For-profit Colleges Run Amok

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Federal regulators have given an unexpected reprieve to the for-profit education sector by significantly weakening new regulations expected to hold the schools accountable for both the quality of their education and the ability of their students to repay taxpayer-funded tuition loans.

The gainful employment rule released June 2 by the U.S. Department of Education came after an unprecedented lobbying effort against the regulations by the sector’s publicly-traded schools. Experts say DOE’s initial heavy-handed approach forced the good corporate citizens in the so-called “schools market” to work together with its bottom-dwellers against a rule penalizing them for saddling students with more debt than they can repay. It didn’t help that some federal lawmakers rallied to the aid of the sometimes predatory sector after receiving donations from it.

Longtime competitors in the industry joined forces to bankroll a lobbying campaign that showered political donations on federal lawmakers to neuter the new rule for the $29 billion a year industry.

“That’s actually a fairly accurate assessment,” said analyst Jeff Silber, who tracks the sector for BMO Capital Markets in New York. “The companies who had programs that may have been most at risk to some of these regulations look a lot better than they did a few weeks ago now that they have more time to comply and now that the regulations have, quote unquote, been watered down.”

The final version of the gainful employment rulOld womane gives schools like Bridgepoint Education- singled out as a poster child for sector misconduct by U.S. Sen. Tom Harkin (D-Iowa) – at least four years before they could lose access to federal student funds for misconduct in 2015. They would have faced the same prospect as early 2012 under the original version of the rule.

Still, longtime observers of for-profit colleges say the lobbying win may be a pyrrhic victory for a sector that operates best outside the glare of public scrutiny. They say the recent spate of negative news stories may spell the end of a halcyon period when for-profit schools served as ideal investment vehicles for Wall Street.

Schools like Bridgepoint Education, which lists Warburg Pincus Private Equity as its primary investor, have flown under the radar of the public forum for the most part in an industry sector that enrolls more than 1.8 million students and taps roughly $26 billion a year in federal education funds in their name. They now face a barrage of lawsuits from former students and employees as well as state and federal investigations and audits.

Pull quote 2b2Those probes include a recent report from the U.S. General Accounting Office whose undercover investigators found that 15 for-profit colleges made deceptive statements to potential students and four encouraged them to lie on their applications for federal financial aid.

The schools market also faces more entrenched legislative opposition now and an unwelcome spotlight on their predatory lending tactics, even as their most aggressive and productive admissions tactics are being curtailed. Harkin is investigating for-profit secondary schools, which he blames for boosting the annual cost of the Pell Grant program to $40 billion this year from $16 billion in 2008.

“Senator Harkin is kind of on a jihad against [Bridgepoint],” Silber said of the powerful chairman of the Senate Committee on Health, Education and Pensions.

Meanwhile, U.S. Sen. Dick Durbin (D-Ill.) is pushing to make private student loans dischargeable via bankruptcy, which could cripple one of the sector’s most productive revenue streams.

“If we are serious about protecting taxpayers and students, we should view this rule as the starting point,” Durbin said of the new gainful employment regulations.

That harkinkind of attention makes it harder for an operation like Bridgepoint to hide its earnings reports from students behind its two education brand names: Ashford University and The University of the Rockies.

The initial winners and losers in the battle over the gainful employment rules were evident in stock market trading immediately after the new regulations were disclosed. The companies perceived to be the most at risk received the biggest pop in share price.

Bridgepoint, which has funneled an ever-larger share of revenue to shareholders in recent years, saw its share price surge $3.57 to $27.25 on June 2, before closing at $25.22. The San Diego-based company had been trading at $15.99 a share as recently as April 12, when it looked like the new rules would have sharper teeth.

Bridgepoint Spokeswoman Shari Rodriguez and her staff did not respond to five requests for comment about the allegations against the school, over a two-week period.

The fast-growing schools market, which is overwhelmingly dependent on federal funding, is perceived to be engaging in a new kind of predatory lending by education experts like Hunter College Professor Anthony DeJesus, who specializes in higher education pathways. The business model being pursued by for-profit colleges is similar to the one subprime mortgage lenders embraced at the height of the housing bubble, he said.

However, the schools market uses admissions officersrockies, rather than mortgage lenders, to convince marginal borrowers to take out larger student loans than they cannot afford to repay and then passes the risk of default on to the federal government and the students. There is also one other big difference: subprime homeowners can escape their housing debts via federal bankruptcy protection; student loans cannot be discharged that way. The disparity creates an ironic situation in which the very colleges that put students in financial distress enjoy a financial level of financial protection than their victims, according to DeJesus.

He said minority students are disproportionately victimized by for-profit colleges. Non-white students account for 60 percent of the sector’s students, compared with 41 percent in the public and private nonprofit segments of higher education. Many of the students targeted by the for-profits received poor K-12 public educations. For them, the sector’s predatory ways often represent a second and fatal blow to their familial finances and aspirations, according to DeJesus.

dejesus“The for-profit schools explicitly target low-income, inner-city students who are eligible for federal financial aid without providing the resources most of them need to be successful and graduate, further undermining their future prospects,” DeJesus said. “Many of these for-profit schools are diverting students from better and more affordable opportunities at their local community colleges.”

The GAO report found that students are charged far more by the for-profit schools than by comparable public schools. One for-profit charged $14,000 for a massage therapy certificate available at a local community college for $520.

The schools market retains only 56 percent of its new students into a second year, compared with rates of 72 percent and 73 percent for public colleges and nonprofit private colleges, respectively, according to a comprehensive BMO report on the sector released in September of 2010. Only 24.5 percent of the students enrolled in four-year programs at for-profit colleges graduate in six years, compared with a 64 percent graduation rate at similar nonprofit private colleges and a 55 percent rate at similar public colleges.

