For-Profit Colleges

Richard Cordray, director of the CFPB, spoke yesterday to advocates across the U.S. in a national field call hosted by Americans for Financial Reform. The call was designed to provide a point of direct engagement between communities and the federal government.  These calls were originally started by Elizabeth Warren when she was the Acting Director, and Cordray promised to continue the calls regularly to improve transparency and to give the bureau opportunities to respond to localized questions directly. Cordray emphasized his commitment to moving forward with the full authority of the agency and entertained questions on a wide range of issues in an effort to identify advocates’ key concerns. 

Way back in 2011, we conducted a survey of readers that told us a number of things: importantly, we learned that many of you look to us for timely news from the asset building field and that a regular round-up of articles would be a welcome addition to our other content. In keeping with the spirit of 2012 and resolutions and all that good stuff, the Asset Building Program is introducing a new weekly blog feature: a Friday news round-up. We hope this will help you (and us, for that matter) keep up with developments in the field, note-worthy news, and learn about partner organizations working around the U.S. on asset building, economic security, anti-poverty policy, and accessible financial services for low- and middle-income Americans. Topics will vary week-to-week (and depending on the news!) but we’ll aim to provide a diverse overview of the things we’re keeping an eye on that we think you’ll find interesting too.

Over the past two years, the higher education policy discussion has been chock full of debate over for-profit institutions. Are they high quality? Do students gain valuable skills? Should the students who attend them be eligible for federal grants?

At the request of Congress, this week the GAO released a report that focuses on student outcomes at for-profit institutions compared to their non-profit and public counterparts. The GAO’s findings mostly conform to the criticisms leveled against the industry in recent years – students from for-profit schools tended to have lower bachelor graduation rates, higher unemployment, more student loans, and less success passing licensing exams – and that may well be how the headline gets written in what has become a very polarized debate in Washington.

But there is another headline buried in this latest GAO report.

There is a severe lack of rigorous research available on student outcomes by institution type.

Rather than conduct their own study of higher education outcomes, the GAO conducted a literature review using 11 studies concerning the efficacy of for-profit institutions on a variety of outcomes. But by using pre-existing studies, the GAO faced a series of limitations. For example, while many of the studies controlled for one or two student characteristics, such as race, gender, or socio-economic status, some did not control for all of the characteristics. Because academic outcomes tend to vary widely depending on these characteristics, not including all of them in a statistical model is problematic. Similarly, some studies did not differentiate between whether a school was 2- or 4-year or whether students transferred among programs, providing a limited picture of the context in which students are educated.

Additionally, GAO researchers studied whether students from for-profit institutions are more or less likely pass 10 different types of occupational licensing exams. While this did involve original research, the study still faces several limitations. For example, because it only examines students who enter professions that require licensing exams (nurses, lawyers, cosmetologists, etc…) it does nothing to address the success of students in other fields. Due to data limitations, the study does nothing to control for student characteristics when it considers outcomes. According to the GAO, for-profit institutions tend to attract more minority and low-come students than other types of schools. Though the study concludes that non-profit and public school students do better on all but one licensing exam, an analysis that controlled for student characteristics might show something different.

The lack of solid research on student outcomes by school type is not that surprising. Until recently, research was limited by data availability as most available datasets are old, limited in scope, or small. But this will not always be the case. As states begin to improve their higher education data systems, linking K-12 data with higher education and workforce outcomes, they will open up a world of rich student-level data. In the meantime, Department of Education datasets, like the National Postsecondary Student Aid Survey (NPSAS) and the National Student Loan Data System (NSLDS) provide ample opportunities for researchers looking to improve the quality of studies on these important questions.

Hopefully researchers will see this GAO report as a call to action. The unknowns surrounding student outcomes at all school types are too great and the costs to taxpayers and students too large to leave these questions unanswered.

