For-Profit Colleges Squander Tax Dollars, Report Says

For-profit colleges in the U.S. receive billions in federal dollars yet spend more money on marketing than on instruction, with many students dropping out without a degree and in debt, according to a Senate report.

The schools, which got $32 billion in tuition aid in 2009-2010, aren’t a good investment for taxpayer money, according to the study released today. The report, from the Senate Committee on Health, Education, Labor and Pensions, led by Iowa Democrat Tom Harkin, examined 30 education companies over two years.

More than 9 percent of college students were enrolled in a for-profit school in 2009, up from 0.2 percent in 1970, according to Teachers College at Columbia University in New York. The Obama administration has cracked down on recruitment and marketing practices at the schools and proposed rules to limit funding to those whose students don’t earn enough to repay their debt. More needs to be done, including setting minimum standards for services such as tutoring and career counseling, according to the report.

“In the absence of significant reforms,” the report said, “the sector will continue to turn out hundreds of thousands of students with debt but no degree, and taxpayers will see little return on their investment.”

Educational companies have lobbied against new regulations, which they say will restrict opportunities for working adults and low-income students.

The Bloomberg Education Index (USEDU), made up of 13 publicly traded companies, declined 53 percent in the year through July 27.

Federal Aid

The $32 billion in federal support received by for-profit schools in the 2009-2010 academic year accounted for 25 percent of all Education Department student-aid funds. For-profit colleges got $7.5 billion in Pell Grants, which fund scholarships for low-income students, up from $1.1 billion in 2000-2001, double the rate of growth for all recipients of Pell funds, the report showed.

For-profit colleges spent $4.1 billion, or 22 percent of their revenue, on marketing and recruitment, and took an additional $3.6 billion, or 19 percent, in profit, according to the study. They spent $3.2 billion, or 18 percent of revenue, on instruction.

The schools also devote more staff to recruiting new students than ensuring the success of their existing ones, according to the study. In 2010, the 30 for-profit schools employed 32,496 recruiters compared with 3,512 career services staff and 12,452 support service workers, the report showed.

As a result, 596,556 students who enrolled in the 2008-2009 school year dropped out by mid-2010, the report said. In two- year associate’s degree programs, 64 percent dropped out.

Default Rate

For-profit college students take on more debt, with 96 percent receiving loans compared with 48 percent at four-year public universities. They also default at a higher rate than their counterparts at nonprofit institutions. Almost half of all federal student loan defaults came from students at for-profit schools.

The report blames lax enforcement by accrediting agencies that rely on self-reporting, state education departments that lack funds to oversee colleges and loopholes in federal regulations.

To contact the reporter on this story: Oliver Staley in London at ostaley@bloomberg.net

To contact the editor responsible for this story: Lisa Wolfson at lwolfson@bloomberg.net

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