After a two-year investigation of the for-profit higher education industry, Sen. Tom Harkin (D-Iowa) on Monday unveiled an exhaustive report on the colleges' business practices, highlighting schools that charge excessively high tuition and shortchange academic investments in order to maximize revenues.
The report, featuring hundreds of pages of research drawn from internal company e-mails and statistics, concludes that the federal government has failed to protect students from misleading sales pitches and poor quality programs, and has not adequately safeguarded the $32 billion in taxpayer dollars that flow to the industry.
"American taxpayers are the single biggest investor in for-profit colleges, yet the government that holds their trust has little ability to ensure that they get the return on investment they deserve: educational and career success for the students who enroll," the report said. "Congress must put in place a much more rigorous regulatory structure that incentivizes the sector to make the financial investments necessary to result in higher student success."
The report from the majority staff of the Senate Health, Education, Labor and Pensions Committee, chaired by Harkin, delves into many of the familiar criticisms leveled against the industry recent years: poor graduation rates, high rates of student loan default and aggressive recruiting tactics targeting low-income students who are eligible for the maximum in federal student aid.
But the report fleshes out these problems with comprehensive new statistics, internal correspondence and company presentations that shed light on the motivations of those in charge.
Harkin's staff found that 30 large companies that own for-profit colleges employed more than 35,000 recruiters, yet had only about 3,500 employees working in career services and 12,400 working in student support.
The 30 companies examined in the report spent less on student instruction than on marketing and advertising. Student instruction also cost less than the money that went to corporate profit. In 2009, the companies spent $4.2 billion on marketing and generated $3.2 billion in pre-tax profit, yet spent only $3.2 billion on instruction.
"For-profit colleges charge exorbitant tuition, they provide an inferior education, they have sky-high dropout rates," Harkin said Monday. "So how do they recruit a steady stream of students? The answer is these are marketing machines."
On average, the for-profit colleges analyzed spent 22.7 percent of all revenue on marketing and advertising, far more than most public institutions, the report said, while spending 17 percent on instruction -- an average of about $2,050 per student. By contrast, Portland Community College in Oregon spends $5,953 per student on instruction, and about 1.2 percent of its budget, or $185 per student, on marketing.
A central finding was that the federal government lacks proper methods to determine how students are faring at for-profit schools. To analyze graduation rates across higher education, the Department of Education only considers students who are attending college for the first time -- a standard that captures only a fraction of the non-traditional students who often attend for-profit schools after stints at community colleges or other schools.
The committee staff requested data on all students enrolling at 30 for-profit education companies from July 2008 to July 2009 and found that about 54 percent of students who enrolled in those colleges had withdrawn by the middle of 2010.
Representatives of the for-profit college industry and Republican Senate committee staff argued that the investigation has been too narrowly focused on for-profit schools, and has ignored broader problems of student debt faced by students across higher education.
"Unfortunately, Senator Harkin's report continues in the tradition of ideology overriding reality," said Steve Gunderson, the president and chief executive of the Association of Private Sector Colleges and Universities, an industry lobbying group. "The report twists the facts to fit a narrative, proving that this is nothing more than continued political attacks on private sector colleges and universities."
The Republican staff on the Senate education committee criticized the "partisan nature" of the investigation, and argued that Democratic committee members should have heeded recommendations from Republicans to expand the scope of the investigation. The minority staff report also criticized the fact that hedge fund manager Steve Eisman, who had testified at a 2010 Senate hearing on industry, did not disclose financial interests he had in betting against for-profit education stocks.
"By failing to examine similar problems at public and non-profit institutions, which serve 90 percent of all post-secondary students, committee members have been given no perspective to judge which problems are limited to the for-profit sector and which exist throughout all institutions of higher education," the Republican staff wrote. "Without that perspective, the committee simply does not have a meaningful record upon which it can legislate constructive solutions that benefit all students."
Harkin's report asserts that the profit motive and quarterly earnings expectations at such schools makes them different from other sectors of higher education, and that Congress needs to step in as a counterbalance.
"Federal law and regulations currently do not align the incentives of for-profit colleges so that the colleges succeed financially when students succeed," the report said.
The report contains hundreds of examples of e-mails and internal slide shows indicating the pressure to enroll as many students as possible.
An internal manual from the Apollo Group instructed recruiters to push back against students who were concerned that the cost of tuition was much higher than other schools. According to the documents, the recruiter was instructed to respond: "When your degree hangs on the wall in a few years ... will you tell your friends and family you bought the cheapest degree you could find?"
According to the report, the Apollo Group, owner of University of Phoenix, says the training manual is no longer in use.
Degrees at most for-profit colleges are significantly more expensive than at comparable public institutions, and the report found that recruiters are often trained to avoid direct questions about tuition costs.
Training materials from National American University, based in South Dakota, clearly told recruiters: "Do not give out the complete program cost," and urged them to only cite costs per credit hour if asked several times.
When a member of a college accrediting panel suggested that an ITT Technical Institute campus post information about tuition increases in the student lounge to be more transparent, the company's regulatory affairs manager denied the request, saying the company was complying with all state requirements by listing it in the course catalog.
"Until the (accreditation) criteria require an additional posting, all ITT Technical Institutes will list tuition and other charges as required in the catalog," read the email from 2009.
The report also noted a major shortage of career placement staff for schools that market themselves as a pathway to better jobs. University of Phoenix, for example, has no career services staff, and Bridgepoint Education Inc., which owns the 90,000-student Ashford University, has one career placement employee.
A spokesman for Apollo Group wrote in an email that the report "misses on some key initiatives we have in place today," including an online career planning tool that assesses students' best career options." The company is also working with "a growing number of employers, community colleges and industry associations" to improve networking opportunities and tailor curriculum to specific workforce needs, said the spokesman, Richard Castellano.
Internal documents from ITT Technical Institute show a "highly flexible criteria" used to decide how many students are successfully placed in jobs. One document showed that counselors are sometimes able to count jobs at Blockbuster or a video game store as successful career placements for the digital entertainment and game design program.
Although the Obama administration has imposed several new regulations meant to rein in marketing abuses at some schools, Harkin said the rules don't go far enough.
Harkin's report listed a number of suggested reforms, including better data collection to track the number of students who drop out and the number of job placements. The committee staff also suggested requiring that schools show better outcomes for students to remain eligible for federal financial aid.
The report concluded: "Congress has failed to adjust the unique legislative framework that governs this sector of higher education to ensure that the demands of shareholders and investors do not overrun those of taxpayers and students."
UPDATE: 8 p.m. -- This article has been updated to include comments from a spokesman for the Apollo Group.