The Next Great Collapse?

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The Senate Health, Education, Labor and Pensions Committee waded into the growing controversy over just what kind of education students receive at for-profit colleges and whether the result is worth the huge amount of money students are borrowing to pay for attending the schools.

“For all our investment in this sector, we know surprisingly little about whether students are completing degrees, transferring to other schools or just dropping out,” Committee Chairman Sen. Tom Harkin (D-Iowa), said at the hearing, one of several the committee will hold as it weighs options for new regulations.

A key question that emerged Thursday was whether students  are actually graduating from for-profit colleges and, if so, what value their degrees or credentials have in the real world. Witnesses told the lawmakers the question is difficult to answer even with extensive existing federal education data.

“What information is available suggests that very large numbers of students are leaving for-profit colleges each year,” said Harkin, who in concert with the hearing released a report, Emerging Risk? An Overview of Growth, Spending, Student Debt and Unanswered Questions in For-Profit Higher Education.

The report shows that students at for-profit colleges represent 9.2 percent of all college students, but 22.9 percent of all federal student loans, and 44 percent of defaults on student loans. Meanwhile, for-profit colleges, Harkin’s report notes, are posting profits as high as 37 percent.

“There’s something wrong with this statistical progression,” said Steven Eisman, a portfolio manager at the FrontPoint Financial Services Fund, who is known for his criticisms of the subprime mortgage industry long before that industry collapsed. He has recently studied the explosion of the number of students taking courses at for-profit colleges and their use of federal loan programs.

Eisman predicted big problems for the government’s student loan program if for-profit colleges continue to rake in billions of dollars in federal aid from students who ultimately are likely to default on their loans.  He called for the federal government to reign in the for-profit section, which he and others said often engage in misleading sales tactics that inflate the job placement and salary rates for their graduates.

Harris Miller, president and CEO of the 1,400-member Career College Association, which represents for-profit colleges, was quick to rebut Eisman’s description of the colleges.

“Comparing the for-profit career college sector to the subprime mortgage banking industry is as silly as it is simplistic,” Harris said in a statement aimed at Eisman’s testimony.

He said unlike fly-by-night mortgage companies, the schools have a reputation to safeguard and a disincentive to lend money to students who are unlikely to succeed academically, a tactic some contend for-profit colleges use to fatten their bottom lines. He noted that schools have to pay back to the federal government any money the schools received if a student drops out shortly after enrollment.

However, Kathleen Tighe, the U.S. Department of Education’s inspector general, said many for-profit schools have committed “refund violations” when it came time to paying money back,

“They are often miscalculating or failing to pay funds,” Tighe said.

She testified that 70 percent of college investigations by her office involve proprietary schools, a disproportionate amount considering that the nation’s 6,000 or so colleges are evenly split between not-for-profit and for-profit colleges.

Tighe also testified that for-profit colleges have engaged in “creative accounting” when it comes to the “90-10” rule – which precludes for-profit colleges from receiving more than 90 percent of their revenue from federal Title IV grants and loans. The rule is meant to gauge the quality of an institution, the concept being that a college that receives at least 10 percent of its revenue from other sources is good enough to attract students who don’t need loans.

 

Unaccredited at twice the price

Thursday’s hearing was meant largely to address the plight of students such Yasmine Issa.

Issa, a former student at Stanford Brown Institute in New York, testified how in 2005, as a 24-year-old divorced mother of 3-year-old twins, she used her savings, child support and $15,000 in federal student loans to go through the school’s ultrasound program, thinking it would guarantee her a job and a better life. It was only after she started searching for a job – after having spent $32,000 to complete the program – that she learned the program was not accredited.

“I never felt so low in my life,” Issa told the committee, describing how she was unable to find work with the credential from an unaccredited program.

Issa said she didn’t know until after she finished Stanford Brown that an area community college offered an accredited ultrasound program for half the price. That program wouldn’t admit her because her credits at Stanford-Brown were not transferrable, Issa testified.

Issa said the interest rate on the $15,000 she borrowed through Sanford Brown is subject to an interest rate of 6.8 percent -- a figure that Harkin noted will likely double the amount owed in about a decade.

Margaret Reiter, former supervising deputy attorney general  of the California Department of Justice, testified about prosecuting for-profit colleges for engaging in misleading sales tactics, such as inflating job placement rates and salaries earned by graduates.

Sharon Thomas Parrott, a senior vice president at the Chicago-based headquaters of DeVry Inc., a chain of for-profit schools, tried to counterbalance charges that for-profit college graduates can’t get jobs, testifying that 90 percent of DeVry’s graduates who use the school’s job placement services secure placement in jobs related to their education at DeVry.

Reiter countered that the fact that DeVry only counts students who use the school’s job placement services makes it difficult to count the actual number of DeVry graduates who got jobs in the field they studied.

“I don’t trust a single statistic that this industry produces,” said Eisman, the financial analyst,  citing a case in which a for-profit college counted jobs students had before they even enrolled as successful job placements.

“Something has got to be done,” Harkin said. “I don’t know exactly what. But I don’t think any objective person in the industry can objectively say we can just sit by and let nothing happen. We’re going to make something. We cannot let this go on like this.”