New For-Profit Regulations Call Out Schools on Bad Practices

The words “higher education” do not typically conjure images of undercover government agents with hidden cameras, heated congressional hearings, and explosive investigative news stories. For for-profit education institutions like the University of Phoenix and Strayer University, however, it has quickly become the norm. Policy makers and advocates for students and consumers are increasingly concerned that this sector of higher education overcharges, uses aggressive and misleading recruitment and financial aid practices, and underdelivers when it comes to the value of the education that they provide.

In late June, Rep. George Miller (D-Calif.) and Sen. Tom Harkin (D-Iowa), chairmen on the House and Senate committees that work on education, asked the U.S. Government Accountability Office (GAO) to review the business practices and support these schools receive from federally backed student loans and grants.

Early in August, the GAO came back with an investigative report that was an embarrassment for the for-profit college industry. It disclosed some for-profit college recruiters encourage students to falsify personal and financial information to get access to more federally backed financial aid. The investigation, conducted by GAO officials posing as prospective students, also revealed that 15 unnamed colleges misled students on likely earnings for degrees and the cost of tuition.

Meanwhile, in late July, the Department of Education released a notice of proposed rule making that could force the for-profit education industry to dramatically readjust its business practices and the educational products it offers. The rules would tie federal financial aid eligibility to a combination of the ability of a school’s former students to repay their students loans and their average student debt to income ratio.

Yet despite the slew of blemishes the industry has suffered, for-profit colleges continue to offer flexibility to non-traditional students.

The history of for-profit schools

This isn’t the first time that for-profits, more formally known as proprietary colleges, have been the focus of increased government scrutiny. For decades, they occupied a gray area in the Department of Education's regulations. These institutions do not receive appropriations funding or operations subsidies from state or federal sources like traditional not-for-profit public and private colleges. However, Title IV of the 1965 Higher Education Act allowed students at for-profit schools to receive federally backed loans and grants to pay for tuition.

In the 1980s there was a proliferation of institutions offering direct job programs with professional certifications. Stephen Burd, editor of Higher Ed Watch, New America Foundation’s education policy blog, calls these colleges “fly-by-night trade schools that were set up solely to reap profits from the federal student aid programs.” Burd says students would be saddled with debt they couldn’t pay back, and the quality of the education they received left many employers hesitant to hire them.

In 1992, Congress passed regulations to rein in unscrupulous proprietary colleges guilty of misleading students with unrealistic expectations of future income. It established loan default standards that barred students from using federal dollars to cover the cost of tuition at schools that graduated too many students who later defaulted on their loans. This policy worked for most of the 1990s. Over 1,000 schools were dropped for having 40 percent their graduates default on their loans after one year or 25 percent after three consecutive years.

Today, for-profit colleges are much better at offering their students the job-training talents they need to successfully compete in the job market. A report by the Chronicle of Higher Education in February suggests that some employers are becoming comfortable with for-profit grads entering the job market. One employer commented that a particular school specializing in radiology equipment produces workers who are “more mature and focused than those from other institutions.”

Jim Smith, spokesman for the Association of Proprietary Colleges (APC), an association of proprietary colleges based in Albany, N.Y., says, “All of our colleges partner with local businesses when designing new programs and degrees. In fact, we have many examples where employers have seen a need for employees and asked our member colleges to design programs to fill that need.”

Increasing enrollment in for-profit schools

Still, federal officials are troubled by certain trends. Enrollment data from 2008 shows 1.8 million students have attended for-profit institutions, compared to 550,000 in 1998. But, as Sen. Harkin noted, 20 percent of students still defaulted on their loans within three years of leaving a proprietary college. Meanwhile, the national average for defaulting on college loans is under 12 percent, and graduates of public four-year colleges suffer a smaller 7 percent default rate. And notably, while these schools enroll only 10 percent of the national student body, they receive a quarter of all available federal aid dollars and account for 44 percent of all federal student loan defaults. Proprietary colleges earn 87 percent of their revenue from federally backed funds.

Defenders of proprietary colleges like Career Colleges of America (CCA), which represents over 1,400 accredited, for-profit colleges and is based in Washington, argues that the high default rates are a reflection of the general demographic they enroll. In a December 2009 statement posted on the official CCA blog, the association says, “50 percent of career-college students come from the lowest economic quintile. A terrible economy makes the default rates that much worse.”

