The National Consumer Law Center, a nonprofit group, on Wednesday released a report calling for tighter state regulation of for-profit institutions. Federal crackdowns, such as proposed "gainful employment" standards, will not be strong enough to prevent deceptive practices in the sector, according to the report. The group's recommendation's include a call for states to stop relying on regional accreditors to vet for-profits, and for state agencies to instead set their own minimum standards.
San Francisco's city attorney, Dennis Herrera, on Tuesday announced a $4.4 million settlement with Education Management Corporation (EDMC). Herrera's office had been investigating the student-recruiting tactics of the California Art Institutes, which EDMC owns. The for-profit chain did not admit wrongdoing as part of the settlement, according to a corporate filing. It will pay roughly $2.5 million in scholarships for past and present students at the local Art Institutes. The rest of the settlement amount will cover Herrera's costs for the investigation. The company also reached a voluntary agreement to provide more public information about its programs, such as job placement and graduation rates.
The office of Florida's attorney general, Pam Bondi, announced on Tuesday that it had concluded a three-year investigation into the recruiting and enrollment practices of Kaplan Inc., a for-profit chain. The investigation, which focused on other for-profits as well, found no violations by Kaplan, according to a statement from the company. Kaplan also voluntarily reached an agreement with Bondi's office, under which it will disclose more details about academic programs. The company will also reimburse the attorney general's office for fees it racked up during the investigation.
The University of Southern California's Pullias Center for Higher Education on Friday released a proposed research agenda on the for-profit sector. The five-page document grew out of a meeting the center hosted in April. The event featured five papers with different perspectives on for-profits, which sought to "move beyond hyperbole" by confronting the competing narratives about the sector.
The 30 participants from the April conference reached a consensus about a research agenda to address the most most pressing and fundamental policy questions about the scope, cost, quality and accessibility of for-profits. The resulting paper describes how to better track the performance of for-profits as well as changes that could improve their student outcomes. It also asks questions that seek to get at the differences between for-profits and traditional colleges.
At least nine letters sent to the Education Department and Congress, allegedly from business owners who had hired Corinthian Colleges graduates and praising the for-profit chain, were actually written by Corinthian employees, The Orange County Register reported. The letters were part of a lobbying campaign against new rules proposed by the Obama administration. A Corinthian spokesman said that there had been no intent to deceive and that the employees made a mistake. He said that the record would be corrected.
Investor Service, the credit ratings agency, has downgraded the credit outlook for Laureate Education to negative from stable, citing the global for-profit chain's increasingly leveraged position. Laureate, which is based in Baltimore and enrolls 800,000 students at 200 campuses around the world, has used debt to finance many of its acquisitions. The pending purchase of a Brazilian university for $500 million would bring the company's total debt to roughly $6 billion, according to Moody's.
"The company's current pace of investment has resulted in leverage that is now quite high," the ratings agency said in a written statement. "Moody's believes that the company will be challenged to restore lower leverage over the near team."
The $6 billion in debt is more than Laureate's annual revenue. However, the company's liquidity is adequate, Moody's said. Laureate has $427 million in cash on hand. And the ratings agency said Laureate remains in a "prominent market position," thanks to solid enrollment growth and "favorable industry fundamentals."
Doug Becker, Laureate's CEO, recently toldInside Higher Ed that the company plans to continue its growth strategy.
The court of public opinion has not been kind to the for-profit college sector over the last few years. In particular, the reputations of the 15 publicly traded companies that dominate the sector have been tarnished through repeated stories of alleged abuse of federal financial aid programs and students aggressively lured into programs where some end up with unmanageable debt.
But for-profit education did not always operate this way. Some of the same companies barraged by today’s negative headlines were innovators of new business models that served populations left out of the traditional postsecondary education space. Others offered training programs for years before there even was a Higher Education Act that made federal financial aid available to students.
What led so many companies astray is a story of strategic choices made at the height of the 2000s boom. Faced with the means to achieve infinite scalability by tapping into a federal entitlement program, the opportunity to use online learning to cut costs, and motivated by Wall Street cash and its accompanying investor pressures, several companies pursued hypergrowth at all costs. They moved away from traditional missions, pursuing any and all students they could through sophisticated recruitment machines designed to feed the neverending demand for hitting enrollment and earnings targets.
