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For-profit education


For-profit education

For-profit education (also known as the education services industry or proprietary education) refers to educational institutions operated by private, profit-seeking businesses.

There are three types of for-profit school districts or charter schools, using public funds to finance operations. The majority of for-profit schools in the K–12 sector in America function as EMOs, and have grown in number in the mid-2000s. The other major category of for-profit schools are post-secondary institutions which operate as businesses, receiving fees from each student they enroll. A third type of for-profit schools, which is less prevalent in the United States, are K–12 schools which operate as businesses.

EMOs function differently from charter schools created in order to carry out a particular teaching pedagogy; most charter schools are mission-oriented, while EMOs and other for-profit institutions are market-oriented. While supporters argue that the profit motive encourages efficiency, this arrangement has also drawn controversy and criticism.[1] Kevin Carey, director of the education policy program of the New American Foundation said in a 2010 column in The Chronicle of Higher Education that "For-profits exist in large part to fix educational market failures left by traditional institutions, and they profit by serving students that public and private nonprofit institutions too often ignore." He also noted that "There's no doubt that the worst for-profits are ruthlessly exploiting the commodified college degree. But they didn't commodify it in the first place."[2]


While to some extent for-profit colleges have always existed, their numbers exploded after 1992, when after the United States House of Representatives Committee on Education and the Workforce created a federal regulation known as the "90–10 rule" and defined "institution of higher education" for the purposes of federal-aid eligibility as including for-profit institutions. The idea behind the 90–10 rule was that if a proprietary school's offerings were truly valuable—for example, if they filled some niche that traditional State and private non-profit educational institutions did not—then surely 10% of their students would be willing to pay completely out-of-pocket, i.e., those who fell above federal guidelines for receiving taxpayer subsidies to attend college. Traditional educational institutions routinely met this bar without even paying attention.[3][4][5]

For-profit schools make up a small percentage of America's educational institutions, but the number of schools is growing. In February 2000, there were hundreds of thousands of students being taught at 200 for-profit postsecondary facilities, with approximately six percent of students nationally enrolled at a for-profit institution.[6] Eduventures, a higher education research and consulting firm, states that nine percent of all U.S. college and graduate students attend for-profit institutions.[7]

Between 1998 and 2000 a Boston-based company called Advantage Schools (since taken over by Mosaica Education) saw its revenue increase from $4 million to approximately $60 million.[8] Between 1995 and 2000 the Edison Schools' yearly revenues grew from $12 million to $217 million. In 2000 Edison Schools projected that by 2006 it would manage about 423 schools with 260,000 students, giving it revenue of $1.8 billion.[8]

Potential benefits

Supporters claim that for-profit schools operate more efficiently,[9][10] and that these increases in efficiency can lead to lower fees.[11] However, a comprehensive study of 16 states by researchers at Stanford found that 37 percent of Charter Schools they studied perform worse than comparable public schools.[12]

Supporters argue that for-profit schools rely on attracting students rather than compelling attendance and therefore tend to be more responsive to parents' wishes, and are especially flexible and responsive to the needs of adult learners, and that they also encourage policies that address bottom-line academic performance allowing them to focus on what consumers (students) want—if parents or students do not like the service being offered, they are able to take their business elsewhere.[13] As opposed with traditional education, for-profit institutions often offer programs that can be completed in two years or under with great flexibility. Ann Morey reports in an article that about 45% of the students that attend these schools are 24 or older with most of them working adults who do not have time for the more traditional methods.[14] Morey also goes on to state that since most of these students are adults they do not require any recreation facilities such as sporting areas and other amenities that available from traditional universities and all of the tuition goes towards the learning of these students.[14]

Potential drawbacks

A study by the National Bureau of Economic Research, in Cambridge, Massachusetts, suggested that students who attend for-profit education institutions are more likely to be unemployed, earn less, have higher debt levels, and are more likely to default on their student loans than similar students at non-profit educational institutions.[15] Although for-profits typically serve students who are poorer or more likely to be minorities, these differences do not explain the differences in employment, income, debt levels, and student loan defaults.[15] The Government Accountability Office has also found that graduates of for-profits are less likely to pass licensing exams, and that poor student performance cannot be explained by different student demographics.[16]

