For-Profit Education Companies Face More Scrutiny

For-profit education companies running virtual / distributed / adult serving colleges and universities have come under increasing fire. The most recent volley of criticism was made last week in a 17-page report from Senator Tom Harkin, the Iowa Democrat who chairs the U.S. Senate Health, Education, Labor and Pensions Committee.The Obama administration is proposing tougher regulation of the for-profit industry because of concern that recruiters are signing up unqualified students and leaving them with loans they may be unable to repay.

 

According to Harkin’s report, the number of students attending for-profit colleges rose to 1.8 million in 2008, from 550,000 in 1998, Federal aid to for-profit colleges has 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. 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 found. At least one company spent more on marketing than on education.

 

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 found.

Investors and analysts had previously ripped the for-profit education industry sector a new one during the May, 2010 Ira W. Sohn Investment Research conference. Hedge-fund manager Steven Eisman gave a presentation entitled “Subprime Goes to College”  during which he reflected that he thought he’d never see a scandal equal to sub-prime mortgages, but he’s found it in today’s for-profit education companies.

 

This past Thursday’s Congressional hearings once again featured testimony from Eisman. In his written testimony, Eisman once again compared for-profit colleges with the sellers of subprime mortgages. Both left customers with heavy debts they can’t repay.  “If nothing is done, then we are on the cusp of a new social disaster,” Eisman said, according to a copy of his prepared remarks. 

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