For-Profit Colleges

Demand Value in Higher Education

[Editor's Note: A version of this post ran yesterday in the Albany Times Union]

The College Board reports tuition is up nine percent this year in inflation-adjusted terms, despite declining prices throughout the economy and stagnant median family income. Parents want to know why the sharp increase and why college costs so much in the first place.

The answer, in a word, is demand. Until we channel higher education demand in a more rational direction, tuition will continue to outpace inflation, grant aid, and family income.

Higher Ed Watch readers know that demand isn't the only factor driving tuition. College supply is relatively limited. Higher education is slow to embrace productivity gains seen elsewhere in the economy. Most important, states cut higher education funding to balance budgets, and colleges backfill those cuts by hiking tuition. Banks act as enablers, supplying big student loans to anyone willing to borrow.

But at its base, tuition rises because suppliers, including those who finance them, take advantage of high, under-informed, and often irrational consumer demand. As families shop colleges this fall, they would be well served to focus on value. The Department of Education can help by protecting consumers from the worst deals. We need a lemon law for colleges that cost too much and deliver too little.

Putting an End to the Subprime Student Loan Racket

[Editor's Note: Yesterday we ran an excerpt from an article that Higher Ed Watch Editor Stephen Burd wrote for The Washington Monthly [cover pictured right] on the subprime student loan crisis at some of the nation's largest chains of for-profit colleges. Today, we're running a second excerpt that provides recommendations for putting an end to predatory lending at these institutions. To read the full article, click here.)

For a while it looked like the meltdown on Wall Street, and the ensuing credit crunch, would put an end to predatory lending at for-profit schools. In 2008 Sallie Mae quit offering subprime private loans to students at for-profit colleges because the astronomical default rates had helped throw its stock price into a nosedive. But the proprietary college industry has found a way around this roadblock, namely making private loans directly to students, much the way used-car lots loan money to buyers rather than going through a third party. For example, in a recent earnings call with investors and analysts, Corinthian said that it plans to dole out roughly $130 million in "institutional loans" this year, while Career Education and ITT Educational Services Inc., another for-profit chain, have reported that they expect to lend a combined total of $125 million.

These loans could prove to be even more toxic than the private ones offered by Sallie Mae. This is because some schools are packaging them as ordinary consumer credit, which has even fewer built-in safeguards than private student loans, especially when it comes to disclosure requirements. This makes it easier for schools to mislead borrowers about the terms of the debt they are taking on. In one class-action lawsuit filed earlier this year, former students of Colorado-based Westwood Colleges allege they were duped into borrowing institutional loans at a staggering 18 percent interest. According to the complaint, the college's corporate bosses advise their admissions officers to sign students up for these loans without revealing how costly they are going to be. Thus borrowers don't learn about the steep interest until after they leave school and receive their first loan bill. Worse, the lawsuit alleges that some students have been signed up for loans without their permission.

Jillian L. Estes, a Florida lawyer who represents the plaintiffs in the case, says she has been approached by two dozen former Westwood admissions representatives who admit that they deliberately avoided telling students about the terms of these loans. "They knew they'd never be able to enroll these students if they were up front with them," Estes explains. (In their written response to the lawsuit, Westwood College officials offered a "categorical rejection" of the allegations brought by Estes and her clients.)

The Career College Association's Doublespeak

Testifying yesterday at a House of Representatives hearing on alleged admissions abuses at several for-profit colleges, Harris Miller, the president of the Career College Association (CCA), said that his organization doesn't have any tolerance for "schools that violate the rules and regulations" that govern the federal student aid programs.

"Let me say up front: there is no room for cheating in the process of higher education, whether by students, teachers, administrators, other school personnel, or outside testers and evaluators," Miller (pictured on the left) stated, adding "We share the government's interest in eliminating any form of fraud and abuse associated with the Title IV [student aid] program."

These are very good sentiments. But at Higher Ed Watch, we are unaware of any role CCA, the national lobbying group for proprietary colleges, has played in ferreting out fraud and abuse among its members.

Over the last decade, some of the largest publicly-traded for-profit higher education companies have come under scrutiny from federal and state regulators and have faced numerous lawsuits by former employees, shareholders, and students over allegations that they have engaged in misleading recruiting and admissions tactics to inflate their enrollment numbers.

