Spotlight Focuses on For-Profit Sector

For-profit schools--the fastest growing sector of higher education--are facing increasing scrutiny in Congress and the media. As the Department of Education released its proposed rules intended to strengthen oversight of institutions participating in the title IV student aid programs, the Senate Health Education Labor and Pensions (HELP) Committee held a hearing on June 17 examining the federal investment in for-profit education.

At the hearing, HELP Committee Chair Tom Harkin (D-IA) released a report, "Emerging Risk?:  An Overview of Growth, Spending, Student Debt and Unanswered Questions in For-Profit Higher Education." The report details the enormous growth in enrollment at, as well as  federal aid flowing to, for-profit schools over the last decade, with for-profit enrollments jumping 225 percent from 1998 to 2008. Much of this growth is attributable to online education since the 2005 repeal of statutory provisions that restricted distance learning programs to no more than half of the programs and half of the students at Title IV eligible institutions. The for-profit sector's share of federal student aid has also grown, with for-profits receiving almost one quarter of all Pell Grants in 2009--compared to 13 percent a decade earlier. Further, the share of Title IV funds received by for-profits exceeds their share of enrollments:  for-profit schools enroll 10 percent of all students, but receive 23 percent of Title IV funds. This is because proprietary schools tend to enroll more low-income students, who rely almost completely on federal aid and private loans to pay their cost of attendance. Title IV funds also make up an increasing proportion of for-profit schools' revenue: an average of 77.4 percent for the five largest publicly held institutions. 

Much of the recent press coverage of for-profit institutions has centered on research and theories espoused by Steven Eisman, a portfolio manager with FrontPoint Financial Services Fund. Eisman, known for being one of the few to warn about the subprime mortgage crisis, gave a speech in May at a New York investment conference with the catchy name, Subprime Goes to College. This was the basis for his testimony at the Senate hearing. Eisman is concerned that students at for-profit institutions are being saddled with mountains of easy-to-obtain loan debt to pay for poor quality education which will lead to rising loan defaults and ruined lives. Ninety-six percent of proprietary school students take out loans to pay for their education-a much higher percentage than those attending public and nonprofit institutions. 

More to Come 

The Senate HELP Committee has promised that the June hearing will be the first in a series of hearings on for-profit education in the coming months. Members of the House, including Rep. George Miller (D-CA), chair of the House Education and Labor Committee, have also expressed concern. Miller and Harkin, the House and Senate education committee chairs, among others, have requested a Governmental Accountability Office study of the quality of proprietary institutions and their receipt of federal funds. 

Recently proposed changes to Title IV regulations seek, in part, to address some of the concerns about proprietary schools, including removal of a number of safe harbors related to the ban on incentive compensation for recruiters and financial aid administrators that has been blamed for a resurgence in aggressive marketing tactics by some schools. An additional notice of proposed rulemaking that would link Title IV eligibility of programs preparing students for "gainful employment" to debt loads of graduates is expected later this summer.