Flipping Colleges for Profit

Slate's The Big Money has a June 17th article entitled "Subprime for Students," which details how a not-for-profit college gets flipped into a raging money machine.  In this version of a now-familiar tale, a private concern bought out a small religious school for $9 million, renamed it, and turned it into an online school set up to harvest federal aid dollars.  The result: $454 million in tuition and fees last year (actually from two schools treated this way).  The company, BPE, spends $145 million on marketing and recruitment, according to the article.  It's a finely tuned machine:

At the end of last year, BPE had 1,175 recruiters responsible for drumming up business. The company plainly discloses in its annual report that it sets tuition (currently $7,860 a year) to stay within the loan limits of Title IV, the regulations governing financial aid. One Ashford recruiter Eisman quotes is more blunt: “They conveniently price tuition at the exact amount a student can qualify for in federal loan money. If a person has money available for school, Ashford finds a way to go after them. … It’s a boiler room, selling education to people who really don’t want it.”

 How many recruiters does your school have?  I bet you don't need a comma to write it down.

This situation gets compared to the sub-prime mortgage crisis.  Details are in the article, but one estimate of the loan defaults by 2020 puts the total in the hundreds of billions. 

Shorting Higher Ed

There are stirrings lately that the Edu-bubble--putative over-leveraging of higher ed--is about to burst. For some time, the narrative in the press has been that a four-year degree is overpriced, typically with graphs that show average tuition and fees. Here's one from Money magazine last year (graph on left).

This one was cited byt Glenn Reynolds in a Washington Examiner article "Higher education's bubble is about to burst":

College has gotten a lot more expensive. A recent Money magazine report notes: "After adjusting for financial aid, the amount families pay for college has skyrocketed 439 percent since 1982. ... Normal supply and demand can't begin to explain cost increases of this magnitude."

I'm not sure he noticed the Money article was a year old. He gives no proximate cause for thinking the bubble is pop-worthy.

There have been others, for example in the New York Times. I summarized and commented on some of these in this post in November 2009.  It's a popular sport to find examples of recent graduates with mountains of debt and figure out where the blame goes. For example, this article in the New York Times:

[...] Ms. Munna, a 26-year-old graduate of New York University, has nearly $100,000 in student loan debt from her four years in college, and affording the full monthly payments would be a struggle. For much of the time since her 2005 graduation, she’s been enrolled in night school, which allows her to defer loan payments. This is not a long-term solution, because the interest on the loans continues to pile up. So in an eerie echo of the mortgage crisis, tens of thousands of people like Ms. Munna are facing a reckoning.

I speculated that at some point we'd start to see discount online colleges, and compared it to a merger of University of Phoenix and Wal*Mart. That doesn't seem to have happened yet, but Wal*Mart has bought into the current prices in bulk. In The Washington Post article "Wal-Mart partners with online school to offer college credit to workers" Ylan Mui writes that " [I]n classic Wal-Mart fashion, the company negotiated a 15 percent tuition reduction on other courses at APU in exchange for handling some administrative and marketing duties." This is from American Public University, where their website quotes prices up to $300/credit, which is about the going rate for coursework.

Is this too high? If you imagine a three-credit course with 20 students enrolled, each paying the $300 per credit, that's a total revenue of $18,000 for the course. The instructor may cost $3000, and the infrastructure a few hundred. A large amount goes to advertising, and there's some administrative overhead. The rest is profit. From the article:

American Public University is one of a growing number of so-called career colleges that operate on a for-profit model, rather than as state institutions or private foundations. APU's parent company is publicly traded and its reported revenue jumped 43 percent to $47.3 million during the most recent quarter, while profit rose 46 percent to $7.6 million.

A large part of this profit comes from the federal government in the form of grants and guaranteed loans. (See this article for details.) There is noise now about changing the rules to cut off this geyser of public money going into the pockets of shareholders. Steve Eisman, who bet against the mortgage industry and won, is quoted in Mother Jones in "Steve Eisman's Next Big Short: For-Profit Colleges":

In a speech titled "Subprime Goes to College," delivered Wednesday at the Ira Sohn Investment Research Conference, Eisman blasted the for-profit education industry, likening these companies to the seamy mortgage brokers who peddled explosive subprime loans over the past two decades.

This is political, of course. The for-profits seem to have enamored themselves to the Republicans, who are perhaps hoping to privatize all of education. The Chronicle has an article about a review panel of 18 individuals...

[...] that reviews accrediting groups. And the stark divisions among those named to the panel does not bode well for a unified or harmonious approach to its task when it begins meeting again this year after a two-year hiatus.