[Over the last several months, Higher Ed Watch has examined how many for-profit colleges cook the books on the job placement rates they disclose to prospective students and regulators. In prior posts, we have looked at how the manipulation of these rates is a widespread problem throughout the industry; revealed some of the most common tricks of the trade for-profit schools have used to inflate these numbers; showed how accreditors and regulators have been asleep at the switch as these abuses have been occurring; reported on the Obama administration's unsuccessful effort to curb these practices; and examined how the drive to manipulate these rates comes straight from corporate headquarters and not rogue employees (see here and here). Today, we finish up this series by going back in history to see how this all could have been avoided.]

The origins of the widening job placement rate scandal in the for-profit higher education sector go back nearly 20 years. Had the Clinton administration officials who ran the Department of Education at the time heeded the warnings of Congressional investigators, the Government Accountability Office, and its own Inspector General, the abuses that are being unearthed today could have been rooted out long ago.

The story begins in the early 1990s when a Senate oversight committee headed by Sam Nunn (D-GA) conducted an investigation that uncovered widespread fraud and abuse in the for-profit higher education sector. The Nunn Committee revealed that scores of unscrupulous schools were reaping profits from the federal student aid programs by enrolling people straight off the welfare lines and pressuring them to sign up for student loans they had little hope of ever repaying. Many of these individuals were lured into the schools with false promises about the lucrative jobs they would be able to get after attending these institutions.

When it came to assigning blame for the federal government’s failure to stop these schools from ripping off students and taxpayers, the committee found that there was plenty to go around. However, the panel reserved some of its harshest criticism for the accrediting agencies that had failed to weed out these institutions or even to detect that anything was amiss.

In its final report in May 1991, the committee urged the Education Department to work with the accreditors to strengthen their ability to carry out their oversight responsibilities or strip them of their gatekeeping role entirely. As part of this effort, the committee recommended that the Education Department be required to “develop minimum uniform quality assurance standards” that accreditors would use to evaluate for-profit schools -- including establishing a single methodology for calculating job placement rates. According to the report:

The Department should be responsible not only for formulating those standards, but also for developing and carrying out a meaningful review and verification process designed to enforce compliance with those standards. If the Secretary determines that an accrediting body does not or cannot meet these requirements, recognition should be terminated.

In 1992, as part of legislation reauthorizing the Higher Education Act (HEA), Congress followed up on this recommendation by requiring the Education Department to put in place standards it expected accreditors to meet as part of its evaluation process. Lawmakers also required the accrediting bodies have standards in place for judging a school’s “success with respect to student achievement in relation to its mission, including, as appropriate, consideration of course completion, State licensing examination, and job placement rates.”

When the time came for the Clinton administration officials in charge of the Education Department to write the rules for carrying out the Higher Education Act revisions, they took a very narrow reading of these requirements. Noting that Congress had not explicitly mandated the establishment of uniform standards, they gave accreditors wide latitude to develop their own criteria for judging a school’s “success with respect to student achievement” and for verifying the information that schools would provide them. Department officials explained in the preamble to the regulations that they had to stick “closely to the law” to avoid “regulation driven management.”

Both the Government Accountability Office and the Education Department’s own Inspector General Thomas Bloom objected to the final rules. In blistering testimony Bloom delivered to a House Government Oversight subcommittee in 1996, he accused the Department’s leaders of misinterpreting the intent of Congress:

By requiring the Department to ‘set standards’ for evaluating accrediting agencies in specified areas, Congress was directing the Department to put meat on the bare-bones statutory language in order to ensure that the agencies had meaningful, quantifiable, and enforceable standards for their member schools…the Department’s regulations are not what the 1992 HEA amendments contemplate.

The failure of the Department to set standards and require vigorous enforcement would only lead to more fraud and abuse, Bloom argued:

Without enforceable standards, schools that fall short of their own accrediting agency standards -- even in such basic areas as graduation and job placement -- may continue to be accredited and continue to participate in the SFA [student financial aid] programs. Since what you measure you get, without measurement and enforcement of even these basic standards for student achievement, we cannot assure that vocational trade schools in the SFA program will consistently graduate and place the bulk of their student in jobs for which they were trained.

