college, inc.

Interview: Daniel Golden

“Accreditation doesn't go with the owner; it goes with the institution. So whoever happens to own that college, they get the benefit of its regional accreditation.”
Dan Golden

He's covered higher education for 12 years and currently is an editor at large for Bloomberg News where he writes almost exclusively on for-profit colleges. This is the edited transcript of an interview conducted on April 21, 2010.

What is a for-profit college? ...

For-profit colleges have been around a long time. And aside from having the for-profit economic structure with shareholders, they've generally been oriented toward careers, vocational programs, as against liberal arts programs one might associate with the Harvards and Yales of this world.

What's [their] economic structure?

The economic structure has changed and evolved over the years. Today the for-profit colleges are heavily dependent on the federal government. The publicly traded for-profits, something like 75 percent of their revenue comes from federal aid to their students, federal grants and loans, which is up from 64 percent, I think, 10 years ago.

And similarly, the University of Phoenix, which is the biggest for-profit, it now gets 86 percent of its revenue from the federal government, up from something like 48 percent nine or 10 years ago.

So, once upon a time, these schools had a different revenue model, but today they basically cater to low-income, disadvantaged students whose tuition is paid by federal grants and loans. The University of Phoenix, for example, has evolved to that. ... The University of Phoenix is, by far, the biggest of the for-profit colleges. It has close to 500,000 students. In fact, it's one of the biggest American universities of any kind --

Isn't it by far the biggest?

No, because [the] State University of New York is slightly bigger, and so is the Ohio public system. ...

The University of Phoenix has evolved a great deal. When it started and in its early years, it was a school for middle managers who had had a certain amount of college but hadn't finished their degrees. Their employers would send them to Phoenix -- at the employers' expense -- and they would complete their degrees there. It was essentially a degree-completion school for people who wanted promotions in business.

Then they made a drastic turnaround six or seven years ago. That market was close to saturated. They couldn't grow at the rate they wanted and the rate [with which] they could please their Wall Street investors by simply catering to people who were completing their degrees, so they started a two-year program that was essentially for people with no college experience -- many of them low-income, disadvantaged students -- funded by the federal government.

And that's why Phoenix's revenue has gone from being less than half of it coming from the taxpayer to almost 90 percent. And that two-year college, Axia College [of University of Phoenix], has grown from hardly any students to more than 200,000 today. But that growth has also brought problems, because students with less readiness, less academic preparedness need more remedial help; it's harder for them to graduate. So Phoenix has encountered a number of problems academically by shifting to this new market.

And Phoenix, because it's so large and because it's been around so long, has had a tremendous influence on the rest of the for-profit sector, and there's been a general move by the whole sector toward the lower-income, less prepared students who are funded by federal revenue. ...

But highly profitable?

Highly profitable. And of course, funding from the federal government, which is a very guaranteed and certain source of funding. Now, the one limit on them is that there's a federal law that says that a college cannot derive more than 90 percent of its revenue from federal student aid, from the Title IV program as it's known.

And Phoenix, because it was bringing in so many students who were entirely paid for by the federal government, moved closer and closer to this 90 percent limit, from being less than half dependent on federal money in 2001 to now 86 percent dependent. So that 90 percent rule is very much a threat to them. ...

So [Phoenix is] doing some online [courses] before they start Axia? They know about online?

Yes, Phoenix was a pioneer in online education well before Axia. And if you think about it, their academic model was quite suited to online education because they have a standardized, centralized curriculum. Everybody who takes a given subject, like business or criminal justice, a given course, they take the same course, they read the same books and so on. So it's quite easy to replicate and take onto a grand scale, as against a traditional college like Harvard or Yale, where every professor has a very different course. So their growth model lent itself very well to online expansion.

Tell me about the online experience.

The way the online experience works at most of the for-profits, including Phoenix, is what's called asynchronous, meaning that you're not necessarily watching the professor talk to you in real time. The professor may leave a lecture that you can watch anytime you want, and then, at some point, you will post responses or thoughts on an online bulletin board and chat with your classmates or communicate with them on the bulletin board.

And in the course of the week, you hand in a couple of assignments or whatever's required. So it's a very convenient way to take classes in the sense that you don't have to be on your computer at a given hour, and so whenever you have downtime from work, you can be online. In that sense, for Phoenix, it was an extension of their mission to serve working adults because it's very convenient and flexible.

The downside of online education is, if somebody requires remedial help, it may not be as easy or helpful for them to get it online as against meeting with a person who's actually there. And also if your life is unstable, if you're a low-income student, maybe you get evicted from your apartment, maybe you're constantly moving around, you may not have Internet access all the time, and then that can make online education very problematic. ...

What is a for-profit [compared to a nonprofit]?

A for-profit college is distinguished from the nonprofit in practice by several things. One is that the for-profit college tends to be career- and vocational-oriented, with the payoff being a job at the other end rather than a sort of generalized liberal arts curriculum.

They also, because they're seeking profits, they tend to recruit students very aggressively. They have a sales force -- they don't call it a sales force, but that's what it is. They spend very heavily on advertising. It's a model that's much more designed to gain revenue through sales as against the model of we're going to instruct whoever happens to come by and express an interest. So the recruiting and the advertising very much distinguish the for-profit from the traditional college.

So they recruit much more intensively?

They do recruit very intensively. Anybody who's gone online to Google or Yahoo! or their e-mail will often see pop-up ads from the for-profit colleges. Or if you're watching television late at night, it almost seems to be saturation advertising.

And help me understand the sales force. What are they doing?

They have a sales force that essentially is given leads that come either from somebody going online and expressing interest in an online form or that are gathered by a lead-generation company that the college may hire or contract with. So these names of potential students come in, and it's the job of the sales force to talk to these potential students, call them, e-mail them and persuade them to enroll.

So they have call centers?

Yes, they have call centers, sure.

