By Terry Connelly, former Dean of GGU’s Ageno School of Business
For-profit colleges have thrived by upending the long-standing operating model of universities. They treat higher learning as a business, students as customers, and “college traditions” as disposable.
The “Clean” Slate
“For-profits did not have the baggage of academic systems or faculty governance that focus on faculty,” says Gregory M. St. L. O’Brien, an administrator with long experience in higher education. In the same Chronicle of Higher Education article, he also says that for-profits were “free” of the traditional faculty structure of tenure-track professors moving through peer evaluations of their teaching and services and teaching faculty serving as department chairs holding tight to how curricula are organized.
The for-profit colleges have designed a business model that enabled enrollment to climb, at one point, at six times the rate of other American universities over the prior four decades. Never mind that promised salary levels can turn out to be much lower after graduation – or nonexistent if you can’t finish – and students, therefore, can take longer and longer to repay the loans they incurred to be able to attend – in some cases well into their 60s. For college-level students, the six-year graduation rate was 66 percent at private nonprofit institutions; 59 percent at public institutions; and 23 percent at private, for-profit institutions according to government statistics.
The way private, for-profit universities have exploited loopholes to get more student loan funding has taken money away from other more efficient ways to support access to higher education, such as community colleges, where no shareholders need to be satisfied with returns on investment. To achieve such returns, for-profits do not leave the design of the curriculum and course structure in the hands of the professors invested in student learning and experience, but instead, construct their learning platform with the interests of investors and owners in mind. University of Phoenix and Trump University were sued through a government class action and a whistleblower case for skirting federal loan rules, respectively.
For-profits have focused on honing their instruction products – whether in-person or online – to match their targeted tuition price-points, which in turn are deliberately designed to procure the maximum amount of Federal education grants and loans. These students might be attending part-time in real-world terms, but are considered full-time students in terms of federal aid eligibility.
Investors are also attracted to the education sector by a situation many other industries would be delighted to enjoy: higher education consumers are already conditioned to pay higher tuition pricing every year for essentially the same product, regardless of whether or not it is new and improved. This kind of market can be a bonanza if you can cut production cost further, commoditize the product, optimize to deliver efficiency over quality, and supercharge your marketing pitches with high-pressure tactics.
For college-level students, the six-year graduation rate was 66 percent at private, nonprofit institutions; 59 percent at public institutions; and 23 percent at private, for-profit institutions according to government statistics.
The for-profits’ stocks were pummeled when the Obama Administration proposed an across-the-board requirement that all for-profit colleges track whether the jobs that their graduates actually get provide salaries sufficient to service their student debt with enough left over to live on.
Marketing a College Like a Sub-Prime Mortgage
Some online colleges, like Ashford University, spent up to 28% of its government-subsidized tuition revenue – more than it spent on the cost of its classes – on aggressive student recruitment campaigns. The University of Phoenix spent nearly a $100 million annually on promotion, including the cost of naming a football stadium (the school has never fielded a team). These spending rates – which do not necessarily include their extensive lobbying spend in Washington, DC – run up to ten times more than traditional non-profit institutions (even with the increase in marketing by private and public non-profit colleges to move up in US News ranking by garnering ever more applications to look more “selective.”
Seductive Sales Tactics
Some for-profits seek to drive all prospective student inquiry directly to their call centers by rarely publishing actual class schedules or tuition rates on their websites. This simple tactic forces prospects to contact the schools by telephone placing themselves at the tender mercies of the school’s own or outsourced phone-sales professionals. Some for-profits used sales quotas coupled with pay incentives to push enrollment, a practice that violates federal rules. A Government Accounting Office 2010 undercover Department of Education study presented to the Senate Health, Education and Labor Committee, found “fraudulent, deceptive and otherwise questionable marketing practices” at all fifteen for-profit schools investigated, including direct inducements for fraudulent financial aid application by prospective students, as well as direct assistance to undercover applicants in answering questions on their admission exams.
The same DOE report also described “intimidation techniques,” used by recruiting managers on subordinates who were not meeting targeted enrollment number. Ultimately, University of Phoenix paid a multi-million dollar fine to the DOE to conclude the investigation.
