Haven't we heard this story before? It features a high-pressure sales force persuading consumers in search of the American dream to go deep into debt to purchase a product of often dubious value. Default rates are sky high. Taxpayer money is squandered. Top executives walk away with fortunes.
This sounds like a description of the subprime mortgage industry, which came crashing down two years ago. But what I just described is the reality at many for-profit colleges.
Their recruitment ads are ubiquitous, offering visions of a cap-and-gown graduation, followed by placement in a well-paying job. At their best, for-profit colleges deliver. Many provide top-quality, innovative options for students who want to pursue postsecondary education while managing work and family obligations.
But serious questions have been raised about some of the major players in this rapidly growing industry. Critics charge that many for-profit colleges employ overly aggressive recruiting tactics targeting low-income students. Students take on excessive debt, and though dropout rates are not available, there is reason to believe that they are very high.
Critics say that the entire business model, especially in the case of publicly traded companies, is premised on a college's ability to churn through many thousands of students, whose federal Pell grants of up to $5,550 and Stafford loans are paid to the school, with no accountability for student learning or graduation. Even good actors in this industry are lured into the vortex of bad practices in order to compete and meet investors' expectations.
For more than 50 years, the federal government has provided students with grants and loans to help pay for college. This has been a powerful investment in our human capital and our nation's future. However, an ongoing investigation by the Senate Committee on Health, Education, Labor and Pensions (HELP) has raised serious questions about whether students -- and taxpayers -- are getting good value for the surge of federal dollars flowing to for-profit colleges.
From 2008 to 2009, 23.6 percent of federal Pell grants flowed to for-profit schools, double the percentage from 1999 to 2000. Federal aid to for-profit colleges skyrocketed from less than $5 billion in 2000 to nearly $26.5 billion last year. At many of the major for-profits, federal dollars now account for more than 80 percent of their revenue, according to a Department of Education report.
The HELP Committee heard testimony in June from Yasmine Issa, a 29-year-old divorced mother of twins who used Pell grants and loans to pay for training to become an ultrasound technician. After completing the for-profit college program in 2008, she was turned down for jobs because -- as she belatedly learned -- the school's program was not accredited by the organization that determines if she is eligible for a required exam. She was left with a $21,000 debt.
Issa is not alone; 96 percent of associate-degree students at for-profit colleges take out loans, compared with only 38 percent of community college students. And for-profit college students are eight times more likely to graduate with a debt larger than $20,000.
For-profit colleges account for only 10 percent of students enrolled in higher education, but those students receive 23 percent of federal student loans and grants, and account for 44 percent of defaults.
Wall Street money manager Steven Eisman told the committee that many for-profit colleges are "marketing machines masquerading as universities." Their rapid growth is driven by easy access to federal student loans, guaranteed by the government. "The government, the students and the taxpayer bear all the risk," Eisman testified, "and the for-profit industry reaps all the rewards."
Some for-profit schools spend a very large share of revenues -- nearly 50 percent-- on non-instructional expenses, primarily marketing and recruiting. They do a poor job of producing graduates but a stellar job of generating wealth for shareholders and executives. One large for-profit institution has a nearly 40 percent profit margin, larger than most Fortune 500 companies, including Apple. The president of the largest for-profit college is paid nearly 14 times the compensation of the president of Harvard University.
Eisman, who was one of the first to predict the collapse of the subprime mortgage industry, sees disturbing similarities in today's for-profit college industry. He estimates that students enrolled by for-profit colleges could default on as much as $275 billion in federal student loans over the next decade.
Subprime borrowers were able to walk away from their homes and, therefore, their debt. But it is a different story for millions of students who take out loans to attend for-profit colleges. Under the law, people cannot discharge student debt in bankruptcy; so if they can't pay it off, it will continue to accrue compounded interest indefinitely. Subprime borrowers lost their homes, but students like Issa stand to lose their future.