Can you help me understand how big a part of that business is it?

It's a very important part of a for-profit college business. They have hundreds and hundreds -- the bigger colleges -- of salespeople, enrollment counselors, whatever you want to call them, and they have targets that they want to meet, just like any other call center in terms of the number of students they want to enroll, the quotas that they have.

This has been a perennial source of tension with federal regulators: the extent to which these colleges do or don't pay the recruiters simply based on how many bodies they bring in. ...

What's the pitch?

... The pitch from these schools, first of all, [is] that a college education is vital to a job in today's society, or a college degree is vital and that they are the best place to get it because they provide up-to-date programs in key job fields that are growing. In reality, they all seem to provide pretty much the same types of fields and programs: business, criminal justice, medical assistant, maybe education and teaching. Those are the standbys.

But they all say: "We can help you get a job. You can get a degree. You can do it in your free time, spare time, via online education." And a couple, they also will often tell you that they are just as good as the nonprofits, just as good as Harvard or Yale or Stanford because they have the same accreditation, which is true as far as it goes. They do have the same accreditation, but that doesn't necessarily mean they're exactly the same school.

We'll come to accreditation in a bit, but tell me more about -- they're selling hope then? They're selling a promise of a better future? They're selling a promise of a better job is what I'm hearing? ...

They are selling the hope of a better job, a better future, a higher salary, and you will often hear from students, or disillusioned students, that they were promised a job or that there was a guarantee. The colleges say they don't make a guarantee, they don't make a promise; they simply give the fact and their record of success in job placement. But it's probably, in the mind of the beholder, a gray area somewhere in between.

So a disconnect between what an enrollment counselor or someone on the sales team might have said in a phone call or might have implied in a phone call and [what] the student actually signs as sort of the contract with the school.

Well, no, Essentially I'm saying that what they say and what the student hears may not be quite the same thing. And yes, the school usually has some kind of disclaimer somewhere on the form saying that they don't guarantee a job, but that fine print may be lost on the enrollee.

Because they're thinking if I sign up for this, I'm going to be making $20,000 a year extra, I'm going to be making $30,000 a year extra, and it's worth the investment.

Yes. The hope of the student is: "If I sign up, I'm going to get a better job, a higher salary, a brighter future. I'll be able to get this degree quickly, working in my spare time in the field that I'm interested in, and it will be painless and worthwhile." And certainly that's the impression that the salespeople do give.

And the reality?

The reality can be like that for some people. For many more, it ends in disappointment. These colleges often have high dropout rates so that some students don't end up with a degree. Even if they do end up with a degree, they may not get the kind of high-paying job they're hoping for.

They often, because these colleges charge a relatively high tuition, they have to pay for the tuition with loans as well as grants. Unlike a public community college, where a federal grant will usually cover most of the tuition, for the for-profit colleges, the tuition requires substantial borrowing. So a student who drops out or who doesn't get a high-paying job, sooner or later they have to pay the piper, and that could mean tens or even hundreds of thousands of dollars in loans that they have to pay back.

And for the dropout student, it's even worse, because they don't even have the degree to fall back on.

Right. ... The students who drop out, they don't even have the degree. They're often heavily in debt, and the credits they may have accumulated at the for-profit college, often it's not easy to transfer them to a nonprofit or a public college. Often those credits are not accepted.

So they may find that they've wasted a year or two years with all to show for it a huge amount of debt and no college credits accumulated. They may have to go somewhere else and start over. And if they can't pay back the debt, they're not eligible for financial aid to go somewhere else. So in all likelihood, they'll never be able to go to college again.

So, total dead end?

Total dead end. ...

I'm surprised by the price that they charge, that it's so high, and the amount of debt that people come out with. ... I'm coming with a B.A. [bachelor of arts degree] [at] a for-profit, $31,000, versus $17,000 in a state school. It's just a huge difference, a huge burden. What do you think of that?

Yeah, it is a large burden. I think one reason that they're able to charge so much is that it's not coming out of the student's own pocket in the beginning. Sooner or later they'll have to pay the piper after they leave the school, but when they enroll, Uncle Sam is paying.

So whether a school is charging $17,000 a year or $12,000 a year doesn't seem like a big difference to the student who's enrolling. They don't realize how much difference that's going to make in their monthly payments once they have to start paying back the student loan. But because it's not out of their pocket right away, they are willing to enroll in the more expensive college.

And the for-profits make it easy.

Well, of course. A lot of the people enrolling are responding to advertising. These colleges spend almost as much on advertising as they do in instruction, or in some cases more. People see an ad online, they see an ad on television; it mentions an education in medical assisting or dental assisting or teaching or criminal justice, and they think, "Oh, that's what I want to study."

And they call up, and before they know it they're signed up. And the colleges make it very easy. You don't have to wait until the next semester starts in three months. You could start on Monday. And they'll walk you right through all the various forms and help you get the financial aid. And it becomes a very easy and smooth process. ...

Have you spoken to people who are enrollment counselors, either current or former? Can you talk to the pressure that they're under, the atmosphere that they work in?

I have spoken to current and former enrollment counselors, recruiters, salespeople, and I think that many of them do feel under a large amount of pressure to meet quotas in terms of enrollments: so many a month, so many every two months. I think that's what's valued. And they speak of places where there's high turnover, high burnout because of these demands and these pressures.

Now, I'm speaking primarily to those who are disaffected, so there may be many more who would be perfectly happy and wouldn't complain. But when people do have a complaint, those are the complaints you hear: high pressure, heavy burnout. All they care is about us enrolling people; they don't care if they're qualified or not. That's the kind of complaint you hear.

And if it's pressure from management?

That's right. The complaints you hear [are] managers are pressuring us to meet quotas in enrollment. The managers don't care if the party who are enrolling are qualified or if they have a chance to graduate; they only care about getting bodies in the door.

All about starts?