Bloom’s testimony was prescient. As we’ve previously written, the job placement rates that for-profit colleges are required to disclose to prospective students and report to accreditors are fundamentally flawed. The methodology that career colleges use to calculate the rates vary accreditor by accreditor, making them impossible to compare. And because neither accreditors, state regulators, nor the federal government make much of an effort to verify these rates, schools have found them easy to game (see here for some of the most common tricks of the trade).

At Higher Ed Watch, we believe that the Nunn Committee and the Inspector General were right and that federal officials should develop a single, national standard that for-profit colleges would be required to use when calculating their job placement rates. It would be accompanied by a strict regulatory regime that would more closely monitor schools to ensure that these numbers are not rigged.

The Obama administration tried to move forward with such an effort but bungled it. However, as evidence of widespread abuses mount, we believe that policymakers won’t have any other choice but to revisit this issue.

It’s just a shame that all the damage that has been done to unsuspecting students and taxpayers could have been avoided.

[Today at Higher Ed Watch, we are running the second of two posts looking at the question of who's to blame for job placement rate abuses at for profit colleges. Click here to read the first post, which ran on Wednesday.]

Kathleen Bittel was ready for a change.

For 16 months, Bittel worked as an admissions counselor for Education Management Corporation’s Argosy University. Under constant pressure to meet her enrollment targets, she felt she was doing more harm than good to the lives of the students she admitted. So when the opportunity to transfer to EDMC’s Career Services Department arose, she jumped at the chance.

Becoming a career service adviser in the online division of EDMC’s Art Institute brand meant taking a hefty pay cut. But Bittel was willing to do it because she saw the new job as “an act of penance” for the work she had previously done as a recruiter.  She believed that in her new post she would finally be able to help students achieve their dreams. Her excitement, however, was short lived.

“At first, I found it very rewarding to have the opportunity to get to know and work with the industrious graduates of the Art Institutes who were actively seeking a better life. I felt I could provide valuable assistance in helping students find good jobs in a poor job market,” Bittel said in testimony she delivered at a Senate Health, Education, Labor and Pensions Committee hearing a little more than a year ago. “But that feeling did not last long. I realized it was all about hitting quotas instead of really helping students find meaningful work.”

In a separate letter to the Senate Committee’s chairman Tom Harkin and other panel members, she wrote, “What I found in Career Services was even more deceptive than the recruiting practices.”

Where the Real Fault Lies

As we’ve previously written at Higher Ed Watch, there is growing evidence that a substantial number of for-profit college companies, both big and small, have deliberately misled prospective students and regulators about their record in placing graduates into jobs.  When abuses have been unearthed, the companies invariably blame them on “rogue” employees. But the truth is that at many of these companies’ schools, the drive to inflate job placement rates comes straight from corporate headquarters.

At these institutions, career service advisers are constantly in a frenzy to meet the aggressive placement targets set by the companies’ leaders. They are regularly reminded that their continued employment depends on meeting their quotas. Just as in recruiting, employees who bend the rules to achieve their numbers are richly rewarded. Those who miss their targets have their pay docked and know that their jobs are at risk.

So is it any wonder that these advisers count any and every job their graduates get as a successful placement, even if the former students are flipping burgers at McDonalds or serving coffee at Starbucks because their training didn’t pay off? Or that they include graduates in their rates who worked for as little as a day? Or that some even falsify or fabricate employment records altogether? (See here for some of the most common tricks of the trade.)

Kathleen Bittel is just one former career services adviser. But her experiences show the unrelenting amount of pressure that is placed on employees to pump up these numbers by any means necessary.

Learning the Tricks of the Trade

Soon after Bittel started her new job, a co-worker took her aside to show her a trick of the trade: how to alter graduates’ employment records to ensure that they count as being placed. As an example, the adviser pulled out a document that a recent graduate had submitted showing earnings that were too low to be considered a “successful placement.” The co-worker then tossed the document into the trash and created a new one using average salary data from the website Salary.com for the relevant position.

