For-profit colleges and universities, unlike their public counterparts, are managed and governed by private organizations and corporations. During the past two decades, enrollment at for-profit institutions increased 225 percent. Today these institutions enroll about 12 percent of all postsecondary students, about 2.4 million as of 2010-2011 academic year. As more and more community colleges meet and exceed their enrollment capacities, for-profit colleges and universities are becoming an attractive option for students. For-profit institutions often provide flexible scheduling with year-round enrollment, online options, small class sizes and convenient locations. These characteristics are attracting a large and growing population of students entering the education market – particularly working adults, part-time students, and students with children.
This growth has also raised concerns—at both the state and federal levels—about the quality of education these institutions offer, the amount of money in scholarships and loans they receive, the tactics they use to attract students, and the success of their graduates in finding jobs. Critics of for-profit institutions argue that many schools and programs leave students with large amounts of debt, few employable skills, and at a greater risk of not completing a degree at all. This is of greater concern because of the heavy federal subsidies that for-profit institutions receive. During the 2009-2010 school year, for-profit institutions received $32 billion in federal grants and loans, including $7.5 billion specifically in Pell Grants. Lawmakers have begun to look for ways to better hold these schools accountable for graduating students that can find gainful employment, not be overburdened with large debt they are unable to pay back, and in this way ensure taxpayers are getting a good return on their investment.
State Action on For-Profit Colleges
Over the past few legislative sessions, many states have sought ways to modernize the regulation of for-profit colleges in their states. Lawmakers recognize the role these institutions play in educating a growing number of their students and oftentimes work closely with for-profit educational institution interest groups and state education officials to craft legislation that supports student success and access, while protecting student and taxpayer investments. Much of the recent legislation provides safeguards and transparency for students, holds schools accountable for providing meaningful degrees, and evaluates allocation of state student aid.
In the 2013 legislative session, Connecticut passed HB 5500 that requires each institution of higher education, including for-profit institutions licensed to operate in the state, provide uniform financial aid information to every prospective student who has been accepted for admission to the institution. The information to be provided is the financial aid shopping sheet developed by the Consumer Financial Protection Bureau and the U.S. Department of Education.
In April 2011, the Maryland General Assembly passed SB 695 giving the Maryland Higher Education Commission authority to regulate for-profit colleges. Along with requiring these institutions to provide data to the commission on enrollment, graduation and retention rates, the legislation also prohibits schools from paying commission or incentives to recruiters, creates a guaranty fund to reimburse students in the case of a school going bankrupt or closing, and notably phases out the use of state student aid at for-profit colleges. Beginning July 1, 2016, state financial assistance can no longer be used at for-profit colleges, except for legislative scholarships and a grant specifically for use at private career schools.
Budget bills in the 2011 and 2012 sessions revising the Cal-Grant program, California’s student financial aid program, have had a large impact on for-profit institutions. Similar to the federal gainful employment regulations, California began tying eligibility for its Cal-Grant program to student loan default and graduation rates. Colleges must have a graduation rate of at least 30 percent and a maximum loan default rate of 15.5 percent. The new regulations do not specifically name for-profit institutions, but apply to both public and private institutions that have more than 40 percent of their students taking out federal loans (effectively exempting California community colleges). When the regulations take effect, nearly 80 percent of for-profit colleges will no longer be eligible to receive Cal-Grant funds.
In January 2010, Michigan’s governor signed the Proprietary Schools Act. The state defines proprietary schools as for-profit institutions teaching a trade or vocation that do not have authority to grant degrees. The act shifts the licensing authority of proprietary schools from the State Board of Education to the Michigan Department of Energy, Labor, and Economic Growth. The bill allows proprietary schools to sell goods and services produced and provided by students if the schools meet the criteria specified in the law. These include requiring that the production of the good or service be an integral part of the instruction, that the use of all proceeds from the sale of goods and services support the school, and that schools disclose to the consumer that the product is from a student.
Federal Action on For-Profit Colleges
Department of Education - Gainful Employment Regulations
In June 2011, the Department of Education released their finalized “gainful employment” regulations linking the employability of students to their ability to pay off student loans. The main intent of the regulations was to help ensure students are getting from schools what they pay for – solid preparation for a good job. This is done by tying a program’s eligibility to use federal student aid to students loan repayment rates and debt-to-income ratio. It is predicted that these regulations will lead to 5 percent of programs at for-profit colleges losing eligibility for federal student aid. A summary and the complete text of the regulations can be found here.
