A day before U.S. senators are set to hear testimony on federal spending at for-profit colleges, Harris N. Miller, president of the trade association that represents such institutions, spoke out in defense of the booming sector and sharply criticized the expected testimony of a Wall Street investor who has compared it to the subprime-mortgage industry.
The investor, Steven Eisman, is a portfolio manager for FrontPoint Partners, a hedge-fund unit of Morgan Stanley, who made his reputation by betting against the housing industry before the real-estate bubble burst. According to an advance copy of his prepared testimony, he will argue at a hearing on Thursday before the Senate Health, Education, Labor, and Pensions Committee that if nothing is done, a similar debacle is imminent in the for-profit higher-education industry. (The hearing, titled "Emerging Risk? An Overview of the Federal Investment in For-Profit Education," will be Webcast on the committee's Web site.)
Mr. Miller, speaking on Wednesday at the National Press Club, noted that Mr. Eisman, as a hedge-fund manager, profits through "short sales," which essentially are bets that the share price of a company's stock will drop. Short sellers, Mr. Miller said, are "modern-day Cassandras, constantly warning of economic doom and gloom." They can perform a useful watchdog service when they draw attention to fraud, abuse, or other miscarriages of investor trust, he said, but he added a caveat: "Particular care should be given to the line between vigilance and vitriol. For whatever reason, Mr. Eisman not only crossed it, he ignored it altogether."
Mr. Miller, who heads the Career College Association, also spoke out about proposed new federal regulations that would affect for-profit colleges, denouncing as "bad policy" one proposal that would tie the amount students could borrow to attend for-profit institutions to the expected salary they would receive after completing their programs.
That proposal, referred to as the "gainful employment" rule, was among the proposed regulations released by the Department of Education last week, although the department is still working on some aspects on the rule.
Subprime Comparison Rejected
Mr. Eisman, according to his prepared testimony, will say that the for-profit higher-education sector has grown at an unusually fast rate because its students have easy access to debt in the form of loans guaranteed by the federal government.
"The government, the students, and taxpayers bear all the risk, and the for-profit industry reaps all the rewards," Mr. Eisman is expected to say. "This is similar to the subprime-mortgage sector, in that the subprime originators bore far less risk than the investors in their mortgage paper."
Mr. Miller particularly rejected the comparison of the for-profit sector and the subprime-mortgage-lending market, calling the analogy as "silly as it is simplistic." The dynamic of higher education is different, Mr. Miller said, because there is no price bubble, as there was in the subprime-mortgage crisis.
Also, he argued, for-profit colleges are not no-name entities with no future reputation to protect. Rather, they are accredited institutions, licensed by the state or states in which they operate, and regulated by the Education Department.
The organizations that accredit them, he said, "are small, not-for-profit entities, not Wall Street behemoths like those who rated the subprime securities, and had no reason to ask tough questions."
Mr. Miller said that for-profit colleges have no incentive to fill seats with students who will not succeed academically. Mr. Eisman and other critics have said for-profit colleges do just that, consuming an ever-rising volume of federal student-aid dollars and churning out students with heavy debts and useless degrees.
"Career-college education is a word-of-mouth business, especially when those words flash across the Internet within milliseconds," Mr. Miller said. "Shoddy schools will quickly find themselves with diminished returns."
Mr. Miller also took exception to an accusation that career colleges are "marketing machines masquerading as universities," saying Mr. Eisman's evidence is a single disgruntled employee.
A Controversial Rule
Mr. Eisman's testimony also touches on the "gainful employment" proposal. Under the regulation released last week, for-profit colleges would be required to disclose their programs' job-placement rates and graduation rates, and provide information that would let the department calculate a ratio of the graduates' debt load as a percentage of their income. The metrics that would be used to calculate that ratio are still under discussion.
In his planned testimony, Mr. Eisman suggests that for-profit colleges could simply lower their tuition as a way to deal with the gainful-employment issue. Mr. Miller said he opposes that remedy because it would essentially function as a tuition cap at institutions. In addition, he said, students are entitled to borrow federal student loans up to the limits set by law, regardless of tuition price.
"Schools are not permitted to limit borrowing to tuition costs," he said. "Thus, tuition reductions will not necessarily reduce the amount borrowed."
Thursday's Senate hearing is the first in a series planned on the issue, and the latest instance of the increased scrutiny over the for-profit sector.
The proposed rules that the Education Department released last Thursday could affect the institutions' eligibility for federal student aid. And on Monday several Democratic lawmakers asked the Government Accountability Office to investigate for-profit institutions, in terms of both how they operate and the quality and value of the education they provide.