Bittel says she was outraged and reported the incident to her supervisors. But instead of being disciplined, the staffer received an award shortly thereafter for being a star performer. The message this sent was “abundantly clear,” Bittel told the Senate committee. “Employees who hit their numbers will be rewarded regardless of whether graduates actually succeed, or whether the information entered truly represents the graduates’ circumstance.”

Bittel wanted to perform her job honestly but found it nearly impossible to do so. The company expected career advisers to help place about 86 percent of the online art students they were assigned into jobs related to their field of study within six months of graduating. Because there were only five advisers in her division, Bittel had to work with between 150 and 180 students and graduates during each reporting period. Employees who met their targets received a $3,000 bonus each quarter.

Despite her best efforts, Bittel had trouble meeting her quota, and the pressure placed on her only continued to grow. “I was constantly reminded that my numbers were not as high as they wanted them to be.” One quarter, she fell short by just one tenth of one percent. As a result, “the company docked $500 from my bonus and I was told that I could lose my job if I failed to meet October’s goal.”

The situation “culminated,” she said, when she was abruptly called one day into a meeting with her bosses:

The head of the department interrogated me, asking the same questions over and over. ‘Why were my numbers the lowest on the team, and why did I think that everyone else had the numbers he wanted and not me?’ He demanded that I provide him with a plan on how I intended to meet his number, reminding me that my job was in jeopardy should I fail.

She soon reached “the breaking point of my conscience due to the constant pressure to do things I felt to be morally unethical,” and took a leave of absence from which she never returned.

Pumping Up the Numbers

But why would for-profit college companies go to so much trouble to inflate their job placement rates?

For one thing, state regulators and national accreditation agencies generally require for-profit colleges to place between 60 and 70 percent of their students in jobs in the fields in which they trained to remain eligible to participate in the federal student aid programs.  A failure to meet these thresholds could, in other words, be a death sentence for the schools. As a result, these institutions have a major incentive to do whatever it takes to keep these rates high.

For another, high placement rates are an essential recruiting tool for bringing in students. Most students are attracted to these institutions on the promise that they are going to get a good job that pays well.

But for some for-profit college executives, there is even a greater incentive for inflating these rates -- their bonuses depend on it. This was the case for EDMC, at least in 2006, according to a Securities and Exchange Commission (SEC) filing from that year that Higher Ed Watch has obtained. That document shows that “the short term cash award bonuses” that EDMC’s leader received that year depended on the company achieving a specific placement rate and average salary amount for its graduates. “Performance above or below target is increased or reduced by 4 percentage points for each 1 percent difference between plan and an actual performance,” the filing states.

There is, of course, an argument that basing bonuses on placement rates is beneficial because it gives company executives a buy in to the success of their graduates. But it also gives these officials a major financial incentive to do anything they can to pump up these numbers.

Given Bittel’s experiences, is there any doubt about which of these outcomes really motivates them?

Next week, we will complete our job placement rate series. Stay tuned.

[Over the last several months, Higher Ed Watch has examined how many for-profit colleges cook the books on the job placement rates they disclose to prospective students and regulators. In prior posts, we have looked at how the manipulation of these rates is a widespread problem throughout the industry; revealed some of the most common tricks of the trade for-profit schools have used to inflate these numbers; showed how accreditors and regulators have been asleep at the switch as these abuses have been occurring; and reported on the Obama administration's unsuccessful effort to curb these practices. Today, in the first of two posts, we will examine one of the most common excuses for-profit schools make when they are caught inflating these rates.]

When Career Education Corporation executives first revealed in August that they had found that “certain” of the company’s health professional schools had engaged in “improper practices” in calculating their job placement rates, they did what for-profit college leaders almost always do when improprieties are discovered on their campuses: they blamed “rogue” employees.