Smith of APC says the timing of regulators looking into default rates reveals misleading figures. “The federal government is focusing on a period of defaults when the entire county was experiencing the worst economy since the Great Depression," Smith says. "In regards to our students, many are single mothers, working adults, first generation college students, and from economically and educationally disadvantaged backgrounds.”

But given that 40 percent of these schools are owned by 13 publically traded companies, regulators and observers can’t help but wonder how much of their business practices are meant to game Title IV benefits. Says Burd: “In many ways now, the stakes are much higher, though—as many of the schools are owned by huge publicly traded corporations that enroll tens of thousands, and in some cases hundreds of thousands of students.”

Setting the standards

The bigger fight between proprietary colleges and supporters of tighter regulation occurred recently within the Department of Education. After the Higher Education Act reauthorization was debated in Congress in 2008, the Department of Education invited major stakeholders in higher learning to discuss a wide swath of proposals and recommendations in what is called a negotiated rule making session. Lenders, school administrators, and others with a constituency in the field were asked to agree on a set of standards for what constitutes gainful employment, the provision that allows for-profit college students to use Title IV funds to pay for their tuition.

Ben Miller, a policy analyst at Education Sector, an independent think tank that focuses on education reform issues, explains the sessions didn’t lead to a single point of formal convergence. “They did not reach an agreement, and that gave the Department a free hand to write the regulations it saw fit,” Miller says.

What the Department of Education proposed was a “very nuanced and well designed standard,” says Miller. The policy released by the department creates a new metric for helping students put their money into the trust of reliable proprietary institutions that won’t debilitate them with debt upon completing their programs. After a public comment period, the department will consider compelling objections and additions, and publish the new regulations in November. Industry leaders have several months to prepare for the changes that will go into effect next July.

For years, vocational programs have been required by the federal government to provide “gainful employment in a recognized occupation” in order to keep receiving federal student aid. But there’s never been an accepted definition of what actually constitutes gainful employment. So the Department of Education proposed a new definition of gainful employment that requires schools to demonstrate that their former graduates are repaying their student loans at or above certain thresholds, while the ratio of their annual debt payment to their income are below other benchmarks.

Schools that do well on these calculations will be unaffected; those that do poorly will lose their student aid eligibility. And those in the middle will have to warn students that their debt levels may be too high and may not be able to increase enrollment or admit new students.

The new standards will apply to all non-liberal arts programs offered by for-profit universities and non-degree training programs at public and private, not-for-profit institutions.

“This isn’t about shutting down the for-profit sector. There are plenty of things for-profits do well,” Miller says. But certain institutions offer programs that are more effective than others, and if one program cannot pass muster then it is probably an indication the school should re-orient its resources to its more successful programs.

For-profits have mixed reactions to new standards

The proposed rules are by no means draconian, and they aim to protect consumers rather than punish troubled institutions. When limited details of new proposed rules were released on July 23, shares for the 13 publically traded companies that own proprietary colleges went up, suggesting the for-profit colleges have much less to worry about than they initially thought.

Robert Silberman, chairman and chief executive officer of Strayer Education, Inc, the company that owns the for-profit institution Strayer University and has 84 brick-and-mortar campuses as well as a bevy of online programs, says in an email, “We think default rates are an appropriate measure for academic quality.” He added that his school’s default rates are lower than competing for-profit colleges.

Strayer’s chief financial officer, Mark C. Brown, explains that because Strayer’s default rates are on par with most traditional colleges, this should mean graduates are earning enough to not fall behind on their repayment obligations.. “Why would one’s default rate be low if an individual wasn’t able to achieve their earnings potential? Wouldn’t you agree the default rate is a proxy for debt-to-income? The institutions who have the lowest default rates are the ones who have the greatest ability to repay whatever debt they have when they leave an institution.” Brown says that the majority of Strayer’s students who do not graduate—and around 50 percent do not—quit within the first two quarters, minimizing the financial toll of walking away from an institution without a degree in hand.

Brown also takes exception to the government’s calculus for measuring default rates. While the current standard is measuring number of defaults, he proposes the department consider judging a school’s default rate by a dollar amount instead. “If you’re talking about how much the taxpayers are underwriting, isn’t it more relevant the dollars the taxpayers are funding, as opposed to the number of students who default?”

