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'Bad Apples' or Something More?

June 24, 2010

WASHINGTON -- Two weeks ago, the hub of the federal government’s scrutiny of for-profit higher education was the U.S. Department of Education, where a team of staffers were putting the finishing touches on a set of proposed regulations aimed at reining in abuses of the federal financial aid program.

Abruptly, though, since the draft rules were released to reporters and Congressional staffers on June 15, the activity has moved to Capitol Hill -- a change in location that has been accompanied by an equally sudden and stark shift in the focus and tone of the debate about for-profit colleges and universities.

Education Secretary Arne Duncan and other Obama administration officials have often sought to characterize their probing of the for-profit sector as aimed at identifying "bad actors" and as part of a search for new measures of "value” for postsecondary institutions of all types, be they public, independent or corporate.

But the rhetoric and activity coming from Congress has thus far been harsher, suggesting skepticism among lawmakers in both chambers and on both sides of the aisle about the behavior of -- and appropriate role in higher education for -- private sector colleges. The intensity of the language and the assertions of systemic problems recall for some observers the last period of broad-based and aggressive scrutiny of for-profit higher education, a set of hearings that led to major revisions of the Higher Education Act in 1992

When the Senate’s Health, Education, Labor and Pensions Committee today holds the first in a series of oversight hearings examining for-profit colleges and the rapidly increasing federal education dollars that flow to them through students, the discourse is likely to be anything but friendly toward the sector.

Some of the best evidence of the probable tenor comes from the committee itself. In a written statement, the chairman, Sen. Tom Harkin (D-Iowa), said the hearings would aim to “ensure that students are actually getting the knowledge and skills they need to pay off the debt” they accrue at for-profit institutions. “While for-profit colleges have a responsibility to their shareholders, they also have a responsibility to provide educational value to their students, and an obligation to ensure that the federal dollars they receive are well spent.”

Between 2000 and 2009, the amount of Title IV federal aid -- Pell grants, Stafford loans and all other aid administered by the Department of Education -- going to for-profit institutions grew $4.6 billion to $26.5 billion. Enrollments nearly tripled from 673,000 in 2000 to 1.8 million in 2008 (and even higher since then with the nationwide rise in unemployment). While students at the institutions make up about 10 percent of the postsecondary student population, their institutions receive 24 percent of Title IV funds.

While the Senate has initiated its head-on scrutiny of the sector, the House of Representatives at least began its examination a bit more circuitously.

Last week, the House Education and Labor Committee conducted a hearing billed as an examination of accreditors and the credit hour. But the committee’s chair, Rep. George Miller (D-Calif.), used discussion of a for-profit institution’s allocation of too much credit for some courses as a way into big-picture questioning of the sector. “Institutions now have requirements to shareholders, to profit margins, to the stock market and to others,” he said. “This is a matter of serious concern.”

After that hearing, Democratic staffers said, Miller and fellow House Democrats Timothy Bishop, of New York, and Ruben Hinojosa, of Texas, came together with Harkin and Sen. Richard Durbin (D-Ill.) to sign a request for the Government Accountability Office to a conduct a wide-reaching review examining the sector’s academic quality and use of federal funds.

On Monday, they sent a letter to Gene L. Dodaro, the office’s acting comptroller general, that cited “[r]ecent press reports [which] have raised questions about the quality of proprietary institutions” that “stem from the rapid growth of this industry over the last few years, reported aggressive recruitment of students by such institutions, increased variety in the delivery methods used to provide education to students, and the value of the education provided by such institutions.”

For-profit college officials and Congressional Republicans alike say they share a desire for more data. Harris N. Miller, president of the Career College Association, said in a Monday statement that he welcomed the call for more information about the institutions and their performance. “It is time for analysis by anecdote to end,” he said. “We have every expectation that the GAO, using facts and figures, will provide a full and fair review…. Private sector colleges and universities, operating under the triad of regulation -- federal and state governments and federally approved accreditors -- are equipping men and women from all walks of life to be successful in a globally competitive workforce, and the GAO report will confirm that.”

A Republican Senate committee staffer said that members of his party would likely have signed onto the data request had they been asked. “We were never approached,” the staffer said. “As far as I know, no Republicans were asked to sign on to it.”

