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Has the Conversation Changed?

August 9, 2010

WASHINGTON -- Leaders in for-profit higher education have historically tried to deflect criticism of the institutions by pointing to a few misbehaving "bad actors" who aggressively recruit unqualified students, keep them enrolled for as long as possible while burying them in debt and, if students stick it out long enough, award them worthless degrees.

But the events of last week -- most notably the findings of the Government Accountability Office's undercover investigation of recruiting at for-profit colleges that included inducements to commit fraud at four institutions, and the highly critical Senate hearing at which the findings were aired -- challenged the validity of that argument and put advocates of the sector on the defensive in a way that they have not been for years. The developments emboldened critics, saying that the week's events prove what they've been saying about the systemic nature of the sector's problems.

And the developments prompted a perceptible, if subtle, shift in the rhetoric of for-profit college leaders and a set of self-imposed actions that, while derided by skeptics as little more than damage control, reflected a recognition by the institutions that their previous protestations may no longer suffice. "It's not us, it's them, so don't penalize the whole sector" has become "it's us, but it's not really that bad, and we're trying to fix it -- so don't use a heavy hand in regulating or legislating against us."

Based on the tack taken by Congressional Democrats in recent weeks, following on the Obama administration's aggressive regulatory approach this winter and spring, many observers seem to think that wish may be wishful thinking at this point.

With the GAO's findings suggesting that evidence of for-profit recruiters encouraging students to commit fraud was fairly widespread and that questionable or misleading practices were identified at all 15 for-profit colleges that investigators visited, “the world changed this week,” said Terry W. Hartle, senior vice president of government and public affairs at the American Council on Education. “There should be no doubt that the world of federal student aid policy changed this week," certainly for for-profit colleges but perhaps for nonprofit institutions, too.

A few hours after the hearing ended on Wednesday afternoon, a team of Credit Suisse analysts who have been closely monitoring Washington's scrutiny of the sector wrote “the hearing was quite harsh on the for-profit education sector, and certainly did not come as a relief.” (Note: This paragraph has been updated to clarify the characterization of Credit Suisse.)

On Friday morning, Jeff Silber, a managing director at BMO Capital Markets, downgraded the sector’s stocks for investors. Admitting “this call is late,” Silber said, “the level of uncertainty exacerbated this week … likely meaning the increased oversight will be with the sector for some time.” That sort of analysis, in combination with several companies' reports of slowing enrollment growth, helped drive down the stocks of most of the sector’s publicly-traded companies by more than 10 percent between Monday morning and Friday afternoon.

The GAO Report as Evidence

No matter how you cut it, it was a hell of a week for for-profit colleges. On Monday, reporters and investors got their hands on the GAO's “secret shopper” investigation of recruiting practices at 15 for-profit colleges that identified questionable or misleading statements everywhere -- and inducements to commit financial aid fraud at four.

On Wednesday, the GAO’s report in hand, Sen. Tom Harkin (D-Iowa) and other members of the Health, Education, Labor and Pensions Committee voiced concerns about the GAO's findings and cornered the leader of a national accreditor, who insisted that his agency’s standards were “rigorous,” even though the accreditor had given approval to some of the campuses where the GAO found problems. (While it’s not an accreditor’s responsibility to hunt for fraud, some senators wondered how people examining the institutions could miss such seemingly endemic problems.) Two Senators not on the HELP committee asked the Secretaries of Defense and Veterans Affairs to provide information on the funding that flows from their military education programs to for-profit institutions.

The biggest change engendered by the GAO report, particularly in the eyes of Congressional and other critics, was that it suggested “systemic” problems in the sector, as Harkin put it -- problems that would almost certainly need legislation to be ameliorated. The agency's findings seemed to unshackle Harkin, making him less guarded, and more passionate, on the issue than ever before.

“I’m pleased to see that all of the concerns that we’ve been expressing to Congress for the last decade are being borne out by independent observers,” said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers. “This is a slam dunk. There’s no ambiguity to what’s going on.”

Harris N. Miller, president of the Career College Association, the sector’s biggest trade group, said the GAO’s findings and the hearing were “a wakeup call” for him and his members. “And a wakeup call doesn’t mean it was a good week.”

When the HELP committee held its first hearing examining for-profits on June 24, Miller's strategy was to go on the offensive, attacking the committee's decision to include Steven Eisman, an investor who stood to make money on greater scrutiny of the sector and declining stock prices, among its witnesses. After this week's hearing, there were no distractions -- just the sobering evidence gathered by GAO and signs that Congress won't be backing down.

