan money on his behalf.
Of course, it's illegal for kids Bobby's age to receive financial aid. But for-profit colleges haven't always been scrupulous when it comes to raiding the federal treasury. Between student-aid and GI Bill
programs, most schools receive 90 percent of their revenue from the American taxpayer. And the recruiters—often little more than salesmen paid largely by how many people they enroll—are driven mercilessly to keep those cash registers ringing.
Students don't get much in return. Although tuition rates can run as high as those at America's most esteemed universities, the education is generally substandard. In the end, most kids wind up walking away with a questionable degree bought at top dollar—and a mountain of debt to accompany it.
Bobby took online classes for almost a year. But when he wouldn't endorse Ashford's lying on his financial-aid forms, administrators miraculously discovered that he was under 18. Since this left him ineligible for federal aid, Ashford was forced to return his loan money to the feds.
The school wouldn't be eating those costs. Bobby would. Ashford, which declined interview requests for this story, sent him a bill for $13,000.
Last fall, Bobby was finally able to enroll at a real university, Eastern Michigan, where he was named a national collegiate scholar. Yet he still owes Ashford. Because that's a private debt, he isn't eligible for deferments while he's in school, and any future wages could be garnished.
Unfortunately, this isn't a scam that only targets the young and naive. The for-profit industry is so rife with deceit, it has been billed as the second coming of the mortgage
-loan debacle. And the same people are behind it. Three-quarters of all for-profit students are enrolled at schools owned by Wall Street
banks and private-equity firms.
All told, they soak $30 billion a year from American taxpayers. But even in the age of slash-and-burn government, Congress has shown no interest in stopping it.
Consumer Fraud As a Business Model
You might not know it, but you're sitting on $117,000. That's basically how much every American is potentially worth in government student aid. Want to attend grad school? Throw in another $114,000.
And as for-profit colleges have discovered, an 18-year-old with 100 large makes for a very easy mark.
In order to get in on the gravy train, a school only needs accreditation from some supposedly neutral body. But Congress neglected to say who should do that accrediting, resulting in a system loaded with charlatans. Some agencies have built sturdy reputations over decades. Others are little more than rubber-stamp factories, more geared toward gobbling up members' dues than safeguarding kids.
"It never occurred to [Congress] that as billions of dollars get attached to the recognition process, the process would get corrupted," Nassirian says. "When you say yes, you gain membership dues. After all, you're living off these dues."
Yet even bargain-bin accreditation takes several years. So the titans of Wall Street found a way around this by purchasing small, failing schools to snatch up preowned accreditation.
Take Bridgepoint Education. Its majority stockholder is Warburg Pincus
, a New York private-equity firm. When it needed accreditation for Ashford University, it bought the 87-year-old Franciscan University of the Prairies
, a struggling, 300-student religious college in Clinton, Iowa
. Overnight, it was transformed into the online powerhouse Ashford.