For-profit colleges duck in and out of the regulatory limelight, attracting the unwanted attention of government officials as they compete against other colleges -- and each other -- for the biggest slice of the lucrative higher education market.
According to many, including Iowa Senator Tom Harkin, schools such as Corinthian Colleges (NASDAQ:COCOQ) and the Apollo Group's (NASDAQ:APOL) University of Phoenix have been engaging in unethical and, possibly, illegal behavior in order to recruit students, including providing false information regarding employment outcomes.
In addition, these publicly held companies get the lion's share of their revenues -- a shocking 86% -- from taxpayer funding because 96% of enrolling students take out federal loans, even though these schools sign up a mere 10% to 13% of the college population each year.
Minnesota: a case study
A recent in-depth look at for-profit higher education in Minnesota paints a disturbing picture. The state's Office of Higher Education notes that private, for-profit schools are generally more expensive than public and private, not-for-profit institutions, and that more than 90% of the for-profit's student base had taken out loans to pay for their associate's degree, compared to 64% of those enrolled in the state college system.
Similarly, a typical four-year degree at a for-profit nets students more than $45,000in college loan debt, compared with a little more than $29,000 for those graduating from a not-for-profit four-year institution. Women and veterans are often seen by for-profits as the most desirable customers, since both groups are usually eligible for federal student aid. These groups often face a hard-sell approach from these colleges.
Under the gun, most of the time
For-profits have been the target of lawsuits and investigations for some time. Two years ago, a group of 22 attorneys general joined together to probe problems within the sector, and the publication of Harkin's inquiry followed two years of investigation.
More recently, others have joined the fray, with California's attorney general filing suit last month against Corinthian. The lawsuit alleges that the school, part of a larger investigation of the for-profit education industry, engaged in false advertising, used deceptive means to entice low-income students into taking out federal loans, and misrepresented its successes in the job placement of its graduates.
The Federal Trade Commission is also getting into the act, issuing strict guidelines aimed at for-profit colleges that offer vocational programs. The FTC is warning institutions against misrepresenting themselves in their sales practices, as well as regarding job placement, post-graduate salaries, and accreditation.
More regulation needed?
Harkin's report lays bare myriad problems with the for-profit education industry, making note of the fact that they are businesses that are answerable to stockholders, not students. Taxpayers are also plowing money into these entities, however -- to the tune of $32 billion per year -- and closer regulation is warranted to protect the interests of both taxpayers and the students these colleges are meant to serve.
Despite the inflow of money, outcomes are often poor, with more than 50% of students enrolling in these types of schools dropping out before finishing a degree program. Since almost all have taken out loans, these non-graduates now face a future with poor job prospects, in addition to onerous student debt.
Harkin notes that for-profits are necessary and fill an important place in the higher education landscape. More government oversight is needed, he contends, and regulations protecting students are long overdue.
Like many powerful corporate entities, the for-profit education system has been able to stave off change, but the constant government scrutiny and student complaints have taken their toll on enrollment -- and profits. The University of Phoenix was recently forced to freeze tuition, close campuses, and lay off hundreds of employees. Reining in these educational entities should improve outcomes not only for students and taxpayers but investors as well.
Fool contributor Amanda Alix has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.