"We have to show that we as an association and we as institutions are changing our behavior," Miller said. "It means not just saying something different, it means doing something different.... We need to focus more on compliance."

While it was “fairly likely that Congress would act” before GAO released its findings and the Senate held its hearing, Hartle said, “now I think it is inevitable.” And, with Congressional scrutiny continuing to ramp up, he said, it’s extremely likely that the U.S. Department of Education will issue final regulations on contentious issues such as gainful employment and incentive compensation that are at least as harsh as the versions released this summer in two notices of proposed rule making.

Some members of the House of Representatives, though, are still pushing for the department to back down. Fourteen House Democrats and two House Republicans -- mostly members of the Congressional Black Caucus -- wrote to Education Secretary Arne Duncan on Tuesday asking that the department ease its proposed regulations to define gainful employment of for-profit colleges’ former students using metrics based on debt levels.

And Rep. Rob Andrews (D-N.J.), a longtime advocate for the sector, wrote his own letter to Duncan on July 30, arguing that Congress, the Obama administration and colleges and universities “should take a more comprehensive look at the return on investment of higher education for students and taxpayers” across sectors. Like other for-profit supporters, Andrews is trying to draw attention to traditional higher education as well, understanding that nonprofits have the clout to kill unfavorable legislation.

Miller wrote to the Education Department on July 30 asking the agency to at least double the 45-day public comment period on the notice of proposed rule making detailing proposed metrics on gainful employment. “We do not believe that the 45-day period provides sufficient opportunity for schools and the rest of the higher education community that would be impacted by the proposed rule to assess fully the many significant, complex issues raised in the NPRM,” he wrote.

Late last week, the department denied the request, Miller said, explaining that it plans to publish final regulations by Nov. 1 -- so that they can go into effect on July 1, 2011 -- and that extending the public comment period and making any changes based on those comments would not make it possible for the department to stick to that timeline.

Coupled with the GAO report and Wednesday’s hearing, the department’s decision to decline the extension request might’ve been bad enough news. (One small shred of optimism for the sector: the Small Business Administration’s examination of the gainful employment rule for the impact it would have on small for-profits.) But Harkin also stressed that more oversight was to come.

Harkin said he planned to hold hearings in September, November and possibly December. He also asked the 15 publicly-traded for-profit college companies and 15 others to submit information on how the institutions recruit and enroll students, determine prices, calculate financial aid, and manage compliance with the 90-10 rule (which requires for-profits to collect at least 10 percent of their revenues from sources other than federal financial aid), as well as information about corporate finances and structure. The first set of data is due on Aug. 26 and the second set on Sept. 16. Harkin said that his decision about the topic of the next hearing would probably be influenced by the patterns the data reveal.

“Are we talking about a few bad apples or are we talking about the entire orchard being contaminated by a business model that churns students, that provokes the kind of recruitment and unethical conduct we saw in the GAO, because of a need to increase profits?” Harkin asked, rhetorically, at the hearing. His repeated use of "systemic” to describe the problems suggested that he is going after the whole orchard.

Though results of the fall’s elections could alter the political calculus (and could bring nonprofit colleges more directly into the fray), the evidence of fraud, Hartle said, “changes the political and policy environment incredibly.”

The question is no longer whether Congress will act but how it will act. “That students were encouraged to commit fraud requires Congress to step in and say we have to satisfy ourselves that this problem has been dealt with,” he said. “It’s a long and winding road – the start of a fairly long and complicated process to design strong and appropriate legislation that will not have an enormous number of unintended consequences.”

Crisis management or real change?

After Inside Higher Ed and other news organizations published stories on the GAO report Tuesday morning, Harris Miller issued a six-point plan laying out how the CCA and its members planned to investigate and reform themselves. “We can have zero tolerance for bad behavior,” he said in a statement then, proposing a strengthened code of conduct for members and the development of a sector-wide secret shopper program to ensure that employees behave properly when interacting with students.

For months, Miller said he welcomed policy makers’ scrutiny because it would ultimately vindicate the sector’s efforts to be seen as more than a bunch of “bad apples.”

“It is time for analysis by anecdote to end,” he said in June, after a group of Democrats asked the GAO to begin a wide-reaching investigation of the sector. “Elitist Wall Street stock manipulators, rather than higher education experts, have been driving hyperbolic media coverage, creating the impression that outliers are the norm, and insulting millions of hardworking students and graduates in the process. We have every expectation that the GAO, using facts and figures, will provide a full and fair review.”

