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For-Profit Colleges Shortchange Taxpayers, Senate Study Says

Photographer: Joshua Lott/Bloomberg

The University of Phoenix, part of Apollo Group Inc., in Phoenix, Arizona. Close

The University of Phoenix, part of Apollo Group Inc., in Phoenix, Arizona.

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Photographer: Joshua Lott/Bloomberg

The University of Phoenix, part of Apollo Group Inc., in Phoenix, Arizona.

For-profit college chains including Apollo Group Inc. (APOL) pressured students to enroll while dodging questions about costs, according to a Senate report that cites a trove of internal e-mails and training documents.

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

The report, more than 1,000 pages long, takes aim at Apollo’s University of Phoenix, Education Management Corp. (EDMC), Washington Post Co. (WPO)’s Kaplan Higher Education and other for- profit colleges, which as a group spend more on marketing than instruction. Harkin, the U.S. Justice Department and state attorneys general are investigating for-profit colleges, which rely on federal financial-aid money for as much as 90 percent of their revenue.

“In this report, you will find overwhelming documentation of exorbitant tuition, aggressive student recruiting and abysmal student outcomes,” Harkin, who is proposing more regulation of the industry, said at a news conference today in Washington. “These practices are not the exception. They are the norm.”

Apollo, based in Phoenix, fell 4.1 percent to $27.22 at the close in New York. Education Management, based in Pittsburgh, declined 7.8 percent to $3.77, and Washington Post dropped 1.2 percent to $340.49.

A Bloomberg index of 13 for-profit college companies, slipped 4 percent, and has dropped 46 percent this year.

‘Political Attacks’

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

Steve Gunderson, president of the Association of Private Sector Colleges and Universities, which represents for-profit schools, said his members provide education to 3.8 million students, including working adults and veterans.

“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,” Gunderson in a statement.

In a minority report, Senate Republican staff members criticized the report’s findings, saying that Democrats repeatedly refused to work in a bipartisan manner and expand the scope of the investigation to include nonprofit and state universities, raising “substantial doubt about the accuracy of the information.”

‘Create Urgency’

Apollo recruiters are trained not to provide direct answers about costs when speaking with recruiters, according to materials cited in the majority report.

“If a prospect says, ‘You’re too expensive,’ the recruiter could respond, ‘Can you afford not to go?’” or “If you are going to making more money, wouldn’t these loans be easier to pay back?,” according to a 2007 training manual cited in the report.

The manual urges recruiters to “create urgency in your students” so they don’t wait to sign up. It counsels recruiters: “Do not tell the student we have classes running every week unless you can agree on a start date, or rolling start dates is a selling point.”

The training manual is outdated and doesn’t reflect Apollo’s approach to enrolling students, Rick Castellano, a spokesman, said in an e-mail.

Apollo Group in 2009 began offering a mandatory orientation program that lets students try programs before committing to taking on debt. The U.S. Education Department and the Harkin report both praised that program, Castellano said.

Education Management

At Education Management, which runs a chain of Art Institutes and other programs, the company pushed recruiters to meet enrollment targets, according to e-mails. “Please everyone hit the phones!!!,” a manager wrote in a 2008 e-mail. “We are far behind where we need to be!!!”

Supervisors offered prizes such as company-paid trips, including to Hawaii, according to the report. EDMC told investigators that it never sponsored such a trip.

Jacquelyn P. Muller, an Education Management spokeswoman, said the company hasn’t had the chance to review the full report.

At Kaplan, recruiters were told to enroll as many students as possible, encouraging employees to ask questions that would “uncover their pain, fears, and dreams” so they would stir up their emotions and enroll quickly, according to 2009 training materials. Kaplan called this approach the “artichoke method” that would result in “peeling back the layers” and “Getting to the PAIN.”

Marketing Outlay

The report noted, as an example of “significant reforms,” a Kaplan program that lets students try out classes before committing to take out loans.

“The bulk of the report repeats prior criticisms and relies on dated, isolated situations to characterize current practices,” Kaplan said today in an e-mail.

Students complained in e-mails to ITT Educational Services Inc. (ESI) that recruiters misled them about the cost of programs, their access to loans, and whether their credits would be able to transfer to traditional programs.

“We enrolled in good faith, thinking we were working towards a diploma improving our future, but instead we would have paid a lot of money for something insignificant,” one student said in a May 2010 written complaint to the company.

ITT Complaints

In a letter to Harkin, ITT said the complaints in the report “are not representative of typical student experiences.”

At today’s news conference, Laura Brozek, a former director of recruitment who worked for ITT from 2004 through 2011, said the school would enroll convicted felons into criminal-justice programs after which they wouldn’t be able to get jobs because of their records.

“In my opinion, this is unconscionable,” she said.

Lauren Littlefield, a spokeswoman for Carmel, Indiana-based ITT didn’t immediately comment in response to an e-mail.

For-profit colleges spent $4.1 billion, or 22 percent of their revenue, on marketing and recruitment, and took $3.6 billion, or 19 percent, in profit, according to the report. 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.

More Debt

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

“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.”

To contact the reporter on this story: John Hechinger in Boston at jhechinger@bloomberg.net; 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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