Agendas are clear from the nominations:

Congressional Republicans, naming a third of the committee's members, mostly chose panelists from the business world or for-profit colleges but no one currently serving at a traditional nonprofit institution. The GOP appointments include Anne D. Neal, president of the American Council of Trustees and Alumni, who served on a previous version of Naciqi and was one of the most outspoken advocates for colleges to show greater evidence of student achievement and for accreditors to require such evidence in their standards.

Republicans also named two leaders of proprietary colleges to the committee: Arthur E. Keiser, chancellor of Keiser University, and William J. Pepicello, president of the University of Phoenix.

Congressional Democrats, by contrast, chose four of their six members from the ranks of public colleges, along with the former chancellor of the University of California at Davis.

So Republicans are for private, for-profit education and for standardized testing. Democrats are supporting the old creaky model of higher education. This doesn't bode well for reasoned debate. 


The Dept of Ed is casting about for new models.  In this article in The Chronicle, Secretary Duncan is quoted as saying that

his hope is to reallocate money from other federal programs, which he didn't name, and use it to offer financial incentives to colleges that show creativity in containing costs and improving their graduation rates.

Huffington Post article lists one possible remedy:

In January, the Education Department suggested one answer: for a program to be eligible [for public money], a majority of its graduates' annual student loan payments under a 10-year repayment plan must be no more than 8 percent of the incomes of those in the lowest quarter of their respective professions. The earnings data would come from the Bureau of Labor Statistics.

This is the kind of measure I've been asking for for years--actual data on how students do in the marketplace after graduation.  This would do more than anything to illuminate the debate about the worth of education.

Free Market Education

In a retention study a couple of years ago, I discovered quite convincingly that many students at the institution didn't understand the product they were buying: the highest risk group was low social capital (typically first generation) who had chosen the institution as their first choice. A couple of months later, most of those students had changed their minds about whether it really had been their first choice. Most of the details are unpublished, but you can find a bit here.

If we generalize this, we reach a conclusion that's not too far-fetched, viz. that the population of students that is most vulnerable is also at the greatest risk of failure because they are uninformed. Vulnerabilities include not understanding how higher education works because they are not sophisticated consumers of the product. In the case of the retention study, students probably relied more on local reputation and geographical proximity than a real survey of options. Other vulnerabilities include financial naivete and barriers to admittance in traditional four-year schools because of low grades and test scores. All of these tend to go together in a bundle of misery. There are ditches on either side of the road to enlightenment: one is simply giving up in the face of the complexity of it, and the other is being taken advantage of by unethical operators. This article is about the latter.

In "Survival Strategies" I mused about a discount behemoth that joins the economies of scale of Walmart with the online commercialization of education of University of Phoenix. I imagined that for-profit institutions would use their competitive advantage to drive costs down. I haven't found evidence of that outside the open education movement. On the contrary, the for-profits seem to want to milk every last cent out of the subsidized education market, in some cases preying on those students with limited options or limited horizons.

In the unfortunately titled article "A Neo-Liberal Arts Education," Danny Weil writes about Alta Colleges Inc., which is a story like we've heard before: buy an existing institution and "flip" it to for-profit, go massively online and rake in subsidy dollars [Edit: I showed my own ignorance here--I didn't know what neoliberalism was. See the comments]. I described this in "Survival Strategies" as a way to quickly get the accreditation status needed to attain status and eligibility for state and federal aid. In the case of Alta College Inc., they were content with national accreditation rather than regional. How many applicants know the difference? How many applicants from the population I described earlier would know that national accreditation is nearly worthless?

Weil makes a case that deregulation fanned the flames:

In 2002, for example, around the time Alta Colleges, Inc. saw tremendous growth and soaring profits, Sally Stroup, the top lobbyist for the University of Phoenix, was appointed the Department of Education's assistant secretary for post-secondary education. During her tenure, which ended in 2006, the Department of Education softened rules that prevented the career colleges from obtaining more than 90 per cent of their income from federal aid.

I must note that this article appears on a political e-zine, and the title seems to make a bizarre charge that fraud is the same as "new liberal education." This is particularly odd since blame is placed squarely on the Bush administration. Maybe I'm too dumb to figure it out, but the color of politics detracts from an otherwise fascinating article. You can read it and judge for yourself; I'll try to stick to what can be verified elsewhere. For example, students of Westwood College, owned by Alta College Inc., have filed a class-action suit claiming:

Respondents engaged in deceptive and illegal trade practices continuously throughout the course of a student’s interactions with the colleges. From the moment of initial contact, Westwood specializes in a high-pressure, sales-oriented recruiting program with a solitary goal of increasing student enrollments. Admissions Representatives intentionally mislead or lie to students regarding the actual costs and fees associated with enrollment, job placement opportunities and statistics, credit transferability, and the value of the school’s accreditation.

