Why Do You Think They're Called For-Profit Colleges?

Michael Morgenstern for The Chronicle

July 25, 2010

Michael Clifford believes that education is the only path to world peace. He never went to college, but sometimes he calls himself "Doctor." Jerry Falwell is one of his heroes. Clifford has made millions of dollars from government programs but doesn't seem to see the windfall that way. Improbably, he has come to symbolize the contradictions at the heart of the growing national debate over for-profit higher education.

Until recently, for-profits were mostly mom-and-pop trade schools. Twenty years ago, a series of high-profile Congressional hearings, led by Senator Sam Nunn, revealed widespread fraud in the industry, and the resulting reforms almost wiped the schools out. But they hung on and returned with a vengeance in the form of publicly traded giants like the University of Phoenix.

Entrepreneurs like Clifford, meanwhile, have been snapping up dying nonprofit colleges and quickly turning them into money-making machines.

Most of that money comes from the federal government, in the form of Pell Grants and subsidized student loans. Phoenix alone is on pace to reap $1-billion from Pell Grants this year, along with $4-billion from federal loans. A quarter of all federal aid goes to for-profits, while they enroll only 10 percent of students.

Unfortunately, a large and growing number of graduates of for-profit colleges are having trouble paying those loans back. Horror stories of aggressive recruiters' inducing students to take out huge loans for nearly worthless degrees are filling the news. The Obama administration, flush with victory after vanquishing the student-loan industry this year, has proposed cutting off federal aid to for-profits that saddle students with unmanageable debt. Congress has rolled out the TV cameras for a new round of hearings that are putting for-profits on the hot seat. One observer called the event "the Nunn hearings on steroids." 

The new scrutiny of for-profits is welcome. Without oversight, the combination of government subsidies and financially unsophisticated consumers guarantees outright fraud or programs that, while technically legitimate, are so substandard that the distinction of legitimacy has no meaning. For-profit owners and advocates have a hard time admitting that.

I spoke with Michael Clifford recently as he was driving down the California coast to meet with a higher-education charity he runs. He's an interesting man—sincere, optimistic, a true believer in higher education and his role as a force for good. A musician and born-again Christian, he learned at the knee of the University of Phoenix's founder, John Sperling. In 2004, Clifford led the sale of a destitute Baptist institution called Grand Canyon University to investors. Six years later, enrollment has increased substantially, much of it online. The ownership company started selling shares to the public in 2008 and is worth nearly $1-billion today, making Clifford a wealthy man. He has since repeated the formula elsewhere, partnering with notables like General Electric's former chief executive, Jack Welch. Some of the colleges that Clifford has purchased have given him honorary degrees (thus "Doctor" Michael Clifford).

Clifford will concede, in the abstract, to abuses in the for-profit industry. But he rejects the Obama administration's proposal to cut off federal aid to for-profits at which student-debt payments after graduation exceed a certain percentage of the graduates' income. In fact, he denies that colleges have any responsibility whatsoever for how much students borrow and whether they can pay it back. He won't even acknowledge that student borrowing is related to how much colleges charge.

That refusal is the industry line, and it is crazy nonsense. As a rule, for-profits charge much more than public colleges and universities. Many of their students come from moderate- and low-income backgrounds. You don't need a college degree to know that large debt plus small income equals high risk of default. The for-profit Corinthian Colleges (as of mid-July, market cap: $923-million) estimated in official documents filed with the Securities and Exchange Commission that more than half the loans it makes to its own students will go bad. Corinthian still makes a profit, because it gets most of its money from loans guaranteed by Uncle Sam.

Other industry officials, like the for-profit lobbyist Harris Miller, would have you believe that government money that technically passes through the hands of students on its way from the public treasury to the for-profit bottom line isn't a government subsidy at all. In that regard, for-profits lately have been trying to rebrand themselves as "market based" higher education. To understand how wrong this is, look no further than the "90/10 rule," a federal rule that bars for-profits from receiving more than 90 percent of their revenue from federal aid. The fact that the rule exists at all, and that Miller is working to water it down (it used to be the 85/15 rule), shows that for-profits operate in nothing like a subsidy-free market.

The federal government has every right to regulate the billions of taxpayer dollars it is pouring into the pockets of for-profit shareholders. The sooner abusive colleges are prevented from loading students with crushing debt in exchange for low-value degrees, the better.

But that doesn't mean for-profit higher education is inherently bad. The reputable parts of the industry are at the forefront of much technological and organizational innovation. For-profits exist in large part to fix educational market failures left by traditional institutions, and they profit by serving students that public and private nonprofit institutions too often ignore. While old-line research universities were gilding their walled-off academic city-states, the University of Phoenix was building no-frills campuses near freeway exits so working students could take classes in the evening. Who was more focused on the public interest? Some of the colleges Clifford bought have legacies that stretch back decades. Who else was willing to save them? Not the government, or the church, or the more fortunate colleges with their wealthy alumni and endowments that reach the sky.

The for-profit Kaplan University recently struck a deal with the California community-college system to provide courses that the bankrupt public colleges cannot. The president of the system's faculty senate objected: The deal was not "favorable to faculty," she said. Whose fault is that? Kaplan, or the feckless voters and incompetent politicians who have driven California to ruin?

Wal-Mart recently announced a deal with the for-profit American Public University to teach the giant retailer's employees. What ambitious president or provost is planning to make her reputation educating $9-an-hour cashiers?

Traditional institutions tend to respond to such ventures by indicting the quality of for-profit degrees. The trouble is, they have very little evidence beyond the real issue of default rates to prove it. That's because traditional institutions have long resisted subjecting themselves to any objective measures of academic quality. They've pointed instead to regional accreditation, which conveniently allows colleges to decide for themselves whether they're doing a good job.

But many for-profit institutions have regional accreditation, too. That's what people like Clifford are buying when they invest in troubled colleges. Accreditation has become like a taxicab medallion, available for bidding on the open market. As a result, long-established public and private nonprofit colleges are left with no standards with which to make the case against their for-profit competitors. At one recent Congressional hearing, the Senate education committee's chairman, Tom Harkin, said of the for-profits, "We don't know how many students graduate, how many get jobs, how schools that are not publicly traded spend their [federal] dollars, and how many for-profit students default over the long term." All true—and just as true when the words "for profit" are removed. There's no doubt that the worst for-profits are ruthlessly exploiting the commodified college degree. But they didn't commodify it in the first place.

For-profits fill a void left by traditional institutions that once believed their world was constant. Fast-developing methods of teaching students over the Internet have given the velocity of change a turbo boost. In such a volatile situation, all kinds of unexpected people make their way into the picture. And once they get there, they tend to stick around. Traditional institutions hoping that Congress will rid them of for-profit competition will very likely be disappointed.

Kevin Carey is policy director of Education Sector, an independent think tank in Washington.