For-Profit Colleges’ Debt Disorder

Source: In These Times

Late last month, an organization called the Coalition for Educational Success (CES) announced its intention to formulate a new code of conduct to govern for-profit higher education institutions. CES said that, in conjunction with former Govs. Ed Rendell (D-Penn.) and Thomas Kean (R-N.J.), it plans to develop standards that “will improve and ensure transparency, disclosure, training, [and] provide strong new protections for students” attending “career colleges.”

Sounds great. But what is CES and why is it proposing a higher education code of conduct right now? To understand that, one has to dive into a hotly-contested federal policy battle: the attempt by the U.S. Department of Education to implement new rules governing the for-profit college industry, which the coalition represents.

Since late last year, for-profit colleges—schools like the University of Phoenix and Devry University—have been ferociously lobbying against a new Education Department regulation (known as “gainful employment”) that would cut higher education programs off from federal dollars if too many of their students can’t find good jobs and default on their students loans. The regulation is scheduled to take effect on July 1.

“While a majority of career colleges play a vital role in training our workforce to be globally competitive, some bad actors are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use,” U.S. Education Secretary Arne Duncan said last September. And the financial data from one of the for-profit industry’s biggest players—a company called the Education Management Corporation—shows that Duncan’s characterization is right on the mark.

Subprime schools

Many for-profit colleges make up to 90 percent of their revenue from the government through various avenues of aid used by their students, including federal student loans, as I reported earlier this year. They have profit margins as high as 30 percent and their CEOs make millions annually—almost all of which comes courtesy of American taxpayers.

But the schools also produce a disproportionate amount of student loan defaults. Currently, 11 percent of higher education students attend for-profit colleges in the United States; those students receive 26 percent of federal student aid and account for 44 percent of student loan defaults. Nearly a quarter of students who attend for-profit colleges default within three years of graduating, if they graduate at all.

The for-profit schools claim that they are serving a portion of the population that can’t access traditional higher education. A few days ago, in fact, activists and community leaders, including Rev. Jesse Jackson, bought this characterization and called on the Education Department to delay action on gainful employment in order “to evaluate the actual effects of this proposal on minority and lower income students.”

But as former Campus Progress editor Kay Steiger noted, minority students make up a large percentage of the for-profit student body, and therefore, “If anything, black and other minority leaders should be calling for stronger regulations so that students of color aren’t left with huge piles of debt and dismal job prospects.” Much like subprime mortgage lenders took advantage of minority communities—where traditional banks weren’t serving the population—for-profit schools prey on those students who legitimately have trouble accessing higher education.

Taking the fight to Washington

So for-profit schools are almost exclusively reliant on taxpayer money that translates into sky-high profits and huge CEO salaries—and students who are crippled with debt and left without the skills to find a good job. (The schools have also been caught using fear and intimidation to recruit prospective students. Documents uncovered by the Senate Oversight Committee show that for-profit recruiters are taught a series of questions called the “pain funnel” to entice students into signing on. A separate pending Department of Education regulation seeks to end such practices.)

If the gainful employment regulation were in place and enforced, many programs at these schools would lose their main stream of funding. That’s where the new CES standards come in.

CES represents a slew of for-profit colleges, including ITT Technical Institute and Pacific College. It is backed by the Education Management Corporation, the country’s second-largest for-profit chain, which is owned, in turn, by Goldman Sachs Capital Partners (the private equity arm of the mega-investment bank) and two other private equity firms. When Education Management Corp. was bought by these firms in 2006, it was the largest buyout ever in the for-profit education sector.

Currently, 89.3 percent of Pittsburgh-based Education Management Corps.’ revenue comes from the federal government, according to its filings with the Securities and Exchange Commission. In order to prevent the gainful employment rules from coming online, thus preserving that federal largesse, the Education Management Corps.’ political action committee made more than $35,000 in federal campaign contributions in 2010 and spent more than $800,000 lobbying that year, according to data compiled by the Center for Responsive Politics. The CES spent another $430,000.

As the New America Foundation’s Higher Ed Watch blog reported, Education Management Corp. also hired DCI Group, a Republican public relations firm, to strong-arm the company’s employees into sending letters to the Education Department in opposition to the gainful employment rules.

The companies behind CES are hoping that by “adopting standards of responsible conduct” and putting a new face on their industry, they can preempt gainful employment and convince policymakers to let the industry self-regulate. But while it is fighting hard to preserve its access to federal dollars—and its students’ continued reliance on federal loans to finance their education—Education Management Corps.’ business decisions reveal that it knows how sour those loans can be.

Sour loans

In August 2008, Education Management Corp. launched the Education Finance Loan Program, its own direct loan shop, to fill some of the gap created when private student loan providers left the market following the financial crisis. But by 2010 the company was looking to get rid of its lending arm, because, as shown by the company’s December 2010 SEC filing, it realized those loans were a huge credit risk:

The Education Finance Loan program adversely impacts our liquidity and exposes us to greater credit risk because we own long-term loans to our students. This financing program provides for payments to us by our students over a term as long as 20 years, which could have a material adverse effect on our cash flows from operations. In addition, we have the risk of collection with respect to these loans, which has resulted in an increase to our bad debt expense as a percentage of net revenues.

According to Credit Suisse analysts, the company expected half of those loans to go into default, judging by the reserves it held against them. On April 14, 2011, Education Management Corporation sold its in-house loan portfolio to “an unaffiliated Delaware trust.”

In other words, at the same time that the Education Management Corp. was trying to convince the federal government to continue allowing students to spend their federal aid in its schools, it was offloading its own loan program because fully half of the loans it made would never be repaid. It’s hard not to conclude that the company believes taxpayers should be shouldering the cost of the for-profit industry’s habit of producing unemployable graduates. (Multiple calls to the Education Management Corp. office by In These Times were unanswered, and a message left on the company’s voicemail was unreturned.)

For-profit schools say that their service is one no other higher education institutions are willing or able to provide. They claim to be training a generation of workers who would have no education, were it not for the for-profit industry. While that’s a laudable goal, instead of changing their product to better ensure student success, the Education Management Corp. and other for-profit schools are lobbying to prevent new common-sense regulations and trying to whitewash their industry under a veil of new self-generated “standards,” while pocketing huge amounts of taxpayer money and paying their CEOs millions. Their business model is one built on making money, regardless of whether or not students receive an education that is worth the cost.

The ultimate takeaway is: For-profit schools appear to be doing whatever it takes to ensure that taxpayers keep supporting them as they prey on the hopes, dreams and fears of those looking for higher education.

Pat Garofalo is economic policy editor for, part of the Center for American Progress Action Fund. His work has also appeared in The Nation, the Guardian, U.S. News & World Report and the Washington Examiner.