For-profits have higher completion rates for one and two-year associates degree programs, but higher drop out rates for four-year bachelor's degrees.[15] However, studies have suggested that one- and two-year programs typically do not provide much economic benefit to students because the boost to wages is more than offset by increased debt. By contrast, four-year programs provide a large economic benefit.[17]

An investigation by the New York Times suggested that for-profit higher education institutions typically have much higher student loan default rates than non-profits.[18] Two documentaries by Frontline have focused on alleged abuses in for profit higher education.[19][20]

For-profits have been sued for allegedly using aggressive and deceptive sales and marketing practices.[21] Holly Petraeus, wife of retired General David Petraeus and a high-ranking official at the Consumer Financial Protection Bureau, has accused for-profits of preying on vulnerable military personnel.[22] Petraeus wrote:

"This gives for-profit colleges an incentive to see service members as nothing more than dollar signs in uniform, and to use aggressive marketing to draw them in and take out private loans...One of the most egregious reports of questionable marketing involved a college recruiter who visited a Marine barracks at Camp Lejeune, North Carolina. As the PBS program Frontline reported, the recruiter signed up Marines with serious brain injuries. The fact that some of them couldn’t remember what courses they were taking was immaterial, as long as they signed on the dotted line."

A report by the Government Accountability Office documented misleading sales and marketing tactics used by several for-profits.[23][24][25] Critics have also pointed out that more than half of for-profits' revenues are either spent on marketing or extracted as profits, with less than half spent on instruction.[26][27][28]

Opponents say that the fundamental purpose of an educational institution should be to educate, not to turn a profit. In 2000, Bob Chase, president of the National Education Association, stated that "educating children is very different from producing a product".[29]

Certain postsecondary education programs at institutions of higher education are eligible for participation in the federal student aid programs. These programs, which are offered by public and private not-for-profit institutions, postsecondary vocational institutions, and by for-profit proprietary institutions, should prepare students for gainful employment. For decades, the U.S. Department of Education (ED) had not established regulations that explicitly outlined what it means for a program to be properly preparing students for gainful employment. As pressing concerns about the quality of programs at for- profit institutions began to arise, the concerns about the level of student loan debt assumed by students did as well. Such issues led to new initiatives and rules to be set in place outlining the parameters for what should be mandated to help ensure gainful employment.

The Senate HELP committee released data showing one in every four students who enroll at a for-profit school default on their loans within three years of leaving, with for-profit students accounting for almost half of all loan defaults.[30] Most for-profit colleges charge enrollees much higher tuition rates than analogous programs at community colleges and state public universities despite credits being likely not eligible to be transferred to other institutions.[30] In fact, 96% of students attending for-profit college apply for federal student loans compared to 13% at community colleges. During the 2009-2010 school years, for-profit colleges received almost $32 billion in grants and loans provided to students under federal student aid programs.[31] This staggering number means nearly all students at for-profit institutions acquire student loan debt, even when they do not earn the end product of a degree or accumulate increased earning power through their studies (Sessions, 2011). These statistics represent a large portion of for- profits, uncovering the serious need for greater accountability in ensuring students are making sound investments in such institutions.

According to the Government Accountability Office (GAO), enrollment in such institutions has increased faster than traditional higher-education institutions in recent years. With the student and federal interest in such programs growing, so has the concern with their productivity. Regrettably, this is not a simple matter to address, as the issue is multidimensional. For-profit institutions have become an increasingly visible portion of the U.S. higher education sector. For-profits also acquire the largest percentage of their overall revenue from federal student aid programs, highlighting tax dollars are potentially not being used efficiently.[32]

