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What Might the For-Profit Sector's Problems Mean for All of Higher Ed?

Earlier this week, the chair of the Senate Health, Education, Labor, and Pensions (HELP) Committee, Senator Tom Harkin, held a press conference to announce the release of the committee’s report on the for-profit higher education industry. (The video archive of the press conference is currently viewable from Sen. Harkin’s homepage; in the future, it will most likely find its way to his “Videos” page or his YouTube site.) As the culmination of a two-year investigation, the four-volume report highlights a number of concerns about the sector’s recruiting and spending practices, student outcomes, and heavy reliance on federal sources of student financial aid for revenue. The report’s executive summary effectively covers the range of issues involved, so I won’t try to recreate it here, but a few points from it illustrate why the problems of the for-profit sector are increasingly important:

  • … Federal taxpayers are investing billions of dollars a year, $32 billion in the most recent year [later cited as 25% of U.S. Dept. of Education student aid funds], in companies that operate for-profit colleges. Yet, more than half of the students who enrolled in in those colleges in 2008-9 left without a degree or diploma within a median of 4 months.
  • Among the companies examined by the committee, the share of revenues received from Department of Education Federal student aid programs increased more than 10 percent, from 68.7 in 2006 to 81.9 percent in 2010.
  • Committee staff estimates that in 2009 when all sources of Federal taxpayer funds, including military and veterans’ benefits, are included, the 15 publicly traded for-profit education companies received 86 percent of revenues from taxpayers.
  • For-profit colleges devote tremendous amounts of resources to non-education related spending including marketing, recruiting, profit and executive compensation, while spending relatively small amounts on instruction. In fiscal year 2009, the [30] education companies examined by the committee spent:
    • $4.2 billion or 22.7 percent of all revenue on marketing, advertising, recruiting, and admissions staffing.
    • $3.6 billion or 19.4 percent of all revenue on pre-tax profit.
    • $3.2 billion, or 17.2 percent of all revenue on instruction.
  • Ninety-six percent of for-profit students take out student loans, according to the most recent U.S. Department of Education data. In comparison, 13 percent of students at community colleges, 48 percent at 4-year public, and 57 percent at 4-year private non-profit colleges borrow money to pay for school.
  • For-profit schools enroll far more high-dollar borrowers. Fifty-seven percent of Bachelor’s students who graduate from a for-profit college owe $30,000 or more. In contrast, 25 percent of those who earned degrees in the private, non-profit sector and 12 percent from the public sector borrowed at this level.
  • Students who attended a for-profit college accounted for 47 percent of all Federal student loan defaults. More than 1 in 5 students enrolling in a for-profit college—22 percent—default within 3 years of entering repayment on their student loans.

By themselves, the committee’s findings would trouble the higher education community at large. However traditional institutions may find their anxiety levels raised even more by the way in which the report characterizes a couple of the sources of those problems as well as the committee’s proposed solutions for them. For one, the report continues a recent trend by policy-makers to place at least some of the blame at the feet of accreditation, implying the potential for further federal engagement in that space:

  • Accreditation: The self-reporting and peer-review nature of the accreditation process exposes it to manipulation by companies that are more concerned with their bottom line than with academic quality and improvement. Accrediting agencies seek to help colleges improve. Because of this institutional focus on continuous improvement, they sometimes appear to have difficulty drawing and enforcing bright lines and minimum standards.

For another, the report cites a lack of state oversight of higher education as a major contributing factor, appearing to invite increased activism by the states in this space (and to endorse a federal role in motivating such activism, as in the case of distance education state authorization):

  • State Oversight: State oversight of for-profit education companies has eroded over time due to a variety of factors, including State budget cuts and the influence of the for-profit college industry with State policymakers. The U.S. Department of Education had never defined minimum requirements for State authorization, and many States have taken a passive or minimal role in approving institutions, reviewing and addressing complaints from students and the public, and ensuring that colleges are in compliance with State consumer protection laws.

