COVER STORY: A Growing Concern
C O V E R S T O R Y
A Growing Concern
By Paul Bradley
They are the fastest-growing sector of higher education, experiencing rapid growth as the recession-wracked economy drives more people back to the classroom.
They are renowned for their nimbleness, able to quickly adjust curriculum to meet the employment needs of emerging businesses. They are open-admission institutions specializing in helping non-traditional students who are mostly older than 25 or are members of minority groups, specifically African Americans and Hispanics, and have family members who have never set foot on a college campuses.
That figure accounts for about 10 percent of total enrollment in higher education, but it also attests to the rapid growth of the for-profit sector. Enrollment has jumped by about 2 million students over the past decade.
More growth is on the way. Enrollment in post-secondary education is projected to grow by about 1.2 percent per year in the foreseeable future. Enrollment at proprietary colleges is projected to grow much faster, 5 percent to 10 percent a year. In fewer than 10 years, proprietary colleges are expected to account for 14 percent of total higher education enrollment.
The sector is now positioned to prosper as the flow of federal dollars through the federal spigot becomes a torrent. The U.S. spends about $410 billion on post-secondary education every year, a figure that is expected to increase as President Obama strives to reach his goals of getting every American to enroll in some form of education beyond high school.
A Firm Trend
The trend is already well-established. More than 2,000 for profit schools take part in the federal Title IV program, allowing them to disburse federal loans, grants and other campus-based federal aid. Since the 2001-02 school year, Title IV disbursements to for-profit colleges have increased by 164 percent, according to the U.S. General Accounting Office.
A recent analysis by the Associated Press showed that a growing percentage of both low-income students and the government aid that follows them are ending up at for-profit schools, from local career college to giant publicly traded chains such as the University of Phoenix, Kaplan and Devry.
Last year, the five institutions that received the most federal Pell Grant dollars were all for-profit colleges, collecting over $1 billion among them. That was two-and-a-half times what those schools hauled in just two years prior, the AP found, analyzing Department of Education data on disbursements from the Pell program, Washington’s main form of college aid to the poor.
There are many reasons that for-profit schools are prospering. Unlike public community colleges, they don’t face plunging state subsidies. Budget crises might be bad news for governments, schools and students, but they are good news for for-profit institutions. The schools also offer great flexibility to students, offering classes at night, on weekends and online, though tuition generally is much more than that of public schools.
But even as the colleges experience an enrollment surge, they also are facing renewed scrutiny and criticism. Critics gripe that the industry has too many incentives simply to enroll students and tap Washington’s largess, and not enough to make sure students succeed.
For-profit schools long have been dogged by a reputation for overzealous recruitment practices and high default rates among student borrowers. Now, two recent developments seem certain to embolden federal regulators now writing rules aimed at reining in for-profit colleges and their recruitment practices.
Last month, a report by the U.S. Department of Education showed that more than one in five borrowers of federal student loans who attend for-profit colleges default within three years of beginning repayment. Since the federal loans are guaranteed by the government, taxpayers wind up paying for loans that can’t be collected.
The new data show nearly 400,000 students who entered repayment in 2007 had defaulted by 2009, representing 12 percent of all students who entered repayment that year. Nearly half of these borrowers (44 percent) attended for-profit schools, even though only 1 in 14 students attend such schools.
A Significant Change
The DOE report reflected an important change in federal policy that could create a burden on for-profit schools. In the past, the government has reported loan default figures in terms of how many students default within two years. That figure stands at 6.7 percent of student borrowers overall, and about 11 percent at for-profit schools.
But in the belief that the three-year numbers give a fuller picture of whether a student at a particular school will default, the government will soon use the three-year standard to determine which colleges qualify for Title IV. Starting in 2012, colleges will be judged on how many students default within three years of starting repayment. The threshold default rate for sanctions will be 30 percent. Any college that exceeds the benchmark can be disqualified from Title IV.
The DOE report showed that nearly 12 percent of borrowers who began repayment in fiscal 2007 defaulted within three years — up from 9.2 percent for 2006. But at for-profit colleges, the rate was 21.2 percent within three years, according to The Associated Press. That was up from 18.8 percent for fiscal 2006.
Harris Miller, president and CEO of the Career College Association, which represents for-profit colleges, said the increase reflects the poor economy. He also said high default rates don’t measure a school’s quality, and noted that his group’s members enroll large numbers of low-income students.
“If you accept low-income students you’re going to have high default rates,” he told the AP. “It has nothing to do with whether you’re for-profit or not.”
