College Inc.: US Universities’ Focus on Profit

Source: Indypendent

Imagine a business that rakes in billions of dollars in taxpayer funds, but provides its customers with a defective product that fails for more than half of them–though that track record hasn’t stopped the business owners from enjoying ever-increasing profits.

Sounds like the parasites of Wall Street or the insurance industry, doesn’t it?

But according to a U.S. Senate report, the same is true of a growing number of colleges and universities–the expanding sector of higher education that is run for profit.

The Senate report is a shocking exposé of a new growth industry that turns out to be another scheme for the 1 percent to make money at the expense of some of the most vulnerable people in society.

But anyone who investigates the for-profit college scam will be struck by something else, too–the abuses of College Inc. are extreme examples of a trend toward privatization and business-like operations throughout all of higher education, which threaten to undermine the system as a whole.

For-profit colleges are capturing a greater share of students nationwide. Over the past 10 years, the for-profit higher education industry has tripled in size, with fall enrollment growing to more than 2.4 million in 2010. That increase is seven and a half times faster than the 28.8 percent increase in enrollment at public colleges, according to the College Board.

This is despite the fact that for-profit colleges are more expensive than even the most prestigious public institutions. Bachelor’s degrees average $62,702 at for-profit institutions, versus $52,522 at flagship state public universities. The average associate degree at a for-profit college costs $34,988, more than four times the $8,313 at the average public community college. Certificate programs at for-profit colleges average $19,806, compared with $4,249 at community colleges.

It’s no surprise, then, that students at for-profit colleges are more likely to end up deeper in debt. Fully 96 percent of students at for-profit colleges borrow to pay for tuition, compared with 48 percent at four-year public and 13 percent at community colleges, according to the Senate report, titled “For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Access,” the result of a two-year investigation by the Senate Committee on Health, Education, Labor and Pensions, chaired by Democrat Tom Harkin.

“Independent students, who make up most of the for-profit student body, leave for-profits schools with a median debt of $32,700, but leave public colleges with a median debt of $20,000 and private non-profit colleges with a median debt of $24,600,” the Senate committee report found.

As a result, according to the New York Times, “Students at for-profit colleges make up 13 percent of the nation’s college enrollment, but account for about 47 percent of the defaults on loans.”

Although the profits generated by for-profit colleges end up in private hands, the vast majority of revenues come from the government, in the form of federal grants and federally guaranteed student loans. According to the Harkin report, the Apollo Group, the largest of the for-profit education companies and operator of the infamous University of Phoenix, “$3.1 billion in federal student aid, in addition to $46 million in military education benefits…86.8 percent of the company’s revenue, and $925 million of their profit, is attributed to federal taxpayer sources.”

At the same time that states, pleading poverty, are slashing public university budgets and the federal government now charges interest on loans to graduate students while they’re in school, more than $30 billion are funneled each year to for-profit colleges from the federal government, in the form of grants and loans.

Despite paying (and borrowing) significantly more, students at for-profit schools are less likely than their counterparts at public four-year institutions to leave school with a degree. Of the nearly half a million students who enrolled in an associate degree program in 2008-09, the report found that nearly two-thirds (62.9 percent) had dropped out by the middle of 2010. Over half (54.3 percent) left their bachelor’s degree programs by that point.

And studies show the benefits of a degree from a for-profit school are likely negligible. A study published in June by two Boston University economists found that while those who get degrees from public or private non-profit colleges and universities experience significant benefits, including higher wages and lower unemployment, students who attended for-profit universities don’t. As Time magazine reported:

The [Boston University] researchers found that six years after they enter college, for-profit students are more likely to be unemployed–and to be unemployed for periods longer than three months. And, further, if they are able to find a job, students who attend for-profits make, on average, between $1,800 and $2,000 less annually than their peers who attended other institutions.

