The Senate Scrutiny Begins

June 25, 2010

WASHINGTON -- Senate Democrats began their investigation of for-profit higher education here in earnest Thursday, holding the first in what they promise will be a series of hearings aimed at better understanding the sector’s value to students and taxpayers.

For three hours, the Health, Education, Labor and Pensions Committee heard testimony that, taken together, amounted to a largely scathing overview of the sector.

A former student spoke of being pressured into a vocational program that led her to debt and unemployment. The U.S. Department of Education’s inspector general and a former California prosecutor recounted instances of fraud. An investor who made billions of dollars taking advantage of the subprime mortgage crisis asserted that for-profit higher education is on its way to being the next big debt crisis.

And that picture, of an industry rife with misuse of federal funds, was just what the committee chair, Sen. Tom Harkin (D-Iowa), wanted. “We have a responsibility to ensure the taxpayer dollars are being spent wisely and that for-profit colleges are serving students, not just the shareholders,” Harkin said at the start of the hearing, which was based in part on the findings of a report he released Thursday synthesizing available data on the sector. Federal financial aid provides students an opportunity to receive postsecondary education, he added, and “Congress has a responsibility to ensure that this opportunity is real, and not just false hopes peddled on a billboard or pop-up ad.”

After a decade of little oversight of for-profit higher education that coincided with dramatic growth in enrollments and revenues derived from federal financial aid funding, Democrats in Congress and the Obama administration have begun tightening their grip on the sector. Its institutions enroll about 10 percent of the nation’s postsecondary students but receive nearly a quarter of the funds dedicated to student aid under Title IV of the Higher Education Act of 1965.

While the U.S. Department of Education has thus far focused on revising regulations related to the integrity of the Title IV programs, and have gone out of their way to say they are not singling out private sector institutions (protestations not always believed by representatives of the colleges themselves), congressional Democrats appear primed for a wider-reaching examination of the sector. “These are for-profit schools, but 90 percent of their money comes from taxpayers,” Harkin said. “There’s something happening out there that compels us to look at this.”

But, he added, “for all our investment in the sector, we know surprisingly little” about it. On Monday, he and four other Congressional Democrats asked for the Government Accountability Office to conduct a more exhaustive study of the sector’s student outcomes. “We don’t know exactly what risk we are taking by investing an increasing share of our federal financial aid dollars in this sector.”

Sen. Mike Enzi of Wyoming, the senior Republican on the panel, said he also saw a need for more data on the sector. He acknowledged that “unfortunately, as in other industries, there are bad actors in the for-profit sector." Their presence, he said "is unacceptable," but he warned that Congress and the Education Department ought to “use a scalpel and not a machete” to address problems.

Harkin, though, said he worried that bad actors had engulfed the sector. “It seems that we have a situation where the bad actors are pulling the good actors,” he said. “Now, what I mean by that is that a company that may be a good actor -- maybe DeVry, who has a long history and other companies like that -- are being pulled into this vortex because their competitors are doing it and their competitors are sucking up all this federal money.”

He elaborated: “A school that in the past has been a great school maybe … says wait a minute, we miss this train, we’re out of luck, maybe we’ve got to get on that train, too. And so we find those that know how to game the system in the last 10 years, to increase their profits, to increase their income, churn the students -- those kind of then pull into this vortex a lot of good schools that otherwise would not be doing that.”

Sharon Thomas Parrott, senior vice president of government and regulatory affairs and chief compliance officer at DeVry, Inc., was the only supporter of for-profit higher education included on the panel. She said that she believes her company behaves ethically and is devoted to serving students. "I'm not interested in drawing false distinctions between what motivates a private-sector school and what motivates a state-funded public school. At the end of the day, if we are student-centric, the ties that bind are greater than the lines that divide."

Harkin and other Democrats who spoke at the hearing seemed to be anxious for a philosophical reexamination of the idea of for-profit higher education. “Companies that are increasing their revenues so much each year but all of it’s coming from government money and the huge profit margins,” Harkin said. “If this is education and it’s taxpayers’ money, we really have to question seriously the profit margins of these companies and where that money’s going.”

Sen. Al Franken (D-Minn.) said that for-profit colleges “serve a purpose and some do a good job, but there’s obviously an incredible number of bad actors and I would like to shut them down.” He added: “We talk about waste, fraud and abuse around here -- and I think we’re hearing it today.”

Some of the most dramatic accusations came from Steven Eisman, an investor whose analysis of for-profit higher education has led him to conclude that the sector is on the verge of collapse. He’s made investments betting that stocks of publicly traded for-profit stocks are on the way down, (because they face regulatory -- and now Congressional -- pressure), just as he did with subprime mortgages a few years ago. “Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task," he said. "If nothing is done, then we are on the cusp of a new social disaster.”

But critics, including Republicans on the committee and representatives of for-profit colleges, questioned his motives. Harris N. Miller, president of the Career College Association, gave an hour-long critique of Eisman on Wednesday, and a chorus of similar comments has followed among those with financial stakes in the success of the sector.

Despite Democrats’ clear desire to scrutinize the for-profit sector as a whole -- something Republicans have not been amenable to in the past -- Enzi said he hoped to work with Harkin in planning future hearings on for-profit higher education. The only other Republican attending the hearing, Sen. Lamar Alexander, of Tennessee, who was secretary of education in the early 1990s, did the same. “This could be very productive -- I’d be glad to work with you on this,” he said. Congress ought to take action against bad actors in for-profit and nonprofit higher education “but not diminish the quality and the choices that come with overregulation.”

Harkin made a slight gestural acknowledgment of Alexander’s offer. Whether it is bipartisan or not, Harkin promises more action.

“I don’t think anyone who is reasonably objective about this can say there’s nothing wrong and we don’t have to do anything about this,” he said. “And this committee, I can tell you, we’re going to make something happen.” The next hearing will be in July.

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