Offence is the best defence

As the UK looks to private companies to stimulate competition, the US for-profit universities are taking on their critics. Jon Marcus reports

June 16, 2011

When the heads of the US' private for-profit colleges and universities met in Dallas last week, the mood was upbeat.

The last time representatives of this fast-growing industry gathered for their annual convention, they faced increased regulation, political scrutiny, investigations into financing and recruiting practices, lawsuits alleging fraud and relentlessly critical media coverage.

What a difference a year makes.

The sector's problems haven't gone away, but nor has the sector. Instead, it has fought back aggressively in the courts, Congress and the press. And its success, along with the huge and growing proportion of students it enrols, has placed once-mocked US for-profit universities near the heart of the country's conversation about higher education and the strategy for delivering it.

The schools "are in a better place" than they once were, says Harris Miller, chief executive and president of the Association of Private Sector Colleges and Universities (APSCU), which represents them.

"They used to just try to hide from these things and thought that if they didn't engage they would go away, and that was a big mistake," he says. "We have to tell our story, do the research and present our facts, day in and day out."

Which is exactly what the for-profit universities and colleges have begun to do, becoming as relentless as their detractors.

They have cast themselves as defenders of the low-income, non-traditional students they serve. They have attacked some government regulators as ideologues. They have tried to discredit investigations into their financial practices by seizing on even minor errors, blaming greedy lawyers who see a quick pay-off and "short-sellers" who are trying to affect their stock prices for personal gain. They have commissioned their own studies of the value of their degrees, which, not surprisingly, come to conclusions that are different from those of their critics. And they have invited those critics to bring the same level of scrutiny to bear on conventional, not-for-profit universities, some of which are also vulnerable to attack at a time of spiralling tuition fees.

"I think, at a high level, just as (UK politicians and the public) have begun to ask more questions about the return to citizens and to the government of major investment in higher education, the same thing is happening in our country," says Miller, who worked as a research assistant in the House of Commons before returning to the US as a legislative aide to a congressional committee and, later, running unsuccessfully for the Senate.

The for-profit universities have also poured money into political campaigns, and saw their allies win seats in the autumn congressional elections. Republicans, who seized a majority in the House of Representatives, have proved resistant to further regulation of the industry, and 113 members of Congress from both their ranks and the Democratic Party raised objections to the federal proposal that the schools saw as the biggest threat: the so-called "gainful-employment rule".

The rule would ban federal financial aid to programmes if graduates fail to get jobs that pay enough to justify the cost. Some for-profit institutions get as much as 88 per cent of their revenue from this source, and industry estimates showed that thousands of programmes would be shut down and entire companies forced out of business if the measure were implemented.

During budget deliberations, Congress moved to bar the Department of Education, which proposed the rule, from spending any money to enforce it, even though it had not been approved yet - a huge victory for the for-profit universities.

"While the regulations attempt to address real problems, they miss the target," the bipartisan group of lawmakers wrote, repeating the schools' mantra that cracking down on them would harm low-income students: "The implementation of these new rules will be so burdensome and the projected impact so broad that many reputable schools, particularly those serving the most at-risk students, will be adversely impacted."

This month, the government relented, releasing a dramatically scaled-down version of the gainful-employment rule and delaying its implementation by three years. Instead of imperilling as many as half of the for-profit programmes, the proposal is now estimated to jeopardise about 5 per cent, and even then they would enjoy a more robust appeals process. It was by far the for-profits' greatest victory to date.

But it is not the end of the battle.

The private universities have also filed a suit against the government - "to protect the more than three million students across America currently investing in their futures by enrolling in private-sector colleges and universities" - to block three other rules that have already been approved. One requires states to oversee for-profit higher education; another prohibits recruiters from being paid according to the number of students they enrol; and a third bans the misrepresentation of programmes and outcomes.

The universities are also spending an estimated 11 per cent of their revenues on marketing and advertising, compared with about 1 per cent by conventional non-profit institutions.

The for-profits have quietly done something else, too: they have tried to change some of the practices that have drawn the most trenchant criticism.

One institution, Capella University in Minneapolis, has launched a website that it says shows how many of its graduates get jobs in their desired fields, something for-profit (and, for that matter, not-for-profit) universities have been accused of trying to hide.

Another, the University of Phoenix - the largest for-profit institution in the US and a division of Apollo Group, owner of the UK's BPP - has reportedly cracked down on its own recruiting practices, ending bonus pay for staff who enrol large numbers of students.

It has also introduced "orientation" programmes for new students to reduce dropout rates. Phoenix initially suffered a big decline in enrolment as a result, although this is now rebounding.

This is not to say that the complaints have stopped. At least 11 of the 50 US states are investigating the business practices of the for-profit institutions, which now enrol more than 10 per cent of the country's university students. The US Senate Committee on Health, Education, Labor, and Pensions reports that less than 5 per cent of students at Phoenix complete their associate's degrees within two years, and nearly 21 per cent default on their government loans within three years.

Government statistics also suggest that the for-profit universities have counselled students to defer their tuition-loan repayments. While this ultimately costs the students more in compound interest, it reduces the default rate that regulators use to monitor whether the schools are simply taking students' money without giving them much in return. (A small number of not-for-profit institutions appear to be encouraging deferment, too.)

And some former staff who worked at the private Kaplan Higher Education group are pursuing lawsuits, claiming that they were encouraged to falsify records to prevent poor students from failing or dropping out, thus ensuring that their payments would continue. They also say that Kaplan inflated its job-placement claims.

Kaplan denies the allegations, and the industry contends that for-profit universities are easy targets for such suits because of their deep pockets.

The APSCU attacked the Department of Education for small errors in the reported default rates, referring to "erroneous data that harm students and schools". It blamed the recession for the fact that even the corrected figures showed more than one in five students at for-profit universities defaulting on their loans.

A study backed by the association concludes that high-risk, low-income students, such as those who often opt for its member schools, have similarly high default rates no matter what kind of institution they attend. And another study, co-authored by J. Jorge Klor de Alva, a former president of Phoenix, says that when taxpayer subsidies are taken into account, conventional not-for-profit universities cost society more per graduate than for-profits.

"Strictly from a taxpayer perspective, for-profit institutions represent a better deal than tax-exempt, not-for-profit or public institutions," the study claims.

According to Miller, the American public is beginning to raise as many questions about the return on investment from conventional higher education as it is about for-profit schools.

"That is beginning to shift the conversation away from the (traditional) advantage that non-profit higher education has had. Whether the traditional schools know it or not, I think we're all coming under the same scrutiny," he says.

For the for-profit sector, the most important scrutiny comes from Wall Street, which is voicing renewed optimism. The for-profit universities' stocks are outperforming those of other industries. And an analysis by the financial services firm J.P. Morgan found that, after setbacks caused by the frenzy over increased regulation, the companies are expected to return to mid-to-high single-digit rates of growth.

Even so, the sector is not expecting an easier ride, according to Miller.

"At this point we're so big and so pervasive that the critics are not going to let up," he says. "We have to assume that these challenges aren't going away. At least we're now trying to make it a fair fight."

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