All about starts and not about retention and graduation and so on. That's the complaint. You'll hear it from recruiters. You'll see it in many of the lawsuits filed by former recruiters against these colleges. That's a very common refrain.

And why is that? Why are we getting emphasis on enrollment as opposed to retention or graduation?

I think a lot of what's driving enrollment is the pressure to boost revenues and please Wall Street. The Wall Street community looks every quarter or every year to see if enrollment went up and revenues went up, and if it didn't, they're going to be asking why. And because there's a relatively high dropout rate, it becomes a kind of vicious cycle where these colleges have to enroll more and more and more people just to keep their enrollment even or to grow it a little bit. So the pressure becomes tremendous on the front lines.

We were talking just before ... about quality of education. It's something that's very hard to judge, whether it's a for-profit, community college or a state college. But what can we say about the quality we were getting in for-profits, quality of education?

It is very hard to judge the quality, and I think that most people would agree that the for-profits do a decent job on a sort of basic vocational skills-type of programs. But their model is a very different model, and I think it's appropriate to ask some questions about it.

For example, in the traditional college, the faculty member plays a very important role. They design the curriculum; they often do research. They're an esteemed and valued person, and they communicate their excitement about the field to the student, ideally.

In the for-profit, they don't usually have very many full-time faculty. They use adjunct faculty who are given a curriculum to teach. They don't play much of a role designing it themselves; they don't do research. They're much more of a functionary. So for people who believe that the faculty member has a central role in education, you have to wonder what the quality of education is at for-profit colleges, where the faculty member is not nearly so important.

Then there's the fact that they spend so much on advertising. As I mentioned, many of these colleges spend as much or close to as much on advertising as they do on instruction, and that advertising does not go to quality. So does that impair the quality of the classes is a legitimate question as well.

So help me understand how much federal money these colleges are [receiving]?

In terms of federal aid, from the statistics I've gathered, federal aid to for-profit colleges, in terms of grants and loans to their students, totaled about $4.5 billion in the year 2000. By 2009 that was up to $26.5 billion, so something like a 600 percent, sixfold increase, in nine years.

It's partly because the enrollment has grown at the for-profit colleges, but it's also partly because of this shift in strategy that they've done to go from [a] bit more affluent students to low-income students who are funded by need-based grants and loans.

Are they giving these students an opportunity they wouldn't get in the traditional system?

There is an opportunity, but it comes laden with risk as well, because if these students do not graduate or they don't find a high-paying job, they're stuck with the burden of student loans that they have to pay back. And the for-profit colleges have a higher default rate on student loans than to other sectors such as nonprofit or public colleges. Something like 21 percent of students at for-profit colleges default within three years after leaving school.

And how does that compare with others?

It's substantially higher than other sectors. It also probably understates the true number of students who can't pay the student loans back, because many students at for-profit colleges apply for deferments or forbearances that postpone the day of reckoning on the student loans. So they postpone it, but they don't postpone it forever. So sooner or later past the time that the government and the school are calculating the default rates, that student will be faced with paying the loans back.

Let's unpack that. ... Let's get to this point of the official rules involved just counting from [the] relatively brief window.

That's right. The way the rules work now is that the government officially looks at the default rate of colleges for two years after a student leaves school. That's a relatively short period of time. So in the future, starting in a year or two, they're going to be looking at the default rate for three years after a student leaves school.

But even three years is not the full amount of time that a student might default in, so that the three-year rate for for-profit colleges, which as I said is a little over 20 percent of all their students default within three years, is considerably less than what the lifetime default rate would be.

In addition, students can apply to defer their loans. They can apply for what's known as forbearance. So that pushes the data payment back, but it doesn't end it forever. So the proportion of students who are actually paying their student loans back in full and on time is probably considerably lower than the other 80 percent.

So we've got a default problem in the sector is what I'm hearing?

There is a default problem. Students who leave for-profit colleges, either through graduation or dropping out, are more likely to default than students at other types of colleges. The official rate, which is measured over two years, is something like 11 percent of students default from for-profit colleges.

When you increase that to three years after they leave school, the default rate jumps to something like 21 percent of for-profit students default. I haven't seen studies that took it out any longer, but the longer you go, the higher the default rate would be. So you can come to some pretty discouraging numbers about exactly how many students at for-profit colleges can pay their student loans back. ...

Right now the government's only official numbers that they look at, that they calculate, are the two-year default rates. Soon they'll have to be three years. Beyond that, you don't see any official numbers from the department or from the colleges. ...

... The students are on the hook, and the taxpayer is on the hook?

The reason that we care about these defaults so much is because the for-profit college is not the one that is on the hook if the student defaults. It's you and me. It's the taxpayer. It's the federal government. These are federal or federally backed loans. So if the taxpayer wants their money back, they should be concerned about defaults no matter when they take place. ...

There's a lot of striking parallels between the for-profit colleges and the subprime mortgage industry before the economic crash. For one thing, they both appeal to a group of customers who are low-income, disadvantaged, and may not all be prepared to succeed, to succeed in one case by graduating through college and the other by being able to make your mortgage payments.

In addition to that, it's a situation where the risk is not all borne by the lender in one case or by the for-profit college. Instead, the risk is borne in the case of the college by the taxpayer. ...

The other interesting parallel is that both of these industries, for-profit colleges and subprime mortgage, at that time enjoy vast bipartisan support politically, and the reason is that they appeal to Democrats and liberals because they appear to be broadening opportunity, whether it's for homeownership or for college degrees, both cherished values in America, and they appeal to conservatives and Republicans and free marketeers because they're for-profit companies that are often publicly traded on Wall Street. They have the best of both worlds politically, and yet the situation is ripe for their customers to get in over their heads and for the taxpayers to be left holding the bag. ...

I think that people have not thought enough about the parallels between these two industries. And the lessons from the subprime crisis, people are applying them to the economy and to the financial and investment worlds, but they haven't thought about the parallels in education.

