New Grilling of For-Profits Could Turn Up the Heat for All of Higher Education

June 22, 2010

Congress plans to put for-profit colleges under the microscope on Thursday, asking whether a higher-education model that consumes more than double its proportionate share of federal student aid is an innovation worthy of duplication or a recipe for long-term economic disaster.

The review is being led by Sen. Tom Harkin, the Iowa Democrat who is chairman of the Senate's education committee. Mr. Harkin has expressed concern that recent moves by Congress to pump billions of new dollars into student aid might be undermined by corporate-owned colleges interested primarily in maximizing returns to shareholders.

The evaluation threatens new headaches for an industry that is sometimes exalted by government policy makers as a lean results-oriented example for the rest of academe, and other times caricatured as an opportunistic outlier that peddles low-value education to unprepared high school dropouts.

Many of the issues at stake, however, could mean harsher scrutiny for all of higher education, as worries about rapidly growing costs and low-quality education in one sector could raise questions about long-accepted practices throughout higher education.

Congress and colleges still lack a firm sense of "what our higher education system is producing," said Jamie P. Merisotis, president of the Lumina Foundation for Education. "The model of higher education is starting to evolve, but it's not clear to us what that evolution looks like," he said.

Mr. Harkin's review of for-profit colleges comes a year after President Obama called for a doubling by 2020 of the number of college graduates in the United States, in the hope of preparing the nation for a new era of global economic competition.

A Higher-Education Bubble?

Others, however, see warning signs in the current economic slump, which was driven by an unsustainable surge in housing prices. A similar bubble in higher education could be marked by exploding tuition costs that would drain taxpayers and strangle millions of students with worthless degrees and mountains of debt.

Economic bubbles such as the unsustainable surge in housing prices "typically are built on ignorance and borrowed money," says one prominent pessimist on the matter, Glenn Harlan Reynolds, a professor of law at the University of Tennessee at Knoxville. "And the reason you've got a higher-education bubble is ignorance and borrowed money," Mr. Reynolds said.

Reflecting such fears, Mr. Harkin joined other Democratic lawmakers this week in calling on the Government Accountability Office to conduct a study of the quality of for-profit institutions and their use of federal money.

The lawmakers, including Rep. George Miller of California, chairman of the House education committee, said their concerns included the growing rate of indebtedness among students who attend for-profit colleges.

That points out another parallel with the housing bubble: Much as the government failed to fully consider the effects of encouraging millions of people to buy homes they could not afford, it doesn't have firm data on how many millions of potential students can truly afford a college education. 

 The concern arises in part because the Education Department collects and compiles reams of student data—so much that colleges report spending thousands of hours of staff time each year trying to comply—and yet the government still cannot say how many students fully pay back all its loans.

It "sounds like a simple, single number," said Robert M. Shireman, the department's deputy under secretary of education. It is, however, "much more complex than that," Mr. Shireman said. The difficulties, he said, include the long-term tracking of borrowers across multiple loan programs and repayment systems.

Others disagree. "I don't think it would be difficult at all" to calculate long-term or even lifetime default rates, said Erin Dillon, an analyst who specializes in higher-education financial aid at Education Sector, a nonprofit policy study group. "It would be a matter of just running the numbers."

However complicated to derive, lifetime loan-default figures loom large over the Obama administration's commitment to make Americans the world's leader by 2020 in their proportion of college graduates. That's because the goal, which would require almost doubling the current level of 20-million students graduating from college in a year, will almost certainly require a vast expansion of the sector most capable of rapid growth: for-profit colleges. And the limited loan-default data now available show students who attended for-profit institutions fare the worst.

In its latest annual report, just last month, the Education Department said that 7.2 percent of all borrowers due to begin repaying their federally subsidized loans in fiscal year 2008 had defaulted­—generally meaning not paying for nine months—within two years. That marked an increase from 6.7 percent a year earlier. The rate that year was even higher, 11.9 percent, for borrowers who attended for-profit institutions.

Grim Default Estimates

And default numbers calculated over borrowers' lifetimes may be far worse. The Education Department, in an analysis last November, estimated that more than 15 percent of federally subsidized loans, by dollar value, would enter default at some period. And among two-year for-profit colleges, it said, the estimate is 47 percent.

As large as that sounds, the number's relative significance could be even bigger. For-profit institutions enroll fewer than 10 percent of all college students, and yet they accounted for more than 20 percent of federally subsidized loan money in the 2007-8 academic year, more than double their share a decade earlier, according to Education Department figures. (See related chart.)

