The Rise and Fall of For-Profit Higher Education

The for-profits are down, but are they out?
By William Beaver

The rise of for-profit higher education has been remarkable. According to the Department of Education (DOE), between 1990 and 2010 enrollments at for-profit colleges increased by 600 percent. Nearly 2 million students—12 percent of all postsecondary students—were enrolled by the end of that period. As the enrollment numbers began to rise in the 1990s, publicly traded companies emerged, consolidating the industry through buyouts until only a few corporations—including Corinthian College—dominated the industry.

Over two decades Corinthian became a favorite of investors. The corporation had dramatically increased in size to 110,000 students and one hundred campuses.

Then, just as dramatically, Corinthian collapsed. A stock that had once traded as high as thirty-three dollars had declined to two cents by the summer of 2014. The collapse occurred when the DOE suspended Corinthian from the federal student aid program—the lifeblood of for-profits. Questionable recruitment practices, false job placements, and bogus graduation rates led to the suspension. Without the revenue provided by government loans and grants, the company was doomed.

Did the fall of Corinthian signal a major decline of the once-booming industry that Wall Street had found so attractive? Over the past three years the number of students enrolled at for-profits has declined by 10 percent, while large organizations like Career Education Corporation, DeVry, ITT Educational Services, and Education Management Corporation have closed campuses. The juggernaut of the industry, the University of Phoenix, has seen its enrollments decline from 460,000 in 2010 to 212,000 in 2016. Speaking of Corinthian, then DOE secretary Arne Duncan reinforced the notion of more troubled times ahead: “This is our first major action on this, but it won’t be our last.” Prophetic words indeed, given the fall of ITT, which closed its more than one hundred campuses last September.

Scandal and Reform

Although complaints about unscrupulous practices of for-profit or proprietary institutions of education can be traced from the colonial years to the Progressive Era, the first major incidence of wrongdoing followed the passage of the GI Bill in 1944, which provided postsecondary educational funding for veterans. Under the GI Bill, federal funds would flow to for-profit institutions. For-profit “trade schools” proved popular with veterans—more than a half of a million attended. Unfortunately, reports of widespread malfeasance soon emerged, prompting a 1951 Government Accounting Office (GAO) investigation, which found that 65 percent of the participating institutions used “questionable practices,” including overstating costs, inflating enrollment figures, and recruiting students who had little chance of graduating. As one researcher put it, “The scandals ran wide and deep and involved every entity involved in the program at one time or another.”

Officials at the Veterans Administration admitted that regulation and oversight left much to be desired. The government implemented reforms requiring accreditation and limiting what costs would be covered. The new regulations appeared to work; reports of abuse declined significantly after 1948.

The obvious lesson from the GI Bill was that without adequate regulation, government funds will be misused and fraud will occur.

In 1965, Congress enacted the Guaranteed Student Loan Program to broaden access to higher education. Lending institutions were asked to make loans to prospective college students regardless of their financial status. To encourage private lenders, the government would subsidize the loans to secure lower interest rates, pay the interest while the student attended college, and assume the debt if a student defaulted. At first, for-profit institutions were excluded, since some in Congress believed that the government should not subsidize private enterprise. However, by 1972 for-profits had been included. A compelling argument was made that these schools provided educational opportunities for low-income students who very much needed financial assistance—an argument that would prove difficult to counter and one that would sustain for-profits over the years.

The resulting influx of government capital triggered a major growth spurt. In the 1980s alone, for-profits accounted for as much as half of the increase in college enrollments. According to the National Center for Education Statistics, 89 percent of undergraduates attending for-profit institutions receive some type of federal student aid, compared with 66 percent at nonprofit colleges and universities. At some for-profits, tuition charges coincided with the amount of government aid available, creating an attractive business model. Revenue streams were guaranteed, while schools faced no immediate penalty if students defaulted.

By the late 1980s, skyrocketing default rates made it obvious that something was very wrong with the student loan program. A GAO investigation found that 74 percent of the fraud and abuse occurred at for-profit institutions, whose students accounted for 77 percent of the defaults. By that time, half of the costs of the student loan program amounted to repaying defaulted loans. Institutions with the highest default rates were described as “diploma mills,” whose major purpose was to procure federal funds. As one DOE official put it, “When you have a program that’s $40 million a year there are going to be bad guys out there trying to steal it.” The fraud committed typically involved falsification of records supplied to the DOE. Specifically, false income data were generated to qualify students for financial aid, along with inaccurate attendance records and test scores of students who dropped out, never attended the school, or never existed. Some schools recruited students who had little chance of completing a program and gave them inaccurate information about job prospects if they did graduate.

The upsurge of underqualified students can be traced to the late 1970s, when the student loan program was amended to include individuals who had not graduated from high school or obtained a general equivalency diploma. The “ability to benefit” criterion was implemented. Some for-profits took full advantage of the new, murky concept. Congressional hearings revealed that recruiters often went to unemployment lines, welfare offices, and low-income housing projects in search of customers. If recruiters were successful, bonuses were added to their paychecks.

