For-Profit Education: Milking Students and the Taxpayers for Corporate Profits

Part of the Series

Solutions

Many readers of this column will recognize Charles Smith as one of our guest columnists, who unravels and exposes the fraud and waste in our military budget. He has now turned his considerable government knowledge to examining the problems with for-profit private colleges using the federal student loan program as their own lucrative cash cow to ensure a good profit while not investing as much money into their students when compared to nonprofit private colleges and public colleges. For those who don’t know Mr. Smith’s background, he is a little-known, retired, Army civilian employee hero, who went up against the Iraq contractor KBR on behalf of the troops and the taxpayers and was demoted. Smith was chief of the Field Support Contracting Division of the Army Field Support Command in Rock Island Arsenal and one of his main jobs was to oversee the enormous Army contract with KBR during the Iraq and Afghanistan wars. He told KBR he would legally be withholding 15 percent of all payments to KBR until their auditing systems caught up to their spending. His story as told by The New York Times can be found here.

Next week, Mr. Smith and I will be examining the self-dealing and influence peddling of this industry and will follow their lobbying and campaign contributions as well as the revolving door and cronyism that is emerging in this lucrative and sometimes exploitive industry. We welcome your personal stories on for-profit colleges and any input on this column through comments below or emailing me at [email protected].

Dina Rasor
Solutions Editor

In recent Solutions columns on for-profit prisons, Dina Rasor demonstrated how these privatized, formerly government-run institutions, have become home to self-dealing, destructive social behavior and wasted taxpayer money. In the spirit of looking at increasingly privatized institutions, I see similar aspects of the new and growing for-profit college system we are creating in this country. Enrollment at for-profit colleges and other for-profit educational institutions has increased by 500 percent in the past decade. This growth is much faster than enrollment at public and not-for-profit institutions.

The business model for the for-profits colleges includes heavy advertising to recruit a stream of new students, government loans and government-guaranteed loans to fund their education and intense cost control on educational costs. The government (read taxpayers) guarantees the loans on the highly possible chance students do not achieve anything close to their goals of an education and a job, and these students may also default on their loans while failing to even graduate. The institutions make a nice profit whether students graduate or not and whether they start a career or not. Should they default on the loan, the taxpayer will pick up the tab. This business formula of for-profit colleges continues the recent trend by businesses to make higher profits by socializing the risk, while privatizing the profit.

If you pay attention to the investment banking industry, the for-profit prisons, the health insurance industry and now for-profit colleges you will see this same pattern; private profits with public risks. When industries are structured in this manner, we also get intense lobbying for favorable legal treatment, the spreading around of campaign money and a revolving door for politicians and regulators. The public often foots the bill with little or no benefit from the process.

An Example

Many may have seen the ubiquitous television and other media ads for the Arts Institutes of America. These ads, being viewed by unemployed people and kids who can’t get into many colleges, seem like a lifeline in a time of high employment. According to their ads, you, too, can create best-selling video games, design haute couture dresses worn by celebrities or become the chef at a three-star restaurant. All you have to do is enroll and obtain federal loans to support your education. The Arts Institutes are part of a company, EDMC, which runs a system of for-profit colleges with lofty stated goals. Their web site states:

… we’ve proudly provided career-focused education for more than 40 years, arming our students with the skills, abilities and experiences employers are looking for through the following schools:

The Art Institutes
Argosy University
Brown Mackie College
South University

Unfortunately, it is not clear, despite their buoyant promotions, that their students leaved armed with an employable degree or skills to get a real job in these industries. For this reason, employers may not see these students as part of the next generation workforce. As for-profit institutions, these schools see prospective students as bodies to buy seats in a classroom. The federal loan system that they heavily use was designed to help educate our future workforce, but is, in many cases, instead being used by this industry to make the highest profits for their shareholders. Unlike private nonprofit universities, which get tax deductions under the promise of educating and graduating students, the for-profits have the fiduciary duty to their shareholders, while using taxpayer resources for their main funding source.

