Short-term thinking is the main problem for for-profit colleges (essay)

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.

Federal panel fails to reach consensus on debit card, state authorization rules

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Education Department is now free to promulgate new rules on campus debit cards and state approval of online programs after a negotiating committee failed to reach agreement on the proposals. 

Consumer Group Sues Education Dept. for Debt Collection Records

A consumer advocacy group on Monday sued the U.S. Department of Education over the agency’s refusal to release documents showing how the federal government awards bonuses to debt collection companies it hires to recover defaulted student loans.

The National Consumer Law Center charges in its lawsuit that the department violated the Freedom of Information Act by withholding records relating to the performance and incentive pay for the government’s contracted debt collectors. The group had sought information about the department’s methodology for evaluating and compensating the companies. It also requested documents that show how individual debt collection companies have performed.

The Education Department asserted, according to court documents, that it may keep the documents secret under an exemption to the information law that protects “trade secrets” and certain commercial or financial information.

Persis Yu, a lawyer at the law center, said in a statement that “collection agencies routinely violate consumer protection laws and prioritize profits over borrower rights.” She added: “Taxpayers and student loan borrowers have a right to information about the impact of the Education Department’s policy of paying outside debt collectors on the rights of borrowers.”

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McCaskill says legislation could seek tougher penalties for colleges on sexual assaults

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At a roundtable discussion about her efforts to clamp down on campus sexual assault, Senator Claire McCaskill says she's eyeing tougher penalties, mandatory climate surveys and other changes. for headline, maybe 'Senate Warning on Sexual Assault'? dl ** looks good /ms

Sallie Mae, Navient settle U.S. charges of overcharging servicemembers, misrepresenting late fees

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Federal regulators announce two settlements over alleged overcharging of military servicemembers and misrepresenting late fees to other borrowers.

Senator McCaskill Says Higher Ed Lobbying Group Interfered With Her Sexual Assault Survey

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Sen. Claire McCaskill criticizes guidance the American Council on Education gave its members on how to respond to the lawmaker's survey on sexual assault. 

Sallie Mae Spin-Off Expects $103 Million Hit From Probes

Navient, the loan-servicing company formerly known as Sallie Mae, disclosed to investors Friday that it expects to pay an additional $103 million to settle two federal investigations, on top of the $70 million it already set aside last year for that purpose.  The company is facing investigations from the Federal Deposit Insurance Corporation, the Department of Justice, and other federal and state agencies over how it managed and processed the payments of student loan borrowers, including active-duty servicemembers.

The spin-off of Sallie Mae’s loan-servicing business into its own independent company, Navient, was officially completed at the end of April. Navient now inherits all liability stemming from the federal and state investigations of Sallie Mae’s loan-servicing business, the company said. The FDIC has cited Sallie Mae for unfair or deceptive acts involving the way it made disclosures to borrowers and assessed certain late fees.

Navient said Friday that, based on its discussions with the FDIC, the company believes it will be required to refund $30 million worth of certain late fees to borrowers of Sallie Mae loans dating back to November 2005. In addition, in an effort to “treat all customers in a similar manner,” Naveint said it also expected to “voluntarily” reimburse $42 million in late fees for borrowers whose loans were not owned by Sallie Mae but were serviced by them.

The Department of Justice has been probing whether Sallie Mae cheated active-duty servicemembers by not providing them with the interest-rate discount to which they are entitled under federal law. To settle those allegations, Navient said it expected to pay out $60 million.

None of the settlements are finalized, the company said. However, accounting standards generally require companies to disclose potential losses only when they are probable and reasonably estimable.

In addition to the Department of Justice and FDIC investigations, the Consumer Financial Protection Bureau is also probing the companies. They are also facing investigations by a number of states, led by Illinois Attorney General Lisa Madigan.

Consumer advocates and a growing number of Senate Democrats have said they are concerned that the Education Department is too lax in its oversight of how Sallie Mae services loans on behalf of the government. Some have called on the Education Department to assess penalties on Sallie Mae or to end its servicing contract with the company.

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Tufts University, Federal Officials Resolve Title IX Standoff

Tufts University and the U.S. Department of Education have resolved an unusual dispute over how to settle a finding that the university’s handling of sexual assault cases violated federal law.

University and federal officials said Friday that Tufts had formally recommitted to the signed agreement that it backed out of earlier this month, which prompted a warning from the Education Department that the university’s federal funding may be in jeopardy.