Because education just does not seem like a sphere in which business or profit or subprime behavior would be readily apparent?

Right. And I think also because there's a kind of disconnect in American society where for-profit colleges are very important. They're growing tremendously. They're a very quickly increasing part of American college going. But they're not really very familiar to decision makers and policy-makers and people in Washington who make decisions.

The power elite in this country doesn't usually send its kids to for-profit colleges, and they're not really aware. It's almost like this system is growing -- even though it's in plain sight and it advertises all the time, in another strange way it's almost invisible to the decision makers at the top of the political and corporate hierarchy. ...

And have you looked into the amount of outstanding student loan debts that are [out there]?

I've heard some numbers secondhand. I don't want to use them. ...

I mean, it's massive amounts of student loans outstanding.


You see Sallie Mae pulling back because they were seeing so many defaults --


-- and for-profit colleges having to step in to fill the gap --

Right. They're now making their own loans.

-- and keep enrollment going, and you just wonder how big a crisis is out there.

Right. I have the same exact questions. ...

We know that there's a lot of outstanding student loan debt in America. One interesting question [would] be, how much of it is incurred by for-profit colleges rather than the traditional schools? My guess is it's a growing segment, because for-profits are the fastest growing part of American higher education. But I'd like to know the figure. I haven't found it yet.

That kind of debt and the debt burden on students who are going there is considerably higher.

That's right. And so the debt burden on the students who go to the for-profits on average is higher than in the other sectors. And it would be very interesting to know what's the outstanding loan debt just for the for-profit colleges. It would be also interesting if we had better data on default rates and deferments and forbearance and -- there's a lot of data we're still lacking.

Yeah, it sounds like, for an area where there are so many questions, there's a lack of transparency with a lot of this information.

I'd say that there is a lack of transparency about a lot of information about for-profit colleges. On the other hand, I never found that nonprofit colleges were all that transparent either, so I don't want to single out for-profit colleges for that, because in general, in the education establishment, there are gaps in disclosure, let's say.

Hard to get the data that we want --

Exactly. Exactly.

And as the financial consequences become more and more serious, I guess those questions get sharper.

Right. And I do think that the Obama administration is probably asking a lot of these questions, too, looking at the for-profit college sector with a much more jaundiced eye than the Bush administration did. And I think it realizes that the for-profit colleges are growing quickly and are going to have to continue to grow in order for the administration to meet its college-going and college-graduation goals.

So they're trying to rein in the abuses without undermining the sector itself. It's kind of a delicate tightrope that they have to walk, because they don't want to undercut the sector. I don't think the administration wants to be responsible for some big drop in these colleges' share prices. But on the other hand, it wants to rein in abuses and make sure that they're straightforward in their representations to prospective students.

And how's it going?

There's a whole bunch of regulations that it's talking about, but there hasn't been a lot of actual change yet. We haven't even actually seen the final form of the proposals, because the regulation process is eternally long. We'll have to wait and see.

Their proposals involve tightening restrictions on incentive compensation, which is the jargon term for paying recruiters based on how many people they enroll. Then they want to link a school's ability to receive financial aid to whether its graduates get good enough jobs to be able to pay back their student loans. But there's a big political battle over that, and what form that regulation will take is still being hammered out. ...

They have a lot of different constituencies to be concerned about in this area, because, as I mentioned, the for-profits are politically popular both with Democrats and with Republicans. ...

So there's Congress; there's Wall Street; there's the millions of students who now go to these colleges. And it's only to be expected that they're treading pretty warily.

Let's break apart incentive compensation requirements again. First, what is incentive compensation? What are the issues here? Why has this become a gray area in the first place?

Incentive compensation, which is the paying of recruiters based on how many people they enroll, comes on the radar because it appears to encourage recruiters to sign up unqualified students. If you're paid based on how many people you enroll, you'll enroll pretty much anybody.

So the concern is that they're bringing in students who can't succeed or graduate, loading them with debt and then leaving them to flail just so the recruiter can make more money. So that's the issue at the heart of it. And there's been many lawsuits against for-profit colleges overpaying incentive compensation.

Then is it because it's illegal?

In 1992 there was a law passed that banned incentive compensation and essentially said that colleges could not pay recruiters based on how many people they enroll. That was the law of the land for 10 years or so until it was watered down by the Bush administration, which essentially changed it to be that they could not pay a recruiter only on the basis of how many people they enrolled; it could be one of the considerations as long as there were others.

That's currently the law, but the Obama administration seems to be on the verge of proposing, if this regulation ever comes through, going back to what was the law before the Bush administration watered it down: that you can't do incentive compensation at all.

Now, the argument against that is that in a way it doesn't make sense to ban it completely. If you can't pay a salesperson based on sales, what exactly can you pay them on? So to the free-market, for-profit-college mind, I think they find the ban on incentive compensation ludicrously impractical.

And from the reformer viewpoint, it has to be curbed because it's an incentive to sign up unqualified people. And the result is, I think, that they will try and meet in the middle, and there will be a lot of gray area and colleges going right along the edge of what they think the law will allow. ...

When you look at their 10-Ks, [a document businesses are required to submit annually to the Securities and Exchange Commission,] you see they're spending a lot of money on this part of the operation.

That's right. I mean, this is the pulse of the for-profit college, is the call center and the recruiter bringing in the students.

And the lawsuits?

There have been a lot of lawsuits over the years against for-profit colleges over incentive compensation, in part because of the unsettled nature of the law. As I mentioned, it started one way in 1992 and with a total ban on incentive compensation, and then it was watered down under Bush.

This kind of back-and-forth can lead to lawsuits. In general, former recruiters have sued for-profit colleges alleging that the pay structure was completely based on incentive compensation and that, as a result, they were recruiting unqualified students who essentially had no business being in college. And some of these lawsuits have been thrown out. Some have been settled depending on what district and what the exact nature of the claims are.