U.S. Department of Education data on students who left school in 2008 and 2009 at the peak of the for-profit college boom show just how bad the strategic emphasis on growth over quality has been. In total, 40 percent of programs offered by publicly traded companies, representing 48 percent of for-profit students in the data, fail one or both of the tests of debt-to-earnings and student loan default that the Education Department is proposing to use to judge the success of career training programs. This includes 44 percent of students enrolled in colleges owned by the Apollo Group, which runs the University of Phoenix. It also includes 90 percent of students at ITT Technical Institutes.
But companies like Strayer and Capella that took a more measured approach to growth look much better in the data. Not a single program at Strayer appears to be leaving graduates overly indebted or headed for default, while just one of Capella’s 96 programs has problems — a bachelor’s degree in health informatics. Capella’s income results are so strong that not a single program had a debt-to-earnings ratio above 1 percent.
The results for Apollo and ITT are particularly troubling because these are two companies with long operating histories that used to be some of the best examples of what successful for-profit education could be. The ITT Technical Institutes actually predate the Higher Education Act by nearly 20 years and were clearly able to recruit and educate students without being wholly reliant upon the federal grants and loans that make up the majority of its revenue. From its founding in the 1970s until the early 2000s, Phoenix would not admit students unless they were 23 or older, were working full-time, and had at least two years of workplace experience. This helped it build and maintain a reputation as a high-quality option for working adults that other colleges were reluctant to educate.
For those seeking to maximize profit, the entitlement nature of the federal student aid programs provides a clear path to unlimited growth. Anyone who meets minimal eligibility criteria qualifies for at least a multithousand-dollar student loan. Low-income students — the ones who just happen to be the least likely to go to college and can be recruited with the least competition — can bring thousands more in additional revenue each and every year through federal Pell Grants. As long as companies could find American students, there was little ceiling to the growth possibilities.
The internet pushed that growth ceiling even higher. Digital coursework could reach students anywhere in the country at a substantially reduced cost. Finding sufficient concentrations of students to justify face-to-face investments like classrooms and more professors became totally unnecessary. The recruitment pool had effectively become anyone with a pulse and an internet connection.
Entitlement programs and distance learning provided an opportunity and means for exceptional growth, but it was Wall Street that came in with the motive. The Apollo Group and ITT became publicly traded in the mid-1990s. At Apollo, enrollments rose from 124,000 in the fall of 2001 to 470,800 in the fall of 2010. ITT, meanwhile, grew from 28,600 to 88,000 over the same period.
Enrollments grew even faster from 2006 on, fueled by cheap credit available elsewhere in the economy and constant demands for showing increased student starts. But such growth pressure can coexist with historical standards and missions only while there’s a glut of students who fit that mold. Once that pool is tapped out, either standards or enrollment targets have to give.
Standards and institutional mission lost. Phoenix removed its enrollment requirements and began placing more emphasis on two-year degrees to students regardless of age or work experience through Axia College. A university with over two decades of experience catering to one type of student immediately started enrolling anyone it could. As former Phoenix Senior Vice President John Murphy wrote in his book Mission Forsaken, “It was a money-spinning financial decision, but a cheerless academic disaster.”
The Education Department data show what an academic disaster looks like in numerical terms. Take Phoenix’s associate degree in office management and supervision. It is the second-largest associate degree program offered by any institution in the country. And more than 9,800 of the 27,500 students who started making payments on federal student loans for this program from October 2008 through the following September ended up defaulting on their debt by the fall of 2012. These individuals had their credit ruined and balances inflated through a host of fees and penalties, and will almost certainly never be able to discharge their debts through bankruptcy.
The office management and supervision program is just one of 20 programs at Phoenix with a default rate of 30 percent or higher. This represents over 32,200 individuals — about the same size as the University of Alabama. Every single one of these programs offers an associate degree. It even includes programs that should have direct market payoff, such as network systems administration (default rate of 44 percent) and information technology (42 percent).
By contrast, Phoenix’s graduate programs do not look so bad. None of them had unacceptable results and just one — a doctorate in higher education management — had a default rate over 15 percent. Two doctoral programs (business administration and organizational leadership) even had typical earnings over $100,000. One has to wonder how many students might have been prevented unnecessary financial harm had Phoenix stuck to its core business model and not pursued such expansion.