Catherine Lhamon, the assistant secretary for civil rights, confirmed in a statement Friday that the university was no longer in breach of the agreement.

“I congratulate Tufts University for taking swift action to cure its breach of its April 17 agreement with” the department’s Office for Civil Rights, she said. “I look forward to working with [Tufts] President [Anthony] Monaco and the university community to ensure the safety of all students on campus.”

Monaco “officially” recommitted to the signed agreement during a meeting on Thursday with Lhamon, the university said. Following student protests on campus, a university spokeswoman first said last Friday that the university was recommitting to the agreement.

The standoff began last month when Tufts withdrew from an agreement it had signed nine days earlier to resolve a Title IX complaint against the university. The Education Department responded by saying that Tufts had breached the agreement and warned that officials might seek to cut off the university’s federal funding if the matter was not resolved in 60 days.

At the time, university officials said they were backing out of the agreement because they had signed it under the understanding that federal officials were concerned only with a previous violation of Title IX on the campus, not a current issue. The university said it strongly disagreed with the conclusion by the Office for Civil Rights that its current sexual assault policies violated Title IX.

The department’s announcement about the Tufts case came as the Obama administration was promoting its efforts to push colleges to clamp down on sexual assaults. The administration also publicly named, for the first time, all of the 55 colleges that the Education Department is probing for their handling of sexual assault cases.

Separately, the Education Department announced Friday that Virginia Military Institute had violated Title IX by kicking out pregnant cadets and not properly handing sexual harassment and assault cases. Federal officials and VMI have entered into an agreement to resolve the violations, which requires the institution to make several changes to its policies.

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Higher Ed Lobby: Congress Should Address Athlete-Union Issue

The American Council on Education, the umbrella lobbying organization for colleges and universities, on Wednesday said that allowing college athletes to unionize would produce a litany of bad consequences.

In a letter to Representative John Kline, the Republican who chairs the House education committee, Molly Corbett Broad, the group’s president, took issue with a decision last month by a regional director of the National Labor Relations Board to classify Northwestern University football players as employees.

Broad said that such an issue should be addressed by Congress rather than be decided by an administrative agency. Her letter came as Kline, who has been critical of the NLRB decision, is set to hold a hearing today billed as an inquiry into allowing “big labor on college campuses.”

Broad also made the case against allowing athletes to unionize by citing “a range of negative and troubling consequences” that would flow from such a decision. Athletic scholarships would become taxable income under the Internal Revenue Code, and would therefore potentially cost athletes money, she said. In addition, if college athletes were able to collectively bargain with their colleges, such negotiations would “undermine the collegial, academic culture” on campuses. And, if college athletic unions were successful in increasing the compensation of their members, the reallocation of resources “would jeopardize institutions’ ability to offer other sports and the educational opportunities they provide to male and female athletes who may not receive athletic scholarships,” the letter said.

Proponents of letting college athletes unionize have also been taking their case to Capitol Hill in recent months. The College Athletes Players Association, which represents the Northwestern players, has been holding meetings with lawmakers, seeking to garner support and fend off any legislative attempt to stop their organizing efforts.   

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Interest Rates on Federal Student Loans Set to Rise

The cost of borrowing money from the federal government to pay for college will increase in the coming academic year.

Interest rates on most federal student loans are now set to rise following Wednesday’s sale of 10-year Treasury notes, the government debt to which rates are tied.

The interest rate on new loans for undergraduate students will increase to 4.66 percent, up from the current 3.86 percent. The cost of new direct loans for graduate students will jump to 6.21 percent from the current 5.41 percent.

A bipartisan accord struck in Congress last year pegged the interest rates on federal student loans to the government’s borrowing cost. The government now sets student loan interest rates each year based on the last auction of Treasury 10-year notes prior to June 1.

Loans disbursed starting July 1 will reflect the new rates, which are fixed for the term of the loans. The interest rates on existing federal direct loans are not affected by the changes, though some Democrats in Congress this week said they were pushing legislation that would allow borrowers to refinance their existing loans at current rates.

The following are current and future rates for student loans issued by the U.S. government:


Current-Year Rate

(2013-2014 AY)

New Rate

(2014-2015 AY)

Undergraduate Direct Loans

(Subsidized & Unsubsidized)



Graduate Direct Loans



Direct PLUS Loans

(Grad PLUS & Parent PLUS)




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