The trouble with for-profit colleges.

Examining higher ed.
Nov. 16 2005 3:18 PM

The Profit Chase

For-profit colleges have lots of champions—and lots of problems.

You've seen this ad before, on the subway or at a bus shelter: An attractive young ethnic type beams in three-quarter profile, against a background of blue sky and clouds, looking off at … his future. At the bottom appears an aspirational word like Apex or Phoenix or Capella. Despite appearances, the product is not a psychopharmaceutical; it's one of the nation's 2,000-odd for-profit colleges.

So-called proprietary schools, which rely on tuition to both cover their operating costs and turn a profit, enroll about 1.6 million of the 20 million students at all accredited colleges nationwide; they run 28 percent of all two-year colleges. Their enrollment is growing four times faster than the sector as a whole, about 8 percent a year. The largest is the Apollo Group, which operates the well-known University of Phoenix and three other colleges. In all, Apollo has 176 locations, plus many online programs, with a total enrollment of 307,400 students in the United States, Puerto Rico, and Canada, up there with the largest state university systems.

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Conservatives have hailed the robust for-profit college phenomenon as a welcome infusion of free-market forces into an otherwise bloated higher-education sector. The top official at the Department of Education making decisions about higher education, Bush appointee Sally Stroup, was previously a lobbyist for the Apollo Group. A vigorous champion of proprietary schools, Richard Vedder of AEI was recently named to a blue-ribbon Department of Education commission on the future of higher education that aims to tackle, among other things, the issue of soaring costs. Proprietary schools, among the largest donors to higher-education committee members, not surprisingly also have many loyal Republican supporters in Congress.

But before we herald these institutions as the smarter, leaner future of higher education, it is worth scrutinizing their practices and their shady past. There is no question that they are adept at turning a profit. Yet commercial colleges' long history of ethical lapses and the highly uneven quality of their offerings make them a poor model for a higher-education field in crisis.

American "career colleges" date back to the 1850s, when H.B. Stratton and P.R. Bryant founded a chain of 50 schools starting in Buffalo, N.Y., to teach shorthand, bookkeeping, and the use of the newfangled mechanical typewriter primarily to women, who were not welcome at most traditional colleges. They occupied cheap rental space in downtown office buildings rather than spending money on leafy campuses. The industry also grew through correspondence courses, which acquired a checkered reputation over the years. For every reputable accounting program, there were hucksters like the bogus art schools that took out the famous "can you draw this?" matchbook ads.

As the liberal arts curriculum evolved (or devolved) from the classics, to the humanities, to today's critical-thinking courses and ethnic-studies departments, the need for vocational education remained, and commercial institutions were there to fill it. They attracted underserved students, especially low-income and working adults, by offering accelerated courses with flexible schedules and focusing their pitch on job placement. These schools commonly report placement rates of a credulity-straining 80 percent or 90 percent, no matter what the program; the Department of Education does not track or verify these numbers. Tuition is set far above the rates charged by public community colleges, for-profits' main competitors, yet below those at private nonprofits.

Today, according to the biggest for-profit lobbying group, these schools graduate about half of the "technically trained workers"—a fuzzy category—in the United States. Proprietary schools are the likeliest place to turn if you're interested in becoming a Microsoft Certified ™ Systems Administrator, or a clerk processing the paperwork for an HMO. Many of these colleges do offer bona fide degrees, including advanced degrees, in established subjects like business or computer science. But the volume business is in non-degree programs, which are shorter and cheaper to produce; they can cost hundreds or thousands of dollars yet terminate in a certificate of dubious value. Some of the offerings are pure wish fulfillment, like video-game design, film directing, or fashion merchandising; others are so limited they barely deserve to be called postsecondary. At the University of Phoenix, for example, you can earn a master of arts in education or an MBA with a specialty in e-commerce. At the other end of the spectrum, an outfit called Allied Schools offers a home-study course in "medical report writing" that involves "basic keyboarding skills, with an emphasis on medical terminology." There is no US News & World Report ranking or other objective measure to guide prospective students, who must make do with marketing claims.