In recent years, an absence of federal oversight has allowed a dangerous bubble to grow in the for-profit college industry. The challenge is to crack down on the bad actors and abusive practices while preserving the positive options and innovations that many for-profit colleges have pioneered.
Tom Harkin (D-Iowa) is chairman of the Senate Committee on Health, Education, Labor and Pensions. This piece appeared this morning as an op-ed in the LA Times.
As Eisman has profited immensely from all of this, i find it despicable that so many people in Government are mimicking his credo (which was designed to manipulate the market, not to help students) and you ALSO do so here. It means you have subjected yourself and the senate to influence peddling.
That you are aware Eisman is shorting should mean you would be especially careful NOT to use his words and should not be yourself influencing the market using his words. Although the American people are used to corruption in Wallstreet and Government, weren't the hearings supposed to be all about the students and their burden of loans and the burden on the taxpayer and not a manipulation of the market?
May I suggest that the Government start tracking the funds and grants and create agency/school accreditation watchdogs to ensure their is NO exploitation to begin with, rather then allowing the greedy to abuse the very people ... the students it was supposed to help.
Then maybe a fox like Eisman wouldn't have to be asked to guard the henhouse.and you wouldn't need to regulate after the fiascos and crisis that the Government created in the first place ...greed factories..
I'm no fan of big government and in a perfect world, we would not need regulation. Well, hello derivatives, hello "pick a payment" loans, hello safety short cuts by big oil; we live in a world of elitist greed. Fix it! (and please quit fighting for crop subsidies in your own state or you can't cast the first stone). I'm glad you're tackling (if you are faking it, shame) this issue.
Oh, great, so now we are also getting students on the hook for GED help.
As one who has taught GED classes for several years - ones that were grant-funded and cost around $15 per semester for students - and who has worked in higher ed, I am telling you that the above says all that needs to be said. If you can't see it, I suggest you are duped.
I'm not accusing, I'm really asking.
And personal responsibility is just as important as reforming the system. I (stupidly) went to a private college right after high school and got a useless liberal arts degree, but I made sure to go somewhere that offered me grants, I worked, I applied for every scholarship I could find, and only borrowed $10K for the whole 4 years. This was 10 years go. Now I'm in school again for a real career, and since I worked and saved I haven't had to borrow anything. It's called being responsible, not purchasing things you can't afford, be it an education, a vacation, a flat-screen, TV, whatever. Live within your means.
All colleges, not just the for profit, need to be regulated or they will take advantage and raise tuition. The stupid mandate and quotas and throwing money at r higher education is pie in the sky.
If the Government doesn't want to track the money, there are always swindlers happy to make sure THEY know where it is going!!
Also, you are seriously out of you mind if you think that the tuition dollars "end up in the pockets of the administrators." That's just an inflammatory comment with no evidence to back it up. Even if the dean of a law school makes $500k-$1 million a year, you're talking about a $300 million a year business. You're talking .001%-.002% of the school's revenue. That money subsidizes other schools in the university, that's for sure....
The system--if you can call it that--that we have now puts ALL the risk on the student, far and away the poorest and most vulnerable party in the education transaction. And institutions have NO RISK WHATSOEVER in addition to NO OBLIGATION TO BE TRANSPARENT.
By the way, currently, only about 30 percent of college graduates are functionally literate, according to an American Library Association study--the lowest rate on record. So colleges have no accountability, either. I oppose standardized testing for grade school and high school students, but we should have such tests for college graduates, administered by neutral parties, not the colleges themselves. And here, again, tuition should be refunded and the diploma withdrawn if a graduate fails the tests.
I get recruiter calls from the University of Phoenix all the time, and sometimes, on a whim, I ask about their job placement rates. I've gotten every answer from "we don't track those numbers" to "very high rates of success". Obviously evasive answers, yet even back when I attended a large public university, the "career counselors" in student advising gave me similar replies like "psychology is relevant to any job and will help you get a foot in the door". Without solid placement rates and starting salary numbers, students aren't able to evaluate the value of the education, which leads to these predatory for-profit schools.