Federal regulatory actions by the ED have attempted to address these issues in the Title IV of the Higher Education Act of 1965, as amended. These efforts were very contentious. For-profit institutions argue their sector is unfairly targeted and believe the Department of Education over stepped its boundaries in 2010 by implementing regulations specifying requirements for Gainful Employment. These rules outlined in a report by Congressional Research Service (CRS), aimed to hold for-profits accountable by creating standards which must be upheld and followed, which will in turn attempt create more opportunity for gainful employment amongst enrollees.[33] Through these regulations the ED believed that institutions will reinforce their educational programs to meet these higher standards, and relatively few programs will fail. Programs that offer a rewarding education at a reasonable price will succeed, and institutions will continue to innovate to assist students and taxpayers.[34]

The regulations mandated by the ED were to help regulate the for-profit sector and to combat the issue of Gainful Employment. However, the Association of Private Sector Colleges and Universities, which endorses for –profits, challenged these regulations in court. On June 30, 2012 the U.S. District Court for the District of Columbia decided to vacate most aspects of the regulations.[33] The court sustained that the ED had the authority to regulate gainful employment, yet it cited the ED had not provided rationale metrics or measures in the debt measures. At present, only the disclosure requirements of providing prospective students with placements rates, on time graduation rates and other similar information remain.[35] On March 19, 2013 the judge ruled again in response to the ED’s motion to reinstate the reporting requirements in order that it could implement the disclosure requirements of Gainful Employment. The judged denied the motion of the ED on the basis that the reporting requirements would violate the federal ban on the student unit record system. It is strongly debatable that the court’s ruling negates the small amount of transparency and accountability mandated by the disclosure requirements, leaving the policy issue of for-profits being accountable for Gainful Employment unattended.[36]

Others claim that because for-profit schools have never been a mainstream idea, no complete blueprint for running a for-profit institution really exists, which could lead school administration to make costly errors.[9] For example, in order to maximize profits, valuable services and activities are often eliminated. Extracurricular activities such as sports teams or volunteer clubs are left with little or no budgeting in order to keep costs low. This loss of non-academic activities might hurt a student's ability to enroll in some colleges or universities later on. The two largest EMOs in operation today, Edison and Advantage, claimed to have high school juniors completing college-level coursework, but recent studies have shown that many of these students are performing at or below the 11th-grade level.[8] Some former students claim that for-profit colleges make them feel like they went to the flea market and bought themselves a degree.[37]

According to James G. Andrews of the American Association of University Professors, corporate models of education harm the mission of education.[38]

Some critics have called for-profit education "subprime education", in an analogy with the subprime mortgages bubble at the heart of the Great Recession – finding uninformed borrowers and loading them with debt they cannot afford, then securitizing and passing the loan onto third-party investors. Short Seller Steve Eisman (famous for being a character in Michael Lewis's The Big Short) has described the accreditation situation regarding for-profits like ITT as follows: "The scandal here is exactly akin to the rating agency role in subprime securitizations." [39]

A two-year congressional investigation report—from a committee chaired by Senator Tom Harkin, D-Iowa—examined enrollment numbers in selected for-profit higher education institutions. The committee found that $32 billion in federal funds were spent in the most recent year on various colleges. The majority of students enrolled in the institutions left without a degree and carried post-schooling debt. Regarding the dropout rates, the report said 54% of students in bachelor degree programs dropped out before degree completion and 63% of students in associate degree programs dropped out.[40]

Accreditation and transfer-of-credits

Many for-profit institutions of higher education have national accreditation rather than regional accreditation. Regionally accredited schools are predominantly academically oriented, non-profit institutions.[41][42] Nationally accredited schools are predominantly for-profit and offer vocational, career, or technical programs.[41][42] Many regionally accredited schools will not accept transfer credits earned at a nationally accredited school even if the curriculum and content of the course are similar.[41][42][43][44]

In the 2005 congressional discussions concerning reauthorization of the Higher Education Act and in the U.S. Secretary of Education's Commission on the Future of Higher Education, there have been proposals to mandate that regional accrediting agencies bar the schools they accredit from basing decisions on whether or not to accept credits for transfer solely on the accreditation of the "sending" school.[43][44] They could still reject the credits, but they would have to have additional reasons.