Having just received relief from federal regulation on distance education state authorization, public and private, not-for-profit institutions may now rightly wonder how long that relief might last and what else they might face in the near future. During the press conference, Harkin stated that the committee explicitly developed this report under his leadership to set the stage for next year’s reauthorization of the Higher Education Act (HEA). In that context, he stressed that he saw for-profit higher education as occupying “a unique niche,” such that regulations on that space arising from the HEA reauthorization might not necessarily apply to public and private, not-for-profit institutions. However, text on state authorization from the body of the report indicates that, under Harkin’s leadership, the committee may continue to see state authorization as something it should address in reauthorization, which would clearly impact all of higher education just as the U.S. Department of Education’s distance education state authorization regulation did before being struck down:

"The Department’s finalized rule stated that the Secretary would consider an institution to be legally authorized by a State if: (1) the authorization is given to the institution specifically to offer programs beyond secondary education, (2) the authorization can be revoked by the State, and (3) the State has a process to review and appropriately act on complaints concerning an institution and enforces applicable State laws. The finalized rule also required schools offering postsecondary education through distance or correspondence education in a State in which it was not physically located, to meet any of that State’s requirements in order for it to offer postsecondary education to students located in the State. The purpose of this requirement was to ensure that schools offering online classes to students in multiple States were properly authorized by each of the States. Without this requirement, and what is happening currently, is that many schools that primarily offer online classes to students located across the country only have to be authorized by the State in which they are headquartered." (Senate HELP Committee, For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success, p. 131)

Also during the press conference, Harkin cited proposed reforms for consideration in the reauthorization process that might be hard to restrict to just the “bad actors” in the for-profit sector, with potentially significant implications for all colleges and universities in terms of the regulatory overhead they must manage and the standards to which they are held accountable. He stressed the need for greater information about student outcomes and greater reliance on those outcomes in determining institutional eligibility for federal student aid programs. In this regard, he noted that expanding on the U.S. Department of Education’s gainful employment regulations, which many in higher education are afraid might lead to inappropriate standards being applied to traditional academic programs, could be a key strategy. Regardless, the demand for more information about individual student outcomes could lead to a slew of increased data tracking and reporting requirements. In turn, this might generate some difficult discussions about how to balance such requirements with existing privacy laws as well as how best to fulfill the requirements themselves (e.g., through state longitudinal data systems, revisions to the Integrated Postsecondary Education Data System (IPEDS) and the laws governing what it can address, or some other vehicle). Harkin additionally stated that Congress needs to explore ways of ensuring that institutions provide a basic level of student support services. While he implied earlier in the press conference that this concern probably doesn’t apply to traditional institutions, it’s unclear what federal standards in this area might look like or what the precedent of setting such standards might mean for future federal regulation of higher education.

The summary of the reform proposals in the report also reflects these issues (please see below), further emphasizing that the HELP Committee’s work on for-profit higher education bears watching as the HEA reauthorization gets underway in 2013. That assumes, of course, that the Democrats retain control of the Senate, and thus Harkin continues to chair the committee. If the Republicans take control of the Senate and its committee chairmanships, a whole new set of dynamics will emerge for colleges and universities to navigate.

  • Enhance transparency by collecting relevant and accurate information about student outcomes.
    • Require that the Department of Education collect comprehensive student outcome information and enable data retrieval by corporate ownership;
    • Establish a uniform and accurate methodology for calculating job placement rates;
    • Increase the regulation of private lending.
  • Strengthen the oversight of Federal financial aid.
    • Tie access to Federal financial aid to meeting minimum student outcome thresholds;
    • Prohibit institutions from funding marketing, advertising and recruiting activities with Federal financial aid dollars;
    • Improve cohort default rate tracking by expanding the default reporting rate period beyond 3 years;
    • Require that for-profit colleges receive at least 15 percent of revenues from sources other than Federal funds;
    • Use criteria beyond accreditation and State authorization for determining institutions’ access to Federal financial aid.
  • Create meaningful protections for students.
    • Create an online student complaint clearinghouse, managed by the Department of Education, for the collection and referral of student complaints to appropriate overseeing agencies, organizations and divisions;
    • Prohibit institutions that accept Federal financial aid from including mandatory binding arbitration clauses in enrollment agreements;
    • Enforce minimum standards for student services that include tutoring, remediation, financial aid, and career counseling and job placement;
    • Extend the ban on incentive compensation to include all employees of institutions of higher education, and clarify that this ban extends to numeric threshold or quota-based termination policies. 
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