And can you talk to any of the suits? There's one famous one, the Phoenix one.

There was a long-running once against the University of Phoenix that went on in courts for seven or eight years and was finally settled a few months ago by a couple of former recruiters making the allegations I mentioned of unqualified students being signed up by recruiters who were looking for incentive compensation. That was settled by Phoenix for $70 or $80 million a few months ago. ...

The other sort of knotty issue [is] ... gainful employment. How does one explain what that is?

The "gainful employment" proposal is basically a way to link the financial aid money that a college gets to its ability to help its graduates find high-paying jobs that will enable them to pay off student loans. The concept is that if a college's graduates are paying more than a certain percentage of their annual income in paying back their student loans, then the college should not receive financial aid because it didn't do a good enough job in job placement and job salary and so on.

It's an attempt to hold for-profit colleges accountable for the hope that they sell of finding a good job at the end of the road. If their tuitions are particularly high and their graduates end up with very low-paying jobs or no jobs at all, this regulation would penalize them.

It's an attempt to cut to the heart of the problem or the issue facing for-profit colleges, which is, [is] their tuition worth it? Does it pay off in terms of a high-paying job? If the money they charge and the debt that their students incur pays off in the form of a good job, then they will not be affected by gainful employment, and they will fulfill their promise.

If, on the other hand, their students incur a huge amount of debt to pay a high tuition and then don't find a good job, this gainful employment regulation could come back to haunt them by taking over, turning off the federal spigot.

That's just a sort of direct challenge and test of whether for-profit colleges actually fulfill the role that they say that they serve. Whether [it will] ever actually become a law that they have to follow is still up in the air because it's just a proposal at this point, and there's various versions of the proposal floating around.

As I understand it, that's the concept. It's an effort to hold them accountable for their central reason for being: We provide good jobs and enable students to pay back loans. If they do, then they're fine. If they don't, then they're in trouble.

And they're worried?

I think they are worried. Some are more worried than others, but those with the higher tuition and the lower-paying jobs at the other end, I think they are worried. And I think there's a political battle gearing up over this.

Can you think of how intense that battle is? Are you hearing about what's going on in Washington for this?

My sense is that there's a pretty strenuous lobbying battle going on with the for-profits gearing up for a big fight. The problem they face is that this is a regulation the Department of Education can impose. It's not something that will go before Congress. But the Department of Education has many other bills and areas of legislation they'd like to see [go] through Congress, so there may be a lot of bartering or discussion going on along those lines. ...

The last big cleanup was in the early '90s. Can you speak to that?

Yeah, the last big cleanup of for-profit colleges was about 20 years ago. There was a scandal at the time over career schools, career colleges signing up anybody and everybody off welfare lines or unemployment lines just for the federal aid money. Often the schools would be shams or fly-by-nights, and the student would be terribly disappointed. They would leave, or they'd be unready for school. They would drop out ... after a few months without getting a certificate or a degree or diploma or anything for it.

It was a miscarriage of justice, and that was realized. And Congress passed a whole series of reforms that, as we've discussed, were intended to rein in the for-profit colleges in various ways: limits on what proportion of their revenue could come from student aid; limits on their default rates on student loans; limits on incentive compensation. That was the regulatory structure that was devised to try to keep for-profit colleges on the straight and narrow.

And a lot were closed [down]?

Many of them were closed down. I've interviewed many people who had student loans at that time they couldn't pay back, and those schools have disappeared.

And over the last 20 years the sector has grown tremendously. The regulations have been watered down, especially under the Bush administration. There's a lot of concern that we're approaching a situation that in some ways is reminiscent of the one that was 20 years ago with for-profit colleges, again enrolling students who are unprepared, without jobs after the degree, with high dropout rates. So there's a certain momentum building for reform again.

Can you talk to the new incarnation of for-profits? I mean, it's very different. My understanding is that back then, it was generally smaller trade schools. And version 2.0 seems a very different beast.

At the time, they were sort of small trade schools. There was not online education, and I think some of them were correspondence schools. They were not large, publicly traded entities the way we have them now. They were less respectable, more at the fringe than the for-profit colleges we have today.

And their enrollments were smaller. The courses they were teaching were even more vocational than for-profits today. They were truck driving or hairdressing, things like that. Today's for-profit colleges still have a vocational and career essence, but they have broadened out what they offer, courses that are not as strictly job-oriented as they once were.

So yeah, the for-profit sector is bigger. It's different. It's taken on more of a sheen of respectability, and it has more clout in Congress and on Capitol Hill. So it is a very different beast today. As a result, we're not having a rerun of those issues, but there are certain echoes of them certainly in what's happening today, ... enough to make people with long memories look at the parallels and get worried.

What do you think are the most striking parallels?

I think the most striking parallels between then and now are some of the recruiting abuses, where I see some of the for-profit colleges today, as then, going after some of our most dispossessed people in society: again, the welfare lines; the unemployment lines; the people in very unstable circumstances. That's very reminiscent of it.

And the exploitation of federal student aid programs, again, is a parallel issue. I would say that the exploiting of disadvantaged people for taxpayer money was the essence of that scandal, and it's an issue again today.

Accreditation -- something I'd never heard of until I started working on this story.

Accreditation is essentially higher education's way of policing itself. These are not government bodies' accreditors. They are bodies made up of colleges that seek to enforce [a] common standard of behavior and quality. But they've taken on a much more important role than that, because they're also the gatekeeper for financial aid.

If a college is not accredited by somebody, it cannot receive federal financial aid funds. Thus the accreditors [are] the gateway not just to kind of an informal seal of approval but to millions and millions and millions of dollars in federal money. So accreditation has taken on probably a bigger role than was originally imagined.

