Here’s the business model.
Find the most vulnerable people in society: the poor, minorities, people that the mainstream deems too risky to be a good customer. Sell them something that they can’t really afford by pushing a loan that they probably can’t repay. Use the hard sell. Tell them that this loan will help them solve all their problems and realize the American dream. Set impossible quotas for your sales force, quotas that incentivize questionable sales practices. Reap huge profits for your investors and when things go wrong, count on a government bailout.
Sound familiar? It should. This business model reaped billions in profits for subprime mortgage providers like Countrywide before the scheme came crashing down. Now, in the aftermath of the subprime mortgage mess, this business model lives on in the $29 billion for-profit college industry, an industry that might as well be called the subprime student loan racket.
For-profit colleges are the fastest growing segment in American higher education. Enrollment in the colleges, colleges like the University of Phoenix and DeVry University, has been growing nine percent a year on average for the last 30 years. 3,000 for-profit colleges educate around ten percent of American college students.
At face value, there is no reason why for-profit colleges cannot function in conjunction with more traditional colleges and universities. One major factor behind the for-profit sector’s success is its willingness and ability to enroll students who are shut out of conventional higher education. For-profits offer online, night and weekend classes, which are more convenient for students with full-time jobs.
Sounds great right? What could possibly be wrong with an industry that expands access to higher education?
A lot, as it turns out.
For-profit schools have always faced skepticism about the quality of the education they offer. How can colleges that spend more money on marketing than they do on education, as many for-profits do, provide education comparable to traditional college?
They can’t. No matter what the ads may say, a degree from a for-profit is not the same as a degree from a traditional college. An investigative reporting team from Public Broadcasting’s Frontline found that for-profit school graduates often report being unable to find a job because “their degree was perceived to be of little worth by prospective employers.”
Despite the poor quality of the education offered, for-profits are not cheap. Tuition can be six times more expensive than it is at a community college. As a result, 60 percent of for-profit bachelor degree holders graduate with more than three times as much debt as their public four-year university counterparts, with around $30,000 in loans.
Obviously, this is bad for for-profit graduates. Less obviously, this is also bad for students at traditional colleges. Students at for-profits, only ten percent of post-secondary students, compete for and receive a quarter of the limited federal financial aid available to all students.
If these loans gave a broader segment of American society the advantages of higher education, they would be money well spent. However, that is not the case. For-profit colleges are rewarded for the number of students they can recruit, for “asses in classes,” not for the long-term ability of those students to succeed. After the tuition has been paid and the investors rewarded, there is no real incentive for the for-profit to make sure that their graduates are actually able to find jobs and pay back their loans. After all, if these students default, and they do (for-profit graduates account for 44 percent of student loan defaults in the first three years after graduation), it is not the for-profit that pays. No, the student and the government are left holding the bill.
That fact and the significant number of complaints (and lawsuits) from former students and other education industry observers have brought the for-profits to the attention of regulators.
The Obama Administration is expected to announce new rules that will stem the unregulated flow of federal financial aid to the for-profits in the next few weeks. The rules would evaluate for-profits on “gainful employment,” or the ability of graduates to find jobs in recognized occupations, using data on post-education income, debt loads, degree completion, job placement and loan repayment rates. Programs with a good record for job placement and debt loads would continue to be eligible for federal financial aid. Programs with bad records would be disqualified.
Gainful employment evaluations, if implemented with other reforms, will do much to stem the abuse. However, that depends on these reforms surviving the lobbying power of the for-profit. Already, the industry’s lobbyists have descended on Capital Hill and are working to weaken the bill.
President Obama made higher education one of the priorities of his administration. Now, it’s time for him to back those promises up with action.
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