“The actions of a few people have let down others who work hard and responsibly every day on behalf of our students,” Gary McCullough, Career Education’s chief executive officer, said at the time.

But an internal probe of the company performed by an outside law firm has put the lie to these claims. As Career Education officials revealed last week, the lawyers found that the vast majority of the company’s Health Education and Art & Design schools significantly inflated the 2010-11 job placement rates they have been disclosing to prospective students and were about to report to the Accrediting Council for Independent Colleges and Schools (ACICS). “We uncovered that what were going to be reported as placements in a number of cases and a number of places were not genuine placements,” Steve Lesnik, the company’s chairman said during a conference call with financial analysts. Lesnik took over as the company’s CEO last week after McCullough abruptly resigned from his post.

A day after Career Education Corporation’s chief executive officer abruptly resigned, company officials acknowledged on Wednesday that a significant number of their schools had cooked the books on their job placement rates. “We have uncovered the fact that what were going to be reported as placements in a number of cases and a number of places were not genuine placements according to our standards as a company,” Steve Lesnik, the company’s chairman, said during a conference call with financial analysts.

We at Higher Ed Watch applaud Career Education for coming clean about abuses that occurred at their institutions over the last year (although it would be helpful to know exactly what happened at these schools). However, we believe that the measures the company is taking to clean up the mess are wholly inadequate, as they leave students and taxpayers on the hook for the company’s misbehavior.

At issue are the rates that for-profit college companies are required to report to regulators and disclose to prospective students measuring their schools’ success in placing graduates into jobs related to their training.

Career Education Corporation’s chief executive officer Gary McCullough resigned abruptly on Tuesday after an internal investigation found improprieties at a number of the company’s Health Education and Art & Design schools related to how they determine their job placement rates.

In announcing the resignation on Tuesday night, company chairman Steve Lesnik did not provide a specific explanation for McCullough’s departure. But he said that “given the complexities of the regulatory environment and other issues that have arisen over the last year, CEC is moving towards a new phase and the Board views it as the appropriate time to start the process of putting in place fresh leadership at the CEO level.”

In August, Career Education alerted investors and financial analysts that it had found that some of its health professional schools had engaged in “improper practices” in calculating their job placement numbers. Company officials did not disclose the nature of the problems, which they said they discovered while preparing a response to a subpoena from the New York attorney general. But the violations were serious enough to prompt the company to hire an outside law firm “to review the determination of student placements” at its more than 80 U.S. campuses.

On Monday, the company revealed in a Securities and Exchange Commission (SEC) filing that the law firm has “confirmed the existence of improper placement determination practices at certain of the Company’s Health Education Segment Schools.” In addition, the firm found that “certain placements” at both the Health Education and Art & Design schools “lacked sufficient supporting documentation or otherwise did not meet applicable placement guidelines established by the Company.”

In light of these findings, Career Education officials revised the 2010-11 job placement numbers for the 49 schools involved and discovered that only 13 of them have actual rates high enough to meet the Accrediting Council for Independent Colleges and School’s minimum standard of 65 percent. Schools that fail to meet this threshold face a number of possible penalties, including having their accreditation suspended. That could be a death sentence for these schools, as they would lose access to federal financial aid during this period of time.

At Higher Ed Watch, we expect that the news of McCullough’s departure is raising alarms throughout the for-profit higher education sector. After all, Career Education Corporation is hardly the only career college company that has cooked the books on the job placement rates they disclose to prospective students and regulators. As we’ve shown in prior posts, this is, in fact, a widespread problem throughout the industry.

[This is the third and final part of our Higher Ed Watch series looking at what's gone wrong at the for-profit college giant Education Management Corporation. To read the first two posts, click here and here.]

For nearly 40 years, Robert Knutson, the founder of Education Management Corporation (EDMC), built up a for-profit higher education company that was focused on doing “everything we can to ensure that students are successful, and our education process is oriented to the needs of our students,” as he told the Wall Street Corporate Reporter in 2002.

