private universities

Senate Committee Report on For-Profit Colleges Condemns Costs and Practices

By TAMAR LEWIN

Published: July 29, 2012

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.

Senator Tom Harkin, chairman of the Health, Education, Labor and Pensions Committee, completed a two-year investigation.

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.”

In a statement on Sunday, the Association of Private Sector Colleges and Universities, the leading trade group of for-profit colleges, called the report “the result of a flawed process that has unfairly targeted private-sector schools and their students.”

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.