About half the students at for-profits were low income—a major factor for defaulting. However, a Senate subcommittee in 1990 concluded that high default rates were more attributable to the practices of organizations than to the background of students. A consumer law advocate in New York painted a direr picture, declaring, “The system is so fundamentally rotten that it simply does not, and perhaps cannot, keep up with all the bad actors.”

There were also issues with Pell Grants for low-income students. By the early 1990s, this $6.1 billion program served 21 percent of for-profit students. The fraud involved was often similar to loans, but grant money was more difficult to track. Then senator Sam Nunn described Pell Grants as “a bank with no security guards or tellers.” DOE officials told Congress they were uncertain how much money had been defrauded.

In 1988, then secretary of education William Bennett urged Congress to do something about the student loan program. He noted that 8 percent of the 6,500 for-profit colleges and universities had loan default rates of over 50 percent and suggested that any institution with a default rate higher than 20 percent (more in line with nonprofit colleges and universities) should be barred from the program.

Congressional reaction would echo what had by now become familiar themes. Representative Maxine Waters of California argued that for-profits largely exploited underprivileged students, who were saddled with debt and had little to show for it. Supporters the industry agreed that abuses had occurred but argued that for-profits offered valuable training and career education; if federal aid was eliminated, lower-income students would suffer the most. Some in Congress supported excluding for-profits from student aid programs, which would have sealed the industry’s fate. In the end, Congress did not ban forprofits but enacted more than one hundred reform provisions. Several of these changes had a major impact. First, under the new provisions, default rates could not exceed 25 percent for three consecutive years. Second was the 85–15 rule, which stated that at least 15 percent of a school’s revenue had to come from something other than federal student aid, an attempt to eliminate those institutions that survived entirely on federal funds. Lastly, recruiters could not be directly compensated for the number of students they enrolled.

A House subcommittee in 1994 faulted the DOE’s policing of student loans, calling the program “one of the most badly managed programs in the federal government.” The DOE maintained that it lacked the staff to adequately manage a program used by thousands of institutions. In 1990, the inspector general informed Congress that staffing would need to increase by 60 to 70 percent, which of course never happened. The inspector general told Congress that staffing issues made it difficult to know exactly how many for-profits were defrauding the government, since only the worst cases—forty, in 1990—could be investigated.

The new regulations produced results. According to the Chronicle of Higher Education, 1,500, or 22 percent, of for-profit colleges and universities were either removed from the student aid program or voluntarily withdrew, while the default rate at for-profits fell from 36 percent in 1991 to 11 percent in 1998.

A Hospitable Climate

Beginning in the 1970s, an ideological shift occurred. Neoliberalism favored private-sector and marketplace over governmental solutions to various social and economic problems. The Reagan administration embraced this new ideology, appointing a commission that eventually issued a report in 1988 urging that privatization efforts move ahead swiftly as “one of the most important developments in American political and economic life.” Although the report did not specifically mention higher education, for-profits undoubtedly received a boost.

The Republican takeover of Congress in 1994 provided an opportunity to put neoliberal ideals into practice. Congressional supporters, led by John Boehner, then chair of the House Education Committee, argued that for-profits provided job-oriented education in tune with the needs of both industry and students. They attempted to roll back reforms, most notably the 85–15 rule, which was modified to 90–10. The ultimate goal was to move toward a single definition of higher education with no distinction between for-profit and nonprofit institutions. Although the Republicans were unable to push through the single-definition standard, their support laid the foundation for a major industry shift and financial windfall.

During the 1990s, the structure of the industry began to change. In the past, the typical for-profit was privately held with enrollments ranging from several hundred to a few thousand. In the early 1990s, the publicly traded “supersystem college” with thousands of students in multiple locations began to emerge. In 1990, there was only one publicly traded for-profit; by the end of the decade, that number had climbed to forty, with stock offerings raising more than $4.8 billion.

Why did Wall Street find the industry so attractive? Certainly one could argue that these large organizations offered economies of scale by centralizing various management functions. But most important was federal student aid, which provided a reliable revenue stream that would continue to flow for the foreseeable future.

These publicly traded companies mimicked much of what had become commonplace in corporate America. There were stock buybacks to keep share prices higher and acquisitions to ensure growth. As a result, by 2005 only eight publicly traded companies could be considered major players.

Between 1999 and 2004, revenues in the for-profit sector increased by 40 percent while enrollments grew by 30 percent. To ensure profitability, labor costs were kept low: roughly 80 percent of the faculty worked part time, and other staffing was also kept to a minimum—except in the area of recruitment. A 2012 Senate report found the typical for-profit employed ten recruiters for every career-service employee.

Typically, tuition at for-profits is lower than at private nonprofits but about 20 percent higher than four-year public institutions and four times higher than community colleges. Ninety-five percent of for-profit revenues comes from tuition and 75 percent of that comes from federal student aid. For-profits also advertise extensively. Marketing budgets at for-profits are typically ten times higher than those at nonprofits.