The schools market typically charges considerably more, too, while putting less into educating the students that pay its freight. Four-year for-profit colleges spent only 18 percent of their revenue on instructional costs in 2008, according to the BMO study. That compares with 32 percent at similar private nonprofit colleges and 25 percent for public nonprofit schools.

Bridgepoint’s instructional costs have declined every year since its fiscal year 2005 – a point of pride in its presentations to current and potential investors. Its instructional costs fell to 24 percent of revenue in 2011, compared with 69 percent in 2005.

Where’s the money going?

A significant amount goes to marketing and promotional expenses, which rose to $59 million in the first quarter of 2011 for Bridgepoint, compared with $44 million during the same period of 2010. Spending on advertising by for-profit colleges topped $1 billion in 2009. Bridgepoint spent $39 million of that total or nine cents for every dollar of revenue it took in.

According to Bridgepoint, chart

annual full-time tuition for its online students was $15,720 for two semesters in the 2010-2011 academic year. That’s a 5 percent increase from the prior year.

By contrast, full-time, in-state tuition at the prestigious City College of New York runs about $4,830 a year. CCNY grads have won nine Nobel Prizes – more than those from any other public college. Bridgepoint has no Nobel Prize winners. Its Ashford University brand ranked 39th in 2009 among the top 44 online colleges in the Online Education Database’s annual rankings. Online students account for the vast majority of its enrollment.

The disparity in tuition is even more pronounced when you take into account the fact that CCNY students attend class in a brick-and-mortar campus, rather than via the Internet. By contrast, the vast majority of Bridgepoint students attend their classes over the Internet.

CCNY does not have to turn a profit for investors. Bridgepoint does and every dollar that goes to investors is a dollar less being spent on students, according to DeJesus. The vast majority of those dollars are federal education dollars meant for students – not profits.

The business model is the problem, he said. It spawned a 16 percent default rate among students at four-year for-profit colleges in 2009, according to Sandy Baum, a senior associate at the Institute for Higher Education Policy. That’s more than triple the rate at similar public colleges and private nonprofit colleges.

Master of DegreesThe for-profit business model richly rewards its chief executives officers, with the five-highest paid CEOs averaging $10.5 million each in 2009, according to Baum. That compares with an average salary of $1.3 million for the five highest Ivy League college presidents.

Classes are typically larger at the for-profit schools, too, as is the ratio of cheap part-time faculty to full-time instructors. Bridgepoint led the for-profit sector in 2009 with 37 part-timers for each full-time instructor. That compares with a median of about 4 part-timers for each full-time instructor in the schools market.

Bridgepoint lists its enrollment at 88,250 on its website, but says it only has 60 full-time instructors. That means there is only one full-time professor at Bridgepoint for every 1,471 students.

“These people are a nightmare,” Edward Porzio, 49, of Palm Springs, Calif., said of Bridgepoint’s Ashford University. “They stole at least $20,000 from me.”

Porzio said his problems with Ashford began when he discovered they were having his student loans and grants sent directly to them by the federal government, instead of to him. The school was also applying for grants and loans in his name without his knowledge, he said.

Prozio said he did well in online classes during the three months he attended the school, but was kicked out after withdrawing the authorization that had allowed Bridgepoint to take the federal funds he was supposed to be receiving in April 2009. The school continued to claim grants and loans in his name for another year, he said.

Pashford 2orzio estimates that his three months at Ashford cost him $9,000 in grants and $11,000 in loans. He still owes the loan money, even though he never received a single credit from Ashford.

“All the problems began after I revoked my authorization,” Porzio said. “They took everything.”

A former employee at Ashford University told the U.S. Department of Education in 2009 that the company is motivated by profit growth, not the best interests of its students. The unidentified employee described student dropout rates as “astounding” and said Ashford used salary adjustments to get around a prohibition against paying commissions for student enrollments.

“There is no regard to whether a student really belongs in school,” said the former employee, whose name was redacted from the DOE document. “The goal is to enroll as many as possible.”

The stakes are high and getting higher due to the schools market’s rapid growth. Enrollment has surged to 1.8 million from just 365,000 a few years ago. Bridgepoint has seen its own student-body expand nearly seven-fold since 2007, when it had 12,716 students.

For-profashfordit students now account for 26 percent of all student loans and 46 percent of all student loan dollars in default, according to the U.S. Department of Education. One out of every four members of the schools market is dependent on federal student aid for at least 80 percent of their revenues. Federal funds accounted for 86 percent of Bridgepoint’s revenue in 2009.

Bridgepoint’s gains have moderated in recent weeks as the reality of its notoriety has begun to sink in with investors. Shares of BPI closed at $19.87 on Aug. 8, down 21 percent since June 2.

The problem for investors is that Bridgepoint and the entire for-profit college sector is incredibly sensitive to word-of-mouth and some of the same tactics that contribute the most to profit growth also tend to be those that hurt students. That’s one reason the sector spends so much on advertising, sales and marketing.

The schools market spends about 20 percent of its revenue on sales and marketing; Bridgepoint spent about 31 percent in 2009.

The sector is now facing a new wave of criticism and scrutiny from regulators, state and federal lawmakers and students. Silber, the BMO analyst, said the challenge for reputable schools in the for-profit sector is once again to distance themselves from the bad apples.

“You do that by focusing on quality output measures,” he said. “You improve your retention, you improve your graduation, you keep on creating programs that the market wants and then you’ll be able to attract a better quality student because they’re going for the programs that are in demand as opposed to the ones that are just trying to milk the federal government.”