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For-profit Colleges Haul in Government Aid

Students aren’t the only ones benefiting from the billions of new dollars Washington is spending on college aid for the poor.

An Associated Press analysis shows surging proportions of both low-income students and the recently boosted government money that follows them are ending up at for-profit schools, from local career colleges to giant publicly traded chains such as the University of Phoenix, Kaplan and Devry.

Last year, the five institutions that received the most federal Pell Grant dollars were all for-profit colleges, collecting over $1 billion among them. That was two and a half times what those schools hauled in just two years prior, the AP found, analyzing Department of Education data on disbursements from the Pell program, Washington’s main form of college aid to the poor.

This year, the trend is accelerating: In the first quarter after the maximum Pell Grant was increased last July 1, Washington paid out 45 percent more through the program than during the same period a year ago, the AP found. But the amount of dollars heading to for-profit, or “proprietary,” schools is up even more about 67 percent.

For-profit colleges say the country has little choice but to accept their help to achieve President Obama’s goal of getting every American to enroll in some form of education beyond high school. The for-profit schools have space while community colleges are bursting at the seams. Besides, their convenience and career-focused curriculum are clearly winning customers, who are free to use their aid where they choose.

But critics say the increased federal aid has unleashed a new gold rush. They complain the industry has too many incentives simply to enroll students and tap the spigot from Washington and not enough to make sure students succeed.

The industry is “an aggressive sales operation that has a voracious appetite for recruiting the poorest students,” said Barmak Nassirian, associate executive director of AACRAO, a group representing admissions officers and registrars at traditional colleges. “The victims here are the students themselves and the taxpayers, who have to pick up the tab.”

Regardless of how AP’s findings are interpreted, they underscore the extent to which the United States has ramped up its support for low-income college students in recent years, but increasingly outsourced the job to the private sector.

Last year, Washington paid out a record $18.3 billion in Pell Grants, which typically go to families earning under $40,000. Proprietary colleges collected about $4.3 billion of that, or about 24 percent – roughly double the proportion a decade ago.

In the first quarter of the current academic year, for-profit colleges collected $1.65 billion, or 67 percent more than in the same period a year ago. On July 1, the government made more students eligible for Pell grants and increased the maximum award by $600 to $5,350.

For-profits are also grabbing a growing share of loans subsidized by the government to help low-income students. They collected about $7 billion in subsidized Stafford loans in 2008-2009, up from $4.7 billion two years before. Taxpayers subsidize the interest rate and take the hit when students default. Nearly one-quarter of students at for-profit schools default within four years, more than double the rate of other schools.

Overall, the sector enrolled about 2.7 million students in 2007-2008, the latest year with complete federal data available. That was only about 10 percent of total enrollment in higher education, but it’s about 2 million more than a decade before.

The numbers are even more striking for low-income students: The number of Pell recipients enrolled in for-profit schools is 50 percent higher than two years ago.

Phoenix alone had more than 230,000 Pell recipients last year (and received $657 million Pell dollars, roughly its parent company’s yearly profit). Its campuses educate nearly four times more low-income students than the entire Big 10, and more than 30 times the Ivy League, the AP found. Unlike proprietary schools, those traditional colleges enjoy tax-free status for supposedly providing a public service, notes Harris Miller, president and CEO of the Career College Association.

On a recent weeknight at a University of Phoenix branch in Raleigh, students began streaming in during early evening. Virtually all work full time. Many were older than traditional college students and many were minorities. The “campus” is a suburban office building off a highway interchange. Inside, the feel is thoroughly corporate computer work stations, sleek desks, wired classrooms with whiteboards.

Aja Holmes, a 28-year-old single mother of two, dropped out of nearby North Carolina State University after having her first child a decade ago. Now she’s hoping to complete a degree and move up in the pharmaceutical company where she works. She’s paying her tuition with a Pell Grant, government loans and employer support. The big draw is convenience.

“I can work full time and still spend time with my kids,” she said. “I can do my homework at night. All my books are online, so I can take my laptop anywhere and read. The program has been good for me.”

Critics acknowledge for-profit schools can be a good match for some. But they point out median graduation rates of just 38 percent (for-profit colleges counter they’re taking on less well prepared student, and say they actually do much better than community colleges with two-year programs).

Students who don’t graduate will be hard pressed to repay their debts. On average, for-profit schools cost five and a half times the price of community colleges. Virtually all students must borrow some money, and even among graduates of for-profit four-year programs, the average borrower ends up owing $33,000, according to the latest government data analyzed by Mark Kantrowitz of the Web site That’s about $5,000 higher than even private nonprofit four-year colleges.

The sector also can’t seem to shake recurring allegations it’s accepting underqualified students just to secure their federal aid, dooming them to failure. Phoenix has set aside $80.5 million to cover a possible settlement of a whistle-blower lawsuit alleging it illegally compensated recruiters based on how many students they enrolled. Other complaints include a lawsuit against privately held Westwood College of Colorado alleging students were misled about fees and tricked into signing high-interest loans. Westwood denies the allegations.

Nassirian and others want students to get more reliable data on outcomes, and not just what they hear from slick TV ads. Apollo Group Inc., which owns the University of Phoenix, spent close to $1 billion on selling and promotional costs last year.

In the late 1980s, the proportion of Pell dollars going to for-profits was similar to now. But a regulation now called the “90-10” rule, which requires colleges to collect at least 10 percent of their revenue from nongovernment sources, drove hundreds of shady operations under and lowered the proportion.

Now, that number is back up so much, in fact, that companies such as Apollo are worried about bumping up against the 90-10 rule. Government dollars accounted for 86 percent of Phoenix’s revenue last year, compared with less than half as recently as 2001.

Most critics insist they don’t oppose the principle of for-profit higher education. But they say the sector has been mollycoddled by friendly lawmakers, who have watered down the 90-10 rule. They want the loopholes closed.

The federal government has taken steps to help students make more informed choices, said Deputy Undersecretary of Education Robert Shireman. Last August, students completing federal financial aid forms began receiving graduation and transfer rate data on the schools they are considering. By next July, every school will have to provide at least general information on job placement.

“Our primary concern is that consumers and students are served well,” he said. But, he added, “this is a consumer choice system. If people who are eligible for federal financial aid choose one school over another, that is their choice.”

Neutral experts say the United States will indeed have to tap the for-profit sector if it’s to meet the president’s goals.

“As we see these cutbacks across the country, we really do need the capacity this sector represents,” said Patrick Callan, president of the National Center for Public Policy and Higher Education.

But, he added: “Somebody ought to be paying attention to it, that’s for damn sure.”

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