This isn’t surprising given how little of their inflated tuition prices for-profit colleges actually spend on students’ educations. The Senate report estimates average per-student spending at for-profit colleges to be just over $2,000 in 2009–and some spend much less.

For example, the Apollo Group, which “educated” over 500,000 students in 2010, spent just $892 per student on instruction. According to its own estimates–which the bosses at the University of Phoenix reserve the right to change at any time–a bachelor’s of arts degree at the school will likely cost over $10,000 per year, while a bachelor’s of science degree runs nearly $15,000 annually, well over 10 times the amount spent on teaching.

Far from being the most efficient way to deliver a service, as proponents of free enterprise like to claim, market-based, for-profit approaches to higher education result in massive waste. Instead of student instruction, the bulk of tuition money goes to marketing to bring in new students, multimillion-dollar salaries for top executives, lobbying politicians and, last but certainly not least, profits.

Marketing is a top priority to for-profit institutions. An investigative report by the Village Voice revealed that recruitment is typically aimed at the most vulnerable–for example, veterans suffering from post-traumatic stress disorder and brain injuries–and often involves outright fraud, such as encouraging under-age applicants to lie to their parents and the federal government about their eligibility for financial aid.

Last year, the Institute for Higher Education Policy released a report revealing that low-income students are four times as likely to attend a for-profit college as students from more well-off families. And low-income women are disproportionately likely to attend for-profit schools, enrolling at twice the rate of low-income men.

A number of these students would have attended public schools in the past–according to the report, the portion of students who grew up in poverty who enrolled at four-year public institutions dropped from 20 percent in 2000 to just 15 percent in 2008.

Students of color are also disproportionately represented at for-profit schools. According to a working paper published by the National Bureau of Economic Research: “African Americans account for 13 percent of all students in higher education, but they are 22 percent of those in the for-profit sector. Hispanics are 15 percent of those in the for-profit sector, yet 11.5 percent of all students.”

For-profit colleges use student recruitment techniques similar to those used by the brokers who pushed sub-prime mortgages during the 2000s–the predatory housing loans that disproportionately targeted African Americans and Latinos, and poor and working-class borrowers. According to the Voice, for-profit colleges:

buy lists [of potential students] from companies like QuinStreet, which made its name providing leads to subprime-mortgage brokers…The idea is to prey on people’s hopes and desires, offering that yellow brick road to the American dream: an education and a better job. [Recruitment workers] are trained to identify emotional weaknesses and exploit them.

In fact, a recruitment staffer quoted in the Village Voice article, who worked for Education Management Cop., an operator of for-profit colleges owned in large part by Goldman Sachs, said, “Half the people I worked with, their previous job was in the mortgage industry. They targeted people in that industry…They were the ones that did the best because they were so unscrupulous.”

Like those who orchestrated the sub-prime mortgage crisis, top executives at for-profit education companies have been rewarded with multimillion-dollar compensation packages.

According to the Senate report, “[T]he CEOs of the large publicly traded for-profit education companies took home, on average, $7.3 million each in fiscal year 2009”–about seven times the amount earned by the highest-paid heads of the most prestigious public and private non-profit institutions. The best paid of all was Richard Silberman, CEO of Strayer Education, Inc., whose compensation totaled $41.5 million in 2009, placing him among the highest-paid corporate executives in the world.

And that’s not to even mention profits. For-profit “education” is incredibly lucrative. Senate investigators say that “many of the companies had profit margins that topped most of Wall Street…the 30 companies examined by the committee generated $3.6 billion in profit, or 19.4 percent of revenue [in 2009].” ITT Educational Services Inc. and Strayer Education Inc. had profit margins of 37.1 percent and 33.7 percent, respectively. On average at these companies, a greater share of total revenues went to profits than to educating students.

And it’s the usual suspects who are making money. The Senate report found that “by 2009, at least 76 percent of students attending for-profit colleges were enrolled in a college owned by either a company…traded on a major stock exchange or a college that is owned by a private equity firm.”

