Comparing Higher Ed to Wall Street

Whenever worried leaders of for-profit colleges have implied in recent months that the U.S. Education Department is gunning for the institutions, officials of the federal agency have discouraged such talk, offering evenhanded rhetoric about treating all sectors the same in their push for increased accountability.

April 29, 2010

Whenever worried leaders of for-profit colleges have implied in recent months that the U.S. Education Department is gunning for the institutions, officials of the federal agency have discouraged such talk, offering evenhanded rhetoric about treating all sectors the same in their push for increased accountability.

The words have provided little reassurance to the colleges, since they haven't always seemed to square with the aggressive approach the Obama administration is taking in rewriting federal rules governing vocational and other programs.

On Wednesday, in a speech to state regulators who oversee for-profit colleges, the chief architect of the Education Department's strategy, Robert Shireman, offered a much more critical assessment of the private sector institutions than he has in his public comments to date, according to accounts given by several people who were in the room. He compared the institutions repeatedly to the Wall Street firms whose behavior led to the financial meltdown and called them out individually, one by one, for the vast and quickly increasing sums of federal student aid money they are drawing down.

While Shireman's comments were aimed most directly at the for-profit colleges themselves, they may be most noteworthy for his indictment of accreditation, higher education's system of institutional peer review. In Shireman's narrative before the annual meeting of the National Association of State Administrators and Supervisors of Private Schools, the accrediting agencies are to the for-profit colleges what the Wall Street ratings agencies were to the misbehaving financial firms: entities charged with regulating an industry that has grown too quickly and too complex for them to control, and that have an "inherent conflict of interest" because their existence depends on financial contributions from those they regulate.

Accreditors lack the "firepower" to regulate the for-profit sector, and the states and the federal government don't necessarily have all the tools they need to do it either, Shireman said, according to the notes of several in the audience. That, he suggested, is why the Education Department must toughen its rules in the way it is now proposing.

Shireman could not be reached for comment, and an Education Department spokesman said its officials did not wish to comment on this article.

To several people in the audience, Shireman's comments represented a much more candid (and critical) appraisal of the for-profit sector than he has offered publicly since he became deputy under secretary of education almost exactly a year ago. Many supporters of the education companies feared his appointment because they believed his track record as an advocate for low-income students and a foe of student debt would result in a crackdown on the institutions, whose students are disproportionately needy and disproportionately go into heavy debt to finance their educations.

But with Wall Street analysts hanging on his every word looking for snippets that might threaten the publicly traded companies' stock prices, Shireman has often seemed to go out of his way to avoid singling the institutions out for criticism.

A typical quotation, from last summer: "Our overall goal at the Department of Education in postsecondary education is to make sure that students ... have the information they need to make good choices, and that they have good quality postsecondary education that serves both them as students and taxpayers as well," Shireman said. "...If there is not quality, we want to know about it and if we can, we want to do something about it. Whether that involves a public institution, a nonprofit, a for-profit, a two-year, a four-year, a trade program, whatever type or sector of institution, we want to do all we can to make sure that we have good quality."

Different Tone

In his comments Wednesday, Shireman laid out the context underlying the Obama administration's elevation of higher education as a central focus of its domestic policies. The economic slide created in part by the collapse of the credit markets has sent Americans streaming back to college in record numbers, and has made it more imperative than ever that more Americans get a higher education to strengthen the country's economic base for the future, Shireman said.

The administration has poured tens of billions of dollars into Pell Grants and restructured the federal student loan programs to try to ensure that Americans have access to higher education, Shireman said Wednesday. Many public institutions, facing cuts in their state funding, have had to limit or even cut their enrollments, reducing their ability to meet the increasing demand from students.

The for-profit colleges, by contrast, have stepped up, seeing their enrollments explode -- and with them, the amount of Pell Grant money that follows the students to the institutions, Shireman said. Anyone in the audience from Corinthian Colleges? Shireman asked the assembled audience Wednesday.

A hand went up. The California-based for-profit higher ed company has seen its revenue from Pell Grants grow by 38 percent in the first three quarters of this fiscal year compared to the last one, he said. Anyone from DeVry? Forty-two percent increase, Shireman said. ITT? Strayer? One by one, he ticked through a list of publicly traded companies, pointing out the increasing amounts of federal money the institutions were collecting ("It was like fourth grade, with a teacher scolding students over their grades," said one person who was in the room).

What are taxpayers and students getting in return for that investment? Shireman asked. It has historically been up to the "triad" -- the three-headed regulatory scheme involving the federal government, state governments and accrediting agencies -- to ensure access, quality and integrity in higher education, he said.

But is that regulatory system up to the job? To draw a parallel, Shireman noted that as this meeting was unfolding in St. Paul, politicians back in Washington were debating possible reforms of Wall Street, to try to fix the "flawed" regulatory process that allowed Goldman Sachs and other purveyors of subprime mortgages to engage in misbehavior that helped devastate the economy.

One major reason the process was flawed, Shireman said, was because the bond rating agencies that were supposed to be judging the riskiness of the financial instruments were supported in large part by fees from the companies that were asking the agencies to rate the financial instruments -- "a clear, inherent conflict of interest," Shireman said, according to the accounts of several in the room.

On top of that inherent conflict, the ratings agencies have been struggling to keep tabs on industries that grew quickly and adopted increasingly complex practices, Shireman said, suggesting that the ratings agencies lacked the "firepower" to regulate the financial markets.

In case anyone missed it, Shireman drove his point home, pointing out that higher education accrediting agencies are made up of (and financially supported by) their member colleges, and see it as their mission both to help the institutions "improve" and also to ensure, in what is essentially a subcontract from the federal government, that they are of sufficient quality. They are nonprofit, unlike the ratings agencies, but they are run by the institutions they regulate, in ways that the credit agencies aren't.

The peer review nature of higher education accreditation has an inherent conflict of interest similar to the ratings agencies, Shireman said. Given that, he suggested, it is crucial for state and federal agencies, as the other two parts of the triad, to step up their role in regulating higher education.

But do state regulators think they have the "firepower" to keep tabs on the big, growing and complex private market college sector? Shireman asked the state officials in the room. The response was underwhelming. "I don't think we feel we have the firepower we need," Shireman said, referring to the federal government's own powers, according to members of the audience.

The bottom line of Shireman's talk, he said, was that "federal and state governments cannot rely on accreditors to assure that consumers and taxpayers are protected to full extent that they need to be. All three legs" of the three-legged stool of higher education quality assurance need to be operating effectively, he said.

Shireman went from there into a review of the department's proposed new approaches to ensuring integrity in the financial aid programs, such as requiring most for-profit colleges and non-degree vocational programs at nonprofit colleges to show that they are preparing students for gainful employment.

Several people who heard the speech said they viewed it as a much more strident critique of for-profit colleges, and of higher education accreditation, than Shireman has delivered before. But David Dies, who heads the Wisconsin Educational Approval Board and just finished a term as president of the national group of state regulators, didn't hear it quite that way.

"I think Bob was explaining why we need state regulation and [Education] Department oversight to be part of this three-legged stool, not just accreditation, and why we all need to work together," said Dies. "He was pointing out some limitations of accreditation, but I didn't really see it" as highly critical of accreditors or for-profit colleges.


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