OBSERVATIONS

Observation: The Rise and Fall of For-Profit Higher Education August 2011

The Rise and Fall of For-Profit Higher Education

By Kevin Kinser
Associate Professor, School of Education, University at Albany

For-profit higher education has grown remarkably over the last 15 years. Since 1995, enrollments in the sector have jumped by 1.7 million, representing one-third of all new students during that period. Four-year for-profits in particular gained, adding more new students than public universities, private nonprofit colleges or community colleges. In providing access to higher education, often through online courses or multistate networks of open-admission campuses, the for-profits excelled, enrolling proportionately more low-income, minority and older adult students than public and private nonprofit institutions.



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Kevin Kinser is an associate professor in the University at Albany’s School of Education. He studies non-traditional and alternative higher education, particularly the organization and administration of for-profit and virtual universities.

Yet the for-profit model is not being examined for lessons on how to expand access to higher education. Rather, the last year and a half has seen the entire sector come under scrutiny.

Some examples:

  • Regulators in the U.S. Department of Education singled out the for-profit sector in developing new rules for federal student-aid eligibility, requiring schools for the first time to demonstrate that their programs were preparing students for “gainful employment.”

  • A Senate committee has held several hearings on for-profit higher education, focusing on the sector’s high-pressure recruiting practices and the above-average debt students incur while enrolled.

  • Eighteen attorneys general have initiated a joint consumer-protection investigation of for-profit higher education in their states, concerned about allegations of fraud and abuse by school operators.

  • Four states have joined with the U.S. Department of Justice in backing a lawsuit against a large for-profit education company because it pays admissions personnel based on the number of students they recruit — a violation of the Higher Education Act.

  • Accreditation agencies clamped down on the ability of companies to acquire struggling private nonprofit colleges and convert them with little oversight into for-profit online universities.

  • Media reports took a decidedly negative turn, with accusations that the for-profit industry represents the next subprime debacle — an argument made by a Wall Street short-seller — getting wide play.

This is a turning point for for-profit colleges. For a decade and a half, enrollments increased and stock prices soared. Now, stock prices have tumbled as companies report far fewer new students enrolling compared to previous years. Their business model of relying almost exclusively on revenue from federal student aid is unsustainable. They spent over $8 million lobbying Congress so far this year and still are left with suing the Department of Education as their best hope for regulatory relief.

From the successes of just a couple of years ago, such a shift in fortune seems incredible. Advocates of the sector claim the only explanation for this sharp reversal is a systemic bias against nontraditional models for education. There is certainly bias, but there are a few less conspiratorial reasons why for-profit colleges now face a much harsher policy environment, despite their demonstrated ability to attract students to higher education.

The attention of regulators was attracted by the simple fact that the for-profit sector was growing very quickly. Earlier, enrollment growth was notable in terms of annual percentage increases, but by the middle 2000s the actual numbers of students enrolling became significant as well. Between 1995 and 2006, the sector grew by about 760,000 students. Enrollment grew by nearly a million in the next two years alone. These eye-popping numbers were possible because of the 2006 elimination of the so-called “50 percent rule.” This regulation had prevented institutions with more than half of their students in online programs from participating in federal aid programs. With that constraint gone, for-profits could add students without adding campuses or classrooms. Recruitment for academic programs could be based on national campaigns rather than focused on distinct local labor markets. And economies of scale could drive profits through centralized curriculum design.

The way students paid for their education changed as well. Rather than using employer reimbursements and self financing as was more common in earlier decades, undergraduate students — 88 percent of the enrollment — paid for this new access by using student loans. In 1995, 59 percent of all undergraduates attending for-profit institutions took out loans. By 2008, 91 percent were doing so. Add in federal grants, and nearly every undergraduate in the for-profit sector is funded at least in part by the federal government.

This new scale of operations meant that the for-profit sector could no longer be seen as a marginal part of the postsecondary universe. In itself, that’s not a bad thing. For-profits offer a key way to increase educational access — a U.S. policy priority since the 1960s. But according to a few important metrics, success in student access was not matched with similar success in student outcomes. Data from the U.S. Department of Education suggest that compared to public and private nonprofit institutions, more students from the for-profits have difficulty repaying their loans, and more default on their loans. Senator Tom Harkin, as part of his committee’s investigation of the sector, discovered that over half of all students in the largest for-profits withdrew within two years of initial enrollment. My own analysis of data over the last four years found that the ratio of students with diplomas to former students beginning to pay back their loans is lowest in the for-profit sector, particularly among four-year for-profits — suggesting that many students are taking out loans to pay for an education that they never receive.

Ratio of Degrees and Awards to Students Entering Loan Repayment

Sector Degrees and other awards earned,
2004-08
Former students entering loan repayment,
2005-09
Awards/
Loan
repayments
       
Private for-profit 4-year or above 898,946 1,314,072 0.68
Private for-profit 2-year 845,177 695,716 1.21
Private for-profit less-than-2-year 921,592 580,015 1.59
For-profit Total 2,665,715 2,589,803 1.03
       
Private not-for-profit 4-year or above 4,415,547 2,337,914 1.89
Private not-for-profit 2-year 87,591 42,748 2.05
Private not-for-profit less-than-2-year 51,361 18,390 2.79
Not-for-profit Total 4,554,499 2,399,052 1.90
       
Public 4-year or above 7,142,272 3,518,450 2.03
Public 2-year 4,121,064 1,407,334 2.93
Public less-than-2-year 160,206 24,781 6.46
Public Total 11,423,542 4,950,565 2.31
       
Based on U.S. Department of Education data

All of this together presents a tough picture for the for-profit sector. While some recent investigations have focused on fraud and abuse, these are red herrings for understanding the current environment. Since the mid-1990s, the policy incentives encouraged student access, and with few levers to encourage attention to student outcomes, the for-profits developed an enrollment-focused business model. They could be successful as businesses without needing to make sure their students succeeded as well. The repeal of the 50 percent rule eliminated physical constraints on their growth, throwing enrollment into overdrive. Their increasing reliance on federal financial aid to sustain their enterprises only emphasized the negative impacts on students who tried the for-profit model but were unsuccessful. The sector was ripe for regulatory intervention.

With most indicators pointing to a decline in enrollments over the next few years, the sector is now at a crossroads. Every level of the regulatory triad — federal, state and nongovernmental accreditation — is actively engaged in reviewing and revamping their policies toward the sector. The federal regulations surrounding gainful employment are an initial attempt to enforce a link between education and outcomes in the sector. The Senate committee hearings, if one can get past their typically partisan characteristics, highlight potential problems associated with a federal aid model that funds for-profit enrollment but ignores completion. Vigorous state oversight and informed accreditation reviews have re-emerged as potent checks on profits taking precedence over student success.

With no centralized regulatory body for education, competition between members of the triad to assert their authority over the sector is emerging. Already U.S. Senate hearings have focused on the perceived failure of accreditation agencies to properly evaluate for-profit activities, and the U.S. Department of Education has emphasized a lack of state oversight of branch campuses and online education. This raises questions about the stability of the triad, and whether a new structure is needed to review large, multistate corporations that function both as businesses and educational institutions. Whether the lead is taken by the federal government, states or accreditation agencies, this new regulatory scrutiny will require the for-profit sector to respond innovatively in order to survive and rise again.

About the Rockefeller Institute of Government

The Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York, conducts fiscal and programmatic research on American state and local governments. It works closely with federal, state, and local government agencies nationally and in New York, and draws on the State University’s rich intellectual resources and on networks of public policy academic experts throughout the country.