The debt burden and default rates for graduates are particularly high at for-profit colleges.
It seems too good to be true, at least for companies. Customers arrive at for-profit colleges by the million. With them comes billions of dollars of federal student grants and loans, to be poured into corporate coffers. Public subsidies may provide up to 90% of revenue; the government bears the risk of loan defaults. This business model has served firms rather well. Its effect on students and taxpayers is less clear. This summer, however, a brawl over for-profit colleges has exploded at last.
On May 26th Steven Eisman, a big shorter, warned investors that for-profit colleges could echo subprime mortgages. June brought a Senate hearing (including testimony from Mr Eisman, to the industry’s horror) and proposed regulations from the Education Department. As The Economist went to press the department was expected to release another, even more controversial rule. Behind this fight lies a new, rather uncomfortable urgency. For-profit colleges have happily depended on government support. Now education may increasingly come to depend on for-profit colleges.
Proprietary colleges have morphed into behemoths, some of them publicly traded companies that reach hundreds of thousands of students in classrooms and online. Enrolment jumped by 225% between 1998 to 2008, more than seven times the rate for all post-secondary programmes. The recession has accelerated this trend. The Apollo Group’s University of Phoenix, the biggest proprietary college, now enrolls 476,500 students. With more students comes more public money. In 2008-09 $24 billion in Pell grants and federal loans went to for-profit colleges.
The return on investment is harder to calculate. The industry is shrouded in fuzzy numbers. Reliable graduation rates and earnings data do not exist. More certain, however, is that the debt burden and default rates for graduates are particularly high. In 2009 the average yearly tuition was about $14,000, compared with $2,500 at a community college. Critics claim that misleading recruiting lures students into programmes that leave them with heavy debt and flimsy skills. Of post-secondary investigations by the Education Department, 70% are related to proprietary schools. Litigation is common. In 2009 Apollo agreed to pay $78.5m to settle a suit over pay schemes for recruiters.
The Education Department is trying to fix these problems. It has proposed requiring schools to give more information about fees, graduation rates and job placement. Schools would not be able to tie recruiters’ pay to their enrolment numbers. The most controversial idea, to cap students’ yearly debt obligations to a small share of income after graduation, will be formally proposed any day now. Harris Miller of the Career College Association contends that such a change would force thousands of good programmes to shut.
Final regulations are expected by November. Further legislation may come from Tom Harkin, who is leading Senate hearings on the industry. Changes are needed—and soon—not merely to protect students and taxpayers. For despite all the criticism, proprietary colleges look likely to become ever more necessary.
Barack Obama has set a goal of having the world’s highest share of college graduates by 2020. Proprietary schools offer flexible classes for those with jobs, children or remote homes. More important, community colleges are severely strained. Though federal student aid has risen, a plan to support community colleges was all but gutted in March. States are overwhelmed by growing demand and shrinking budgets. California estimates that tight capacity forced community colleges to turn away 140,000 students this year. It is no coincidence that Kaplan, a for-profit college, has signed a controversial agreement to tap the state’s glut of students. Mr Miller is defiant. “No one wants to talk about how the capacity expansion has to come from somewhere,” he says. In 2008 for-profit colleges accounted for 7.7% of all post-secondary enrolment. For better or worse, that share is likely to grow.