For-profit colleges may be a bust for taxpayers

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For-profit colleges are booming as the unemployed turn to education, but some members of Congress and Obama administration officials say they are growing at the expense of taxpayers and that students are often exploited.

The average profit among such publicly traded higher education companies soared to $229 million in 2009, up from $150 million the year before, with the lion’s share of their revenue coming from federal student aid.

For example, federal dollars accounted for 86% of revenue at the University of Phoenix, which has more than 458,000 students.


But according to a recent report issued by the Senate Committee on Health, Education, Labor and Pensions, the public’s money is often not well spent on the schools. The colleges cater to low-income and minority students often working online with little supervision, yet they charge on average twice as much as public universities charge in-state students.

Investigators believe a high proportion of students drop out, and those who do graduate find their money wasted because their programs are not accredited. Students at for-profit colleges borrow more and are more likely to default on their loans, furthering taxpayer losses. According to the Chronicle of Higher Education, 30% of students who borrowed from the federal government to attend four-year for-profit institutions have defaulted since 1995. Roughly 15% of students at public four-year colleges and 13.6% at private nonprofit four-year colleges have defaulted since then, the Chronicle reported.

The Department of Education on Friday moved to rein in some for-profit firms with a proposal that would cut off federal student aid to individual programs within colleges that have a high proportion of students who cannot repay their loans after leaving.

“Some proprietary schools have profited and prospered, but their students haven’t,” Education Secretary Arne Duncan said. “These schools -- and their investors -- benefit from billions of dollars in subsidies from taxpayers, and in return taxpayers have a right to know that these programs are providing solid preparation for a job.”

The proposed regulation, less stringent than originally expected, could put out of business 5% of for-profit programs, a number that critics of the colleges said was not high enough.

“At first glance, the regulation appears to set a low bar,” Sen. Tom Harkin (D-Iowa), chairman of the Senate panel that issued the report, said in a statement. “I will be looking closely at this rule to ensure that it goes far enough to protect the $23 billion in federal aid to for-profit schools each year.”


Harkin and a chorus of Senate Democrats are leading the call for government to step up regulation of for-profit colleges, saying it must ensure that tax dollars are not wasted and students are not cheated.

But Harris Miller, president of the Career College Assn., which represents for-profit schools, said the schools have a special challenge.

“We have millions of students who are not even in the educational system who have been told, ‘You’re not college material,’ ” Miller said. “Somebody has to reach out to those people.”

Corinthian Colleges spokesman Kent Jenkins said the disproportionate default rate was a consequence of the large number of low-income students in the programs. Reaching low-income students requires the schools to run high advertising budgets, he added. The Senate panel report noted that the schools devote about a third of their budgets to advertising.

The report acknowledges that President Obama’s goal of doubling the number of U.S. college graduates by 2020 may hinge on for-profit colleges, which are able to expand faster than public institutions. After a series of painful cuts to the University of California and California State University systems last summer, enrollment at for-profit colleges in California shot up 20%.

Stephen Burd, an education policy expert at the New America Foundation, said the scrutiny is long overdue, but lawmakers will have to contend with the industry’s “Teflon lobby.” Many concerns have been raised about for-profit colleges, but nothing has stuck, he said.


“For-profit college lobbyists are accustomed to flexing their muscles on Capitol Hill and getting their way -- no matter how much controversy is swirling around their schools,” he said.

Although for-profit colleges were once mom-and-pop operations, the 14 publicly traded institutions enroll 1.4 million students, up from fewer than 200,000 in 1998, according to the Senate committee report. Kathleen Tighe, inspector general for the Department of Education, testified at the panel’s June 24 hearing that 70% of the department’s investigations involve for-profit colleges, many of which have been found guilty of falsifying student information to obtain more federal funds.

Tighe also testified that she is concerned about the rapid expansion of online programs because students are eligible for the same amount of federal aid but it is more difficult to track their progress -- a potential recipe for fraud.