The aide stressed that Democrats seem to be establishing a partisan divide on the issue. “It’s unfortunate that Harkin is making this into a partisan issue because it’s not,” he said. “There certainly seem to be some problems in the for-profit sector that need to be addressed and anecdotal information isn’t really a smart way to make policy. We need a better, more comprehensive look.”

This spring, the staffer added, Sens. Mike Enzi, of Wyoming, and Lamar Alexander, of Tennessee, who is also a former secretary of the Education Department, had asked Harkin to hold a hearing specifically discussing the department’s proposed regulations and their potential influence on for-profit colleges, but “the response was this general hearing.”

The Hearing

That hearing -- today's -- is the Senate's first in-depth examination of the sector since 1990, when the now-retired Sen. Sam Nunn (D-Ga.) held a series of drama-filled hearings that generated amendments to the Higher Education Act of 1965 that ended up putting some career colleges out of business and forcing many others to change their student recruitment and employee compensation practices.

“Given the massive investment that we’ve made in federal aid, it’s the responsibility of the chairman to ask the right questions,” a Democratic committee aide said, elaborating on Harkin’s statement. “It’s hard to see everything that’s out there on student defaults, debt, questions around outcome measures and hear people basically suggesting that the federal aid programs are being used to the detriment of students and the taxpayers, and not do something.”

The hearing comes as concerns mount that the Pell grant maximum will need to be cut by $800 per student in fiscal year 2011 to make up for an $8 billion shortfall. As lawmakers look at the billions of dollars flowing to for-profits, they can't help but wonder whether some of that money could be better distributed to less expensive institutions. The proposed Title IV program integrity rules would start to decrease the amount of federal aid going to for-profit institutions, said Teddy Downey, an analyst at Washington Research Group, but a Congressional limit of some kind might go even further. "Democrats aren’t going to want to fight tooth and nail for a large increase in Pell grants if these hearings turn out to reveal that there is a lot of bad behavior throughout the industry."

Committee staffers wouldn’t confirm how many more hearings are to come, only promising that more will follow over a not-yet-determined period of time.

Set to testify first today is Kathleen S. Tighe, the Education Department’s inspector general, who in her prepared testimony identified several areas of “waste, fraud and abuse in the proprietary sector.” The Education Department’s proposed regulations, she said, would address many -- but not all -- of the problems and still need to go through a final round of public comment and revisions without being substantively changed to have the kind of effect she hopes to see.

Three others testifying are all outspoken critics of the sector: Steven Eisman, a Wall Street trader (known as a "short seller") who has begun calling for-profit loan debt the next subprime mortgage crisis; Yasmine Issa, a graduate of the for-profit Sanford-Brown Institute who is saddled with more than $20,000 in loan debt and says she can’t get a job in the field for which her training was intended to prepare her; and Margaret Reiter, a former California deputy attorney general and consumer advocate who is an unabashed foe of for-profit higher colleges. The only panelist representing the for-profit colleges is Sharon Thomas Parrott, senior vice president of government and regulatory affairs and chief compliance officer at DeVry, Inc.

Stacking the panel seemingly decisively in opposition to for-profit colleges naturally rubs the sector the wrong way. In a statement, the CCA said that because the witness list is “composed almost entirely of sector critics,” it “is unlikely to help the American people understand the important changes taking place in postsecondary education.”

Harris Miller, the group's president, has insisted that he welcomes the scrutiny -- something he's said in his statements on the GAO report and the Senate hearing -- but as Congress' rhetoric has ratcheted up, so too has the for-profit sector's.

After the witnesses for the first panel were announced on Monday, Miller issued his second statement of the day, saying he was “surprised that Secretary of Education Arne Duncan or one of his lieutenants is not the primary witness to give the committee a broad overview of higher education and our sector’s role in it.” Instead, that role seems to have been given to Eisman, who Miller described as “a Wall Street short-seller born with a silver spoon in his mouth, who got his first big paycheck the old-fashioned way, through his parents” and who stands to make money if for-profit higher education stocks fall as a result of hearing testimony.

Miller’s attack on Eisman went further on Wednesday, when he held an hourlong news conference questioning Eisman’s motives and attempting to discredit the investor’s paralleling of for-profit higher education to subprime mortgages. “Comparing the for-profit career college sector to the subprime mortgage banking industry is as silly as it is simplistic,” Miller said, before listing the many differences he sees.

