For-profit colleges and universities are a growing presence in American higher education. The sector accounted for an estimated 13 percent of all U.S. college students in 2009—up from 5 percent in 2001—as well as an outsize share of the federal financial-aid dollars that help students cover the cost of higher education. For instance, nearly 25 percent of Pell Grant funds—need-based awards that the federal government provides to students from low-income families—go to students of for-profit schools.
To their supporters, for-profit institutions—described as such because they do not have tax-exempt status and rely on tuition, stock market investors and other private sources of income—are meeting a need by providing an accessible postsecondary education to nontraditional students. Moreover, supporters say, such schools serve many economically disadvantaged students and working adults whom nonprofit colleges have historically underserved.
Yet a history of problems in the sector has repeatedly made it a target of government regulators and public interest groups. In recent years, for-profit schools have come under intense criticism for, among other issues, questionable recruitment practices, low completion rates and heavy student debt burdens. Former students of for-profit schools account for nearly half of all student loan defaults.
The debate over for-profit postsecondary schools—which those in the industry prefer to call career, proprietary, or private sector colleges—raises questions about how best to balance access and accountability. Such questions are important at a time when leading voices are calling for many more Americans to earn postsecondary credentials and degrees.
Through news articles, academic studies and other resources, this Topics section looks at the for-profit college landscape, including federal efforts to address some of the sector’s perceived shortcomings.
Unlike private and public institutions with nonprofit status, for-profits do not receive direct operational funding from state or federal sources. However, students enrolled at proprietary colleges have been permitted to receive federally backed grants and loans since 1972, under Title IV of the reauthorized Higher Education Act of 1965.
A USA Today analysis of college costs showed that 92 percent of students at for-profit colleges took out loans, compared with 60 percent who attend nonprofit private schools and 27 percent who enroll in public schools. According to The Chronicle of Education, annual tuition for full-time undergraduates at four-year colleges was $30,900 at for-profit schools in 2008, compared with $15,600 at public and $26,600 at private nonprofits.
In the late 1980s, a series of scandals led to congressional action that restricted for-profit schools’ access to federal dollars. To rein in institutions whose graduates tended to face financial difficulty, Congress moved in 1989 to ban colleges from receiving Pell Grants and many other types of federal student aid if too many of their students defaulted on their loans after two years. In 1992, Congress enacted the 85/15 rule, which required higher education institutions to generate at least 15 percent of their revenues from non-Title IV federal assistance—which includes Pell Grants and Stafford Loans, but not military student aid like the G.I. Bill. In 1998 that ratio was changed to 90/10.
More than 1.8 million students were enrolled in 2009 at degree-granting proprietary institutions eligible for Title IV financial aid, according to a February 2012 working paper from the Center for Analysis of Postsecondary Education and Employment. That represented more than 9 percent of students at aid-eligible degree-granting schools, up from just 0.2 percent in 1970. From 2000 to 2009, enrollment tripled in for-profit, aid-eligible schools, while enrollment for the rest of higher education increased by 22 percent. And those 2009 data do not include nearly 1,000 proprietary colleges that the U.S. Department of Education has excluded from access to taxpayer funds due to persistently high student default rates.
According to 2012 data, the default rate for loans issued to students at for-profits was 15 percent. Loans tied to public institutions were at 7.2 percent, and private nonprofits 4.6 percent. When the Education Department changes its cohort rate from a two-year to a three-year model in 2014, those default rates are expected to increase.
Many industry critics argue that for-profit schools have often emphasized recruiting new students at the expense of helping them earn degrees or get jobs. In 2004, the University of Phoenix, the industry’s largest institution, paid the biggest fine in Education Department history—$9.8 million—to settle charges that it had tied recruiters’ salaries to enrollment increases despite a federal ban on the practice. A U.S. Senate committee investigation found Ashford University, a for-profit institution with 78,000 online students, employed 1,700 student recruiters but only one job placement specialist. The committee also found 84 percent of Ashford’s two-year degree students enrolled in 2008 had dropped out by 2010.
For-profits have also been cited for predatory enrollment practices that allegedly target combat veterans. Stories of recruiters arriving at the hospital rooms of soldiers with head wounds to sign them up for classes led President Barack Obama to sign an executive order in April 2012. It called on colleges to crack down on false advertisements on military bases and other misleading information.
In 2005, the Inspector General of the U.S. Education Department testified before a congressional panel that 74 percent of the agency’s cases of student aid fraud by institutions involved proprietary colleges.
But the perhaps the biggest blow to the sector was a 2010 report released by the Government Accountability Office (GAO) commissioned by Sen. Tom Harkin, D-Iowa, chairman of the Senate Committee on Health, Education, Labor and Pensions. It found that for-profit college recruiters encourage students to falsify personal and financial information to qualify for more federally backed financial aid. GAO investigators posing as students also reported that 15 institutions greatly exaggerated the potential earnings the programs would bring. Later that year, the GAO revised the report to soften some of the conclusions. Yet a follow-up investigation in 2011 found more problems, such as lax rules on proving high school graduation and weak standards for policing such abuses as plagiarism.
Following the 2008 reauthorization of the Higher Education Act, the U.S. Department of Education was tasked with setting up rules for how best to monitor career colleges. After more than a year of high-profile debate, the department finalized “gainful employment” rules in June 2011. The rules, which penalize schools with low student debt repayment rates and high debt-to-income ratios, were widely seen as less rigorous than versions first proposed in 2010. Inside Higher Ed published a helpful guide to the two versions of the gainful employment rules. A federal court ruling in June 2012 invalidated the requirement that at least 35 percent of a program’s former students pay back their federal student loans. That ruling, and the ongoing legal processes, have inhibited early enforcement of the gainful employment policies.
In March of 2014 the Obama administration proposed a revised, tougher set of restrictions on the industry, including penalizing programs for having high cohort default rates and students whose incomes don’t exceed a certain ratio of wages to debt. Career colleges are likely to sue.
Supporters say that for-profit colleges offer programs to individuals looking to broaden their skills that community colleges—the chief rivals of for-profits—have been slow to provide. For-profit schools also offer training for trades that liberal arts institutions have never entered or long abandoned. Those offerings are attracting students that might not pursue a postsecondary education otherwise, supporters argue.
The federal government’s tougher stance toward for-profit colleges is not winning over some organizations that advocate for low-income populations. After Congress ended the practice of allowing for-profit students to qualify for federal financial aid without earning a high school diploma or GED, CLASP, a Washington-based advocacy organization for low-income people, criticized the new rule as an obstacle to low-skilled workers who need pathways to better jobs.
In general, students entering for-profits have lower incomes than those starting community college, according to a 2010 study commissioned by a career college.
Students at for-profit institutions also are more likely to be female, to be African-American and to be beyond traditional college age. According to federal data from 2009-10, African-Americans accounted for 22 percent of the enrollment of for-profit institutions, compared with 14 percent at two-year public colleges and 11 percent at four-year public colleges. Fifteen percent of students in for-profits were Hispanic, compared with nearly 16 percent at two-year and 10 percent at four-year public colleges. About 65 percent of students in for-profit institutions were 25 years and older, compared with 31 percent at four-year public and 40 percent at two-year public colleges. And about two-thirds of students at for-profits were female.