The American Commission of Career Schools and Colleges (ACCSC), a nonprofit organization created for the purpose of accrediting for-profit schools, supports the proposed rule.[45] It and other nationally accrediting institutions and have been lobbying for it for some time.[43][44] The ACCSC claims regionally accredited schools will not accept nationally accredited schools credits for purely arbitrary, prejudicial and/or anti-competitive reasons.[45] It further states that, since the Department of Education recognizes both national and regional accreditation, there is no reason for regionals to differentiate between the two and to do so amounts to an unwarranted denial of access.[43][44][45]

The position of the American Association of Collegiate Registrars and Admissions Officers (AACRAO) is that national accrediting standards are not as rigorous and, though they might be well-suited for vocational and career education, they are ill-suited for academic institutions.[6] AACRAO alleges that this proposed rule is unnecessary and unjustified, could threaten the autonomy and potentially lower the standards of regionally accredited schools, and drive up their costs.[6] Furthermore, it states the proposed rule is an attempt by the for-profits' "well-funded lobbyists" to obscure the difference between for-profits' "lax academic criteria for accreditation" and non-profits' higher standards.[6] AACRAO claims only six percent of American students attend for-profits and only four percent attempt to transfer to non-profits.[6] Eduventures, Inc, a Boston research firm, states that nine percent of all U.S. college and graduate students attend for-profit institutions.[7]

Admission representatives at Crown College (Tacoma) and Florida Metropolitan University allegedly made various misrepresentations concerning the transferability of their credits to entice students to enroll in those schools.[7]

Several of the larger for-profit schools have sought and received regional accreditation, including the following:

Business failures

There have been failures of for-profit schools, including Business Computer Technology Institute (BCTI)[46][47] and Court Reporting Institute (CRI).[48][49] These two schools allegedly violated numerous federal statutes, were funded mainly from federal and state loans and grants given to attending students, and then closed, abandoning many of their students.[46][47][49]

2010 Pell Grant fraud controversy

For-profit higher education in the US has been the focus of concern regarding business practices. In August 2010, the Government Accountability Office reported on an investigation that randomly sampled student-recruiting practices of several for-profit institutions. Investigators who posed as prospective students documented deceptive recruiting practices, including misleading information about costs and potential future earnings. They also reported that some recruiters had urged them to provide false information on applications for financial aid.[50]

Out of the fifteen sampled, all were found to have engaged in deceptive practices, improperly promising unrealistically high pay for graduating students, and four engaged in outright fraud, per a GAO report released at a hearing of the Health, Education, Labor and Pensions Committee held on August 4, 2010.[51] Examples of misconduct include:

  • offering commissions to admissions officers,
  • employing deceptive marketing tactics by refusing to disclose total tuition cost to prospective students before signing a binding agreement,
  • lying about accreditation,
  • encouraging outright fraud by enticing students to take out student loans even when the applicant had $250,000 in savings,
  • promising extravagant, unlikely high pay to students,
  • failing to disclose graduation rate, and
  • offering tuition cost equivalent to 9 months of credit hours per year, when total program length was 12 months.

The four for-profit colleges found to be engaging in fradulent practices were:

  1. Westech, California: Encouraging undercover applicant with falsified $250,000 in savings to falsely increase the number of dependents in the household in order to qualify for a Pell Grant, as well as take out the maximum amount in student loans;
  2. Medvance Institute in Miami, Florida: Financial aid representative told an applicant not to report $250,000 in savings, comparing student loans to a car payment in that, "no one will come after you if you don't pay". In fact, a student loan default may remain in the debtor's credit history, prevent them from taking out a car loan, mortgage or rent, and may have their pay garnished up to 15%, until the student loan is paid in full. Another admissions officer at Kaplan College in Pembroke Pines, Florida,[52] alluded to fraudulent behaviour stating to the applicant when inquiring about the repayment of loans, "You gotta look at it ... I owe $85,000 to the University of Florida. Will I pay it back? Probably not ... I look at life as tomorrows never promised ... Education is an investment, you’re going to get paid back ten-fold, no matter what.";
  3. Anthem Institute in Springfield, Pennsylvania: Financial aid representative editing applicant's FAFSA form by omitting $250,000 in savings;
  4. Westwood College in Dallas, Texas: Admissions representative telling applicant to falsely add dependents to qualify for Pell Grants, assuring the applicant that the dependents would not be verified through previous income tax returns nor Social Security numbers, and financial aid representative encouraging applicant not to report the $250,000 in savings, stating that "it was not the government’s business how much money the undercover applicant had in a bank account.", when the Department of Education requires students to report such assets, along with income, to determine how much and what type of financial aid will be awarded.