Now that some of those GAO findings have been made public, Miller tried to balance the fact that an examination he said he approved of had produced an unfavorable view of his constituents.

“Maybe the factual findings of the GAO aren’t as widespread or as systemic as they think,” he said. Nonetheless, to the institutions he prefers to call "market-driven," the problems “are more widespread than any of us thought.”

He added: “Is it as wide or as deep as some people think? No, I don’t think so, but it still has to be addressed.”

Nassirian said he saw the sector having two options for how to respond to the GAO report and Congress’s questions -- either by “seriously evaluating the sustainability of their past practices and genuinely reform in the interest of long-term survival,” or by “coming out swinging.”

So far, there’s been a bit of both strategies.

In response to the GAO investigation, Career College Central, a news aggregation website with a decidedly pro-sector position, launched a “Double Standard” page, where it is culling “advertisements in which community colleges, four-year institutions or their related online programs make statements that career colleges cannot.” Paradise Valley Community College, for instance, promised incoming students that they would be able to "begin a new job within two years." An advertisement for the University of Texas at Austin’s law school calls the city “one of the most dynamic cities in the U.S.” The University of California at Berkeley calls itself “truly a prototype of a contemporary university” and “one of the world's leading academic institutions.”

Pedro de la Torre III, an advocacy senior associate at the left-leaning Center for American Progress’s Campus Progress, wrote on Thursday that the site demonstrated that “[i]n the face of mounting evidence of widespread abuse in the sector it appears that the classic defense, ‘it’s only a few bad apples,’ is no longer convincing, leaving the for-profit education industry with but one retort: of ‘they do it too!’ ”

But, he said, “the problem is that the examples of ‘misleading’ advertising by other higher education sectors are, at least comparatively, harmless, and that all of the data clearly shows that for-profit education is -- more than any other sector -- in desperate need of strong oversight.”

Kaplan, Inc., has frozen new enrollments indefinitely at its Kaplan College campuses in Pembroke Pines, Fla., and Riverside, Calif., two of the campuses visited by GAO investigators. “We will take all necessary actions -- including termination -- with respect to any employee found to be in violation of our clearly outlined standards and the code of conduct that is emphasized in our repeated training and our day-to-day operations,” said Melissa Mack, senior vice president of marketing, in a statement. “The actions described in the GAO report are simply unacceptable. We will do everything we can to ensure that such incidents are not repeated anywhere at our 75 campuses or among our 16,000 higher education employees.”

One question that was posed at the Senate hearing -- and that appears to be ignored by a strategy like Kaplan’s -- is whether questionable recruitment practices were generated by “rogue” employees at campuses, or by higher-ups. If the problems at Kaplan, or any other for-profit college, reach beyond the campus level, then toughening rules just at the campuses GAO visited won’t actually bring widespread change.

“People are going to have to be taken out in the back and metaphorically shot,” Miller said. He sounded like he was thinking about the “rogue” recruiters or campus-based managers, rather than high-level executives at the major companies or the owners of privately held colleges. “I’m not sure it’s true, I’m not sure it’s false,” he said, that deceptive recruiting practices at some colleges were coming from above. But, going forward, he said, “leadership has to come from the top.”

Like Miller, Anthony Guida, senior vice president of regulatory affairs and strategic development at Education Management Corporation, said in June that he welcomed the GAO’s scrutiny of the sector. The agency's work, he said at the time, would “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.”

One of the campuses GAO investigators visited was Education Management’s Argosy University in Chicago, but “it causes us to bristle a little when they say all 15 schools were found guilty of fraud and deception.”

At Argosy, one of GAO’s secret shoppers was quoted a price that represented only about 20 percent of the annual tuition, while another student who asked for the college’s graduation rate was told that “not everyone graduates” and was given only a vague answer about faculty qualifications.

Guida defended all three findings. There was, he said, “not any intent to mislead” and, had the secret shopper completed the enrollment process, he “would have gotten all the information” from Argosy’s enrollment agreement document.

While GAO said that “all 15 were found to have done misrepresentation,” Guida said he doesn’t “think any of these three examples fall into that” category. “A lot of the stuff was bad and it needs to be condemned,” he said, just not what Argosy’s employees did. Nonetheless, he said, the Argosy employees who met with GAO’s undercover students will go through additional training.

Nassirian said he is doubtful that for-profit colleges will make any large-scale effort to change. “If they really wanted to seriously enforce any kind of a code of ethics, the whole business model would be upended because the business model here is consumer fraud,” he said. “The margins involved can only be produced if you can shortchange people on the substance of what you purportedly sell, which is education.”

 

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