Going for Broke

For-profit colleges have been accused of preying on poor students, loading them with debt and pocketing their government loans. But lawmakers are finally fighting back

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Photograph by Jeff Wilson for TIME

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But it was the internet age and the rise of distance learning that accelerated enrollment at for-profits, which has nearly tripled, to 2.2 million, since 2001. For-profits today have both virtual and physical campuses--the behemoth University of Phoenix has locations in 40 states and on the Web--and their students can earn every kind of degree, from a certificate in fashion merchandising to a Ph.D. in industrial psychology. Many are nationally accredited, though others have the more sought-after regional accreditation that puts them on comparable footing with traditional schools.

Aside from government loans and grants, there is a lot of private money at stake. "Historically, they've proven to be very profitable companies," says Jarrel Price, an education analyst at Height Analytics, who noted that for-profits' stocks became particularly attractive to investors during the economic downturn but have been underperforming since 2009 because of regulatory threats. Still, the Washington Post Co., for example, derived 59% of its revenue in the fourth quarter of 2010 from Kaplan, the for-profit education subsidiary it acquired in 1985.

None of this would be troubling if the schools produced good results--and many of them do. But some alarming trends have emerged. Graduation rates are poor: only 27% of first-time, full-time bachelor's-degree seekers at for-profits finish within six years on average, compared with (still nothing to write home about) 55% at public schools and 65% at private nonprofit schools. For-profits also account for a high portion of student-loan defaults--more than 40%.

"Yes, we have a higher default rate than the Harvards and the Yales," says Harris Miller, CEO and president of the Association of Private Sector Colleges & Universities, an industry group. "But if Congress required Harvard to have the same demographic as the American people, instead of drawing from the top earners in the country, they'd have very different outcomes."

But what the industry can't defend is the aggressive marketing tactics for-profits use to reel students in, which include, as the GAO report showed, overstating future earnings potential or job-placement rates. In the coming weeks, the Department of Education will be finalizing a highly contentious "gainful employment" rule, whereby programs with many graduates whose paychecks can't cover their student loans--known as a high debt-to-earnings ratio--could be disqualified for federal financial aid. Miller argues that the rule would block hundreds of thousands of students from access to higher education. "Many community colleges have had to cut back their programs, which is probably the only alternative that most of these students would have," he says.

The Bottom Line

On that point, at least, senator harkin agrees. "I think we have missed the boat in terms of providing adequate funds to community colleges," he says. "I am not against distance learning. I think it can provide a great service to a lot of people. It's just that ... the primary purpose of the for-profit schools is to make a profit, not to educate people to get them a job."

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