It was found that 14 out of 15 times, the tuition at a for-profit sample was more expensive than its public counterpart, and 11 out of 15 times, it was more expensive than the private counterpart. Examples of the disparity in full tuition per program include: $14,000 for a certificate at the for-profit institution, when the same diploma cost $500 at a public college; $38,000 for an Associate's at the for-profit institution, when the comparable program at the public college cost $5,000; $61,000 for a Bachelor's at the for-profit institution, compared to $36,000 for the same degree at the public college.[53]

This is counter to International Education Corporation CEO Fardad Fateri's claims of the lack of use of unorthodox recruiting practices and a for-profit's "value" in an IEC open letter to Congress,[54] the tuition cost of certificates and Associate's degrees being 28 and 6 times more than at a public college, respectively; Fateri writes, "Credit should be given to non-profit universities that have been able to convince students and their sophisticated parents to pay approximately $400,000.00 for an undergraduate degree that will seldom lead to an academically related career." However, the most expensive college in the United States, Sarah Lawrence College in Bronxville, New York, had a tuition cost of $41,040 for 2009 fiscal year,[55][56] bringing the tuition of a four-year bachelor's degree to just above $160,000.

The institutions identified in the Committee hearing in respect to the GAO report numeration were:
Tuition cost comparison between for-profit, public and private colleges for equivalent programs.
  1. University of PhoenixPhoenix, Arizona[57]
  2. Everest Institute – Mesa, Arizona[58]
  3. Westech College – Victorville, Ontario, Moreno Valley, California[59]
  4. KaplanRiverside, California[60]
  5. Potomac College – Washington, D.C.
  6. Bennett Career Institute – Washington, D.C.
  7. Kaplan – Pembroke Pines, Florida[61]
  8. College of Office TechnologyChicago, Illinois[62]
  9. Argosy UniversityChicago, Illinois[63]
  10. University of Phoenix – Philadelphia, Pennsylvania[58]
  11. Anthem Institute – Springfield, Pennsylvania[64]
  12. Westwood CollegeDallas, Texas[64]
  13. Everest Institute – Dallas, Texas[65]
  14. ATI Career TrainingDallas, Texas[66]

Students at for-profit institutions represent only 9% of all college students, but receive roughly 25% of all Federal Pell Grants and loans, and are responsible for 44% of all student loan defaults.[67] University of Phoenix tops this list with Pell Grant revenue of $656.9 million with second and third place held by Everest Colleges at $256.6 million and Kaplan College at $202.1 million for the 2008–2009 fiscal year, respectively.[68] In 2003, a Government Accountability Office report estimated that overpayments of Pell Grants were running at about 3% annually, amounting to around $300 million per year.[69] Some of the universities that are top recipients of Pell Grants have low graduation rates, leaving students degreeless, and graduating alumni may find it excessively difficult to find work[70][71] with their degrees, leading some former students to accuse recruiters of being "duplicitous", and bringing into serious question the effectiveness of awarding Pell Grants and other Title IV funds to for-profit colleges.[72][73] University of Phoenix's graduation rate is 15%.[74][75] Strayer University, which reports its loan repayment rate to be 55%, only has a repayment rate of roughly 25%,[76] according to data released by the U.S. Department of Education on August 13, 2010.[77] The low repayment rate makes Strayer ineligible for receiving further Title IV funds in accordance with new "Gainful employment" regulations brought forth by the Department of Education, which are to take effect on July 2011.[78] If passed, the minimum loan repayment requirement for any institution receiving Title IV funds, subject to suspension and expulsion if not compliant, will be 45%.[79]

