Buzz
Lately, for-profit colleges have been making headlines, and unfortunately, not for the right reasons. They’re facing lawsuits, government criticism, and investigations into their questionable practices. If a for-profit college is on your radar, make sure you’re fully aware of what you’re getting yourself into.
You’re probably familiar with some of the big names in the for-profit education sector: ITT Tech, the University of Phoenix, and the Art Institute, all of which have recently faced major scrutiny. Just recently, Education Management Corporation, one of the largest for-profit chains, agreed to settle for $95 million over accusations of illegal recruiting and consumer fraud.
With enrollment numbers rising, both Federal and State governments are beginning to take action against these schools, which is a step in the right direction. This is crucial, as for-profit schools are major contributors to issues like overwhelming student debt and post-graduation unemployment, which many graduates are all too familiar with.
What Exactly Is a For-Profit School?
For-profit colleges operate more like businesses than academic institutions. And that’s not surprising when you consider that their name itself hints at a focus on generating profits.
The National Association for College Admission Counseling (NACAC) outlines the key differences between public, nonprofit, and for-profit colleges. The main distinction comes down to their sources of funding:
Public: Primarily funded by state or local taxes, with some contributions from tuition and endowments. As a result, these schools are state-run, which explains why tuition is more affordable for in-state students.
Private, Non-Profit: Mainly funded through student tuition and endowments. These schools operate as non-profits, typically governed by a board of trustees. While they do receive some government assistance, they mainly rely on private support, allowing them to follow their own operational strategies.
Private, For-Profit: These are businesses designed to generate profits for their owners and shareholders. Despite receiving up to 90% of their revenue from federal student aid, they are driven by the interests of investors and stockholders, as the NACAC points out.
Given their business-oriented nature, for-profit schools are required to perform various financial tasks that public and nonprofit institutions do not, such as providing financial returns to shareholders. While private nonprofit colleges have faced criticism for commercializing education (e.g., by adding luxury amenities to attract students), for-profit institutions are inherently commercial enterprises.
Running a business is fine, but when your business tricks people into paying for something that benefits you at their expense, that’s not healthy capitalism—it’s exploitation.
How For-Profit Colleges Contribute to the Student Debt Crisis
During my research into the student debt crisis, one statistic stood out. While national student debt has surged, the average borrower still owes less than $30,000. While that’s a significant amount, with student debt totaling 1.3 trillion dollars, $30,000 per borrower seems relatively modest.
The math doesn’t quite add up, and it turns out that for-profit colleges are a major factor. A report from the U.S. Department of Education reveals that although for-profit students make up just 13 percent of the overall higher education population, they account for 31 percent of all student loans (and about half of all loan defaults). The high loan balances of for-profit students contribute to their disproportionate share of national student debt. As explained in a report from Brookings Papers on Economic Activity, Adam Looney of the U.S. Treasury and economist Constantine Yannelis state:
Most traditional borrowers don’t accumulate significant loan balances…. the borrowers who do have high debt are mostly graduate students, parents, and
“independent” undergraduate borrowers, many of whom are attending for-profit schools.
Essentially, a four-year degree from a for-profit school often leads to a “very large balance,” according to the report, which is comparable to what you might owe after earning a graduate degree. Some might argue that for-profit college students are more likely to borrow large sums, which could explain the high debt numbers. This is true: they often come from lower-income families and borrow more than students at nonprofit or public institutions. However, this doesn't fully explain the issue, especially since many for-profit institutions actively target borrowers and encourage them to take on more debt than necessary. The Center for American Progress reports:
Students attending non-four-year, for-profit institutions have experienced the most significant rise in student loan debt compared to any other group. In 2001, 62 percent of freshmen at these schools took out student loans, and by 2009, that percentage had skyrocketed to 86 percent.
These trends stem from a lack of regulation on private lenders and the aggressive marketing tactics used by for-profit schools, in particular.
A friend once shared her personal experience of borrowing to attend a for-profit school. At just 18 or 19, she was approved for a loan of $100,000 (which she’s still repaying), despite the fact that her tuition was much less. When she explained that she didn’t need that much money, the lender actually encouraged her to borrow the full amount, telling her she didn’t have to use it for education expenses—she could spend it however she wished.
While this is just one person’s story, it aligns with a growing reality: many for-profit schools engage in predatory practices.
How They Attract Students
For-profit colleges don’t just engage in predatory practices; they specifically target those in need of affordable education. Some schools have even been known to attempt to recruit the homeless. They focus on low-income individuals who are eager for better-paying jobs and are likely to qualify for government aid. The Center for American Progress highlights several of these unethical recruitment strategies:
These tactics include direct marketing to borrowers who often don’t realize all of their available options. This strategy has received widespread criticism for its role in burdening borrowers with unmanageable debt. Moreover, these schools have made a deliberate effort to target and recruit veterans, even working with third-party marketing firms that create the illusion of being affiliated with or endorsed by the federal government... The outcome is often depleted benefits and excessive student debt.