For-profit institutions contend that such numbers say far more about the overall difficulty of achieving the Obama administration's goal than about their ability to help attain it. Reaching the doubling goal would mean enrolling and graduating 20-million students who are now considered unwilling to do or incapable of the work, said Peter P. Smith, senior vice president for academic strategies and development at Kaplan Higher Education.

"This isn't just a social vision," Mr. Smith said. "This is tough work."

Others agree but worry about the tradeoff inherent in the advertisement-driven for-profit model, which works to maximize returns to outside shareholders at the same time the vast majority of its money comes from taxpayers. They wonder if that model represents the best method for helping prospective students make the critical and deeply personal assessment of whether the long-term educational benefits of a college education will justify the long-term costs.

And it's not solely a problem of the for-profit sector, Mr. Reynolds said. Colleges of all type have been raising tuition for years as the government offers ever-growing amounts of grant aid and loan money, he said. The price inflation is driven by the fact that a government-backed loan, while offering students only a slight break from market interest rates, "looks cheap because you don't have to make payments for a while," he said.

The Obama administration is nevertheless determined to increase federal-aid levels, hoping to help the millions of students whose primary problem is money rather than academic potential. The government hands out some $25-billion a year in grants and about $85-billion in subsidized loans, and Congress found another $36-billion for the Pell Grant program this year by ending the practice of paying private-loan companies to distribute federally subsidized loans.

That determination to expand the distribution of federal tuition assistance has left Congress and the White House seeking other ways to ensure that students get quality for their money. Just last week, the House education committee held a hearing in which Democratic members joined the Education Department's inspector general in pressing accrediting agencies to more clearly define the "credit hour" measurement used in student-aid allocations. Some colleges have objected, wanting more flexibility in defining their educational missions.

The Education Department last week also proposed tougher rules forbidding colleges from compensating recruiters based on student enrollment, while working on regulatory language that would cut off federal student aid to college programs whose graduates carry high student-loan debt relative to their income. And this week Mr. Harkin is leading the hearing focused on for-profit colleges, with plans to showcase some of the sector's leading critics, including Steven Eisman, a hedge-fund manager who predicted the housing bubble and is now issuing similar warnings about for-profit higher education.

Debt-Avoiding Strategies

Even the proposed regulatory changes may not be enough, according to some analysts, to prevent the Obama administration's pursuit of record graduation rates from turning into record student indebtedness.

Jackson Toby, an emeritus professor of sociology at Rutgers University at New Brunswick, has proposed that eligibility for federal student loans be tied to past academic performance. Low-income students could still get Pell Grants, allowing them to attend low-cost institutions such as community colleges, but they could not get the federally subsidized loans typically necessary to afford four-year institutions or for-profit colleges until they can demonstrate that they can handle that level of work.

"There are some problems that cannot be remediated," he said, "and therefore there are some kids who cannot really make it in college, no matter how much remediation we attempt to do."

Others strongly disagree, warning of dangers to society from any attempts to limit student eligibility based on strategies to predict a student's future success. "It's a terrible problem," Amy E. Slaton, associate professor of history and politics at Drexel University, said of the growing default rates, "but the worst possible answer is to try to predict who's going to default and keep them from even trying."

Kaplan is cautiously testing out one solution. Beginning this past March, Mr. Smith said, the university began a pilot program in which new students can enroll conditionally and then leave after three weeks, without any debt or any transcript, if they find they cannot handle the work.

"It is a substantial hit to revenue," he said of the trial course structure, "but the fact of the matter is it's absolutely the right kind of thing to do." The for-profit University of Phoenix, the nation's largest university system, is advertising a similar trial system.

Through all the disagreements over the difficulty of calculating a student-loan default rate and the challenge of reducing that number, there's much wider agreement across the political spectrum that the government should not be using it as a measure of a college's overall success rate.

Deanne Loonin, a lawyer with the National Consumer Law Center who regularly helps students in default, said the college is just one responsible party. "There are a lot of other factors that go into why people default," often involving personal circumstances of the borrower, Ms. Loonin said.

And the Education Department lacks hard data in many of those areas, in part because many traditional colleges, especially private institutions, have resisted efforts to collect and cross-tabulate student records.

That informational void helps contribute to the poor image of for-profit colleges, which consider themselves leaders in graduating low-income students, said Harris N. Miller, president of the industry's lobby group, the Career College Association.

"Transparency is always good, facts are always good," Mr. Miller said.

Whether it involves defining credit hours or setting accreditation standards, the root of the problem may be that the government is looking for better ways to ensure that its money is spent on worthwhile educational ventures, and yet it doesn't want to challenge the right of each college to define its own mission.

So far that has proven to be a fundamental contradiction in judging the overall value of higher education, said Mr. Merisotis, of the Lumina Foundation. "There's got to be a third way," he said. "We don't have it yet."