Said Deborah Cochrane, program director at the Institute for College Access & Success: “While some increase in overall defaults may be the result of unemployment and the economy, those factors do not explain the large numbers and percentages of defaults at certain schools. Disturbingly high default numbers mean the education students received did not give them the earning power to repay their student loans.”
The CCA last year commissioned a study which concluded that default rates are tied to numerous factors, including overall student debt and graduation rates.
“In sum the empirical evidence suggests that default rates are not good vehicles for assessing the quality of institutions or of various types of loans,” the report said. “The causes for loan default are rooted deeply in ever-present tensions around federal financial aid policy.”
Days after the DOE report was released, the University of Phoenix, the nation’s largest for-profit college, agreed to pay $78.5 million to settle a whistleblower lawsuit over whether the school used high-pressure recruiting tactics to enroll unqualified students and violated federal law by paying salaries based on the number of students an employee enrolled.
While the school admitted no wrongdoing in the settlement, the case put for-profit institutions and their practices in an unwanted spotlight. Earlier in the year, in August, a report by the GAO urged strong government oversight of for-profit schools to ensure that only eligible students receive federal student aid. “Weaknesses in the Department of Education’s oversight place students and federal funds at risk of potential fraud and abuse,” it concluded.
The CCA said “the GAO report describes the actions of a few school personnel and testing personnel behaving in an unethical manner.Nothing in the GAO report suggests that the practice of admitting unqualified students is widespread or indicative of the sector as a whole.”
“Our focus remains providing students with a purposeful education designed to speed entrance to a competitive and productive workforce. We will continue working with our member institutions to assure that each maintains the highest level of ethical conduct, whether in the admissions processes or any other aspect of school operations and conduct.”
Still, federal rules-writers appear ready to follow the GAO admonition.
At issue are Higher Education Act rules. In 1992 – the last time lawmakers moved to regulate for-profit schools — Congress barred schools whose students receive federal financial aid from paying recruiters based on the number of students they enroll. Lawmakers feared recruiters would bring in unqualified students to boost their own paychecks.
In 2002, the Education Department added a series of 12 “safe harbors” to the regulations, specifying kinds of compensation permitted under the law. Among the safe harbors are provisions allowing up to two pay raises for recruiters in any 12-month period and allowing them to take part in profit-sharing plans.
In a new round of rule-writing that will conclude later this year, DOE has recommended eliminating all of the exceptions. In a draft proposal, DOE said “the Department believes that the specific language of the  statute is clear, and that the elimination of all of the regulatory ‘safe harbors’ would best serve to effectuate congressional intent.”
The DOE draft proposed language to replace the current rules. Colleges “will not provide any commission, bonus, or other incentive payment based directly or indirectly upon success in securing enrollments or financial aid to any person or entity engaged in any student recruiting or admission activities or in making decisions regarding the awarding of student financial assistance.”
Consumer advocates and college admission officials support the new proposal, contending it would eliminate abuse. But others believe colleges of all stripes need some guidance from regulators in devising acceptable forms of merit compensation.
If those in Washington are intent on reining in for-profit schools, the public appears to be strong supporters of for-profit schools. A recent national poll by the liberal group America for Democratic Action Education Fund found that public support for for-profit colleges is growing as the economy falters.
Conducted by Lake Research Partners, the poll surveyed 1,000 adults. It found that “for-profit education empowers minority groups, and does not hinder them. People believe higher education is more critical now than ever to get ahead and support for-profit education as a way to make Obama’s goal of increasing college graduates possible.”
Specifically, the poll found that 58 percent of adults have a favorable opinion of for-profit colleges. Only one in five had a unfavorable opinion. But while those figures may appear heartening, they pale in comparison to community colleges. The same poll found that 86 percent of adults have a favorable opinion of community colleges, and 84 percent have a favorable view of state-supported colleges and universities.
Other key findings of the poll included:
- 78 percent of those surveyed said they were convinced for-profit universities have an open enrollment policy that offers a post-high school education to many undeserved communities.
- 81 percent surveyed said online for-profit colleges and universities offer students the flexibility they need to be successful and earn a college degree.
- 74 percent surveyed believe for-profit colleges and universities have access to the money needed to expand and have developed the infrastructure needed to grow rapidly without lowering their educational quality.
The report concluded that “the public does not buy arguments that for-profit colleges and universities exploit their students. Instead, they believe these institutions play a powerful role in making a college education more accessible to non-traditional and underserved students.”
“In the end, as more and more non-traditional students return to college, the vast majority of Americans understand that for-profit colleges and universities are a good option for these students because they offer more flexibility and the opportunity to earn a degree that they would otherwise not have.”