Not an Isolated Case

The General Accounting Office (GAO) recently released a report revealing that some publicly traded for-profit colleges have been pumping up their enrollment numbers by deliberately admitting unqualified students.

Federal law requires that students who have neither a high-school diploma nor its equivalent must pass a government approved "ability to benefit" (ATB) test before becoming eligible to obtain federal financial aid to pay for college. But during an undercover investigation it conducted at a local branch campus of a large proprietary school chain, the GAO discovered that the school helped prospective students cheat on the ATB test. In addition, while conducting site visits at for-profit colleges around the country, the accountability identified incidents at "two separate publicly traded proprietary schools" in which recruiters "referred students to diploma mills for invalid high school diplomas in order to gain access to federal loans without having to take an ATB test."

Such abuses are serious, the GAO writes, because they can be very damaging to the students involved. "Unqualified students who receive federal financial aid for higher education programs are at a greater risk of dropping out of school, incurring substantial debt, and defaulting on federal student loans," the report states.

The accountability office goes out of its way, however, to emphasize that its findings "do not represent nor should they be interpreted as implying widespread problems at all proprietary schools." Proponents of the for-profit higher education industry have jumped on that statement to downplay the abuses and say that the incidents the GAO uncovered were isolated cases.

The Growing Student Debt Crisis at Career Colleges

Is there a looming student debt crisis at our nation's for-profit colleges and trade schools? The latest data from the U.S. Department of Education's National Center for Education Statistics (NCES) certainly seems to suggest so.

According to an analysis of this data by the College Board, 60 percent of bachelor's degree recipients at for-profit colleges graduate with $30,000 or more of student loan debt. That's one-and-a-half times more than graduates at higher-cost private colleges and three times more than those at public universities and state colleges. At the same time, one in five students who earn associate degrees at proprietary schools graduate with a debt load of at least $30,000. That's four times more than associate degree recipients at community colleges. [The average annual salary of associate degree recipients is around $38,000.]

The data in question comes from the 2007-08 edition of the National Postsecondary Student Aid Study (NPSAS), a nationwide survey of college students that the NCES conducts every four years. The study provides the most comprehensive data available on how students and their families pay for college.

But even this data doesn't provide a complete picture of the burdensome amount of debt proprietary college students are taking on -- as it does not include median debt levels for the millions of low-income and working-class students who drop out each year from for-profit colleges and trade schools buried in debt but without the training they need to find jobs that will help them repay their loans. Many of the largest publicly traded for-profit school chains have an extremely spotty record of graduating students.

Guest Post: California Dreamin’ Becoming Proprietary Students’ Nightmare

By Betsy Imholz

For the past three years, there has been absolutely no state oversight over the for-profit colleges and trade schools that operate in California -- leaving nearly half a million proprietary school students in the state without any protection against unscrupulous institutions. The lack of regulation is testament to the for-profit higher education industry's political ties in Sacramento and Washington, which it has used to eviscerate what was once the toughest proprietary school regulatory regime in the country.

Now, with a new Administration in Washington, and hundreds of millions of federal stimulus dollars for job training at stake, the proprietary sector appears to have had a change of heart and is championing a bill (AB 48) in the California Legislature that would re-instate regulation. But don't be fooled. As written, this legislation would do more harm than good, allowing financial aid dollars to flow to the schools without meaningful state oversight, while their students become ever-more burdened with student loan debt.

The history of for-profit higher education in California is replete with scandal -- so much so that the state, for years, was known as "the diploma mill capital of the nation." When the U.S. Senate Permanent Subcommittee on Investigations (aka the Nunn Committee, named after its chairman, Sen. Sam Nunn of Georgia) investigated abuses in federal student aid programs in the early 1990s, proprietary schools in California stood out as being among the most unscrupulous in the country. Many of these proprietary institutions were found to be feeding on federal financial aid by recruiting homeless people straight off soup kitchen lines and out of welfare offices and signing them up for federal grants and loans.

A Leap Forward

The U.S. House of Representatives Committee on Education and Labor took a huge step forward today by approving, on a mostly party line vote, landmark legislation that would eliminate the Federal Family Education Loan Program (FFELP) and use a large share of the savings to significantly increase spending on Pell Grants. The bill would require that as of July 1, 2010, all federal loans be made by the federal government through the Direct Loan program.

