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Do for-profit colleges spend too much on bus ads?

A new report from a Senate education committee adds a fresh layer of data -- most of it critical -- to the debate over the wisdom of allowing colleges to operate for profit.

The "Emerging Risk?" report emerged Thursday from the Senate Health, Education, Labor and Pensions (HELP) Committee, as the panel convened for its first hearing on whether the sector requires greater government oversight.

Sen. Tom Harkin, the Iowa Democrat who chairs the committee, said the "limited amount of publicly available data" available for study illustrates "an alarming trend in this industry.

"Taxpayers are investing billions of dollars in for-profit colleges, yet student debt and default rates at these schools are disproportionally higher than at non-profit and public universities," Harkin said in a statement. "This data begs for oversight of this industry, which will begin with our first hearing today."

(Disclosure: The Washington Post Co. has a stake in the outcome of this regulatory episode as the owner of Kaplan Higher Education, a big player in the for-profit sector.)

The Obama administration has proposed a series of tweaks to federal law that would curb the worst alleged abuses in the for-profit industry. Two have captured the most attention: a regulation that would discourage the institutions from compensating recruiters based on a head count of students recruited, and another to restrict programs whose graduates have unreasonably high levels of student debt relative to their earning power.

In fewer than 20 pages, the report pulls together a fairly comprehensive portrait of the data points that have congressional regulators worried.

1. For-profit colleges have exploded in enrollment. The 14 publicly traded companies in the industry enrolled 1.4 million students as of 2008, up from 200,000 students in eight companies 10 years earlier.

2. Online education is fueling the boom, facilitated by a 2005 rule change that allowed schools to furnish more than half their courses online.

3. For-profits gobble up student aid. The institutions enroll 10 percent of students but receive 23 percent of federal aid.

(Industry leaders say that's because the sector serves a disproportionate share of low-income and self-supporting students, a point its critics do not dispute. The report notes that for-profits "actively recruit primarily low-income students.)

4. For-profit colleges spend barely half of their budget on education and nearly one-third on recruiting and marketing, spending heavily "on television advertisements, billboards, phone solicitation, and web marketing." Some publicly traded schools spend as little as 32 percent on education.

5. Large numbers of students cycle through for-profit colleges. Completion rates are a mystery in the for-profit sector. But available data show the for-profits tend to enroll more students over the course of an academic year than their total starting enrollment. One school studied started the year with 62,000 students, enrolled another 117,000 students and ended the year with 86,000 students. Where did the rest go?

6. As previously noted on this blog, for-profit students borrow more than other students, and one-quarter of 2008 graduates borrowed more than $40,000.

(For-profit leaders note, again, that they serve a largely low-income student population, hence the loans.)

Conclusion? The data, on balance, yield a "mixed portrait" of the sector that "calls into question the taxpayer return on their multibillion-dollar investment."

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By Daniel de Vise  |  June 25, 2010; 9:10 AM ET
Categories:  Access , Admissions , Aid , Attainment , Finance , For-profit colleges , Marketing , Online , Public policy  | Tags: for-profit college tuition, for-profit debt, for-profits, higher education finance, senate investigation for-profits  
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Why pick on "for-profit" colleges when it looks to me like they are all for profit. Tell me where all the money goes from research and sports. Sure looks like big business to me. How many CEOs of big name colleges make more than the President of the USA? Professors use free slave labor in graduate students. They do not do that with online classes. This amounts to trying to prop up old traditional schools that are not getting tax subsidies like they used to.

Posted by: PowerpeaceMaster | June 25, 2010 10:04 AM | Report abuse

College Inc. The Problems with For-Profit Colleges:

Alexis Avila
Prepped & Polished

Posted by: preppedandpolished | June 25, 2010 1:55 PM | Report abuse

For-profit colleges exist mainly because a loan industry and federal student aid exist to sustain them. The loan industry, in turn, only exists because Congress forces taxpayers to bail them out.

The for-profit colleges come out ahead because they get whatever price they want in tuition. The banks would have a rough go of it were they not shielded by government loan guarantees, which allow them to get rich, too. Students end up saddled with huge debts that they often cannot repay, and it's not clear that the educations offered by these schools help everyone find better jobs. Meanwhile, taxpayers foot whatever part of the bill that students themselves cannot pay.

Is there something wrong with this equation? Probably, but it's often the same with nonprofit colleges. The nonprofits do not have owners raking in money for themselves, but nonprofit colleges do increasingly have corporate-style CEOs who are paid corporate-style salaries, which is almost the same thing.

Really, it's the entire university industry that needs to be turned on its head. For-profits are just a next logical step to a condition that's been developing in higher education for the last several decades.

Prior to federal student aid, a student in the 1960s and early 1970s could attend a state college and graduate with no debt with only a little help from the parents. A summer job and a part-time job during the school year could usually pay the bulk of tuition and room and board. Several thousand dollars of student aid, however, means that colleges can charge several thousand dollars more, and so they do. And because lenders are then able to push cheap loans at students who cannot afford these higher prices, colleges are often able to charge several thousand more on top of that. Tuition rates are so high now that for-profit schools found an opening to offer cut-rate educations, while still making ample use of loans and aid.

In short, higher education got hijacked by the finance industry. Profit has been the driving motivation for a long time, and for-profit colleges are just putting a new face on what is already the situation in the industry as a whole.

Posted by: blert | June 26, 2010 12:47 PM | Report abuse

I can't speak to the aid issue, since I've been paying for my own tuition. But I think one reason for-profit colleges have flourished is that they make things more convenient for students than nonprofit schools. Traditional colleges and universities limit the number of classes they offer and limit the enrollment for those classes, and they still think in terms of semesters. For-profit online universities are much more flexible. Want to start class on Monday? No problem; just register today. Seeking a class that is done in five or six or seven weeks? No problem. It makes sense to examine the for-profits' results, how they serve students and the success rates. And I'm sure some are poor performers. But frankly, I also think nonprofit universities need to think more creatively and work harder to serve students with more offerings and more flexible scheduling. Otherwise, the for-profit schools are going to have them for lunch.

Posted by: barbarachina | June 26, 2010 4:08 PM | Report abuse

Loan default rates track to the type of student being served, not the governance structure of the institution. The GAO stated this definitively in its review of ability-to-benefit students. It just happens that for-profit schools serve more poor and minority students and so have higher default rates.

But know that there are plenty of for-profit schools with very low default rates. And there are plenty of non-profit schools with very high default rates. As a group historically black colleges & universities have very poor default rates but still receive additional government subsidies.

The main difference with community colleges and other state-funded schools is that they receive non-federal subsidies from state and municipalities. If you look at drop-out rates, defaults, state subsidies, and corporate taxes, for-profit schools are a much better deal for taxpayers on a $/graduate basis.

As a society we have decided to subsidize poor students to given them a chance to lift themselves out of poverty. And FP schools do this as well or better than any other type of school. We can decide as a society not to invest these dollars, but let's have that conversation honestly -- with all the facts, not just the ones that fit our ideological notions.

- Trace Urdan

Posted by: turdan | June 26, 2010 5:48 PM | Report abuse

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