For-Profit Colleges – A National Disgrace

The reputation of American universities, long viewed as the best in the world, is being befouled by the cancerous growth of for-profit colleges that saddle students with crushing debt in return for very little of marketable skills.

At a time when our youth are told that a college education is indispensable to their hope of ever finding a job, the for-profit colleges pursue the young like gulls following fishing trawlers, encouraging them to take on debt they cannot afford to pay. This predation takes the form of eating our young.

The schools do not issue that debt; they just cash the checks, which is what has caused a stampede to create some 2,000 colleges that now account for 13% of all students, up from 3% ten years ago, most by large corporations and even private equity and hedge funds. The loans — about 80% of them — are from the federal government. And if the student cannot pay? The U.S. taxpayer will eventually pick up the tab.

The government in the 2010-11 academic year issued $24 billion in loans and $9 billion in grants to students at for-profit schools. A study of 30 such colleges just issued by a Senate education committee chaired by Iowa Democrat Tom Harkin says that these institutes do not behave like the usual accredited institutes of higher learning. They spend on average 22.4% of that revenue on marketing and recruiting and only 17.7% on teaching. Keeping down the costs of actually educating students made certain that profits would be a heady 19.4% — that is, after paying the CEOs of these colleges an average of $7.3 million that year. One CEO — Robert Silberman of Strayer Education — was paid $41 million including stock options. (The president of Harvard was paid $700,000).

The colleges make such handsome profits by charging far more. The Harkin study schools charge almost four times as much as community colleges and public universities for associate degree and certificate programs. For four-year degrees the industry-wide average tuition is $31,000 a year, almost double the cost of public universities. For-profit colleges have been found to ratchet up their tuition to match the maximum amount a student can borrow from the government.

Schools find it in their interest to be unclear about the real costs of enrolling. There is a newsletter that advises marketing technique called Enrollment Management that counseled admissions personnel to “avoid bad words like ‘cost,’ ‘pay’, ‘contract’ and ‘buy’”. These are “direct marketing ‘words’ that can make or break” the pitch. Letters to students often refer to “financial aid” without clarifying that the aid takes the form of loans.

What results? Few at for-profit colleges complete their courses. At Phoenix University, the largest in the field — it took in $4.9 billion in 2010, almost all from the government — two-thirds of associate-degree students leave before earning their degree, and less than 9% of its bachelor degree candidates graduate, even allowing them six years before taking the measure.

But the students’ debt lives on. About 96% of students at for-profit schools take out loans, versus about 13% at community colleges and 48% at four-year public universities. Those at the for-profits may be only 13% of the national student body but they account for 47% of the defaults on student loans.

The few that do complete courses get little help finding employment. The Harkin report found that while there was the astonishing total of 32,496 recruiters for the 30 studied colleges, there were 3,512 staff members to assist graduates in finding jobs. One of them, Ashford College, wth 78,000 online students and $216 million in profits, had 1,700 recruiters, but just 1 job placement officer.

Others who do complete coursework and seek to transfer to a different school then find that their credits are not accepted elsewhere. ITT Educational, for example, has 148 locations in 39 states and 71,000 students enrolled. At the end of its ad small type reading ''Credits earned are unlikely to transfer” appears for a moment. In contrast, credit for a two-year associate degree from a community college will almost certainly transfer to a four-year college toward completion of a degree.

The $1 trillion in student debt, now greater than credit card debt, caused us to report almost a year ago on student loan defaults posing “The Next Financial Crisis” (restored to our Education page or here). It is the dropout group which poses the greatest threat. Education Sector, a Washington research outfit, published this study earlier the year which found that the default rate on loans to students who drop out is four times higher than those who stay for a degree. They leave themselves strapped with a loan to repay with greatly diminished chances to find a job, much less jobs that pay enough to cover the debt.

Most insidious is the targeting by the for-profits of U.S. armed services personnel. There is a federal regulation that the for-profit colleges must derive (a mere) 10% of their revenue from sources other than the Department of Education. In an unaccountable loophole, even though the post-9/11 GI Bill benefits come from the federal government, they qualify toward the 10% requirement. So the for-profits aggressively promote GIs to use up their benefits on their worthless courses.

One would think that Republicans would cheer the Harkin report for outing the waste of government funds and, therefore, taxpayer money. Instead, Republicans on the committee that issued the report called it a hostile partisan work that should have investigated nonprofit colleges as well. That puzzling reaction may be explained by the for-profit college sector spending $8 million a year on lobbying in 2010 and again in 2011.

To stem the hemorrhaging of money to the for-profits, the Obama administration devised a rule that would cut off funds to those that failed in (a) three of four years to meet (b) just one of the three requirements that (1) at least 35% of recent graduates are repaying loans or (2) that their payments do not exceed 12% of their income or (3) 30% of discretionary income. Despite the several ways a college could pass, the rules — a test of whether a college produced employable graduates rather than wasting tax money — were struck down by a judge of the U.S. District Court of D.C. as being “arbitrary and capricious”, as if any threshold along a path of 0% to 100% could have a concrete premise.

The Education Department said that 48% of for-profit institutions failed the 35% test. As it stands, they will go on getting full funding.

One would expect the disgust from Governor Romney with the scandalous waste of government money sent to the for-profits and even the alarming burgeoning of student debt they are causing. Yet he has said, “I just like the fact that there’s competition. I like the fact that institutions of higher learning will compete with one another, whether they’re for-profit or not-for-profit”. He believes they “hold down the cost of education”. Given what we have cited, he seems unaware of the facts. Either that or unduly influenced by friend Bill Heavener who is the head of the private equity fund that owns Full Sail University, a college in Florida, and is co-chair of Romney’s fund raising in that state, and who gave $45,000 to a SuperPAC set up by former Romney aides.

As for holding down costs, Full Sail, which specializes in the entertainment field, charges $81,000 for a 21-month program in video game art. It graduates just 14% of students.