And it's at a time when the actual number and variety of accreditors seems to be growing by leaps and bounds. There were originally, I guess, six regional accreditors around the country that accredited your traditional nonprofit and public colleges. Then other types of accreditors sprung up to accredit for-profit colleges. There's many, many accreditors now. ...

I've read many instances of for-profit colleges buying traditional colleges, buying small, failing colleges. And they're able through that purchase to obtain accreditation.

Right. Now, those for-profits who are doing that, they already have accreditation, but they don't have the most desired, highest, most prestigious level, called regional accreditation. So one shortcut to regional accreditation is to acquire a regionally accredited college.

And that's because accreditation does not go with the owner; it goes with the institution. So whoever happens to own that particular college, they get the benefit of its regional accreditation. They have to still live up to the standards and so on, but essentially this is a shortcut to obtain the most desired level of accreditation.

And then what they do is in their marketing they will then say: "We have the highest level of accreditation. We have the same level of accreditation as Harvard and Yale and the University of Virginia and Stanford." So it becomes a very useful claim, particularly online, when they're appealing to students who have never heard of the nonprofit that was bought, but they've heard of all these great schools with the great accreditation.

It's a way to entice people around the country or around the world to enroll. So they take these nonprofits, which are usually financially failing. They acquire the nonprofit, they turn it into a predominantly online school, and then use the accreditation as a branding and marketing appeal to quickly ramp up the enrollment online.

That's how they take them from being financial failures to financial successes, because online education is much more profitable than a campus-based education. And you can grow your enrollment much more quickly because you don't have to worry about building dormitories and so on. Buying accreditation has become a quick and easy way to get a prestigious credential and multiply your enrollment many times over.

And tap into federal funds?

Yes. Buying accreditation is also a way to tap into federal funds, because if you start a college, it's not eligible for accreditation right away, so students initially could not get financial aid. Starting a college from scratch takes a while to ramp up to the point where you can get accreditation and financial aid.

You buy a regional accredited college, you don't have to worry about that. Now, of course, the for-profits I said that are making the acquisition, they are already accredited, so they can also just apply for regional accreditation for a higher form of accreditation for their existing campuses. But there's no assurance they'll get that. So it's a shortcut to accreditation and to financial aid funds.

People think of it as some kind of regulation, some kind of quality control. Is it?

It is a form of quality of control. The question is, how effective is it in that? It looks at the school's finances; it looks at their academics; it looks at their student performance. But a lot of it is based on not set objective standards, but are you meeting your own goals?

So Harvard may have one goal and the University of Phoenix may have another goal, but the accreditor doesn't say which is better. They say to Harvard, "Are you meeting your goals?," and they say to Phoenix, "Are you meeting your goals?" So it's not like it's a set, strict, rigid set of measurable criteria that every school has to meet. It sympathizes with the college's mission and tries to see if it's fulfilling whatever its mission might be.

But that has a downside? I'm thinking of when you speak to students who have spoken to recruiters, and often the --

Students may not understand that just because a for-profit college and Yale have the same accreditor, that doesn't necessarily mean they offer the same programs, they have the same quality of faculty, they require the same amount of work or anything like that. ...

That's not necessarily bad, because not every college can be Harvard or Yale, and it's important to have a system with many different kinds of colleges. But it can lead, one would think, to misunderstandings between the recruiter and the prospective student.

You wrote a big piece about it. Anything that struck you when you were reporting?

Let me talk a little about this accreditation, buying of accreditation. The argument in favor of it essentially is that otherwise these nonprofit colleges would fold and that the country is better off having these colleges at least continue as for-profits than have them disappear.

Now, that's a strong argument. On the other hand, it seems to me that the nonprofits almost in a way do disappear, because what made them distinctive and unusual, their traditions, their cultures often goes away when they're bought by a for-profit just as surely as if they had closed their doors, because the for-profit is generally looking to transform the nonprofit into a predominantly online school that offers the same mix of programs in criminal justice and business and medicine and education as every other online school out there.

And what made that school distinctive -- maybe its religious background, maybe its airplane mechanics program -- whatever unusual individual program it might have specialized in, it tends to lose that identity. The benefit is the students still have somewhere to go, I guess; the faculty still have a job. But you can't really pretend that this is the same institution going on under a new owner, because normally it isn't.

And they don't buy it to keep it as the same institution, because that same institution wasn't making it financially. They buy it to make it another sort of homogenous part of the online education world. Many people have mixed feelings about that, but it's not the same variety of options going forward as there were before.

The [regional accreditor, the] Higher Learning Commission [HLC], they've changed their rules as well. There seems to be some recognition --

Yes, the Higher Learning Commission, they were burned a few years ago when there was an acquisition. A for-profit group of investors acquired a college in the Chicago area, and they didn't end up acquiring, as I recall, the campus. Most of the faculty and students did not end up at the for-profit buyer. It was pretty much just the name of the college and the accreditation. And in fact they may have changed the name, so I think it was just the accreditation. I think there was a lot of controversy over that and a lot of criticism. ...

I think, in response to that and other somewhat similar cases, the Higher Learning Commission has tried to tighten its standards and is trying to pay more attention to, is the college that's being acquired under new ownership, is it really going to be the same entity or a similar entity? If not, we need the buyer to essentially reapply for accreditation. So they are trying to get tougher about this. Also I think the Obama administration would like to see the accreditors be tougher on this, and they're putting some pressure on, too. ...

One of the most startling things to me as a reporter about these for-profit colleges is how similar they all are to each other in terms of the programs they offer: criminal justice, business, nursing, teaching. These are the ones that attract the most students, and they seem to adapt best to online. As a result, the colleges are almost indistinguishable.

You'd like to see an American higher-education system ... where people had different options and could tailor their college to whatever particular interest or career they had in mind. But so far, the for-profit world, it seems to be the same four flavors, you know? There's no mochaccino ice cream or something. It's all chocolate, vanilla and coffee and strawberry.

