Senator: For-profit colleges require tougher oversight

For-profit colleges need tougher oversight, according to a report from a Democratic Senate committee chairman that questions the industry’s advertising spending, tuition costs and reliance on taxpayer dollars.

The criticism of higher-education companies was made in a 17-page report released Thursday by Sen. Tom Harkin, the Iowa Democrat who chairs the U.S. Senate Health, Education, Labor and Pensions Committee. Harkin’s report called for the government to require disclosure of for-profits’ spending of federal money.

The Senate oversight inquiry is part of the growing scrutiny of the education companies, including Carmel-based  ITT Educational Services Inc., Apollo Group Inc.’s University of Phoenix and Career Education Corp. President Barack Obama’s administration on June 16 proposed regulation of the industry because of concern that recruiters are signing up unqualified students and leaving them with loans they may be unable to repay.

“There are growing questions about whether all students—and taxpayers by extension—are receiving value for their educational dollar,” Harkin said at the hearing.

Concerns about student debt and academic quality apply to nonprofit and public colleges, not just for-profits, Sharon Thomas Parrott, senior vice president and chief compliance officer with Devry Inc., a for-profit based in Oakbrook Terrace, Ill., said in her testimony. For-profit colleges serve students who don’t have access to traditional schools: minorities, recent immigrants and working adults, she said.

“Institutions like ours grow for a reason,” Parrott told the committee. “There is an enormous unmet need.”

The for-profit industry contains “bad actors,” such as those who recruit in homeless shelters and misrepresent education quality and job placement, Sen. Michael Enzi of Wyoming, the ranking Republican on the committee, said in his testimony.

“In combating this behavior, it is essential that we use a scalpel and not a machete,” he said. “Whatever protections are put in place must eliminate bad actors and ensure that we do not unintentionally harm students in legitimate programs.”

The committee entered into the record a Bloomberg News article about for-profit college recruiting in homeless shelters, as well as stories about targeting the military and the growth of Apollo’s University of Phoenix.

The number of students attending for-profit colleges rose to 1.8 million in 2008, from 550,000 in 1998, according to Harkin’s report. Federal aid to for-profit colleges jumped to $26.5 billion in 2009 from $4.6 billion in 2000, according to the Education Department. The five largest publicly traded for-profit companies received 77 percent of their revenue from federal financial aid programs in 2009, up from 63 percent in 2002, the report said.

Harkin’s report said one unnamed company had 2009 operating profit of $489 million on revenue of $1.3 billion, a 37 percent operating margin—almost double that of Apple Inc. ITT reported those revenue and profit figures in securities filings, but ITT spokeswoman Lauren Littlefield declined to comment.

Eight publicly traded companies—those that break out such data—spent half their budgets on education, 31 percent on recruiting and marketing and 15.7 percent on undefined administrative expenses, Harkin’s report said.

At least one company spent more on marketing than on education, the report said. Bridgepoint Education Inc., based in San Diego, spent $145.7 million on marketing and promotional expenses last year, compared with $120.1 million on instructional costs and services, according to a securities filing. A Bridgepoint spokeswoman, Shari Rodriguez, didn’t respond to messages seeking comment.

For-profit colleges are more expensive than comparable non-profit schools and leave students with heavier debts, the report said. “Staggering” numbers of student leave for-profits each year, presumably without degrees, according to Harkin’s report. Default rates on government loans in the industry are also higher than similar public and nonprofit institutions, the report said.

The disparities reflect the lower socioeconomic background of students, Harris Miller, president of the Career College Association, which represents more than 1,400 for-profit colleges, said in an interview Wednesday.

The hearing featured testimony from Steven Eisman, a hedge-fund manager whose bet against the housing market was chronicled in a best-selling book. Eisman compared for-profit colleges with the sellers of subprime mortgages. Both industries leave customers with heavy debts they can’t repay, yet don’t bear the risk of defaults, he said. Eisman, who is shorting, or betting against, education stocks, made a similar presentation at a May 26 investment conference.

“If nothing is done, then we are on the cusp of what I believe is a new social disaster,” Eisman told the committee.

The analogy between the two industries is “as silly as it is simplistic” because degrees from for-profits benefit the economy, and the institutions must provide value to protect their reputations, the Career College Association’s Miller said in a speech Wednesday at the National Press Club in Washington.

Two other witnesses, Margaret Reiter, former supervising California deputy attorney general, and Department of Education Inspector General Kathleen S. Tighe, criticized industry marketing practices, including the recruiting of the homeless.

Recruiters from Career Education’s Sanford-Brown Institute in White Plains, N.Y., pressured former student Yasmine Issa to enroll, then left her with $20,000 in debt and unable to find a job as an ultrasound technician, the mother of two said in her testimony.

“It’s hard to find work without a marketable skill, but going to Sanford-Brown to get one has left my family and me worse off than if I had never gone back to school,” she said.

Career Education can’t discuss an individual student’s experience because of privacy laws, a company spokesman, Jeff Leshay, said in an interview Wednesday. The comments at the hearing about Career Education “don’t reflect a full understanding and appreciation for the quality of education we provide,” he said.