For-Profit Colleges: Scooping Up the Stimulus

The University of Phoenix and others are cashing in. Critics say the schools have low graduation rates and dubious recruiting standards

President Barack Obama's stimulus package directs billions in new funding to higher education. Poised to cash in on the largesse are a group of large for-profit universities that specialize in scooping up student aid dollars. Some of the schools, known for aggressive recruiting, are increasing advertising and seeing enrollments rise.

But are these education businesses appropriate beneficiaries of fresh taxpayer generosity? For years skeptics have raised questions about the schools' marketing tactics, graduation rates, and quality of education.

Asked about the coming boom in the for-profit industry, Arne Duncan, the new Education Secretary, told BusinessWeek that he intends to increase monitoring of federal student aid to all schools, private and public: "I am creating an internal task force to optimize our procedures and to build better connections to other consumer protection agencies."

Career-oriented schools such as the University of Phoenix, a unit of publicly traded Apollo Group (APOL), have been benefiting from lean times as adults scramble for credentials they hope will help them find work. The stimulus enacted last month will accelerate this trend by providing an additional $15 billion in Pell Grants for students over the next two years.

Apollo, which received more than three-quarters of its $3.1 billion in revenue from federal student aid in the fiscal year that ended Aug. 31, is well positioned to take advantage of the stimulus. Its Phoenix unit already is the biggest recipient of government student aid. In its most recent quarter, which ended Nov. 30, Phoenix boosted ad spending by 24%, to $88 million. Its enrollment rose in the quarter by 18%, to 385,000 students, who study at campuses in 39 states as well as online.

Some of Phoenix's largest for-profit rivals, including ITT Technical Institute, DeVry University, and Capella Education (CPLA), also are boosting student headcounts and advertising. "We're stepping in and filling the unmet need," says Daniel M. Hamburger, CEO of DeVry (DV), which gets 65% of its revenues from government-backed student aid.

Officials at public universities and community colleges, many of which have cut enrollment because of tightening budgets, protest that Phoenix and similar for-profit institutions use questionable methods to lure students. "These schools are clearly attempting to capitalize on the financial difficulties that families face," says Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars & Admissions Officers.

In 2004 the Education Dept. blasted Phoenix for fostering a corporate culture in which "ethics often are set aside" in a race to increase enrollment and profits. The agency charged that Phoenix paid recruiters solely based on the number of students they signed up, a practice barred by the Higher Education Act. Without admitting wrongdoing, Phoenix resolved the case for $10 million, the largest settlement of its kind. Phoenix executives say they have always paid employees only partly based on the number of recruits, which is legal.

The executives stand behind the quality of Phoenix's education and business practices. They say they cater to underserved constituencies, such as adults who want to attend part-time and members of the military and minority groups. Testing of their students shows improvement in reading and math, they say, and adult grads typically earn 9% to 27% more upon receiving degrees. "There's a lot of bias against recruiting into a college," says Terri C. Bishop, Phoenix's vice-president for external affairs. "We recruit properly, and we take care of students once they're here."

Critics point out that degrees earned at for-profit schools, including Phoenix, often carry less clout in the marketplace, despite price tags comparable to those at many public universities. "I don't think a degree from the University of Phoenix adds any value at all," says Edward Fleischman, chief executive of Execu/Search Group, a New York recruiting firm that specializes in financial services and health care. "It means you could not get into a better school."


Graduation rates at some for-profit schools tend to lag overall levels, at least by the federal standard. The Education Dept. measures the percentage of first-time undergraduates who obtain a degree within six years. Phoenix has a rate of 4%, among the nation's lowest, according to the government. The national average is 57.3%. But Phoenix criticizes the federal approach as misleading in its case because the school serves mostly older students who began college elsewhere. Phoenix claims a 38% overall graduation rate for students seeking bachelor's degrees.

Students who attend for-profit schools tend to carry heavy debt loads. According to data from the College Entrance Examination Board, the average total debt per for-profit university graduate is $29,900, vs. $10,500 for graduates of public four-year schools. Phoenix says its graduates have debt levels of $14,200 to $25,221, depending on the degree they pursue. Tuition for a two-year associate's degree from Phoenix comes to about $19,500; a four-year degree costs about $51,600.

Last July, long before the $787 billion stimulus, the fed boosted its guaranteed educational loan limits by $2,000 per student in response to worries that privately funded lending would dry up in the recession. To maximize revenue—and federal aid dollars—Phoenix employs more than 6,000 enrollment staff members. Names of prospective students, gleaned from online ads and phone inquiries, are funneled to recruiters. Those employees strive to convert each lead into a paying student, according to interviews with former Phoenix workers.

An e-mail sent in late 2006 by an enrollment manager in San Diego urged employees to use "trick messages" to get prospective students to call back. One such message: "Can you please call me, John.... [Y]ou have an unresolved issue that I need to discuss with you as soon as possible." The e-mail was disclosed in a whistleblower lawsuit filed against Phoenix by two former employees in federal court in Sacramento. The pending suit accuses the company of improper compensation of recruiters. Phoenix argues that the suit lacks any merit but acknowledges that it has tightened enrollment practices in recent years. The alleged acts of one or two rogue recruiters don't represent company policy overall, it contends. "We have always recruited students legally," says Bishop. "This isn't a boiler-room environment."

Several enrollment workers told BusinessWeek that they felt pressure to sign up as many people as possible. "They were giving you [financial] incentives to stick whoever you could into class," says Christopher Lother, who worked as an enrollment employee and manager at Phoenix until last November. "It's not what college is all about. I couldn't do the job because it was unethical, and I couldn't sleep at night."

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