Recruiters are also trained to manipulate the emotions of prospective students. According to the U.S. Senate Committee's report, recruiters are taught to identify a “pain point” in potential students, such as a dead-end job, the inability to support their family, or the fear of disappointing their parents. Once they identify a person’s vulnerability, they exploit it to convince them that “quick, affordable education” is the solution. You’ve probably seen this approach in their commercials, which promise an escape from dead-end jobs and a path to high-paying careers in booming industries.
Here’s another strategy found by the U.S. Senate Committee:
Students who express doubts about enrolling or taking out loans are met with aggressive sales tactics designed to “overcome objections.” Both students and faculty interviewed by committee staff, along with complaints about companies’ practices, show that students who were enrolled using these tactics are often unprepared for the demands of college and are more likely to drop out with substantial debt but no degree when the promised rewards don’t materialize or turn out to be more challenging than expected.
They also mislead students regarding tuition costs, graduation rates, and employment outcomes after graduation.
This is the reason why Education Management Corporation had to reimburse $95 million. Not only did they deceive students, but they also misled the government. They compensated recruiters based on the number of students they enrolled, which is illegal for schools that accept federal loans and grants.
Why This Matters to All of Us
As a result of these recruitment tactics, these schools are enrolling a large number of students who are unable to afford their education. According to that report from Brookings, for-profit college students account for 44% of all student loan defaults.
These recruiters specifically target veterans and low-income families due to the 90/10 rule. This rule allows for-profit institutions to receive up to 90% of their revenue from federal student aid, making them eager to enroll low-income students who are likely to qualify for financial assistance. However, the other 10% must come from private sources. There’s a loophole that treats GI funds and Department of Defense funds as private, meaning aid from veterans is counted towards that 10% requirement.
For-profit schools also find other ways to exploit the system. According to a report by the U.S. Senate Committee on Health, Education, Labor, & Pensions, these institutions will sometimes halt the flow of financial aid at certain campuses before the fiscal year ends to reduce their federal aid income to 90 percent. They might also increase tuition just enough to force students to pay out-of-pocket or use credit cards—private money. And because they can’t access federal aid if their default rates exceed a certain threshold, some of these schools go as far as paying off vendors and staff to ‘cure’ students from defaulting on their loans.
These practices harm students, but they also hurt taxpayers. A significant portion of our tax dollars goes towards funding federal financial aid. According to a 2-year study by the Senate Committee on Health, Education, Labor, & Pensions, taxpayers are spending tens of billions of dollars on companies running for-profit colleges. Given that many of these students either default on loans or fail to graduate, this doesn’t seem like a wise investment.
How to Separate the Good from the Bad
The government is taking steps to address these issues by cracking down on these companies. For instance, the Education Department has intensified its investigations, and lawmakers are introducing bills, like the Students Before Profits Act, which aim to protect potential students and hold colleges accountable for their actions.
While many politicians and analysts claim that most for-profit colleges are shady, the reality is that there are hundreds of them, and it may not be fair to make such a blanket statement. Additionally, there are valid counterpoints to the criticisms raised against these institutions.
Supporters of for-profit colleges argue that they provide opportunities for veterans and low-income families. Their flexible class schedules allow students to study at night while working or caring for children during the day. For example, my mom attended a for-profit college, and they helped her secure a job after graduation (she's still working there). Although this is just one case and doesn’t represent the entire landscape (I also know people who feel their for-profit degrees are worthless), it's still possible to attend a for-profit school and find employment in your field.
If you’re considering enrolling in a for-profit college, it’s crucial to do some extensive research, especially after all the issues mentioned above. Make sure to check important factors such as student loan default rates, graduation rates (i.e., how many students actually complete their degree), and job placement rates. Keep in mind that this data is self-reported, and schools may exaggerate their figures, so it’s essential to dig deeper. My College Guide recommends asking the following questions:
Are job placement rates reported as “placed” or “employed”? The term placed may simply mean the student went on to grad school, while employed means they actually got a job.
Were graduates employed in their field of study? There’s a big difference. Someone could be working a minimum wage job that doesn’t require a degree. For example, a school was recently fined $30 million for claiming a high employment rate when many of their grads were stuck in low-wage, non-degree jobs like fast food.
What’s the time frame of the data? Are students finding jobs within six months of graduation, or are these figures based on data collected years after they’ve completed their degree?
Be sure to also look into the reputation of the specific school you’re interested in. Nonprofit Colleges Online, for instance, has a list of the 25 worst for-profit colleges. Additionally, you can check out student reviews on websites like Niche.com. The Department of Education’s Heightened Cash Monitoring list flags troubled schools, so make sure your prospective institution isn’t on this list.
Both students and taxpayers have long been skeptical of the for-profit college model, so it’s important to see how things are unfolding now that regulators are stepping up their oversight. At the very least, you need to be well-informed about how these colleges operate, especially if you plan on taking out a loan.
Illustration by Nick Criscuolo.