Examining the Numbers

The Department of Education issued a report in March, entitled “Enrollment in Postsecondary Institutions, Fall 2010; Financial Statistics, Fiscal Year 2010; and Graduation Rates, Selected Cohorts, 2002–07.”. This report provides information on “… basic statistics on postsecondary institutions regarding tuition and fees, number and types of degrees and certificates conferred, number of students enrolled, number of employees, financial statistics, graduation rates and student financial aid.” The Department of Education requires reporting from institutions receiving government money. From this data, they can provide accurate statistics on the state of postsecondary education. These statistics make some telling comparisons.

• Public four-year institutions received 19 percent of their revenues from tuition and fees, compared with 33 percent at private nonprofit institutions, and 91 percent at private for-profit institutions. You read that correctly, 91% of revenue at for-profit institutions comes from taxpayer funds.
• Among full-time, first time undergraduate students receiving any grant aid, differences in average price of attendance before aid and net price of attendance varied by institutional sector. For those attending public 4-year institutions, average price before aid was approximately $16,900 and net price was about $10,200; for those attending nonprofit 4-year institutions, average price before aid was roughly $32,700 and net price was about $16,700; and for those attending for-profit 4-year institutions, average price before aid was approximately $27,900 and net price was about $23,800. The net price is the price students must finance themselves. This is often done through loans, especially at the for-profit institutions.
• The retention rate of undergraduates at four year colleges and universities was 50% for public institutions, 46.8% for private non profit institutions and 37.5% for private for profit institutions.
• Public institutions spend 29.5% of their expenses on instruction (this would be significantly higher if it included hospital administration expenses for medical schools [11%] and research [14%] which were not counted in base costs), private not for profit institutions spend 32% of their expenses on instruction (an additional 9% for hospital services and 13% for research) and for profit institutions spend only 21% on instruction (0% on hospital services and 0.1% on research).
• Graduation rates are 53.6% for public institutions, 65% for private non-profit institutions and 32% at for-profit institutions.

In summary, for-profit institutions cost more, spend less on instruction, retain fewer of their students and have significantly lower graduation rates. They provide no public services in the form of hospitals and research. The for-profits are focused on the bottom line, generally to the exclusion of the interests of their student customers. This system of private for-profit educational institutions is underperforming the public sector and the private not-for-profit sector in any measure of value created. They are using taxpayer resources to finance their students while producing high rates of return for their investors, large salaries for their managers and a significant amount in political contributions and cronyism for their supporters in Congress (more on that next week).

Looking Out for the Public Interest

Education is the classic economic example of a “public good.” Public goods have value beyond the return to any individual investor. If left to the for-profit private sector with their stated goals of making a profit, society will not produce as much education as is socially beneficial. To achieve the best value in education for the public, some level of government must be involved. Public institutions, direct and guaranteed loans for students and research grants are some of the ways we achieve the public values of a robust educational system. Private for-profit institutions now threaten to undermine that public value while luring students to their programs and saddling them with high loan debt. There are public laws have been designed to mitigate the problems we have seen as associated with for-profit schools. These laws have become part of the Higher Education Act of 1965. The main part of the act is TITLE IV student aid provision. This is from where most of the for-profit companies funding is received. Other key aspects are the 90/10 and Gainful Employment (GE) Rules.

The 90/10 rule requires that at least 10 percent of an institution’s revenues for tuition, fees and other institutional charges be received from sources other than Title IV student aid. While it applies only to for-profits, the example is set by the traditional public and private nonprofit educational institutions, where much more than 10 percent of their revenue comes from state funds (state colleges and universities), endowments, gifts and student paid tuition. Only the for-profits have up to 90 percent of their revenue coming from TITLE IV student direct or guaranteed loans.

