The revenues look good, but are the customs sound?

A US Senate report damned the for-profit sector. John Morgan asks if it has lessons for the UK

August 30, 2012

When Tom Harkin and his US Senate committee this summer published their report on the for-profit higher education industry, it was major news in the US. USA Today, one of the nation's biggest newspapers, said in a stinging editorial that the report showed that for-profit colleges were a "racket" and that their business models were "too often based on picking taxpayers' pockets".

The University and College Union wants the Harkin report to be big on this side of the Atlantic, too. The union is leading opposition to the coalition government's drive to encourage more private provision of higher education, and it plans to lobby hard using the analysis.

Sally Hunt, the UCU general secretary, says the report "should be compulsory reading at BIS (the Department for Business, Innovation and Skills) and throughout the UK higher education sector. Crucially, [it] delivers a crushing verdict on administrations who actively deregulated the US HE sector and on a regulatory framework that was unfit to deal with companies whose sole allegiance was their bottom line."

Perhaps significantly for England, where private equity firms and FTSE 100 companies are showing increasing interest in higher education, the Harkin report argues that colleges owned by Wall Street investors or private equity behave differently from non-profit institutions in crucial ways.

US accreditors "are not equipped to properly oversee the modern-day for-profit education institution, especially those whose important decisions are made at corporate headquarters, not at the campus level", it adds.

But is the UCU right about the lessons England should take from the committee investigation?

The Harkin report does say that "for-profit colleges have an important role to play in higher education". Could it be that its real lesson is that regulation and consumer protection for students must be appropriate and robust?

Unflattering portrait

After a two-year investigation, the Senate Committee on Health, Education, Labor, and Pensions chaired by Harkin, junior senator from Iowa, delivered its final report, For-Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success, in July.

The report levels criticisms at for-profits' level of taxpayer funding and their student retention rates. In 2009-10, the sector received $32 billion (£20.3 billion) from Department of Education student aid funds, 25 per cent of the total issued (up from 12.2 per cent in 2001).

Of students who enrolled at for-profit institutions in 2008-09, 54 per cent had left without a degree or a certificate by mid-2010. Online distance-learning programmes, a key focus for many for-profits, have dropout rates as high as 64 per cent, compared with 46 per cent for campus-based programmes offered by the same companies. Those who studied at for-profit colleges accounted for 47 per cent of all federal student loan defaults. In 2009, for-profits spent 22.7 per cent of all revenue on marketing, 19.4 per cent on pre-tax profit and just 17.2 per cent on teaching.

On corporate ownership, the report notes that for many years for-profit colleges were small, privately held companies. "But starting about 15 years ago, Wall Street investors recognised the potential for high profits and low risk and moved aggressively to purchase and invest" in the sector, it says.

There are some connections with England here. Apollo Group, owner of the for-profit University of Phoenix, is the parent company of BPP University College. Ryan Craig, one of the founders of private equity-owned Bridgepoint Education, is involved with another private equity-financed company making overtures to UK universities to offer their degrees online. Meanwhile, the College of Law, a charity with degree-awarding powers, was recently bought by a European private equity firm.

In the US, institutions that receive federal student aid are regulated by three entities: the federal government, the state in which the institution operates, and an accrediting body recognised by the US secretary of education. Institutions must gain accreditation, signifying that academic standards are being maintained, if their students are to be granted access to federal grants and loans.

But accreditors, used to dealing with not-for-profit colleges, "have struggled to effectively evaluate institutions driven by business principles that emphasize growth and revenue maximization rather than academic improvement or integrity", the report argues.

It calls for meaningful data on student outcomes and institutional performance to be collected, and for this information to be "retrievable by corporate ownership, not just by campus or school brand". In other words, regulators should be able to single out for-profit institutions for particular scrutiny.

Hunt says: "The lesson is obvious, and it comes screaming out of every line of the report - for-profit companies carry terrible, unacceptable risks. Yet these same companies are now circling our universities and colleges while our government continues to hand them access to public subsidies without regulation or effective oversight, and is now even planning to give them tax breaks [the proposed VAT exemption for commercial higher education providers]."

A BIS spokeswoman says the department has "noted the findings of the Harkin report". But she adds that any comparison to the UK "would be highly speculative as both countries' higher education arrangements differ significantly". She also points out the UK's "highly regarded system of quality assurance".

The spokeswoman adds that the government will review the process through which it designates private providers' courses, giving their students access to public loans. It will introduce new conditions for designation, including "more robust and transparent quality assurance, financial sustainability and management, and governance requirements and student number controls", she says. Publicly funded universities are already under the auspices of these regulations. While the coalition plans that private providers will be subject to the rules for 2013-14, it has not announced any timescale for its consultation on the system.

US tougher on for-profits

But Roger Brown, professor of higher education policy at Liverpool Hope University, says the Harkin report is "very relevant" to English higher education. He rejects the government's argument about the UK's tougher quality assurance regime, saying that the US is in many respects tougher on for-profits. For example, the sale of institutions with degree-awarding powers in the UK does not prompt any need to re-examine their status, he says.

"In America, if a university changes hands, it has to reapply for accreditation. Whereas in this country, the government waves through the sale of BPP to Apollo and the College of Law to a private equity firm," Brown says. He adds that at present, in the UK "not all private providers whose students can get government-supported fee loans are required to be members of the Quality Assurance Agency".

Others challenge the UCU's stance. Paul Kirkham, managing director of the for-profit, London-based Institute of Contemporary Music Performance, says the report is "fundamentally about a failure to effectively manage and regulate the private, for-profit sector in the US (which clearly has significant differences from the UK) and protect the consumer (ie, student) interest; it does not, as some would have us believe, conclude that private or 'for-profit' provision is a bad thing".

The Harkin report does indeed state that "for-profit colleges...have made attending a college a viable option for hundreds of thousands of people who might not otherwise have obtained degrees".

Kirkham says: "In other words, for-profit provision has improved student choice and enhanced student access, especially for the disadvantaged; it has its place...and, indeed, is a necessity if the sector is to be further expanded and developed to wider benefit."

According to Kirkham, "the lesson that the UK authorities should learn" from Harkin is "how to properly integrate a range of different providers into the HE sector, including for-profits, on a level playing field in a way that kick-starts the innovation and entrepreneurial cycle that is essential if we wish to remain a world-leading country in terms of our HE provision".

He adds: "The introduction of new, for-profit, independent provision into the...sector is quite clearly a threat to the Establishment, hence the rhetoric from the UCU and other vested interests - we should be encouraged that they are fearful of that threat, as they clearly have much to protect that is not in the student interest."

Clearly, different interpretations can be drawn from the report. Sylvia Manning, president of the Higher Learning Commission, a regional accreditor in the US, is cited in it and raises one of its key points.

She highlights the distinction "between a multistate, billion-dollar corporation and a school" and urges Harkin to think about this difference "so that in so far as this is a multistate, billion-dollar corporation, you may well need to have a different regulatory scheme at the federal level".

As the coalition draws up its regulatory regime for private providers, that will be a key challenge: dealing with the new corporate players and avoiding the mistakes of the US.

john.morgan@tsleducation.com.

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