For-profit universities: the Yugos of higher education

For-profit universities (FPUs) have been spreading like wildfire the past few years, thanks to the growth in Internet access, aggressive marketing, and, as we’ve learned recently, government-subsidized student loans. Some of these “universities” are enormous, such as the University of Phoenix, with over 400,000 students. The U.S. government has recently figured out that students at these universities are failing to repay their government-subsidized loans at alarming rates, and it’s planning to impose stricter rules on these loans. This has spurred a frantic lobbying campaign from the FPUs. Today’s Washington Post, for example, has a column by former Secretary of Education Margaret Spellings, now a consultant for the FPU industry, in which she claims the government is trying to “restrict access to a full range of education providers,” cleverly avoiding any mention of what she really wants: continued access to the cheap government loans that prop up these out-of-control institutions.

As a college professor, I’ve been following the growth of these companies, and here’s this professor’s blunt conclusion: they offer low-quality, almost worthless degrees. They have virtually no academic standards. They will accept anyone who can pay, and they seem to care primarily about the bottom line. They also haven’t addressed (and virtually never mention) the elephant in the room: many online students are probably cheating to pass their courses, which aren’t very demanding in the first place. As a result, degrees from FPUs are not highly regarded by employers, who are right to view them with suspicion.

Like it or not, an important part of any college diploma is the reputation of the school that awards it. The Yugo was indeed a car, but would you really want to buy one?

But wait, say the for-profits: we are giving people valuable skills that will help them get better jobs. The problem is, real-world data proves this claim is wrong. Students at for-profit colleges take out many more student loans than regular college students, and they default on those loans at dramatically higher rates. The Dept. of Education reported that in 2009, “44% of students who defaulted within 3 years were from for-profit schools,” despite the fact that only 10 percent of all students were enrolled in for-profits.

Apparently, these so-called universities aren’t giving them “real degrees designed for the real world” (the University of Phoenix’s claim), not unless the real world means filing for bankruptcy. As the PBS show Frontline pointed out last May,
“critics … charge the for-profits with churning out worthless degrees that leave students with a mountain of debt.”
Count me among the critics.

These statistics hint at another fact that the for-profit schools don’t want to talk about: they have built their profits on the back of the federal government’s generous student loan program. Almost a quarter of federal loan dollars go to their students, despite their woeful default rates.

Even worse, the for-profits engage in aggressive, sometimes fraudulent marketing practices to sign up students who can’t afford their tuition. The Government Accountability Office recently conducted an investigation and reported on 15 of the biggest for-profits, saying that they “encouraged fraud and engaged in deceptive and questionable marketing practices” when recruiting students and signing them up for loans.

And for-profit degrees aren’t cheap, either. In fact, they can be far more expensive than a degree in the same field from your local community college, which probably offers higher-quality instruction. The GAO looked at nearby public universities for each of the 15 for-profits, and
“found that tuition in 14 out of 15 cases, regardless of degree, was more expensive at the for-profit college than at the closest public colleges.”
They also found that popular “certificate” programs were often vastly more expensive: for example, a certificate in computer-aided drafting was $14,000 at a for-profit and only $520 at a nearby community college.

The government is finally wising up, and they are planning to put in place more stringent requirements for financial aid. In particular, the government wants to make a university ineligible for aid if its graduates’ debt load is too high to be repaid, over 10 years, with 8 percent of their starting salary. This modest requirement is being fought furiously by the for-profit industry, which has run multiple, full-page ads for the past week in the Washington Post that deceptively claim the government is somehow insulting their students.

(Note that the Post has a massive conflict of interest here. Their publisher also owns Kaplan University, one of the biggest for-profits. As their own columnist Steven Pearlstein admitted in August, Kaplan “has provided the handsome profits that have helped to cover this newspaper's operating losses.” I wouldn’t be surprised if these huge ads, all of them printed in color, didn’t receive some major discounts from the Post, which is basically lobbying to preserve its own profits.)

Unfortunately, the lobbyists are winning. The Obama administration announced Friday that “it would postpone action on a proposal to regulate for-profit colleges and trade schools, granting the industry a reprieve of a few months”, although Secretary of Education Arne Duncan also said that new rules would take effect as planned, in mid-2012. Why are we waiting until 2012 to stop wasting money on propping up for-profit colleges?

I have a better proposal: let’s immediately stop offering government-funded student loans to FPUs. If they really have a better model for higher education, then let them prove it in the free market, without subsidies. If students have to pay for these colleges themselves, they will think twice before purchasing an inferior product. The fact is, and most students know, that public and private universities and colleges offer a better product at a lower cost.

In other words, who wants to buy a Yugo when it costs more than a Honda?


  1. For profit higher ed are not the only ones selling Yugos...

    So What's It Going to Be at BigU?
    A Medallion or a Yugo?
    June 27, 2007

  2. have you seen these:


  3. Rafa, I like the comment your first link points to, about a speech by the author of The Big Short: "In a speech titled "Subprime Goes to College," delivered Wednesday at the Ira Sohn Investment Research Conference, Eisman blasted the for-profit education industry, likening these companies to the seamy mortgage brokers who peddled explosive subprime loans over the past two decades."

  4. "repaid within 10 years on 8 percent of starting salary".... so on current NIH postdoc stipends, would people planning to do a postdoc be allowed to take out loans anymore?


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