The Failure Of For-Profit Schools

Why do our for-profit colleges seem so disappointing? Why are they plagued by high levels of student debt, high loan-default percentages, dismal graduation rates, and third-rate reputations that lead some employers to reject their graduates automatically? Sure, back in the old days there were plenty of commercial schools whose sole raison d’etre was apparently to separate students from their money: those correspondence law schools that advertised on matchbooks and the art academies that would accept you if you could doodle a stick figure onto a restaurant napkin. But today the situation seems exponentially worse. Commercial colleges, which enroll 2 million out of America’s 17 million college students, now seem to be not so much diploma mills as non-diploma mills, where the vast majority of enrollees pay tuition bills comparable to those at four-year public universities but never manage to graduate. Katherine Gibbs, for example, limped along for decades trying to offer alternate career training after the market for private secretaries dried up during the 1970s, then permanently shut its doors in 2009 amid complaints to state regulatory agencies about unqualified faculty members, shoddy and inadequate course offerings, and four-year schools unwilling to accept Gibbs transfer credits. The chain’s redoubtable foundress must be turning over in her grave.
What happened? How did a for-profit college model morph into today’s basement-reputation for-profit model, exemplified by Saturday Night Live’s fictional “University of Westfield,” where the students mainly learn how to fudge the fact that their degree are from the University of Westfield? I blame the corrupting influence of federal money, the easily available Pell grants and guaranteed loans that began to flow with the passage of the Higher Education Act of 1965. Easy federal money has contributed to a vast growth in enrollments at both non-profit and commercial institutions, a ballooning of tuition costs, and, in the for-profit sector, a focus not on the academic outcomes that might build a school’s reputation as a selling point but upon getting as many bodies as possible into their classrooms.
Let’s take the enormous—and vastly profitable–University of Phoenix, with its nearly 400,000 students in 39 states as well as online. Phoenix is regarded as one of the more reputable commercial schools, and it has gained respect over the last two years for issuing fairly candid reports about its strengths and shortcomings. Still, Phoenix and its parent company, Apollo Group, have had their troubles during the last decade—and recently entered into a $78.5 million settlement regarding allegations that Phoenix illegally paid cash bonuses and other gifts to recruiters based on the number of young people they signed up for classes. Phoenix derives an ever-increasing amount—more than three quarters during its 2008 fiscal year, according to a March article in Business Week–of its $3 billion-plus annual revenue from federal student aid. Ii’s the biggest recipient of Pell grants in the nation. Yet Phoenix’s graduation rates seem abysmal. According to the U.S. Education Department, only 4 percent of Phoenix’s students who entered four-year-programs as freshmen graduated within six years, compared with 55 percent of students at non-profit four-year schools. And an executive-search company specializing in financial services told Business Week that a Phoenix degree didn’t “add any value” to a graduate’s resume.

Phoenix counters that the standard the Education Department uses to measure completion rates—counting only students who have never attended college before and then tracking the time it takes them to earn a degree—doesn’t accurately reflect the vast majority of students Phoenix attracts, who tend to be working adults with some college credits under their belts. In its 2009 accountability report Phoenix maintained that by including all those older students, its completion rate is actually 36 percent for those in baccalaureate programs and 26 percent for those who completed two-year associate-degree programs within three years.
Those figures still don’t seem very inspiring, although they certainly beat completion rates at community colleges, where only about 28 percent of students achieve any kind of degree, no matter how many years they take. Meanwhile, tuition at Phoenix, although well below that at nonprofit private universities, is slightly more than that at a typical four-year public university (about $52, 000 for a four-year Phoenix degree) and more than double the tuition most community colleges charge (about $20,000 for a two-year degree at Phoenix).
Federal financial aid via grants and loans helps pay the bulk of those bills. Students at for-profit schools in general have higher debt loads than those at public four-year schools, according to data gathered by the College Board: $29,900 versus $10,500 on average. Students at for-profit schools also have the highest default rates on government loans in the nation: 11 percent within two years of starting repayment in contrast to 4 percent for students at four-year non-profits and 10 percent for students at community colleges. Within three years, a full 21 percent of students at for-profits have defaulted on their government loans, in contrast to only about 7 percent of students at non-profit four-year schools and 16 percent of students at community colleges, the Wall Street Journal recently reported.
Phoenix (which says its own two-year default rate is only 7.2 percent, well below the 11 percent national average at for-profits) defends its low degree-completion rates, its high student debt levels, and its trouble-plagued loan repayment rates by pointing out that it caters to an “underserved population,” as it stated in its 2009 report: lower-income, heavily minority, in many cases single parents, the first in their families to attend college, or with low test scores thanks to Phoenix’s open-admissions policy. That explanation, however, raises the question of whether the bulk of those students, with their poor academic records and high at-risk factors, ought to be in college in the first place. What good does it do to be the first in your family to attend college if you drop out with a load of debt? Or you graduate and some employers won’t hire you because they deem your degree worthless?
Phoenix and its commercial-college sisters are entitled to offer higher education to whomever they please on whatever terms they please, but should they be doing so at taxpayer expense? Most for-profit institutions would fold and disappear if weren’t for their massive infusions of Pell grants and government loans—although so would most nonprofit institutions where free flowing federal student aid has generated administrative efficiencies and tuition inflation. Wherever there is a pool of free money, as Daniel L. Bennett of the Center for College Affordability and Productivity says, there’s “an opportunity for private investors to enter the market and seek economic rent.”
For-profit schools can offer genuine value: classes tailored to students’ work schedules, merciful freedom from the political-correctness indoctrination that is a feature of much nonprofit education. But if they had to earn their income from their students’ own hard-earned money, they might have the incentive to do much more. They might consider packaging rigorous, top-quality, efficiently delivered instructional units that would guarantee the competence of anyone who passed those courses. How about preparing accountants to pass the CPA exam? Turning out crackerjack electricians and computer guys? Developing an online calculus course so good that students at the Ivies would buy it? The current federal slush-fund system for financing higher education rewards filling classrooms with bodies and wasting unqualified young people’s time. For-profit colleges will come into their own only when their focus shifts from boosting enrollment to making their degrees items of value. Then, enrollment will take care of itself.