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Report: For-profit Schools Likened to Subprime Mortgage Lenders

The embattled for-profit college sector took another hit Tuesday with the release of a new report that cites the industry for preying on low-income and minority students in a way that will ultimately lead to a financial catastrophe like the subprime mortgage collapse of 2008.

The report—produced by The Education Trust, a D.C.-based organization that works to address the nation’s achievement gap—essentially serves as a wake-up call for Congress and the federal government to advance with efforts to more heavily regulate the for-profit college sector. Many fear that GOP lawmakers, fresh off a victorious takeover of the U.S. House, may stifle or roll back such efforts.

“The developing showdown between for-profit colleges and the government is another example of how the aspirations of the underserved and the unfulfilled promise of the American Dream combine with lax regulation to make the rich, richer and the poor, poorer,” says the report, titled Subprime Opportunity: The Unfulfilled Promise of For-Profit Colleges and Universities.

“The problem is not the ‘for-profit’ nature of for-profit colleges,” the report states. “Rather, the problem is that their (financial) returns are a function of sustained failure, rather than student success.”

The report delineates—on a campus-by-campus level—the low completion rates and heavy debt loads that plague students in the for-profit college sector.

Specifically, the report notes that, while for-profits enroll 12 percent of the nation’s college students, they enroll 20 percent of the nation’s Black students and 24 percent of Pell Grant recipients, with the latter group bringing in $4.3 billion in Pell Grants to the for-profit institutions in the 2008-2009 school year. The schools also reaped $20 billion in federal student loans that year, the report states.

But despite the money brought in by serving low-income students, the report states, the institutions evidently are not serving the students well.

“Low-income students and students of color are getting access, but not much success,” the report states. “And access without success—without graduation, without employment—is something the nation cannot afford.”

The report shows only 11 percent of students at four-year for-profit schools as graduating within six years versus 31 percent and 36 percent at such public and private nonprofit institutions. Similar breakdowns occur between for-profit and public or private nonprofits that are more restrictive in terms of admission. For-profit schools typically admit all of the students that apply to respective institutions.

Bachelor’s degree recipients are also leaving for-profits with substantially higher average debt loads: $31,190 versus $18,040 at private, non-profits and $7,960 at public institutions, the report states.

“The excuses that we hear from the for-profits is they enroll a larger number of minority and low-income students, and that’s why their graduates have low completion rates,” said Mamie Lynch, higher education research and policy analyst at the Education Trust and co-author of the report. But she says that argument does not hold up under close scrutiny because other public and nonprofit institutions serve the same students with better results.

The report took particular aim at the University of Phoenix, the online college giant whose rapid growth comes despite an average 9 percent completion rate that the report says is a part of a “sobering picture” of completion rates at for-profits overall.

Representatives of the for-profit college sector took exception to the negative portrayal of their industry.

“Today’s report provides many interesting data points, but fails to include the fact that proprietary institutions cost the taxpayer significantly less than traditional schools, which receive direct state subsidies and benefit from tax-free status,” said Ryan Rauzon, a spokesman for the University of Phoenix.

To bolster his point, Rauzon cited a “position paper” released earlier this year that shows for-profits cost taxpayers less than other schools. The paper—titled Higher Education at a Crossroads—was produced by the Apollo Group Inc., which is the parent company for the University of Phoenix.

Jose Cruz, vice president for higher education policy and practice at the Education Trust and a co-author of the Subprime Opportunity report, says the report’s findings show that government regulation is needed to stave off financial ruin for large numbers of students at for-profit institutions. The report notes that for-profits represent 43 percent of all federal student loan defaults, even though they only serve 12 percent of enrollments and 24 percent of federal loan dollars.

“It should go without saying that inaction is not an option,” Cruz said.

The U.S. Department of Education did release a set of rules that more heavily regulate the for-profit industry but put off implementing the most controversial rule regarding gainful employment, which calls for restrictions and possible ineligibility for federal aid on programs whose completers have loan repayment rates of below 45 percent and 35 percent, respectively.

In addition, federal aid for the colleges would be contingent on program completers typically having annual debt service payments that are 8 percent or less of average annual earnings or 20 percent or less of discretionary income. Programs whose completers typically face annual debt service payments that exceed 12 percent of average annual earnings and 30 percent of discretionary income may be deemed ineligible.

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