Hopes are high that the President is 'singing their song'

The private education sector in the US is in buoyant mood, seeing good prospects both at home and abroad, reports Jon Marcus

November 26, 2009

Many of the office parks that line the freeways of southern California bristle with the logos not of high-tech or financial firms, but with names from one industry that has defied the downturn: DeVry, Kaplan, Westwood, Phoenix.

They are for-profit private universities, technical colleges and proprietary schools. Once disparaged, they have become significant challengers to conventional US higher education by offering accelerated degree programmes online or near where their students live, and at night and on the weekends.

With their enrolments up as much as 30 per cent this year, these universities and colleges have collectively increased their share of the American higher education market from 2 per cent to 10 per cent in just a decade. The University of Phoenix, the behemoth in the group, has 443,000 students, 26,000 faculty members and a market value nearing $10 billion (£6 billion). In its fiscal year ended 31 August, the university's owner, the publicly traded Apollo Group, earned a record $4 billion, a per cent increase over the previous year.

"Even when the economy was strong and unemployment was very low, our schools were growing at 9 or 10 per cent a year," says Harris Miller, president of the Career College Association, which represents private vocational institutions in the US. "What the recession and high unemployment have done is supercharge them."

And now they are setting their sights abroad.

"Students in today's service-oriented economy realise that you have to have a post-secondary degree, and, unlike traditional universities, that's the only reason our schools exist," Miller says. "Traditional schools have multiple missions. Our schools have one mission: to help our students get a degree in the easiest and fastest time. And that is a very appealing message to a lot of people."

Those people would appear to include Barack Obama. Although the President has not endorsed for-profit universities, in July he launched an effort to increase the number of Americans with post-secondary degrees, largely by boosting spending on public two-year community colleges, which have abysmally low graduation rates. According to statistics from the Organisation for Economic Co-operation and Development, the US now trails nine other countries in the proportion of 25- to 34-year-olds with post-secondary degrees. By some measures, it has fallen to 15th place.

The President "is singing our song", says Miller. "He's made it cool to get a professional or career education. Not only cool, but imperative. We're just waiting to see who will take the bulk of the market share."

For-profit institutions are betting heavily that it will be them. One big difference between the for-profit and conventional not-for-profit universities is that the for-profits spend an estimated 23 per cent of their budgets on marketing, compared with traditional institutions' outlay of roughly 1 per cent. In contrast, the for-profits spend far less on facilities, often renting classroom space; on faculty, largely resorting to part-time adjunct instructors; and nothing at all on such amenities as extracurricular activities.

The University of Phoenix, owned by the Apollo Group, and Kaplan University, part of the Washington Post Company, run sophisticated promotional campaigns, largely online. The University of Phoenix online and television commercials and print ads feature mostly non-white and non-traditional-age students - by far the fastest-growing segments of the higher-education market and ones poorly served by increasingly expensive conventional universities.

"The for-profits are focused exactly on the segment of the higher education market that is experiencing the highest growth," says Sean Gallagher, senior analyst for Eduventures, a higher education research and consulting firm. "Many of us in finance or the media or the intellectuals out there have had a traditional experience at elite private universities, and we forget that 70 per cent of the US population does not have an undergraduate degree."

But it is not only low-income non-whites who are considering private universities these days. White, middle-income students are also "looking at the University of Phoenix or (for-profit) Capella University alongside (prestigious, not-for-profit) New York University", Gallagher says. In a survey of such students conducted earlier this year, 82 per cent said they were at least open to the idea of enrolling in a for-profit school, and only 15 per cent said they would never consider it, down from 23 per cent in 2005.

The for-profit institutions "have defined themselves over time as just another university that people might consider," Gallagher notes. "This is all about a long-term shift in the market and acceptance."

Kaplan, which has an enrolment of 58,000 students, earlier this year ran a $29 million promotional campaign that positioned it explicitly as an alternative to not-for-profit higher education, which its campaign depicted as outdated. In one of its advertisements shown on television and online, an actor playing a bow-tied university professor tells a lecture hall full of students, "I have failed you", and decries "an educational system steeped in tradition and old ideas". Among Kaplan's promotional slogans is the line: "It's time a university adapted to you rather than you adapting to it."

Such brash and self-confident promotion is a far cry from the way such companies once did business. In the past, for-profit institutions "were more on the fringe of US higher education," Gallagher says. Now, says Miller, "generally the schools are much more sophisticated ... Their history is that they traditionally were family owned and tended to operate in only a few markets. The target audience" - generally poor and undereducated - "was very small and narrow."

Back then, Miller says, for-profit operators "didn't really think they could convince people that they were a real alternative to higher education. The branding and the marketing were pretty unsophisticated - ads on subways and buses and on TV at 3am. They still do some of that; but we've had a fundamental transformation. Now they understand that people may want to go to our schools because we are more closely aligned with their objectives and their lifestyles."

Image problems persist, however. The for-profits, whose students are generally eligible for government tuition aid, have been criticised for dubious recruiting tactics. "There's criticism that (the for-profit institutions) are taking all these financial aid dollars and turning them into profits," Gallagher says.