On June 30, 2012, a federal judge struck down critical components of the regulations and therefore they have not gone into effect. However, the ruling also affirmed the department’s authority to implement regulations defining “gainful employment” to determine a program’s eligibility for federal student aid. The Deparment filed a motion to be allowed to continue collecting data and keep the data and disclosure requirments of the regulation active. The federal judge rejected this motion in March 2013.
In April 2013, the Department of Education announced it will rewrite and gather public comment for revised regulations in light of the court rulings.
Data and Disclosure Requirements (as written in 2011)
Schools would be required to release information to both the Department of Education and prospective students.
- To Department of Education:
- Student & program information, such as enrollment and classification of program
- Money students owe from private loans & institutional payment plans
- Whether students continued/transferred to higher credential program
- To Prospective Students
- Occupations program prepares students to enter
- Graduation & job placement rates for the program
- Typical cost to complete the program
- Median loan debt after completion
(as written in 2011)
In order to remain eligible for federal student aid, programs must meet at least 1 of 3 benchmarks. On average, students must have a:
- Loan repayment rate of 35 percent
- Debt-to-total income ratio less than 12 percent
- Debt-to-discretionary income ratio less than 30 percent
Within 4 years if fail to meet benchmarks:
- Disclose to students program failed to meet benchmark(s)
- Provide information on how to transfer
- Warn students they may not be able to repay their debt
- Program loses eligibility for federal student aid
- Cannot reapply for eligibilty for at least 3 years
U.S. Senate Hearings
The Senate Health, Education, Labor and Pensions Committee has held six hearings and released several reports in the last two years focused on for-profit colleges. The hearings are meant for a discussion of the assets and detriments of the for-profit industry that can be valuable for both lawmakers and consumers and lead to better understanding of the industry and the role it can play in the higher education system.
During these hearings, reports and testimony have outlined concerns regarding disproportionately high student debt and default rates, deceptive recruitment practices, misleading claims of program credentials, and high levels of federal subsidy through student financial aid as well as GI Bill veteran’s tuition assistance.
The hearings have been criticized for their narrow-focus on the for-profit sector and it has been suggested a broader look at all higher education institutions – public, private nonprofit, and for-profit – be undertaken. Sen. McCain (R-AZ) cited an op-ed from a lobbyist representing an organization of for-profit schools in which the case is made against the gainful employment regulations, and argues that in the least the scope of the rules should be broadened to cover more than for-profit schools.
Reports from the Hearings
- Emerging Risk?: An Overview of Growth, Spending, Student Debt and Unanswered Questions in For-Profit Higher Education: data of growth in the sector, the resulting growth of federal student aid into the for-profit sector, and increase in student debt and default rates.
- For-Profit Colleges: Undercover Testing Finds Colleges Encouraged Fraud and Engaged in Deceptive and Questionable Marketing Practices: released by the Government Accountability Office along with undercover footage detailing the findings of undercover investigators sent to 15 for-profit institutions posing as students. According to the report, all institutions investigated made “deceptive or otherwise questionable statements,” to the potential students, including financial aid officers encouraging students to submit false information, and distributing incorrect information about accreditation and employment guarantees. After its initial release at the second HELP hearing on for-profit colleges, GAO later released a revised version of the report. While the conclusions of the report remained unchanged, the severity of some key examples of for-profit colleges' misbehavior were diminished.
- The Return on the Federal Investment in For-Profit Education: Debt Without a Diploma: examines enrollment data and financial performance of 16 for-profit institutions. The report finds that of the 16 schools, 14 received at least 87 percent of all revenue from federal student aid in 2009. Eight of those institutions reported profit margins ranging from 16 percent to 37 percent. Also included in the report is student enrollment data showing that 57 percent of students attending the 16 for-profit schools between June 2008 and June 2009 withdrew.
- Benefitting Whom? For-Profit Education Companies and the Growth of Military Educational Benefits: data showing the increased number of students using veteran’s tuition assistance program funds at for-profit colleges and amounts of this type of federal funding going to these institutions and those institutions student loan default rates. Aggressive recruitment of veteran’s also of concern as veterans’ tuition benefits do not count toward the 90/10 rule requiring institutions to receive at least 10 percent of their funding from non-federal student loans and grants.
