For-Profit Colleges Under Federal Scrutiny

August 5, 2010 by LendKey Staff


The rapid rise of for profit schools featuring online degrees has gotten the attention of congress. On Wed August 4, Democrat senators made it clear that they would pursue tighter regulation of the for-profit education industry. An Inside Higher Ed article outlines the proceedings led by Sen. Tom Harkin (D-Iowa). Much of the hearing focused on findings by an undercover “secret shopper” operation by the Government Accountability Office identifying “fraudulent, deceptive, or otherwise questionable marketing practices” involving aggressive recruiting tactics and manipulative financial aid processing. A former for profit recruiter also shared his experience during the hearing.

This does not sound good for an industry that has seen a rapid rise during the past decade. Schools like University of Phoenix have had booming enrollment. For profit schools attribute this to their ability to reach an under-served market segment through flexible online degree programs. This incredible rise is part of the reason why they are getting so much attention on Capitol Hill.
For profit schools that are qualified for federal financial aid funding for their students began a race for admissions. The for-profit model essentially built their tuition costs around guaranteed Stafford funding offered to any student that files a FAFSA form. This would ensure that any student enrolled would be able to pay their bill and continue their education. But it’s not just guaranteed federal Stafford loans. The University of Phoenix raked in over $1 billion in Pell grant funding as well. Students that attend for profit institutions make up 20% of all Pell grant recipients even though they serve about 6% of the country’s student population

Concerns of the quality of education provided are the major issue that is being dealt with now. Using government funding to finance a for-profit industry may make a great business model, but the end results have been unsatisfactory. While for profit schools serve a minority (6%-10% of all students nationally) they represent 40% of the defaults on federal student loans.

The heat is now on the for profit education industry. The government is concerned about wasted resources. Students defaulting on their loans are unable to get work after completing online degrees. And tax payers are being left to handle the bill. Could it be curtains for the for profit school sector?

Not so fast: As much as this industry has stumbled recently, we cannot ignore that technology must play a major role in the future of education. Online learning can be a valuable tool for education, but it must be used appropriately. Getting rid of for profit schools altogether would be like throwing the baby out with the bath water. We have to admit that this industry did indeed appeal to an underserved market segment searching for a learning resource. The problem is that the for profit industry took advantage of the federal financial aid eligibility of their students by not maintaining high enough admissions standards and not providing a degree experience that could guarantee employment. But to be fair the traditional non-profit colleges already in existence cannot guarantee employment through their programs either. Non-profit schools are not so non-profit when you begin to examine their payrolls and expenses. Every college has somebody making big money from enrollment and endowment enhancement. If both for profit and non-profit receive federal funding, they both need to be scrutinized for quality and efficiency.

For profit education is at a crossroads. They can no longer continue their business practices and expect to get guaranteed funding from financial aid resources. There are two options left. First, for profit schools can limit their enrollment to only admit qualified students based on experience, test scores and GPA from prior institutions. For profit schools knew what they were doing when they admitted massive amounts of students. They knew they could cheaply run an online program and get tuition paid for with guaranteed student loans that all students are entitled to. Claiming to extend educational opportunity while leaving students in debt without real job skills is deplorable and must be stopped.
The second option is that they become completely independent from federal financial aid resources. Students would have to pay their tuition by using their own cash or savings. This would allow the market to determine the worthiness of their online degree programs without government resource artificially propping their budgets. If the business model serves a legitimate market segment and can function without the support of government subsidies than it would be a worthy for-profit institution.

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  • http://educatedquest.blogspot.com edquest

    The for-profit schools have a major contradiction to deal with. By not having many of the frills associated with a traditional educational experience: dormitories, athletics, alumni relations and so on, as well as the most expensive faculty, they are, in effect the least-cost provider for educational services.

    However, they do not price their degree programs in that way. If you have a choice: a publicly-supported two-year or four-year college that grants the same degree, with more frills, but a lower tuition, you should take it. This is true for any student who wants to attend a fairly non-competitive school; there are plenty of public options that are not selective.

    If for-profits want to maintain their price point, they need to prove that they offer tangible advantages: employer connections, highly personalized instruction, a vast alumni network, and scholarships that convey some form of prestige that students would be willing to pay a premium. These are the reasons students borrow large sums of money to attend, for example, Harvard or Wharton, over a state university business school.

    Otherwise, why don’t the for-profits go to fiscally strapped state governments and ask: why don’t turn over administration of your least selective colleges to us? We’ll cut the fat and make money while charging your students less. That, along with employer-subsidized education, might make for a win-win for government and for-profit education.

  • Ken

    This comment is on point. For Profits are taking too much profit for a “no frills” experience. This is different to many traditional colleges that are spending too much on non-academic pursuits (All Frills). Richard Vedder equates this to the “Country Clubization” of College. However I agree that online degrees are charging too much for their service.

    The electronic administrative capacity built by online schools could be integrated with current traditional schools to create a better resource at a lower cost. The number one driver of increased college costs has been administrative salaries, not teacher salaries. Administrative salaries are the cost of facilitating a University, but they do not improve the quality of the learning experience or the cost efficiency.
    There has to be a way that online schools could help higher education by cutting costs, increasing educational accessibility, and teaching the right students the right skills to be productive instead of defaulting on student loans.

    Thanks Edquest for this awesome comment.

  • http://www.ifounds.net ifounds

    However, they do not price their degree programs in that way. If you have a choice: a publicly-supported two-year or four-year college that grants the same degree, with more frills, but a lower tuition, you should take it. This is true for any student who wants to attend a fairly non-competitive school; there are plenty of public options that are not selective.