We can not overstate the significance of the committee leaders' accomplishment. Despite fierce opposition from the student loan industry and their allies in the financial aid world, the committee passed a bill that would eliminate all of the unnecessary middlemen from the process of originating and guaranteeing federal student loans. This change would substantially simplify the federal student loan program and redirect federal funds out of the pockets of lenders and into the hands of the students who need the help the most.

The measure is far from perfect. We have already stated our dissatisfaction with a provision in the bill that would provide a set-aside for all existing non-profit student loan agencies to service the loans of up to 100,000 borrowers in their home states. Non-profit lenders that wish to continue to service loans in the future should have to compete for a contract from the U.S. Department of Education, like all other student loan providers.

Trade School Lobbyists' New Cause?

For-profit college lobbyists have suddenly become concerned about overborrowing by their institutions' students.

On Monday, a procession of career college lobbyists urged the U.S. Department of Education officials to give their schools more discretion to limit the amount of federal loans students can take out to cover their living expenses. The industry representatives made their remarks at a public hearing the Education Department held at the Community College of Philadelphia to gather ideas for strengthening federal student aid rules to improve the integrity of the programs.

"Schools are trying to limit borrowing," said Richard Dumaresq of the Pennsylvania Association of Private School Administrators, which advocates for proprietary institutions in the state. "But it's not enough to stem the tide of overborrowing, especially in a down economy." His comments were echoed by Harris Miller, the president of the Career College Association, and lobbyists for some of the largest publically traded chains of for-profit colleges, such as ITT Educational Services Inc.

At Higher Ed Watch, we would obviously be happy if students didn't have to take on such a heavy load of debt to attend for profit colleges and trade schools, many of which have had trouble graduating students. But it is hard to take the lobbyists' concerns too seriously, considering the recent conduct of many of these institutions.

Rewriting the Rules on Trade Schools to Better Safeguard Students

The U.S. Department of Education's announcement this week that it plans to rewrite its federal student aid rules to improve the integrity of these programs is certainly welcome news. We are particularly pleased that the agency is considering strengthening a regulation that aims to prevent unscrupulous for-profit colleges and trade schools from taking advantage of financially needy students.

As we have reported previously, Congress in 1992 added a provision to the Higher Education Act prohibiting colleges from giving "any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments" to admissions officers. The ban on incentive compensation for college recruiters was included as part of a broader effort by lawmakers to crack down on fly-by night trade schools that had been set up to reap profits from the Title IV federal student aid programs. With reports rampant that trade schools were enrolling unqualified low-income individuals simply to get access to Title IV funds, policymakers believed it was important to bar postsecondary-education institutions from paying recruiters on the basis of how many students they enrolled.

A decade later, top Education Department officials with ties to the for-profit sector decided to weaken this prohibition. In November 2002, the Department issued new regulations that created 12 "safe harbors" for colleges that wished to provide incentive payments to their admissions employees. The agency took this action over the objections of a negotiated rulemaking panel made up of college officials, advocates for students, and consumer groups that had been assembled to consider the rule changes and of the two main national organizations representing college admissions officers.

In the Dark on Student Loan Borrowing

As we wrote yesterday, newly released data by the U.S. Department of Education's National Center for Education Statistics provides disturbing news about the growth of private student loan borrowing, particularly at the nation's for-profit colleges and trade schools.

But the data's release also brings to light a more basic problem: the government's inability to collect and disseminate accurate and timely information about student debt. This is a major failing, as it leaves public officials without the vital information they need to make sound student aid policy.

As it stands now, the most comprehensive information available comes from the National Postsecondary Student Aid Study (NPSAS), a nationally representative survey that aims to determine how students and their families pay for college. Unfortunately, NCES conducts this survey only every four years. As a result, the information it provides becomes dated quickly.

Up until the release of the latest edition of the NPSAS survey last week, student aid analysts and policymakers have had to rely on five year old data to try to understand student loan trends, even though there has been an explosion in private loan borrowing during that period of time. By relying on the old data, public officials have been able, at least to some extent, to downplay concerns about the hazardous amount of high-risk debt many financially needy students have been taking on. [As we have just learned from an analysis of the data from our friends at the Project on Student Debt, the percentage of undergraduates taking out private loans jumped considerably during this time period, from 5 percent in 2003-04 to 14 percent in 2007-08.]