- For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success: report on the two-year investigation by the HELP committee of 30 for-profit education companies between 2006 and 2010. More in depth research on the enrollment growth, marketing and recruitment practices, average cost, student support structures, student debt and loan default rates, and profit of these institutions compared to student’s success in graduating and employability.
Institute of Higher Education Policy
In July 2012, IHEP released A New Classification Scheme for For-Profit Institutions, highlighting that there are several, very different types of institutions within the for-profit sector. Institutions are categorized by educational market (increase/decrease in enrollment by affluence of metropolitan area), institutional factors (specialized or comprehensive by educational market), and individual/student factors (attended only for-profit or attended mixed sectors by institutional factors). The report details these different factors, how they are defined and why, ways to combine the factors to get an even more detailed classification of institutions by deriving data based on the factors. It is hoped that this type of classification can be used to better understand what are appropriate policy levers for the various institutions and better target policy interventions to ultimately improve student success.
American Association of State Colleges and Universities
A brief released in April 2012 from AASCU, Changing Dynamics in State Oversight of For-Profit Colleges, looks at the state role in regulating for-profit colleges. Along with background on the growth of the industry and outlining consumer protection concerns, it provides further analysis of how states can and are overseeing these institutions. AASCU explains the three regulatory agencies that are responsible for overseeing for-profit colleges – states, private accrediting bodies, and the federal government – and explains their roles. Further, they argue that it is the state government that has the greatest responsibility in overseeing for-profit colleges, as they determine the legal authority for a school to operate within the state and provide consumer protection.
The College Board
Trends in For-Profit Postsecondary Education: Enrollment, Prices, Student Aid and Outcomes provides a brief overview of data on enrollment, price, student characteristics, student aid, and completion rates at these institutions. Includes easy-to-read and understand graphs that quickly and clearly compare data between for-profit and other institutions.
National Consumer Law Center
Released December 2011, State Inaction: Gaps in State Oversight of For-Profit Higher Education, provides an overview of the state regulatory structures of for-profit institutions and an evaluation of state aid, consumer protection and student relief fund regulations. The report argues that gaps in these regulations have left students in many states increasingly vulnerable to fraud, and provides recommendations for states wanting to strengthen their regulations of for-profit institutions. Includes many examples of policy options states have implemented to increase consumer protections.
The Education Trust
A highly-publicized report, Subprime Opportunity: The Unfulfilled Promise of For-Profit Colleges and Universities, was released by The Education Trust in November 2010. The report looked at graduation rates at for-profit institutions compared to public and non-profit colleges and universities from 2002-2008. It found that among first-time, full-time, bachelor's degree-seeking students enrolled at for-profit institutions, 22 percent graduated within six years. Comparatively, public and private non-profit institutions graduated 55 percent and 65 percent, respectively.
However, when looking at two-year for-profit institutions, 60 percent of their students earn a certificate or degree within three years, compared to just 22 percent of public community college students. The report notes that those students graduating from two-year programs at for-profits had incurred substantially higher student loan debt than their community college counterparts. After considering federal grants and expected family contributions, the unmet need among those students in two-year for-profit programs was $21,072 (to be paid either out-of-pocket or through student loans). That is compared to an average unmet need of $5,478 at community colleges. According to the report, 95 percent of students enrolled at for-profit two-year colleges took out federal student loans, and 42 percent took out private student loans. As a whole, the for-profit college sector represents 43 percent of all federal student loan defaults despite making up only 24 percent of federal loan dollars.
This report concludes that graduates of for-profit institutions, in general, are having difficulties finding careers with a high enough salary to repay student loan debt. It questions the value of the investment students are making at for-profit colleges and universities and claims the quality of education received falls short of the high cost of attendance.
The Association of Private Sector Colleges and Universities states that the report failed to consider the significant differences in student demographics among for-profits and public or private non-profit schools. The association argues the high default rate and the high number of students taking out loans is a result of enrolling a high percentage of low-income and minority students who are more likely to be “high risk,” and that it is unfair to compare for-profit colleges to public and non-profit institutions.