For-profits top the Department of Education's list for the 2005–2007 cohort default rates, with campuses at ATI and Kaplan reporting default rates far above 20%. Most of the for-profits' expansion has been in the states of California, Arizona, Texas and Florida, with the metro areas of Los Angeles, Phoenix, Dallas and Miami-West Palm Beach being centers of their growth.[57][80][81][82][83] For comparison, in Miami, Everest Institute reports a default rate for two of its campuses to be 18% and 20%; Miami Dade College, the district's community college, which serves as a primary channel for local beginning students, reports a default rate of roughly 10%; Florida International University, a public university serving the Miami metropolitan area, reports approximately 5%.[84]

In an August 4, 2010 Health, Education, Labor and Pensions Committee hearing, Gregory Kutz of the GAO stated that the fraudulent practices may be widespread in the For-Profit industry, noting a University of Phoenix executive chart that encouraged deceptive practices.[85] Joshua Pruyn, a former admissions representative, disclosed to the committee hearing several internal emails distributed among admissions officers in March 2008 which encouraged applications and enrollments through the use of a commissions reward system. During a congressional hearing to present the report, Pruyn's testimony was disproven by tapes of conversations, and it was reported that Pruyn's comments were written by attorneys who were suing Westwood,[86] and inappropriately coached by Chairman of the committee Senator [87] Sen. Harkin noted the conflict of interest due to the ACCSC, a national accrediting agency that accredits many for-profit colleges nationwide,[88] receiving compensation directly from the institutions to which it awards accreditation. The Inspector General issued an assessment in late 2009 recommending the limiting and possible suspension or expulsion of the Higher Learning Commission of the North Central Association of Colleges and Schools due to conflicts in the manner in which the accrediting agency reviews credit hours and program length for online-colleges, specifically American InterContinental University, a for-profit college.[89] The NCA HLC accredits the University of Phoenix and Everest in Phoenix, Arizona. The Department of Education Inspector General is currently reviewing the GAO's documents and report on for-profit colleges dated August 4, 2010.

On November 30, 2010, the GAO issued a revised report, softening several examples from an undercover investigation and changing some key passages, but stood by its central finding that colleges had encouraged fraud and misled potential applicants.[90]

Classification of for-profit institutions

Kevin Kinser, assistant professor of educational administration and policy at the University at Albany, has proposed a "multidimensional classification" scheme of for-profit higher education.[91] Kinser's classes of proprietary colleges are organized by these criteria:

1. Geographic scope:

  • "Neighborhood" – close geographic proximity, in a single state
  • "Regional" – two or more campuses in neighboring states
  • "National" – including in states across the United States and virtual colleges

2. Ownership dimension:

  • "Publicly traded" corporations
  • Family-owned "enterprise institution(s)"
  • "Venture institutions" held by private investors

3. Highest degree granted:

See also


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  34. ^ Federal Registrar. 76 FR 34385. “Program Integrity: Gainful Employment-Debt Measures”. Accessed February 2, 2013.
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  • Brown, H.; Henig, J.; Holyoke, T.; Lacireno-Paquet, N. (2004). "Scale of Operations and Locus of Control in Market- Versus Mission-Oriented Charter Schools" Social Science Quarterly; 85 (5) Special Issue Dec, 2004. pp. 1035–1077
  • Levin, H. (2001). "Thoughts on For-Profit Schools"
  • Symonds, W. (2000). "For Profit Schools" BusinessWeek. February 7, 2000.

Further reading

External links

  • "College, Inc.", PBS Frontline documentary, May 4, 2010, describing controversies and failures of post secondary for-profit institutions.
  • Undercover Testing Finds Colleges Encouraged Fraud and Engaged in Deceptive and Questionable Marketing Practices United States Government Accountability Office
  • "For Profit EDU" – Industry Blog and user group specific to For-Profit Education
  • For Profit Colleges Independent Blog on For-Profit Colleges and Universities
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