Miller also used the conference as a chance to again assert his sector’s opposition to the Education Department’s use of a student debt-to-income ratio to determine whether a program prepares its graduates for “gainful employment."

Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, defends Eisman’s views of the sector. “If his diagnosis fit the mainstream position of the sell-side position, he’d take it,” Nassirian said. “I hope people understand how meaningful this is. This is a guy who when the same kind of orthodoxy reigned supreme on mortgages, he broke ranks -- housing is a good thing but giving people loans they can’t afford to pay is unsustainable. He’s making the same case vis-à-vis the for-profit higher education sector. What’s being peddled is not education.”

Democratic Senate staffers also defended the decision to include Eisman on the panel. “This guy predicted the last subprime crisis and now he’s saying Congress is sitting on a massive problem, there’s something pretty outrageous going on here,” one said. “When you start having criticisms of that high a level you have to confront them, look into them one way or another.”

Even if some lawmakers or observers are critical of Eisman’s potential financial stake in the outcome of any Washington action on for-profit higher education, Pauline Abernathy, vice president of the Institute for College Access and Success, noted that Sharon Thomas Parrott, who is testifying on behalf of DeVry, also has a financial interest. “Eisman’s being transparent in his financial interests,” Abernathy said. “People can evaluate what he has to say and at least take in the facts.”

“Bad Apples” or a Rotten Orchard?

Since late January, when a negotiated rule-making process ended with representatives of for-profit and nonprofit institutions unable to agree on several key issues, Department of Education staff members have worked behind the scenes to complete revisions of a set of regulations aimed at guarding against abuse and waste in the Title IV federal financial aid program.

Throughout the spring, the CCA and the major for-profit higher education companies spent millions of dollars lobbying the department and Congress. At the same time, department officials, including Education Secretary Arne Duncan, repeatedly said they were focused on identifying and eliminating the “bad apples” among the institutions. Again and again -- at least in interviews and speeches -- they stressed that they were not trying to root out the whole sector.

In training their sights on for-profit higher education, and especially in the rhetoric they have used in doing so, though, Congressional Democrats appear more willing to question the quality and performance of the entire sector in a dramatic way. They’re starting with an examination of the sector as a whole to determine whether the problems being reported are just at some institutions or are widespread.

Anthony Guida, senior vice president of regulatory affairs and strategic development at Education Management Company, said that it’s “not surprising considering the amount of federal funds that our sector receives that Congress wants to take a closer look” at where that money is going. “I would hope that as the hearings develop that the focus is really on are we delivering a quality education and are we serving students,” he said. “Hopefully the GAO assessment will allow the discussion to go from hyperbole and anecdotes about a small number of incidents and move into a fact-based discussion of the whole sector.”

Abernathy – whose organization was headed by Robert Shireman, the outgoing deputy under secretary of education, who has led the department's review of for-profit colleges -- said she considers bad actors and a full-on sector review to be one and the same. "When the industry talks about bad actors it’s a reason not to act," she said. "When Secretary Duncan talks about bad actors, it's the reason we need to act."

The current business model of for-profit colleges -- bolstered in large part by federal aid dollars -- "rewards companies based on new enrollments, which doesn't reward the good actors who actually guide students through to a degree," Abernathy said. "We need standards and rules so that good actors can succeed and become the norm."

But whether this series of hearings will be as dramatic and sector-changing as the Nunn hearings is up for debate.

“I think what you’re seeing on the Senate side is a replay of the Nunn hearings on steroids,” Nassirian said. “The fraud and abuse are on steroids. What the Nunn hearings uncovered were financially sort of incomparable to what’s going on now -- the scale of what’s going on here is so much greater. And the corporatization of the proprietary sector and their newfound connection to Wall Street and the advent of the publicly traded ‘school’ have put waste, fraud and abuse on steroids.”

Terry W. Hartle, senior vice president of government and public affairs at the American Council on Education, said he’s not sure. “The evidence of abuse was pretty apparent when the Nunn hearing began. It was not unheard-of to find default rates of 50 and 60 percent. For-profit school owners were convicted of crimes; one of the witnesses was brought into the Nunn hearings in handcuffs.”

Now, though, he said, “I think what you have are, frankly, a lot of questions.” Whether those questions yield answers that do dramatic damage to the sector -- or, perhaps, bring about significant improvements -- has yet to be seen.

 

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