The for-profit education sector is facing a watershed moment, as schools face increasing pressure to prove their educational value. The U.S. Department of Education's new transparency requirements should illuminate the for-profit marketplace, helping students make better decisions about their education.
For-profit education in perspective: A brief history
For-profit education has steadily gained ground throughout the past 40 years, enjoying a dramatic growth since 1994. The Higher Education Act of 1972 put for-profit education on the map by expanding the amount of federal student aid available to for-profit schools. Between 1976 and 2006, enrollment at these institutions grew at an annualized rate of 11 percent. As a share of the entire U.S. higher education market, for-profit schools have steadily gained ground, progressing from a mere 0.4 percent in 1976 to 6 percent in 2006.
Following 1994, for-profit education experienced a historic surge in enrollment, as schools tapped into deep market demand for accessible education geared toward working adults.
The success of for-profit education over the past 15 years can be traced to several developments:
- Online education. Digital learning opened the door to a new student population underserved by the traditional campus model. The virtual classroom brings higher education within reach of rural and other geographically remote populations located many miles away from a college or university. The online format also serves working adults, who do not have the time or scheduling flexibility to attend full-time day classes on a college campus. For-profit schools have cultivated a non-traditional student body through self-paced, customizable programs tailored to the needs of busy adults, including working professionals and stay-at-home moms.
- Career training. At the same time, more and more jobs require specialized career training and credentials. Traditional colleges and universities, home of bachelor's and graduate degrees, have been slow to match the proliferation of specialties offered by for-profit schools, including job training programs with a finger on the pulse of industry needs. For-profit schools claim an estimated 83 percent market share of career training programs taking fewer than two years to complete, including certificate, diploma and professional training seminars. In addition, the sector's associate's and bachelor's degrees tend to focus on real-world applications over theory, a priority which complements career-minded students' need to put their skills to work immediately.
Buoyed by these developments, for-profit schools have been able to position themselves as a legitimate alternative to traditional colleges and universities, especially for underserved geographic areas and demographic groups.
The benefits and costs of educational diversity
The rapid growth of the for-profit education sector diversified the marketplace, giving rise to discrepancies in academic quality. Today, it's possible to get a stellar for-profit education on par with the best traditional universities--or to graduate without the skills to succeed in the workforce. The disparity has led U.S. Department of Education officials to question the value of some for-profit degree programs, pointing to high default rates by these schools' graduates.
At issue: Debt repayment and educational value
At issue is the federal government's financial involvement in the for-profit sector. For-profit colleges get an estimated three-quarters of their revenue from federal grants and loans, reports The New York Times. In the past decade, the industry's dependence on federal aid has quintupled to reach the current level of $26.5 billion. Federal student loans make up much of this funding, and a high proportion never makes it back to lenders due to widespread default among for-profit graduates. According to the U.S. Public Research Interest Group, for-profit students made up 7 percent of the college population in 2007, but 44 percent of those defaulting on student loans.
Of course, high debt default doesn't necessarily indicate low school performance. For-profits typically serve an economically disadvantaged population, which helps to explain the higher default rates. The Wall Street Journal brought up the interesting fact that, "Studies that control for this 'at-risk' student demographic have found that loan default rates at career colleges are comparable to those found at community colleges and historically black schools." The accessibility of the for-profit education model selects for students without the financial means to attend school full-time--single, working mothers and workers seeking a first college degree, for example.
Meanwhile, amid questions of educational value, the federal government has also exposed aggressive recruiting practices at some for-profits. A sting operation by the Government Accountability Office (GAO) uncovered unethical practices by recruiters, who were captured on video encouraging financial aid fraud and misrepresenting tuition costs and graduate salaries to prospective applicants. At the same time, a third-party marketing campaign came under fire for falsely implying the existence of an Obama-supported scholarship for working moms.
Together, high debt default and aggressive recruiting have cast doubt on the value of a for-profit degree, setting off calls for accountability and quality control in for-profit higher education.