In 2002, recruiting efforts were greatly aided when the DOE, once again, allowed bonuses to be paid for enrolling students. DOE officials maintained previous restrictions were no longer necessary, claiming the system had rid itself of unscrupulous actors. The change reflected the amicable relations between the Bush administration and the industry; between 2002 and 2006, the assistant secretary for postsecondary education at the DOE, who was responsible for overseeing colleges and universities, was a former University of Phoenix lobbyist.

The important components for malfeasance were once again in place. By 2006, four of the eight major companies, including Career Education Corporation, Corinthian College, ITT Educational Services, and the University of Phoenix, were charged with improprieties, most centering around the misuse of federal student aid. Corinthian was forced to repay $776,210 in loans and grants at a California campus. Similarly, ITT Educational Services, while admitting no guilt, paid the DOE $230,000 in fines related to financial aid irregularities. The University of Phoenix, while also admitting no guilt, paid $6 million in response to charges that ineligible students had received federal aid. The Apollo Group, the holding company for the University of Phoenix, also paid $9.8 million to resolve issues related to improper recruitment of students.

One might have thought these improprieties would have slowed enrollment growth, but they came to light just as online education was beginning to alter the makeup of the for-profit industry. The motivation to adopt online formats was fairly simple—they are more profitable, since no physical facilities are involved. In addition, online courses provide the ultimate in convenience. Congress provided a further boost in 2006, when it dropped the 50–50 rule, which had required that institutions receiving federal student aid offer at least half of their courses in a traditional classroom setting. The Career College Association, the major lobbying arm of the industry, had fought hard for the change. By 2013, 58 percent of students at four-year for-profit colleges were pursuing exclusively online degrees, compared with 11 percent of private nonprofit four-year institutions. The explosive growth of online students also increased the number of adult students. At four-year for-profits, 69 percent of the students are older than twenty-five, largely because of online courses.

New Scrutiny

The election of Barack Obama in 2008, along with Democratic control of Congress and an increase in student loan default rates, produced a more skeptical attitude toward for-profits. By 2011, the default rates had reached 10 percent, the highest since 1994. About half of the defaults occurred at for-profits, though they enrolled only 12 percent of postsecondary students. A GAO sting operation selected fifteen for-profit colleges for investigation, all receiving more than 89 percent of their revenue from federal student aid. GAO investigators posed as prospective students. In four of the sessions, college officials urged that data be falsified so that the students could qualify for loans and grants, while all fifteen institutions made deceptive or questionable statements regarding the actual costs involved. The report, combined with climbing default rates, reinforced the assumption among congressional Democrats and the Obama administration that fraud and abuse continued to be a problem at for-profits and that tougher regulations were needed.

In 2011, once again, the DOE banned bonuses for enrolling students. New regulations also focused on “gainful employment,” the concept that federal student aid should be available only to institutions of higher learning that prepare students for useful or gainful employment in a recognized occupation.

For at least three decades, critics had expressed doubts concerning job placements for graduates of for-profits. In 2005, the National Consumer Law Center concluded that job claims made by for-profits could not be proven or were inflated. The DOE later found that 72 percent of for-profit graduates with associate’s degrees were earning less than high school dropouts. With such paltry wages, these graduates would find it difficult to pay back student loans. Despite a number of legal challenges from the industry, the new regulations finally took effect on July 1, 2015. They stipulate that, for for-profits to continue to be eligible for federal aid, loan payments should not exceed 20 percent of a graduate’s discretionary income or 8 percent of total earnings. If a school fails to meet the new standard, it will be dropped from the federal student aid program. The DOE estimates that 1,400 colleges and universities (99 percent of which are for-profit) do not meet the new regulation.

For-profit colleges and universities are obviously in a period of decline and increased scrutiny. In addition to the federal government, thirty-seven states are investigating the industry. If the past is any guide, the election of Donald Trump as president, along with a Republican-controlled Congress, should bode well for the for-profits. Yet, their image may now be so tarnished that even Republican support is of little help.

For-profits are highly dependent on tuition. Students must be recruited, and if enrollments decline, so do profits, without which these organizations have few reasons to exist. Profits are ultimately tied to relatively easy access to federal aid, which is also easy to abuse and is another key element that facilitates crime. Regulatory environments play a crucial role as well. Criminal activity declined with the enactment of tougher standards in the early 1990s, and then it began to climb again as some restrictions were lifted. Finally, the continuing episodes of malfeasance will serve only to stigmatize the industry. A recent study found that business graduates of for-profits seeking employment are 22 percent less likely to receive a call back from employers than graduates of nonselective public colleges. In medical fields the figure was 57 percent.

Nonetheless, supporters of for-profits continue to maintain the industry provides a valuable service and claim they want the bad apples removed. Unfortunately, the environment in which the industry operates strongly suggests there will always be a significant number of bad apples and any service provided by the for-profits will be of questionable value. 

William Beaver is a professor of social science at Robert Morris University and has written a number of articles on higher education. His e-mail address is [email protected]