At one California school, faculty were promised a trip to Disneyland for signing up new students. In 2004, the University of Phoenix's parent firm, the Apollo Group, paid a $9.8 million fine - the largest ever imposed by the Department of Education - after an investigation found that it had improperly paid bonuses to recruiters for putting what university insiders crassly described as "asses in classes". Recruiters who fell short, according to investigators, were confined to glass-enclosed cubicles where supervisors monitored their every action.

In 2008, three former high-level employees of Kaplan filed suit in a federal court, accusing Kaplan of enrolling unqualified students and inflating their grades to keep them from withdrawing. The suit is still pending, and the company denies the accusations. And TUI University, an online-only for-profit chain, gave nearly $1 million in government aid to students who did not qualify for it or were not even enrolled, the Department of Education's Office of the Inspector General reported in August after an audit.

The impact of private operators is such that traditional US higher education institutions, which long tried to impede the growth of for-profits by challenging their accreditation, are now following their lead, although often with painstaking slowness. In Boston, Bunker Hill Community College announced that it would hold classes this autumn beginning at 11.45pm and ending at 2.30am to accommodate students who work.

"That's what the consumer wants, and that's what the consumer wants more of," Gallagher comments. "More traditional schools are looking at what they can learn from the for-profits. This is a sector that's just continuing to grow while everybody else is shrinking."

The success of for-profit institutions, say some observers, highlights exactly how traditional higher education has failed to adapt to today's students. The biggest difference is that for-profits treat students "as customers, not as supplicants", Miller says. "The basic undergraduate institution is not there to produce specific outcomes. It's an input-based system. And people out there in the real world are looking for a return on investment in higher education."

A consultant recently brought in by a community college to help it compete with for-profits, Miller says, listed for administrators all the things the school was doing wrong: "He told them: 'You're perceived as cold and impersonal, not convincing students you can give them any skills they can use in the real world. You're not convincing them you can provide any flexibility in timing and scheduling. You're not convincing them that you can help them get a job.'"

But traditional universities also have much that for-profits lack: prestige, history, credibility and, most importantly, accreditation, which it can take years to acquire. So the newest path the for-profits have been taking is to buy them. Small campuses with financial problems, which have lately been resorting to such things as selling their art collections to survive, are proving willing candidates.

In 2004, a group of Texas investors bought Barat College, a financially struggling not-for-profit Catholic liberal-arts college near Chicago, to acquire its accreditation as the basis for a private, for-profit, online-only operation. Faculty members were sacked and the campus sold. The same year, a California group bought the not-for-profit Grand Canyon University and converted it into a for-profit institution with its accreditation intact but some of its faculty axed. There have been several other such deals.

In what may be the most interesting recent development, for-profit ITT Educational Services, which runs a chain of technical colleges, has bought the heavily indebted not-for-profit Daniel Webster College in New Hampshire - not, it says, solely to obtain the school's accreditation, but to save and expand it. Rather than lay off faculty, ITT says, it plans to add more and to let them continue to control the curriculum.

Some of the for-profit institutions now see their impressive cash flow as a means of growing not just domestically but globally, even as conventional not-for-profit universities are being forced to scale back or cancel agreements to operate campuses abroad. "There is a demand for US higher education worldwide," Gallagher says. "The for-profits have capital. They have money in the bank - billions of dollars - and they can take that and invest it. They are going to use the fact that they're financially strong to seize this moment and find opportunities overseas."

In June, Apollo Group purchased BPP Professional Education, the first publicly traded for-profit education company in Britain with the right to award degrees. Kaplan also has a division in the UK, where it, too, sees rising university tuition fees as opening opportunities for American for-profits.

Yet international expansion has been slowed by the same thing that once encumbered for-profit institutions in the US, says Miller: suspicion. "It's going to play out a little slowly because the mindset is so deeply embedded in the not-for-profit concept," he says. For-profits are heartened by political changes in the vast Indian market, where American companies have long been blocked, and they are making inroads in Brazil.

"The bias of the government elites is always towards state control and state approval and therefore not-for-profit (higher education)," Miller says. "Once those brands get established, they're going to be extremely successful, but they've got to get past the initial barriers."

That change is likely to happen soon, says Daniel Levy, director of the Programme for Research on Private Higher Education at the University of Albany. Demand for higher education worldwide is outrunning supply, he says, "even where the public supply is expanding. That leaves either domestic private or foreign providers to expand their presence, or both of the above, which is what's happening."

Nevertheless, he says, "I don't think every type of wariness (about for-profit higher education) is just based on ideology, bias or prejudice. There is certainly a lot of experience that justifies a jaundiced eye about many of these institutions. One of the more difficult tasks is to separate the good, honest for-profit providers from the rip-off operations."

It appears that the federal Government is intent on making that distinction clearer. Hearings were opened this month by the Department of Education on, among other things, the formulation of new rules to prevent for-profit institutions from misrepresenting themselves to potential students about such things as the promise of a job after graduation, and governing the payment of incentive compensation to student recruiters. The regulations will be negotiated by government officials and industry representatives, and the hearings will continue into January 2010.

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