Response: For-profit accountability
In response to widespread default--and the lack of career preparation presumed to be at its root--U.S. Department of Education officials are introducing new regulations to hold schools accountable for educational outcomes. Under the new laws, for-profit schools "would no longer be eligible to receive federal student aid if their graduates' debt load was too high to be repaid, over 10 years, with 8 percent of their starting salary." Specifically, eligibility for federal programs such as Pell grants and student loans would be linked to the employment status and debt repayment rates of the school's former students.
To secure access to Pell Grants and federal student loans, schools will have to show that:
- At least 45 percent of former students are paying off federal aid loans; or
- Graduates have a debt-to-earnings ratio of less than 20 percent of discretionary income or 8 percent of total income
Meanwhile, new transparency rules promise to distinguish top-performing schools from their hyped-up competitors. Under current proposed rules, about 55 percent of for-profit programs would be required to disclose high debt-to-earnings ratios of graduates and to limit enrollment. Some for-profit institutions have challenged the government's method for gathering the student metrics, citing dramatically different numbers from their own research and requesting to see the government's data under the Freedom of Information Act. Further investigation may change the new regulations to make them more equitable. In any case, data transparency should empower prospective students to evaluate the marketing claims of for-profit schools and identify the best value for their educational investment.
The new for-profit standards are meant to single out the high-cost education programs that promise career gains but instead lead to low-wage jobs with little career advancement. Graduates of these programs take on the burden of huge educational debts; without the financial return on their investment, many struggle to make ends meet or default on their loans.
The Department of Education estimates that about 5 percent of all for-profit programs will be affected by the new regulations--unless changes are made.
"We want to hit the ones at the bottom, those that simply aren't working for students," Secretary of Education Arne Duncan told reporters in a press briefing about new regulations on the industry. "The 5 percent would frankly be the bottom of the barrel."
The road ahead for for-profit schools
By weeding out the worst offenders, the new standards stand to benefit legitimate schools and the for-profit sector as a whole. In the press briefing, Secretary Duncan carefully distinguished the opportunistic profit seekers from the rest of the industry.
"Some proprietary schools have profited and prospered but their students haven't, and this is a disservice to students and to taxpayers," he said. "And it undermines the valuable work, the extraordinarily important work, being done by the for-profit industry as a whole."
For-profit education currently serves a sector of the working population formerly excluded from higher education. By offering scheduling flexibility and online education, for-profit schools are making college degrees accessible to economically disadvantaged adults. On the whole, the for-profit model is achieving results. A study released by the Parthenon Group, an independent consulting firm, found that, "Even with this more challenging student population, the private sector generates superior education outcomes as evidenced by a 65 percent graduation rate (compared to only a 44 percent graduation rate at community colleges)." In a recent speech, Arne Duncan lauded the industry for playing a vital role in helping the nation reach the Obama administration's goal of having the world's best-educated work force by 2020.
Despite the negative press, the public appears to recognize the diversity among for-profit players. Sterne Agee analyst Arvind Bhatia observed, "[The] new gainful employment proposal is fair and reasonable and tries to catch the bad actors while not hurting the good ones."
While shares of some vulnerable schools dropped upon announcement of the new regulations, the stock prices of the most respected and well-established education companies gained as much as 13 percent when the news hit. That said, for-profit shares have taken a beating across the board in anticipation of new federal controls as investors struggle to distinguish among for-profit institutions. The recent rise in share price of some companies contrasts with a 52-week loss of between 4 and 67 percent among major public education corporations.
The for-profit industry faces a period of transition, as greater transparency and accountability distinguish the true educational leaders from overpriced and underperforming schools. Ultimately, the quality shakedown will leave the for-profit education sector stronger and better able to deliver on student, investor and government expectations.
By reining in the excesses, the for-profit education sector will, over time, establish itself as a mature industry driven by innovation and sound educational programming.