There are other charges, including the detail that the cost of three years' education at Westwood is between $69,000 and $81,000. This is far more than average cost at a low or mid tier private liberal arts school per year (take nominal tuition and discount by about 40%). According to the complaint, this cost was not transparent to students. The brief also accuses admissions representatives of purposefully misleading students "into assuming that the national
accreditation is of equal value and reputation as regional accreditation and omit any explanation of the various forms of accreditation," noting that:

It is common industry knowledge that nationally-accredited institutions regularly accept credits from both regionally- and nationally-accredited institutions, but that regionally-accredited institutions generally will not accept credits from nationally-accredited institutions. [...] By way of example, one Admissions Representative promised a potential student that Westwood credits would be transferable to the University of Florida or Florida State University if the student ultimately got an offer from a “classier, shinier school”, as long as the course descriptions were the same. Representatives from both Florida colleges said they would not accept credits from Westwood College under any circumstance because Westwood is not regionally-accredited.

There is also some insight into how to flip a college: use call center agents to provide counseling, advising, registration, class selection, enrollment, and financial aid services. It's a sales pitch from beginning to end. These "admissions representatives" have quotas to keep their jobs, the suit states.

The Westwood College website is well-designed, and completely focused on admissions. The website set up by the James Hoyer Law firm called westwoodscammed.me is less formal, but has its own appeal.

In a post called "Virtual Loans", I noted that colleges could benefit from running their own loan programs, but I never imagined how badly that could turn out. It seems that Alta Inc. isn't content with PELL grants and subsidized loans. Weil writes that they "loaned" money to students themselves--without even telling students they were doing so--through an "Apex loan program." I found some corrabating information in an Associated Press article:

One for-profit school, Colorado-based Westwood College, has been hit with a class-action lawsuit accusing it of fraud and arguing that its lending program violates state banking laws. Westwood charges a relatively high 18 percent interest but doesn't call its lending student loans. [...]

Jessica Rosales was 17 when she enrolled at Westwood's Inland Empire campus near Los Angeles. She dropped out after one term and was later told she owed Westwood around $18,000 — nearly half in interest and collection fees. Rosales said that the school misled her about the source of her aid and that she never signed a loan from the school.

Because "virtual loans" are just deferred tuition payments, I can see how you could play semantic games with it, and turn "interest rate" into a "finance charge." It's pretty ugly.

Weils ends his article with a non-sequitur, linking an increase in PELL grant money to debt. I'm not sure what the logic is there, but because this is part of Obama's stimulus package, I suppose that is the link to "neo-liberal" nonsense. It's obviously the wrong conclusion to reach from the evidence presented.

How widespread is this kind of mischief? InsideHigherEd.com posted "Ferreting Out Financial Aid Fraud" this week. The gao.gov site is down right now (!) so I can't access the actual report, but article centers on as many as a million students who did not graduate from high school nevertheless getting federal aid for college . Presumably most of these are at for-profits, community colleges, or tech schools. Such applicants are supposed to take an Ability-to-Benefit test. You can read about it on a college website here. Unsurprisingly, test results get spoofed (Zog's Lemma again).

A GAO representative is quoted in the article as saying:

[E]arly findings [...] have revealed evidence that student aid funds are being disbursed to ineligible students in online programs or to students who have dropped out of these programs.

In summary, students get defrauded and taxpayers get defrauded. I see more regulation in the industry's future. The question is can it be regulated? If not, it's another nail in the coffin of the current order of things.

Speaking of regulation, there was an attempt to weaken transfer policies nationally through the Higher Education Opportunity Act. The actual text of the thing is nearly unreadable, so I'm relying on this nice summary at Council on Law in Higher Education. Quote:

Transfer-of-credit policies were the subject of much debate during the most recent reauthorization of the Higher Education Act (“HEA”). Postsecondary institutions that are accredited by national accreditors complained that institutions that are accredited by regional accreditors unfairly deny students’ requests to transfer credit solely because the credit was earned at an institution that is not regionally accredited.

At times during the reauthorization process, proposed legislation included language that would have prohibited institutions to refuse to consider transfer requests based solely on the accredited status of an institution as long as the accreditor was recognized by the U.S. Secretary of Education.

This isn't hard to figure out. For-profits make lots of money, but are stymied by restrictive transfer problems, so they hire lobbyists to try to force high quality schools to take their credits. We probably have passed the worst risk to the system falling into anarchy--the conditions were perfect for the for-profits during the construction of the HEOA: an administration bent on deregulation and rivers of for-profit money available to buy influence. For now, that time seems to be over, but the fundamental issues remain. For-profit, not-for-profit, and open education will evolve and find market niches. Massive discount online education hasn't arrived yet, but the potential is there. It's going to be a wild ride for those of us in the industry.