April 18 (Bloomberg) -- U.S. colleges would be barred from spending federal taxpayer money on advertising, marketing and recruiting under a Senate bill targeting for-profit institutions.
The 15 largest for-profit colleges, including Apollo Group Inc.’s University of Phoenix, spent a combined $3.7 billion, or 23 percent of their fiscal 2009 budgets, on advertising, marketing and recruiting, according to a summary of the bill proposed today by Democratic Senators Tom Harkin of Iowa and Kay Hagan of North Carolina. Nonprofit colleges spend an average of half a percent of revenue on marketing, the lawmakers said.
Congress, the U.S. Justice Department and state attorneys general are scrutinizing the marketing practices of for-profit colleges, which have higher student-loan default rates than traditional institutions and can rely on federal financial aid for as much as 90 percent of their revenue. The institutions enroll as many students as they can, skimping on instruction and job placement counseling, Harkin and Hagan said.
“American taxpayers cannot afford, and should not be asked, to subsidize massive advertising and marketing machines aimed at recruiting more students who are supported by federal financial aid programs,” Harkin, chairman of the Senate education committee, and Hagan, a member, said in the bill summary.
Phoenix-based Apollo, the largest for-profit college chain, fell 0.6 percent to $35.92 at the close in New York. The Bloomberg U.S. For-Profit Education Index, which tracks 13 companies, dropped 1 percent.
For-profit colleges cater to working adults and other non-traditional students who can’t be reached through a high school guidance counselor, said Steve Gunderson, president of the Washington-based Association of Private Sector Colleges and Universities, which represents in the industry.
The bill “is clearly another attempt by some policy makers to try and put private-sector colleges and universities out of business,” Gunderson said in a statement. “It also reflects a fundamental misunderstanding of the students we serve and the public service we provide.”
The legislation has little chance of passing this year as the presidential election approaches, said Terry Hartle, senior vice president at the Washington-based American Council on Education, which primarily represents traditional colleges. It would also be tough for the U.S. Education Department to define marketing expenses through regulation, he said.
“Like so many things that government does, this is an important idea,” Hartle said in a telephone interview. “But it would end up imposing a significant burden on all colleges and universities because of a handful of bad actors.”
Richard Castellano, a spokesman for Apollo, while criticizing the lawmakers’ “misleading rhetoric,” said he was encouraged their legislation applied to all schools.
“Students choose University of Phoenix because our focus, investments and resources are squarely in line with their interests and success in our degree programs,” Castellano said in an e-mail.
For-profit colleges advertise on the Internet, television, radio and in print. They also operate call centers where recruiters sign up students. Harkin and Hagan modeled today’s bill on a 2008 statute that bars colleges from using federal money for lobbying.
In February, lawmakers in the House and Senate, including Harkin, introduced legislation aimed at curbing what sponsors called aggressive marketing of subpar programs to veterans and soldiers.
In a civil-fraud lawsuit filed in August, the U.S. Justice Department accused Education Management Corp. of securing more than $11 billion in U.S. student aid by paying recruiters based on the number of students signed up, a violation of rules for colleges that receive federal grants and loans.
The company, the second-largest for-profit college company and operator of a chain of art institutes, has denied the allegations.
Jacquelyn Muller, an Education Management spokeswoman, said the company had no comment because executives haven’t had an opportunity to review the bill. Education Management, based in Pittsburgh, fell 0.6 percent to $12.32.
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