Proprietary schools have been eligible for federal student aid under Title IV of the Higher Education Act since 1972. Taxpayer money, $4.3 billion in 2004, in the form of guaranteed student loans and Pell Grants, remains the primary source of revenue for these schools. This makes it emphatically the public's business how good a job they're doing. Unfortunately, the enticement of unlimited federal cash led proprietary schools into their darkest era in the 1980s. With little federal oversight, unscrupulous recruiters haunted welfare offices to sign up unqualified and even homeless students, collected their aid money, and offered useless courses in return. Student loan defaults peaked in 1992 at 22 percent, and proprietary schools accounted for nearly half of all defaulters, although they were the source of just a fifth of all loans. Angry student advocates nearly succeeded in casting these schools out of the federal aid program altogether. Instead, 1,500 of the nation's then 4,000 trade schools were disaccredited, and the 1992 reauthorization of the Higher Education Act added complicated funding rules to try to control fraud.

Since the mid-1990s, the industry has spruced up its public image. After a round of buy-ups and mergers, publicly traded companies now enroll nearly half of for-profit students. These companies are Wall Street darlings—the highest-earning stocks of any industry between 2000 and 2003. But the very characteristic that makes them so attractive to investors, the ability to enroll ever-increasing numbers of students, has been the continuing source of trouble. A rash of investigations and complaints has called into question both these schools' business practices and their educational results.

A Department of Education inspector testified in May 2005 that during the previous six years, 74 percent of the agency's institutional-fraud cases have involved proprietary schools. In the last few years, the SEC has probed or investigated three of the 10 biggest higher-education companies, ITT, Career Education Corporation, and Corinthian Colleges, for discrepancies in their financial reporting. In September 2004, the University of Phoenix received the largest fine ever levied by the Department of Education, $9.8 million, for linking enrollment to recruiters' financial incentives, a violation of agency rules. In January of 2005, 60 Minutesaired an exposé on the Career Education Corporation, which has been sued by students who borrowed up to $80,000 for courses and were stuck working in retail. Frustrated students are increasingly turning to class-action lawsuits to make good on what they say are the colleges' false claims about job placement; such suits have been filed against Corinthian and ITT, among others.

All this bad publicity has hurt stock prices for the companies involved, but it hasn't diminished the industry's political capital. In the last year, Congress has moved toward relaxing all the restrictions of the '92 crackdown. Most important, the version of the Higher Education Act currently before the House would include proprietary schools in a single definition of "an institution of higher education." Right now, they are eligible for student aid but not other kinds of subsidies available to nonprofit colleges; the change would potentially allow them to compete for millions more in infrastructure and program-related grants.

Conservatives like Vedder embrace for-profit colleges precisely because they are businesses. They see them as more focused on cutting costs and raising productivity than state-supported universities, with their tenured professors and their money-losing philosophy departments. They have a point there. The cost of public higher education has been rising steeply for decades. Colleges are a common budget-balancer for states facing fiscal crises; institutions in turn raise tuition, with much of the bill ultimately going back to the federal government in the form of student aid. The prevailing sentiment in Washington is that it's time to turn off the spigot and force colleges to control their spending. The current budget-reconciliation bill, in fact, includes the largest cuts to student aid in the 40-year history of the program.

It's true that proprietary institutions have taken the lead in money-saving innovations like accelerated courses, distance learning, and the deprofessionalization of teaching (hiring only instructors); nonprofit schools, for better and for worse, are already following these examples. Yet pointing to proprietary schools as models of probity is wishful thinking. Experts like Vedder, praising the "highly profitable" for-profit schools, willfully ignore the reality that the big higher-education companies were built to suck up federal handouts, which provide the majority of their income; these schools grab a share of federal aid higher than their share of enrollment, while public community colleges receive less than their share. Even worse, the prevalence of fraud, waste, and abuse in these schools from their origins down to the present day is a clear signal that turning a profit, not serving students, is their top priority. When students equal revenue, the pressure is on to pack them in and charge them as much as the market will bear. When colleges have shareholders, decisions are going to be made with short-term profitability in mind, and the shiny images in those subway ads will displace honest assessments of performance. Or as a University of Phoenix enrollment director told recruiters, as quoted in a 2003 Department of Education report, "It's all about the numbers. It will always be about the numbers. But we need to show the Department of Education what they want to see."

Anya Kamenetz is a New America Foundation fellow. She is a contributing writer for Fast Company and the author of Generation Debt and DIY U.