The US taxpayer has unwittingly been the lead underwriter in the emergence of the for-profit higher education sector, bearing most of the downside risks with few upside rewards in terms of actual taxes paid by for-profit institutions, many of which have gone bankrupt. By 2008, the College Board reported that, despite enrolling 10 percent of higher education students, for-profits were accounting for over 40 percent of federal Pell grants and student loans, and also a higher percentage of student loan defaults, which ultimately go against the taxpayer. Much like subprime mortgage lenders during the great financial crisis of the last decade, for-profits have no “skin in the game” when it comes to that risk of loss.
Assessing Education Quality
Consider also the practice of “buying accreditation” – which is supposed to be an independent evaluation of the quality and integrity of educational offerings. When traditional private colleges that are failing, but already accredited, are converted to for-profits, some accrediting agencies are ruling that those wholesale reorganizations are merely changes in ownership rather than creations of distinctly new colleges – despite the fact that the end result is a complete change in the academic and operational model. When designing their degree programs, the acquirers had the advantage of wiping the slate clean without an independent assessment that prospective students can rely on.
About Golden Gate University
Non-profit since 1901
#1 rated for working professionals in the U.S.
Independent faculty governance
Modest marketing spend
Official Military-Friendly School®
Accredited: WSCUC Senior College & University Commission
A further major step away from traditional academic quality norms structures, pioneered at the for-profit leader University of Phoenix, was to abandon the traditional amount of student-instructor contact time. Despite more online education in general, U.S. regulators and accrediting bodies only caught on slowly.
More Likely to Drop Out
The for-profits less than stellar performance in terms of student retention may be primarily a result of their lower level of resource commitment to the central function of instruction. In many respects, the long-term success of for-profits may depend on whether they will really put the customer first or just put acquiring the customer first.
Although the actual drop-out rate among for-profit college students is difficult to calculate, a report to the U.S. Senate in July 2010 reached its own conclusion: three of the four schools reporting any data at all enrolled more new students over the course of the year than the total number of students at the start. One school started the period with 62,000 students, enrolled 117,000 new students, but ended with just 6,000 students.
…and Less Likely to Pay Back Student Loan Debt
The U.S. Department of Education’s College Scorecard tracks the number of students who dropped out with debt for each college and university in the nation. The figures show a total of 3.9 million undergraduates with federal student loan debt dropped out during fiscal years 2015 and 2016 (from mid-2014 through mid-2016). It found that more than 900,000 of these students dropped out of for-profit universities. That’s 23 percent of all the indebted dropouts, even though only 10 percent of all undergraduate students attend for-profit schools.
Not So Great for Our Military Personnel
Non-profits have long been subject to the federal limit that no more than 90% of their tuition income can be derived from federal student loans and grants. Because they target lower income groups in their intensive marketing efforts, many such colleges risk coming close to or exceeding that limit: but they also know that enrollment of current military personnel who receive educational benefits does not count against that limit. Accordingly, many for-profits also have long been training their in-house or hired marketing guns on our nations’ soldiers, sailors, and marines, many of whom of course are in a position take courses online while deployed overseas. Some for-profit schools have been severely penalized for their treatment of prospective military enrollees.
“But private, non-profit colleges receive comparatively little attention, despite the fact that these institutions enroll a substantial share of students at four-year colleges: 3.4 million full-time equivalent students or 30 percent of all four-year enrollment (compared to 61 percent at public colleges and 9 percent at for-profits).”
Private vs. Nonprofit & Private: Let’s Compare
The role of colleges that are both private and non-profit in expanding educational opportunities deserves more focus than it gets because of controversies surrounding both state university funding challenges and tuition increases, as well as controversies surrounding the for-profit college business models and student outcomes. As a recent Brookings Institute study on private, non-profit colleges observed:
“Public and for-profit colleges both feature prominently in higher education policy debates, usually for different reasons. Rising prices at public colleges and universities have prompted public concern about declining affordability, especially as states have cut back on taxpayer support to these institutions. Weak student outcomes at many for-profit colleges have drawn the attention of policymakers concerned about the waste of taxpayer money and the impact on students who leave college with debt and no degree…
But private, non-profit colleges receive comparatively little attention, despite the fact that these institutions enroll a substantial share of students at four-year colleges: 3.4 million full-time equivalent students or 30 percent of all four-year enrollment (compared to 61 percent at public colleges and 9 percent at for-profits). Consequently, better understanding the role this sector plays in U.S. higher education overall, and in each state, may reveal ways for policymakers to increase educational attainment…
Federal policy plays an important role in the financing of post-secondary education at institutions by providing grants to low-income students and access to loans to all students, in both cases on similar terms regardless of whether the funds are to be spent at a public, for-profit, or private, non-profit college.”