Unfortunately, Phoenix provided a case study for other companies to emulate, especially for recruitment. For ITT that meant creating an aggressive recruitment machine that used a “pain funnel” tactic to increase enrollment by preying on students’ fears and insecurities. And since many of those students were low-income, it created new debt products for students who needed money to cover the gap between tuition and federal aid.
The high-growth model has created legal headaches and poor student results for ITT. It has the largest share of students in failing programs of any publicly traded company. ITT also has programs like its $47,000 associate degree in visual communications, where a higher percentage of students default on federal student loans (45 percent) than find jobs in their field (30 percent).
ITT has also run afoul of the Consumer Financial Protection Bureau (CFPB), which sued the company in February for the debt it offered to cover tuition gaps. In its lawsuit the CFPB alleged that ITT lured students into high-priced private student loans with default rates as high as 60 percent and “sacrificed its students’ futures by saddling them with debt on which it knew they would likely default.”
Recent efforts suggest that there may be ways to turn back the tide and get some companies to focus again on students over growth. Chastened by regulatory efforts aimed at reshaping recruitment practices and holding institutions accountable for debt, coupled with lawsuits and investigations against the worst behaviors, many companies have had to reduce enrollment, offer trial periods, and freeze or lower tuition. This includes initiatives like the Kaplan Commitment, which lets students test out classes for three weeks without paying tuition. Or DeVry’s Fixed Tuition Promise, which guarantees costs will not go up as long as students stay enrolled and came one year after a tuition freeze. Hopefully, these changes will result in better outcomes for students.
But short-term improvement is not enough. The last 15 years has shown just how Wall Street can trump old values and prompt reckless behavior if their ambitions and actions are left unchecked. Without a stronger accountability structure around them, there’s no promise that growth at all costs will not return.
Ben Miller is senior policy analyst for the New America Foundation's Education Policy Program.
Roughly 9 percent of the $511 billion spent in 2011 in the United States on higher education went to financing interest payments or to corporate profits, according to a new analysis from the Center for Culture, Organizations and Politics at the University of California at Berkeley. The American Federation of Teachers (AFT) commissioned the report, which found that $45 billion in higher education spending that year was for interest on individual student loan debt or on colleges' borrowing, or went to profits made by for-profit college companies.
The bulk of the $45 billion figure is attributable to student and institutional borrowing. Operating profits among for-profit colleges were roughly $4 billion in 2011, according to the report, and less than $1 billion in 2012 -- due to plunging enrollments in the sector. The student debt figure cited in the report refers to interest payments on both private and federal loans. The bulk of institutional borrowing was to fund "amenities" and construction projects, according to the study, such as for football stadiums.
For-profits got plenty of attention at a Wednesday AFT event to unveil the report. Rep. Mark Takano, a California Democrat, was there. He urged tighter regulation of the sector.
"This is an insane way to educate low-income students," said Takano. "We need strong gainful emploment rules."
The debate on the Department of Education’s proposed “Gainful Employment” rule has fixed attention on the failure by both sides to resolve one of the nation’s most important problems: How to effectively serve the education needs of America’s new traditional students.
On one side are those who support the department’s new regulations that end student aid to career-oriented programs whose graduates fail to meet certain arbitrary debt-to-earnings ratios and loan default rates. Driven chiefly by opposition to the role of profit-seeking in higher education, this camp appears little concerned with the fate of hundreds of thousands of mostly underprivileged students who may be left without a postsecondary education as a result of the proposed rules.
The opposing camp, dominated primarily by the proprietary sector’s executives, trade groups, and free-enterprise partisans, has taken up a defensive position that too easily dismisses the fundamental need for new regulations to help align the sector’s business interests with higher education’s social goals.
While the former group is working to undermine the institutions best suited to address the needs of students poorly served by public institutions, the latter includes too many players that are far from reforming themselves so as to solve the problems that landed them in the crosshairs of their hostile detractors.
Among the most strident defenders of the proposed regulations is Robert Shireman, a former Education Department executive. In “Perils in the Provision of Trust Goods,” released this week at the Center for American Progress (see related article), Shireman argues that the essential problem with for-profit higher education institutions is that they are for-profit. Shireman contends that because for-profit education companies are unencumbered by the “nondistribution constraint,” which limits the rent-seeking incentives of administrators at nonprofit institutions, executives at proprietary schools are tempted to cut corners on quality or mislead students to increase the returns to shareholders.