The Gainful Employment Rule defines the words “gainful employment” in the Higher Education Act to include minimum debt-to-income standards and loan repayment rates that students must meet in order for schools to retain eligibility for student assistance under Title IV. These rates are set low enough that public and private nonprofit educational institutions are in no danger of not meeting the rule’s requirement. Only the for-profit institutions are failing to have graduates employed at wages that cannot support the debt that they have incurred. This goes beyond statistics and saddles some of the most vulnerable and unemployable students with large long-term debts.

Noting the barrage of advertisements by the for-profits to recruit new student and keep the federal money flowing, Sen. Kay Hagan (D-North Carolina) and my senator, Tom Harkin (D-Iowa), have introduced legislation which would prohibit all colleges from using federal aid programs to pay for advertising, recruiting and marketing expenses. In a statement supporting the measure, Senator Hagan said, “It’s unacceptable that colleges are using billions of taxpayer dollars on promotional activities unrelated to an educational program, American taxpayer dollars should be used to invest in a brighter future for our students, not expensive marketing campaigns.” The bill, S.2296 the Protecting Financial Aid for Students and Taxpayers Act was introduced in the Senate on April 18, 2012. The bill has five co-sponsors and is related to H.R. 4390 in the House of Representatives. The Senate bill has been read twice and referred to the Committee on Health, Education, Labor and Pensions, which Senator Harkin chairs.

Since some of the largest for-profit colleges spend nearly 30 percent of their operating budgets on marketing and recruiting new students, this measure could actually curtail some of the abuses. While the bill applies to all colleges and universities, it would have little impact on traditional not-for-profit institutions. Such institutions spend less than 5 percent of their total budgets on recruiting.

The proposed legislation would require all colleges to report the amount spent on marketing and recruiting to the federal government every year. That sum would then be compared to the percentage of federal aid dollars in the school’s budget.

Kris Kirkham (who has done excellent reporting on this issue), in a Huffington Post article on April 18, noted, “The Apollo Group, which owns the for-profit University of Phoenix, was listed in Advertising Age as one of the top 100 spenders on US advertising in 2009. The $377 million spent that year outpaced Apple Inc., according to the magazine.” Part of the business model of these schools is to obtain as much federal financing for their students as possible. They then use the cash flow to advertise and attract even more students.

As we saw in the Department of Education report, for-profit institutions spend much less money on student instruction than traditional colleges and universities. For-profit schools on average devote less than a third of the money that public universities do toward instruction and less than a fifth of the money spent by private nonprofit institutions, according to that US Department of Education data. It is no wonder that they have much worse outcomes than other institutions.

Current and former recruiters at a number of for-profit institutions, including schools owned by Education Management Corp. and Bridgepoint Education Inc., told The Huffington Post about misleading sales pitches to entice new students to enroll. Essentially, they run boiler-room marketing operations with high-pressure tactics to convince prospective customers that their only hope is additional training. With unemployment higher than it should be, there are millions of potential customers.

“There’s nothing wrong with advertising and marketing,” Harkin has said. “Schools are free to spend as much as they want, as they choose. What we’re saying here is that you just won’t be allowed to use taxpayer dollars to do so.”

Unfortunately, prospects for the bill’s passage appear slim, particularly in the Republican-controlled House, which has supported several measures to repeal or block funding for regulations on for-profit colleges over the past year. It is also unlikely to pass among the business-friendly Republican senators who require 60 votes for practically all legislation, especially with the numerous for-profit college lobbyists buzzing around Capitol Hill. Another bill to regulate veterans government aid to for-profit colleges, introduced by Harkin and Sen. Dick Durbin (D-Illinois) in January, has not made it out of a Senate committee.

In the next article of this series, Dina Rasor and I will explore exactly why such a sound bill, which protects taxpayer interests, is unlikely to pass Congress. We will “follow the money” and connections that keep this industry well lubricated with federal loan money despite their poor track record of helping their students obtaining a degree and then employment with the federal funds they receive.