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For-Profit Education: Will We Ever Learn?

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Earlier this month, the Government Accountability Office (GAO) issued a scathing report about the for-profit college industry. After conducting undercover tests at 15 for-profit colleges, the GAO found that representatives of four colleges had encouraged applicants to engage in fraud to secure government college loans and that representatives at all 15 had attempted to deceive applicants in some way.

No two ways about it, this is terrible. People looking to increase their marketability in a tough economic climate are being deceived about what an education at these schools will cost, what doors these degrees might open, and the salaries students can expect upon graduation. Perhaps worse, at least some schools are encouraging applicants to engage in out-and-out fraud to obtain government loans and are telling students not to worry about repaying them. Many of these students, unable to repay their loans, are defaulting on them and costing taxpayers millions of dollars.

In addition to the issues highlighted by the most recent GAO report, there have been other problems as well. Some for-profit colleges spend a large portion of revenue on non-teaching related expenses, have high dropout rates, and engage in abusive recruiting and debt-management practices.

Given all of the abuses documented, and the ever-increasing amount of federal student aid dollars flowing to these schools, the industry clearly merits greater scrutiny and regulation by both Congress and the Obama administration. But it is also worth noting that for-profit colleges are not the only ones engaged in deceptive tactics here. Some urging additional regulation of the industry are not exactly on the up-and-up themselves. It seems hedge fund managers have developed a remarkable interest in for-profit educational institutions, and not out of heartfelt concern for the American educational system.

Steven Eisman, for example, a hedge fund manager who previously manipulated market reaction in the for-profit education industry and has raked in cash through short sales based on dire public forecasts for companies in that industry, testified (PDF) before a Senate committee in June that the industry is fundamentally unsound and we should expect to lose millions from students who attend such schools and default on their loans. Last May, after a speech before the Ira Sohn Research Conference in which he described specific for-profit education institutions as on financially shaky ground, share values of those companies plummeted and Mr. Eisman reaped huge profits.

Shortly after Mr. Eisman testified about the evils of for-profit colleges, ProPublica reported on other efforts by those with financial interests to encourage federal regulation of the industry. An unidentified hedge fund manager (though according to Mr. Eisman, not him) hired Johnette McConnell Early to encourage federal regulation of for-profit education by sending Education Secretary Arne Duncan a letter signed by 19 executives of homeless shelters and service agencies expressing the concern that "for-profit trade schools and career colleges are systematically preying upon our clients," and pledging support for tighter regulation. While some of those who signed the letter had personal knowledge of aggressive recruiting tactics, others had only heard about them third-hand. Ms. Early claimed not to know whether the hedge fund she worked for was betting against the for-profit higher education industry, but she did admit, "Clearly an investment firm is not going to look into something unless they're thinking about whether it's a good or bad investment."

Further, a non-profit group associated with another high-profile investor, Manuel P. Asensio, has written five letters to members of Congress and regulators since April criticizing the for-profit college industry and calling for stricter regulation. On top of this, one analyst of short-selling stated, "Short sellers have shown a steadily increasing interest in for-profit schools."

These examples suggest there may be a concerted effort by those who stand to benefit financially to drive down the stock price of certain for-profit schools. Knowing this, how can we be sure that the new regulations the Department of Education is proposing are really in the best interest of the Americans most likely to attend these schools? Even more disturbing, the revelations of the hedge fund managers' efforts here raise the specter of whether federal oversight and regulatory processes are being secretly manipulated for financial benefit in other instances.

While for-profit colleges have been rightfully criticized for offering little transparency as to how well taxpayers have been served by our substantial investment in that industry, some of the efforts to fuel anger against and encourage regulation of these schools are similarly lacking in transparency. Congress and the Department of Education should remain vigilant against the efforts of a few opportunistic multi-millionaires to abuse the regulatory process for their own pecuniary interests.