Though there is much to take issue with in Shireman’s essay, I focus here on a contradiction in his argument that undermines his thesis that for-profit status is the problem in order to highlight what the private and publicly traded proprietary sector must do to silence its critics and better serve its students.
Shireman shows that being for-profit is not in itself a bar to being a socially responsible and successful education institution by pointing to the example of the for-profit University of Phoenix. He writes that in its first two decades Phoenix “built a strong reputation, and by all accounts it was well deserved.”
The reason, he adds, is that it primarily served middle managers required to be at least 23 years old with significant prior college experience (60 credits) and a minimum of two years of work experience. Consequently, he correctly notes, many had their tuition reimbursed by their employer. Shireman then goes on to claim that beginning in 2001, Phoenix started eliminating these requirements “to pursue more students using federal aid -- which led to enormous profits but declines in quality and reputation.”
Undeniably, as Phoenix lowered the number of credits required for admission, students entered less prepared, resulting in a decline in retention and graduation rates. However, until recently the university had great difficulties recalibrating its once-successful vision and business plan, resulting in a substantial blow to its reputation and a dramatic decline in its parent company’s market value -- from nearly $12 billion in 2009 to the present $3 billion. But Phoenix was not alone.
Challenged by rising competition, negative publicity, and a transformed economy -- driving many would-be students into the work force -- in the last five years eight of the next largest publicly traded higher education companies lost a collective market value of almost $14 billion. Without diminishing the negative effects of increased competition and a changing economy, the $22 billion loss in market value among companies worth over $32 billion a mere five years ago suggests something more than external challenges as the cause, especially when an additional education company managed to increase its value by almost $90 million during the same period. What, then, is this other cause?
To answer this, I turn to the experience of Paul Polman, who since his appointment as CEO five years ago has increased Unilever’s market value from $73 to $139 billion, partly as a result of the termination of the Great Recession, but more importantly as a consequence of his doing the unthinkable. After 10 years of no growth, he led the company to a new vision based on the idea that to succeed Unilever must evolve around leaders who have the skills “to focus on the long term, to be purpose-driven, to think systematically, and to work much more transparently and effectively in partnerships.”
This means that businesses, especially those with a social purpose, such as higher education, must be organized to serve society by taking responsibility for their decisions through a process requiring thinking long-term about their business model and goals.
Taking a page from the strategy Polman successfully executed, I suggest higher education companies do three things to escape the ongoing wrath of politicians and regulators.
First, end offering quarterly guidance and reduce what is reported to analysts and shareholders to metrics that monitor the creation of long-term values.
Second, make sure performance-based incentive plans are largely based on periodic success measures of long-term goals that reflect a positive social impact.
Third, because merely cutting expenses will not lead to success, apply accumulated cash mainly to the improvement of student performance -- the only currency of lasting value in education.
As some education companies already working to apply the above suggestions know, share price will be affected in the near term. However, these initiatives will diminish negative media and regulatory zeal permitting stocks to ultimately reflect the true value of those companies on a path to sustainable growth.
This strategy requires educating and working on changing the stockholder base. But given the large participation of pension funds and other long-term investors in the stock market, it should permit education companies to stop yielding the future to short-term investor interests.
As some private and publicly traded proprietary institutions have already learned, long-term thinking will make better, uncompromised decisions possible by removing the pressure to make poor choices based on short-term concerns.
Only by thinking for the long term will education companies fully attend to their real social goal: the successful education of their students. That’s what reputable traditional education institutions have done, and what many comprehensive public institutions, subject to volatile annual budgets and lacking in long-term incentives cannot.
In short, it is not that they are for-profit that makes proprietary institutions so vulnerable to questionable practices, it is that many have still not grasped that education is a social goal requiring a commitment to a long-term ramp up.
Jorge Klor de Alva is president of Nexus Research and Policy Center and a former president of the University of Phoenix.
The South Carolina Commission on Higher Education’s Committee on Academic Affairs and Licensing voted against recommending a license that would allow Florida-based InfiLaw to operate the law school, which is a decade-old private law school. InfiLaw, which has law schools in three other states, is facing lawsuits against it in two of them. Many alumni and faculty members in Charleston object to the deal.