But after Goldman Sachs and two other private equity firms acquired Education Management in 2006 for $3.4 billion, they set an entirely different mission for the company: achieving hypergrowth.

To accomplish this goal, the company’s new owners hired a group of executives from the Apollo Group who had been instrumental in the massive expansion of the University of Phoenix earlier in the decade but had run afoul of federal regulators over the tactics they used to achieve that growth. Despite these troubles, the former Apollo officials brought nearly the exact same playbook to EDMC, according to former Education Management employees, the U.S. Department of Justice, and other press reports.

As the Huffington Post reported last week, this new leadership team created a “cut-throat sales culture” that was “laser focused on hitting mandated enrollment targets.” These executives hired thousands of new recruiters and made sure that they knew that their jobs depended on getting students in the door and signed up for loans, even if they knew full well that the students were unqualified for the work and had little chance of succeeding.

"The drive for numbers has created a recruiting staff that could care less about the well-being or success of the students” they bring in, a recruiter for EDMC's South University told the Huffington Post, in the online publication's words. “They’re wolves; they’re hunters,” the recruiter said. “They have one objective: They’re there to make money and get students.”

In retrospect, what’s happened at EDMC should not have come as a surprise. As Goldie Blumenstyk of the Chronicle of Higher Education wrote soon after Goldman’s purchase of EDMC, “When private equity funds do the buying, they do so with an overriding strategy in mind: Acquire the college or company, often with a lot of borrowed money, find ways to make it bigger and more profitable, and sell it at a higher price, either to other private investors or through a public offering."

“Since most private-equity funds are organized as limited partnerships with 10-year lifespans,” she added, “they hope to pull off these sales in five to seven years.”

In other words, firms that do these types of deals are not invested in the long-term health and well-being of the corporations they purchase. Instead, their mission is to build the companies up as fast as they can so they can sell them off and make a killing.

[This is the second part of our Higher Ed Watch series looking at what's gone wrong at the for-profit college giant Education Management Corporation. To read the first post, click here.]

When Todd S. Nelson joined Education Management Corporation as its chief executive officer in January 2007, he said he was attracted to the company because of both its “reputation for quality and doing things the right way” and its enormous potential for growth. Education Management is “in a position to become the preeminent global higher education company,” he told reporters on a conference call announcing his hiring.

To the journalists on the call, this may have sounded like an idle boast. After all, EDMC, with its then-enrollment of 82,000 students, didn’t appear to be any match for Nelson’s former employer, the Apollo Group, which owns the University of Phoenix. As The Chronicle of Higher Education noted at the time, “Apollo is nearly four times the size of Education Management in terms of enrollment (and nearly twice as large by revenue).”

But in the five years since Goldman Sachs and two other private equity firms acquired EDMC for $3.4 billion, and put Nelson at the helm, the company has experienced phenomenal growth, particularly in the exclusively online programs it offers. As we wrote on Tuesday, EDMC’s enrollment doubled from 2007 to 2011 to about 160,000, making it the second largest for-profit higher education company in the country. At the same time, its annual revenue has nearly tripled to a whopping $2.8 billion (nearly 90 percent of which came from the federal student aid programs).

The methods EDMC’s leaders used to achieve this massive expansion, however, have taken an enormous toll on the reputation that the company’s founders worked so carefully to build over nearly four decades. While EDMC was long considered to be one of the best for-profit higher education companies in the business, it is now the target of a multibillion dollar lawsuit brought by the U.S. Department of Justice and half a dozen states, accusing it of defrauding the federal government by defying a federal law that prohibits colleges from compensating recruiters based on their success in enrolling students. Meanwhile, attorneys general in four states – Florida, Kentucky, Massachusetts, and New York – are investigating the company, as is the Department of Education’s Inspector General.

In other words, under the leadership of Todd Nelson and Goldman Sachs, the days when Education Management had a “reputation for quality and doing things the right way” appear to be long in the past.