But an Aug. 16 Wall Street Journal article noted Strayer’s repayment rate is 25 percent school-wide, much lower than Strayer’s internal analysis of 45 percent. Yet the new regulations look to reform the for-profit industry by each program offered, so it is difficult to draw any conclusions about the school-wide effect on Strayer from the findings. Strayer says it will file a Freedom of Information Act request to resolve the discrepancy between its low default rates and the department’s findings, the Journal reports.

APC, which represents proprietary schools, more or less agrees that default rates are an appropriate metric, though it believes the rules single out for-profits unfairly. “According to [the department’s] own data, two-year for-profit institutions have a better completion rate than public colleges across [New York],” says Smith, “Even though the Department acknowledges there are problems across all sectors, these rules are only being applied to for-profit colleges.

Proprietary schools may find one comforting aspect to the new regulations: They offer a grace period of one year. Programs that are struggling to keep up with honoring the thresholds—but are not part of the worst 5 percent—can still receive federal student dollars if they advertise their low gainful employment rates.

Some observers think current government efforts are unfairly placing their attention on for-profit colleges. A statement from CCA following the release of the new proposed rules argues, “Establishing a ratio between student debt and anticipated graduate earnings, is unwise, unnecessary, unproven and is likely to harm students, employers, institutions and taxpayers.”

Conversely, many advocates argue the rules don’t go far enough [PDF].

Differences (and similarities) between for-profits and non-profits

Neal McCluskey, associate director of the libertarian Cato Institute's Center for Educational Freedom, says the term “for-profit” is misleading and poorly defined. “As soon as people hear ‘for-profit’, they think ‘well this must be about exploitation,’” says McCluskey. “And [that] ignores reality in order to paint for-profit schools as somehow very powerful and malevolent.”

McCluskey worries too much money is wasted on inefficient programs and that subsidizing education costs the federal government too much money. “What if they’re trying to sell a product to people who couldn’t get access because they didn’t have the skills or abilities to do well in college?”

McCluskey goes on to speculate that the pool of federal cash available actually encourages predatory marketing practices on students who may never have developed the minimum knowledge base to do well at any college, for-profit or otherwise. A 2009 GAO report noted some proprietary colleges helped students cheat on “Ability to Benefit” tests which are required of students with a high school diploma or GED in order to qualify for federal aid.

Ending proprietary schools’ access to federal money seems unrealistic, though. “This whole argument is bogus," Miller says. "Every college gets some sort of government assistance. And every college is dependent upon those dollars for its existence. To pretend that one is sort of more market-funded—it’s not true and it doesn’t reflect reality. You can’t take in 87 percent of your revenue from a government agency and say you are market-funded.”

For-profits don't compete with non-profits—yet

At any rate, it seems proprietary colleges are here to stay. A 2004 National Education Association report [PDF] argues for-profits serve as a convenient and cost-effective tool for veterans of the work force eager to update their skills. The report also mentions these institutions are highly specialized, and may not appeal to high school graduates searching for the incubatory experience traditional four-year colleges may offer. Nor do they compete with traditional colleges—yet.

“It’s not clear to me that there’s a lot of competition. At the same time for profit schools were booming, the overall enrollment in higher education has also been increasing,” Miller says.

And adds McCluskey, “I think the best thing is … these institutions have the flexibility and freedom to change and I think so long as they have that freedom, they will address the changing labor and employment needs.”

Fortunately for students, Congress and the Department of Education want schools to address debt levels as well as the skills of tomorrow. An institution like Strayer walks on a tight rope between offering a worthwhile education tailored to working adults and non-traditional students, and maintaining an ethical policy that limits the financial burden unqualified students incur.

The argument over the future of proprietary schools lies between two poles. There are those who think for-profits are purely predatory institutions that should be regulated strictly. And then there are those who think that these institutions should have unrestricted access to funds for the benefit of the thousands of non-traditional students who matriculate at them. Finding a median should be the goal—and ending the stigmatization of the industry couldn’t hurt.

Mikhail Zinshteyn is a staff writer for Campus Progress. You can e-mail him at mzinshteyn@googlemail.com.

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