An innovation claimed by for-profits, such as the focus on working adult students and real-world success, has been in place, and delivered with integrity, by Golden Gate University for over 100 years.
What’s Happening Now
For-profit universities are back in the news, most recently in a New York Times editorial last month mentioning Betsy DeVos, a substantial for-profit education investor and the new head of the Education Department, enabling “predatory” practices in the for-profit sector. It should come as no surprise that for-profit colleges are attempting to take advantage of the Trump Administration’s decidedly pro-business / de-regulation agenda. The appointment of Betsy DeVos signaled that there would be a significant rollback of the Obama Administration’s employment rules on abuses in the for-profit sector. According to the Chronicle of Higher Education in 2016, DeVos and company have already “hit pause” on the gainful employment rule.
As The New York Times also reported last month on its front page:
“Members of a special team at the Education Department that had been investigating widespread abuses by for-profit colleges have been marginalized, reassigned or instructed to focus on other matters, according to current and former employees … The unwinding of the team has effectively killed investigations into possibly fraudulent activities at several large for-profit colleges where top hires of Betsy DeVos, the education secretary, had previously worked.”
The Obama Administration team in fact had been looking into advertising, recruitment practices and job placement claims at several institutions, including the DeVry Education Group [now part of Adtalem Global Education]. But that was before DeVos named Julian Schmoke, a former dean at DeVry, as the team’s new boss!
Other ongoing investigations of Bridgepoint Education as well as Career Education Corporation were also stopped by the new DeVos team. Previous federal investigations had been undertaken after reports of misrepresentation of enrollment benefits, job placement rates, and program offerings at multiple for-profits, especially after the collapse of Corinthian College. DeVos also put on more-or-less permanent “hold pending review” the Obama Administration’s rules relating to mandatory disclosure of for-profits’ track records of success (or not) in terms of their graduates attaining “gainful employment” (i.e., enough to pay their student debts and also meet the necessities of life).
As the New York Times pointed out, Bridgepoint also had a high-level contact in the new Administration in the person of Mercedes Schlapp, Strategic Communications director at the White House, who served previously as a consultant to Bridgepoint through the Cove Strategies firm she co-founded with her husband, Matt Schlapp. He went on record to decry what he called the “persecution” of for-profits by the Obama administration because they had brought ‘innovation” to the education field.
An innovation claimed by for-profits, such as the focus on working adult students and real-world success, has been in place, and delivered with integrity, by Golden Gate University for over 100 years. The University has also been focused on the convenience offered by online learning since its inception in the 1990s. For the efforts of its leadership and faculty, GGU has been ranked the #1 ranked university for adult students in the U.S. — two years in a row.
About Terry Connelly
Terry Connelly is an economic expert and Dean Emeritus of the Ageno School of Business at Golden Gate University. With more than 30 years of experience in investment banking, law and corporate strategy on Wall Street and abroad, Connelly analyses the impact of government politics and policies on local, national and international economies, examining the interaction of global financial markets, the U.S. banking industry (and all of its regulatory agencies), the Federal Reserve, domestic employment levels and consumer reactions to the changing economic tides. He holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore (corporate, securities and litigation practice in New York and London), global chief of staff at Salomon Brothers investment banking firm and Cowen & Company’s investments, where he served as CEO. In conjunction with past Golden Gate University President Dan Angel, Connelly co-authored Riptide: The New Normal In Higher Education (2011). Riptide deconstructs the changing landscape of higher education in the face of the for-profit debacle, graduation gridlock, and staggering student debt, and asserts a new, sustainable model for progress. He is a board member of the Public Religion Research Institute, a Washington, DC think tank and polling organization, and the Cardiac Therapy Foundation in Palo Alto, California. Connelly lives in Palo Alto with his wife.