Now, they tell me, though, "We're in a young stage of development, and as we grow and as the years go by, there will be more variety and more individual differences among these companies." But you don't really see it yet.

But they are offering something that is very different to the traditionals? What does it tell us about what they did, what they're not doing, how they're adapting?

A lot of the traditional schools now have online programs as well, but they were late to the game, and they don't have the kind of advertising budgets that they can seriously compete with the online for-profits.

The for-profits staked out this turf very well, and the traditional schools are having a tough time competing. You can probably get a lot of these same programs at the community colleges or at the state college, but you may not be able to get them as easily. You have to reach out to them instead of them reaching out to you.

And they may not offer what you want online. And online is more flexible and convenient. So the for-profits have a lot of marketing and competitive advantages, but I don't think they offer many courses that you couldn't find with some effort at a community or state college.

Are we seeing a big change in the landscape?

I think that this [is] the big opportunity for the for-profit colleges. The state and community colleges are beset by budget cuts. There's a great demand for college educations. There's a great burst of interest in online education, and the for-profits are well positioned to take advantage of it.

We may be seeing a real sea change in the shape of American education, with online and for-profit education becoming ever more dominant. The services where online and for-profit schools are something like 25 to 40 percent of all college may be a harbinger of things to come for American society.

There seems to be a major shift going on, and I know people in the traditional world who are very concerned about being dinosaurs, that with their higher cost for dormitories and full-time faculty and so on whether they will be able to compete and grow at the same rate as the for-profits. The traditionals have brought a lot of this on themselves, because the selective traditional colleges have not wanted to grow because they have wanted to stay selective.

It's kind of like the Groucho Marx line, "I don't want to belong to a club that will have me for a member." They basically built their brands by being hard to get into and by charging a huge amount of money, so they shouldn't be surprised that competitors come along that are not hard to get into, and in fact they're trying to take all comers that may take some market share away from them in the end.

And what does that do ... for the country? What does that do for the economy, this kind of shift?

A lot of that depends on where the for-profit college industry goes. Is it going to outgrow some of these Wild West tactics, these recruiting misrepresentations and abuses, whether it's going to become more responsible, and/or is the government going to make it more responsible?

I think the goal would be if it's going to be a larger share of American education, to have it grow into a place that has relatively low default rates, pays attention to retention as well as to enrollments, provides a quality education that leads to good jobs. And I think we'll see in the next five to 10 years whether that's the direction it goes in. ...

Let's talk about Wall Street for a minute.

... This is a time of great opportunity for them, because there are budget cuts in the public sectors, and there's a great interest in online education, and there's a social goal for more people to go to college.

The result is that, no matter how many critical articles I write about the industry, the stock prices just keep going up. It's kind of a joke here. I'll hand my editor another story pointing out some problem with for-profit colleges, and he'll read it, and he'll say, "And the stock prices are going to go up anyway." So Wall Street [has been] dallying for a long time. And there's many people out there that have been predicting their demise, but they just keep growing. ...

The for-profits do well on Wall Street for a number of reasons: because they rely on government funding, which is [a] guaranteed source of revenue; there's a social goal of having more students go to college, which fits their model. They're going to be where a lot of those students go.

People have been predicting their demise for years, and short-sellers, quite a few are betting against them. They're almost getting to the point where they're too big to fail.

University of Phoenix has close to 500,000 students. That's a large group that the administration has to be very cognizant of. It's not something where they can suddenly say, "Oh, we don't think you deserve financial aid," because there would just be too many students left out on the street with nowhere to go. ...

Can we talk about [the homeless story] now?

Yes. This story that just came out is about another aspect of recruiting abuses by for-profit colleges, and what it looks at is recruiting homeless students. The reason that's a very dicey area is because the homeless are a particularly vulnerable population.

Obviously they don't have a lot of resources. Their lives are unstable. They're more likely than the average population to suffer from mental illness or substance abuse problems. So if you recruit them to go to college, if they're recruited to go to a for-profit college and they take on loans as well as grants, if they don't make it through the college -- it's not easy for them to given their problems -- if they don't make it through the college, they're left with a loan burden that already adds to a very difficult plate.

What did you find?

I found that a number of colleges are courting the homeless, having their representatives go to homeless shelters and give presentations, and also e-mailing them and calling them even though they know they're homeless and in a shelter. It's not a uniform or very extremely widespread practice, but it's not atypical either. I found a number of examples of colleges that were recruiting in the shelters.

Do you have [numbers] of how big an issue this is?

That's a good question. It's not easy to put numbers on it. Now, as it happens, the federal financial aid form this past year for the first time asked students seeking financial aid if they were homeless or at risk of being homeless, and 46,000 students said they were, which is a small percentage of the millions of students who go to college, but nonetheless a significant number of people.

Now, I don't know of those 46,000 how many go to for-profit colleges. The other thing I would say is that they're not always going to for-profit colleges because they are recruited. The homeless, they may have seen an advertisement on TV or on a computer for a for-profit, and they may just sign up just like anybody else. In that case, the college may not know that somebody is living in a shelter.

But in fact, the for-profit colleges' pitch has even more appeal. The hope of finding a job and finding some prosperity and some successes must be wonderfully appealing to the homeless, but it's not easy to achieve. If they do have substance abuse or mental health problems, those can get in the way of studying and academic success.

If they're living in a shelter, they often have very little privacy. There may not be a working computer in the shelter. Some are ex-offenders, and that can limit your job opportunities afterward. Employers may not want to hire somebody. And if they end up without a job, without a degree, with loans, that can prolong homelessness, because, for example, public housing in this country, the federal regulations encourage the public housing authorities to consider the credit record of somebody applying for a housing unit. So if you're homeless, you're applying for public housing, they look over your record and they see that you have a major student loan, they'll be less likely to give you a unit, and you may be stuck in the shelter or in some really bad housing situation or poor apartment or something like that.

So basically it can leave you worse off?

