Imagine an industry in which the federal government guarantees up to 90 percent of revenue, sales are recession-proof and profit margins regularly run in the double digits.
That describes the for-profit college business, which has grown from a small player in education a decade ago into a force that captures more than $12 billion in annual revenues and 10 percent of the nation’s college students.
Once limited to trade and professional-development programs, for-profit schools now offer bachelor’s, master’s and doctoral degrees, many of them through online programs.
The largest companies in for-profit education are publicly traded corporations that collectively earned more than $1.4 billion in profits during the last fiscal year, up 34 percent from a year earlier.
“It’s not that difficult to make money in post-secondary education if you’ve got the right business model,” said Kevin Kinser, an associate professor with the University at Albany, State University of New York, who has studied for-profit colleges.
“You have a limited set of courses, a standardized curriculum and a teaching staff of working professionals. Then you recruit like hell,” he said. “The more enrollments, the more money you make.”
Critics point to lax regulation as another reason for the industry’s rapid growth, and they’re looking to the Obama administration to crack down.
The U.S. Department of Education recently proposed reining in questionable recruiting and tuition practices, sending shock waves through the industry. Rising defaults on government-backed student loans — a sign that fewer students are getting their money’s worth from their degrees — are putting additional pressure on for-profit colleges.
“Some of these schools are realizing the gig is up. They’re under a more serious regulatory threat, and they’re trying to clean up their act,” said Stephen Burd, editor of Higher Ed Watch, a public-policy blog published by the Washington-based New America Foundation. “The question is whether the market will allow that because it means smaller enrollment and less excitement on Wall Street.”
Most of the publicly traded education companies have campuses in Colorado, with familiar names such as the University of Phoenix, DeVry University, Colorado Technical University, ITT Technical Institute and Everest College.
Also thriving in the state are dozens of privately owned schools, including Westwood College, which is based in Denver; College America; and Heritage College.
About 35,000 students attend federally approved for-profit colleges in Colorado.
Some rules set in early ’90s
Online growth has been particularly strong for these schools. Colorado Technical University added 5,400 students to its online school during the past year, accounting for a third of the growth at its 114,000-student parent company, Chicago-based Career Education Corp. CTU’s “on-ground” enrollment grew by 800 students.
Today’s for-profit education industry — led by the Apollo Group’s University of Phoenix, with 443,000 students — evolved in the 1990s from a field of small, privately owned, locally focused trade schools.
Then, as now, schools heavily recruited low-income students and reaped profits largely from government-backed student loans and federal grants. Regulations were sparse, and abuses were widespread.
Fraudulent recruiting practices, high loan-default rates and low levels of graduation and placement sparked a series of scandals that prompted lawmakers and regulators to clean up the industry. Congress in the early 1990s instituted rules that persist in some form today.
At least 10 percent of school revenues must come from sources other than government loans and grants. Regulators also monitor how many graduates default on their student loans after two years.
Schools with default rates above 25 percent for three years running can lose federal student-aid funding.
The government also established more-stringent accreditation standards, which led to the expansion of the trade-oriented schools into degree-offering programs that fuel their growth today.
Private-equity investors saw the industry’s potential and began buying up and consolidating schools, eventually spinning them off as public companies. Public ownership put the schools under the eye of the Securities and Exchange Commission as well as the Department of Education, but it also made them answerable to the constant demands of Wall Street for earnings growth.
The differences between traditional and for-profit schools are many: For-profit students are more likely to be minorities from low-income families; schools are apt to be in a strip mall; professors are working professionals.
Perhaps the most fundamental differences have to do with money. For- profits collect almost all their revenue from tuition and pay taxes on that money, unlike public universities, which receive public subsidies, and nonprofits, which are tax-free and have endowments. As a result, for-profits focus intently on enrolling and retaining as many students as they can.
That creates a different kind of organization, one that observers say has advantages and disadvantages compared with traditional colleges. On the positive side, for-profit colleges offer curricula, schedules and learning systems designed for student convenience.
“There is nothing inherently wrong with a for-profit model for education, and there’s nothing wrong with that model tapping into government resources,” Kinser said. “Many institutions do this with integrity. We have profit-making in hospitals; why not in education?”
Misplaced focus?
But Kinser is concerned that for- profit schools focus too much on enrolling students as opposed to graduating them and that the system rewards the industry for it. The money they receive from the government should be more strongly tied to graduation rates and other performance measures, he said.
Education companies typically spend a quarter of their revenue on marketing — far more than traditional universities. They also spend millions on lobbying to hold off attempts to increase regulation.
Nonetheless, regulators are moving to close a loophole that lets schools give raises twice a year based in part on the number of students enrolled. Regulators also have threatened to begin withholding funds from colleges that can’t demonstrate that tuition costs and student debt levels are reasonable compared with what graduates can expect to earn.
These moves have alarmed the industry and investors, though it’s unclear how far the Obama administration will push new regulations. The Education Department is working with a panel of interested parties — including representatives from public, nonprofit and for-profit schools, as well as consumer and student advocates — to craft new rules governing oversight.
Education-industry analyst Corey Greendale of First Analysis Corp. in Chicago said companies that provide job-training-certificate programs would be hardest hit by the proposal to link tuition to future earnings. Tuition caps might cause those companies to stop offering those programs, he said.
“Price controls are never a good thing for any industry,” he said.
But Rich Williams, a higher-education associate with the Public Interest Research Group in Washington who is on the panel reviewing the regulations, said he sees the proposal as an effective way to weed out companies that offer bogus or overpriced degrees.
“The good actors won’t be affected by this,” he said.
Another area in which for-profits face scrutiny is the high-interest student loans provided by some schools. These unregulated private loans carry interest rates of up to 18 percent and have grown in volume in recent years, in part because of the tightening of credit since the financial crisis.
Westwood College carries about $20 million in student-owed debt on its books, officials said. Westwood charged students 18 percent interest on their financing but lowered that to 10 percent Nov. 1.
Rules may get tougher
Congress is beginning to focus its attention on for-profit schools. Under consideration are measures to allow students to discharge their student loans in bankruptcy — something barred currently — and to clamp down on abuses in direct lending by schools.
For-profit colleges also face pressure to disclose more information to prospective students about job-placement rates and graduate starting salaries. If the schools don’t provide it, the government may require it, said Greendale, the analyst.
“Consumers are going to demand that kind of information. You can’t just have a flashy website claiming ‘We offer great careers,’ without giving more,” he said.
Some investors have turned against the industry, betting its profits and stocks will fall once the government clamps down. Jim Chanos, a hedge- fund investor who has shorted for- profit education stocks for several years, told MSNBC last spring that the companies are due for a fall because they’re over-reliant on government funding and don’t provide value to their customers.
“The problem is (that) the cost of these for-profit degrees is so onerous and kids are coming out with so much debt, I just don’t know empirically they’re any more employable than they were before going in,” Chanos said.
Even with tighter regulations, the for-profit college business is unlikely to stop growing soon. President Barack Obama is calling for more Americans to go to college, and community colleges are turning students away.
“Overall,” Kinser said, “for-profits are pretty well positioned to take advantage of the push to expand post- secondary education.”
Greg Griffin: 303-954-1241 or ggriffin@denverpost.com