The Senate report paints a picture of the for-profit higher education industry that looks an awful lot like the sub-prime mortgage industry, whose collapse triggered the financial crisis of 2008.

Wall Street firms and other big-money investors are raking in billions backing companies that aggressively target low-income people, especially Blacks and Latinos, offering them an inferior product at higher costs. More often than not, students at for-profit schools end up in massive debt with little or nothing to show for it.

Even worse for those caught up in the scam is that student loans, unlike mortgages, cannot be discharged through bankruptcy–and lenders can even garnish Social Security payments to collect on outstanding debts. Without major reforms, student loan debt will cripple many of these borrowers for the rest of their lives.

And just like they let the banksters off the hook for the financial crisis, political leaders have refused thus far to do much of anything about the schemes of the for-profit education industry.

Earlier this year, the Obama administration announced new regulations that were supposed to identify education programs which burden students with high levels of debt–for example, by measuring how many attendees get “gainful employment.” But the new rulers were full of enough holes that even the worst offenders among for-profit colleges could pass muster. According to Higher Ed Watch:

Responding to a massive lobbying campaign from the for-profit higher education industry, the administration watered down their proposed regulations to such an extent that only programs that flunk all three of the department’s low-bar gainful employment tests are considered to be out of compliance. That means that only programs at which fewer than 35 percent of former students are repaying their loans and where the typical graduates have annual student loan payments that exceed 12 percent of their total earnings and 30 percent of their discretionary income would have eventually been in jeopardy of losing access to federal financial aid.

The for-profit college industry paid good money to avoid any trouble in Washington. According to the Village Voice, “The industry had discovered the value of paying protection money to Congress. It spent $16 million on lobbying last year alone, buying a dream team of former officials that includes former House Majority Leader Dick Gephardt (D-Mo.) and no less than 14 former congressmen.”

To add insult to injury, the bulk of the millions that for-profit colleges spend on lobbying comes from the federal government–the source of most of the industry’s revenues. So they are essentially using government money to prevent the government from regulating them.

The abuses of for-profit colleges are an inevitable result of applying the profit motive to a public need like higher education.

In business, the drive for profit trumps every other consideration. For-profit colleges make their money by minimizing costs and maximizing revenues–in this case, spending as little as possible on educating students while charging them as much as possible; spending intensively on marketing to bring in new “customers,” regardless of whether or not they actually finish their degree or receive a quality education; and extracting as much of the revenue as possible in the form of profits and lavish salaries and bonuses for top executives.

However, while for-profit colleges are responsible for the worst outrages, they are merely more grotesque examples of a broader trend toward the privatization of public higher education and a “business model” approach to education.

In recent decades, tuition and fees at public colleges has tripled, while grants are increasingly replaced with loans, leaving students drowning in debt. Instead of a public service provided by the state, higher education has been transformed into a prohibitively expensive product, paid for with debt.

Many of the loans students take out to attend public and private non-profit colleges generate massive profits for private lenders. For example, Sallie Mae, the largest lender to students, was privatized in 2004–it rakes in billions from its operations.

And an investigation by then-New York Attorney General Andrew Cuomo a few years ago found widespread evidence of unethical and often illegal relationships between lenders and college officials at hundreds of colleges, benefiting the student lending industry at the expense of students.

There are plenty of other examples of how higher education generally is following the privatization trends. Many public universities outsource aspects of their operations to private, for-profit corporations. Full-time professors are increasingly being replaced with lower-paid adjuncts, who lack benefits and job security.

Finally, although public universities and private non-profit colleges are not supposed to generate a profit, trustees and top administrators are often able to enrich themselves in various ways at the expense of students, staff and professors.

So while for-profit colleges are an extreme example of the failure of the market to meet human need, the threat to higher education posed by the pursuit of profit runs much deeper. Addressing this means building a movement that demands higher education–provided by full-time professors with union protection, job security, and good wages and benefits–as a human right.