It can leave you worse off. And for a homeless person to be left worse off, that's saying [something].

You spoke to some people who were in shelters, who had been in shelters?

I did. I have a number of case studies in my story of homeless people who were in shelters where they attended presentations by for-profit colleges, homeless people who signed up at a for-profit and said they were guaranteed a job. But it seems very unlikely, given their background and issues, that they would actually get a job in the field that they're studying, people who dropped out of for-profit colleges and now have greater loan burdens.

There's a variety of touching, sort of human stories that you encounter. There may well be some success stories, too, but I don't think that there's that many of them, because it's not an easy climb to make.

And many of them were recruited?

Yes. Many of them, the ones I interviewed, many of them were recruited. And I found that the staff at homeless shelters are very concerned about this problem. Homeless shelters place a big emphasis on privacy. They want to protect the privacy of their clients. They don't want marketers coming there, and solicitors.

If you call a homeless shelter and ask for somebody, they won't even confirm that the person lives there, so they're very disturbed by the volume of e-mails and phone calls coming into the shelters from the for-profit colleges. And a lot of these shelters, some see it as a wonderful college opportunity, but a lot of them see it as just another false temptation.

And when homeless students do go to college, they tend to, understandably, to go to the local community college, because in general the tuition doesn't require them to take on a lot of debt. They can pay for the community college with a need-based Pell Grant. So the community college, financially speaking at least, is usually the better option than the for-profit college for somebody with as few resources as a homeless person.

Some of the shelters have developed good relationships with the community colleges over the years, and they're quite worried that the homeless students may start to go to the for-profits and not fully realize the loan burden that that's going to entail.

Because the disclosure is not necessarily that clear about the possible implications of the debt?

Yeah. And the homeless people may not be that financially sophisticated or they may not have figured it out that well. ...

Without naming any specific colleges, what was their response?

It's an interesting divide. In general, the for-profit colleges said that they don't condone recruiting in shelters and that they didn't realize their recruiters were doing it. Some of them said that.

I think there again, the issue is incentive compensation. If your recruiters are going to make more money by signing up as many people as possible, they may go to homeless shelters whether or not the management thinks that's a good idea or not, because they want to sign up as many people as possible, and there are a lot of people in America who are homeless.

That's one response. Another response you'll get is: "Well, if the homeless want to come here to college, they have as much right as anybody else. We don't discriminate against any group, including the homeless. [If] they have a high school diploma or a GED or whatever we require, if they want to come here, that's fine." Sometimes you'll hear that, too.

I'll also mention, again, without disclosing the name, I did find one example of a college that has a very unusual policy. It's located in a very low-income neighborhood. It recruits in the shelters. Quite a few of its students are homeless, and it actually pays them to come to the college.

If they show up for 80 percent of the classes and get Cs, they get $350 every two weeks. Of course the word is spread very quickly among the shelters that you can make some money if you enroll at this particular college, and they're flocking there. Now that college said: "This is not an enrollment tool. This is just to make sure that they attend and stay in school. And it pays off in a higher graduation rate." All I can say is they certainly are aware in the shelters that if they need some spending money, that's the college to enroll in.

And it makes good business sense for the college because they're bringing in a huge amount of tuition?

Exactly. It makes business sense for the college because the homeless have no resources of their own; they qualify for the maximum federal grants and loans. So the college gets a guaranteed tuition, and that's a major incentive.

What are the rules in this area? It sounds dubious that you would pay people to come to college.

That's something I'm still exploring. But it seems hard to distinguish paying somebody to attend 80 percent of classes or whatever from a sort of standard scholarship program that you will find at other colleges that are obviously not aimed at the homeless. They may be aimed at high achievers or needy students or whatever, but the legal distinction between paying the homeless $350 every two weeks and giving a scholarship to come to a university, it's not clear that there's a legal difference between those two. I'm still trying to sort that out.

It's certainly true that there's a lot of discounting in traditional colleges.

Yeah. But it's unusual for a school to provide a scholarship out of its own funds that nearly everybody can qualify for. And, you know, most people who go to a college can show up to 80 percent of their classes and get a C, so it does seem to be a different nature, different kind of beast from the typical scholarship. But exactly how and what that means legally is a mystery.

But it is still going on?

Yes, it's still going on at this particular college. And I'm exploring it.

And more broadly, in the center, is recruitment of homeless people still going on?

Yes. I think it is. Some of the particular examples I gave, either colleges said they discontinued it, or they said that if their recruiters were doing it, it wasn't authorized. So I can't say that it's common standard practice ordered from above, but I think as long as you have incentive compensation you are going to have recruiters going after the most troubled and marginal people in society.

Whether it's people on welfare lines or unemployment lines, or in homeless shelters or in halfway houses, that's always going to be considered a way to boost enrollment. That's why incentive compensation, in a way, it's an important issue. ...

And in many cases, it's not people who are 18, 19, who are kind of still with the family or have family support that they can fall back on necessarily?

Yeah. Typically the audience that the for-profit colleges are aiming at are not people coming straight out of high school. They tend increasingly to be people maybe in their late 20s, early 30s with dead-end or entry-level jobs, looking for something better. They may have a high school diploma; they may have an equivalency degree; in some cases they may not have either one. They may have to pass a test even to qualify for financial aid.

But they look to resume their education after a hiatus of 10, 15, 20 years. And they see the ad on TV or on the Internet for the for-profit college, and they say: "That's what I need. That's where I want to go. And that's how I can achieve the American dream." And that's where these colleges draw their appeal from. That's where their power comes from.

The dream?

The dream. That's right.

It's a very powerful appeal, isn't it?

It is a very powerful appeal. I mean, it's the essence of America. It's upward mobility. And in many cases these colleges provide that, and, as a result, they keep American democracy going. But in other cases, there's just disillusion and disappointment at the end of the road.


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posted may 4, 2010

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