Scathing report on for-profit colleges and their $32 billion in tax dollars

Scathing report on for-profit colleges and their $32 billion in tax dollars
July 30, 2012
by Maureen Downey
AJC Get Schooled blog

The for-profit colleges are taking billions in tax dollars with little to show for it, according to a report that will be issued today from a U.S. Senate committee.

Despite $32 billion in federal student aid to the colleges, most of the students never earn a degree, indicating that taxpayers are being saddled with a losing investment. However, the for-profits colleges don’t fail everyone, least of all their executives — the CEOs of the colleges were paid an average of $7.3 million, according to the report.

The scathing report states that more than 80 percent of the for-profit college revenues comes from taxpayers. Because of its larger and larger claim on tax dollars, the for-profit college industry has come under greater scrutiny. Latest numbers show that the for-profits enroll 13 percent of the nation’s college students. Yet, those students represent nearly half of all the defaults on college loans.

And government loans are the oil that keeps the for-profit college industry running. Nearly 96 percent of students at for-profit schools take out loans, compared with about 13 percent at community colleges and 48 percent at four-year public universities.

According to Sen. Tom Harkin, who led the Senate investigation:

Enrollment at for-profit schools has grown dramatically over the past decade. Between 1998 and 2008, the number of students attending for-profit schools has grown from 553,000 to 1.8 million, an increase of more than 225 percent.

In order to drive enrollment growth, for-profit schools spend heavily on television advertisements, billboards, phone solicitation, and web marketing. The pressure on recruiters to enroll as many potential students as possible can give rise to recruiting practices that are overzealous or misleading.

For-profit schools are far more expensive than comparable programs at community colleges or public universities. The average tuition for a for-profit school is about six times higher than a community college and twice as high as a 4-year public school.

For-profit schools provide access to many students who have historically not been well served by traditional institutions of higher education. But data collected by the Senate H.E.L.P. Committee shows that many for-profit schools are not providing the support structure to help these students succeed. The data shows that fifty-four percent of students who enrolled in the 2008-2009 school year withdrew by summer 2010.

Close to one in four students who attends a for-profit school defaults on his or her federal student loans within 3 years of leaving school. This high rate of default combined with the fact that nearly all students at for-profit schools must borrow money to pay the cost of tuition, has resulted in a sector that enrolls approximately 13 percent of American higher education students but accounts for nearly 50 percent of all student loan defaults.

Despite poor student outcomes, for-profit schools are highly profitable companies. Profits at 16 of the largest for-profit schools totaled $2.7 billion in 2009.

According to The New York Times:

“In this report, you will find overwhelming documentation of exorbitant tuition, aggressive recruiting practices, abysmal student outcomes, taxpayer dollars spent on marketing and pocketed as profit, and regulatory evasion and manipulation,” Mr. Harkin, an Iowa Democrat who is chairman of the Senate Health, Education, Labor and Pensions Committee, said in a statement on Sunday. “These practices are not the exception — they are the norm. They are systemic throughout the industry, with very few individual exceptions.”

In a statement on Sunday, the Association of Private Sector Colleges and Universities, the leading trade group of for-profit colleges, called the report “the result of a flawed process that has unfairly targeted private-sector schools and their students.”

Over the last 15 years, enrollment and profits have skyrocketed in the industry. Until the 1990s, the sector was made up of small independent schools offering training in fields like air-conditioning repair and cosmetology. But from 1998 to 2008, enrollment more than tripled, to about 2.4 million students. Three-quarters are at colleges owned by huge publicly traded companies — and, more recently, private equity firms — offering a wide variety of programs.

Enrolling students, and getting their federal financial aid, is the heart of the business, and in 2010, the report found, the colleges studied had a total of 32,496 recruiters, compared with 3,512 career-services staff members.

Among the 30 companies, an average of 22.4 percent of revenue went to marketing and recruiting, 19.4 percent to profits and 17.7 percent to instruction. Their chief executive officers were paid an average of $7.3 million, although Robert S. Silberman, the chief executive of Strayer Education, made $41 million in 2009, including stock options.

With the Department of Education seeking new regulations to ensure that for-profit programs provide training for “gainful employment,” the companies examined spent $8 million on lobbying in 2010, and another $8 million in the first nine months of 2011.

Many of the for-profit colleges, the report found, set tuition at almost exactly what a student could expect in maximum federal aid, including Pell grants and Stafford loans. According to a Bridgepoint Education document, when a new $400 “digital materials fee” would make students pay more than would be available from federal aid, the chief executive frantically wrote an e-mail to the finance officer to complain that the change was going to cause a “shortfall.” And documents from Alta Colleges mention restructuring schedules “so we can grab more of the students’ Stafford.”