Big Money in Education Part IV

by Anita

About a year ago I met a young woman who had attended a for-profit culinary school (for -profit schools are very expensive). She had been living at home with her parents while attending the school. When her father lost his job and had to move the family out of state in order to find work, she did not have the resources to stay behind and finish culinary school. Without completing her course of study, she couldn’t get a job at a real restaurant; instead, she ended up working in fast food. She cried as she told of the burden of the heavy debt and wondered how she would ever be able to pay her loans back considering her low income.

Her story was my introduction to the potential problems of for-profit schools. However, as I found out, she is not alone in her debt problem. Many young people (and some older, as well) have taken on large amounts of debt in order to attend college and improve their chances of getting a good job. In 2010, student loan debt surpassed credit card debt for the first time. As of April 2013, the amount of outstanding student loans ($1.1 trillion) is second only to mortgage debt, and the Federal Reserve has expressed concern. The interest rate for Stafford loans is set to double (from 3.4% to 6.8%) on July 1, 2013 unless Congress takes action.

In previous posts I have discussed the large amounts of state and federal money available for K-12 education and the ways in which this money may be funneled into corporate or individual coffers. Billions of dollars in grant and loan money are also set aside for post-secondary education (college, trade school, or university), so it is not surprising that some individuals and corporations would be tempted to seek that money as well.

Public universities such as the University of Texas are supported by the state and federal government, so the costs to students is generally lower. Private universities can be non-profit (e.g. Baylor) or for-profit (e.g. University of Phoenix). A for-profit private university or school is operated like a business, with investors who expect to make money from their investment.

According to the Center for College Affordability and Productivity, over the past two decades, the number of students in for-profit universities has skyrocketed. In 1991, enrollment was approximately 200,000; by 2005 it had increased sharply to 1 million. In 2010, 2.4 million students were attending for-profit schools. For-profit colleges, universities and trade schools primarily target individuals for whom ordinary college classes would be inconvenient, such as those who have full-time jobs. Many courses are online, along with some on nights and weekends.

There is nothing intrinsically wrong with a for-profit college – in fact, these schools have allowed many students who could not attend traditional college to obtain degrees. But, like other for-profit entities, a for-profit university walks a fine line between making money fairly and ethically versus fraudulently and unethically. Even if the leadership of the school seeks to run it ethically, corporations that operate for-profit colleges are responsible to their stockholders and investors first, then to students and teachers. Thus, for-profits must attempt to make as much money as possible in order to execute their fiduciary responsibility.

Characteristics of For-profit Universities

According to a July, 2012 report from the Senate committee on Health, Education, Labor, and Pensions (HELP), many for-profit institutions, including University of Phoenix, Capella, ITT, DeVry, and Kaplan, spent their revenue as follows: 22% for sales and marketing, 19% for pre-tax profit, and a mere 17% on faculty and curriculum! These schools, in order to meet the needs of shareholders, increase their profits in the following ways: 1) charging high tuition, 2) recruiting aggressively, and 3) avoiding benefit payments to employees by only hiring part-time teachers.

Tuition charged by for-profit colleges can be up to four times higher than the cost of a comparable degree or certificate at a community college or a “flagship” university (e.g. University of Texas). For a bachelor’s degree, tuition was an average of 20% higher than the same type of degree at a public university, while the cost of an associates degree was four times higher. The students who enroll in for-profits often are low-to-moderate income workers who need a degree in order to get a better job. They are not well-equipped financially to take on loans for the high tuition and other fees; as a result, the default rate is high – 22% of for-profit students default within 3 years of starting repayment, which is more than twice the average rate for students at public universities.

The HELP committee examined 30 representative for-profits in preparing the report. Together, these 30 schools employed 35,202 recruiters in 2010 – one recruiter for every 53 students. Until federal law prohibited it in 2011, recruiters were paid based on commissions and were basically sales personnel. They are still trained to “help” potential students enroll, and the committee found evidence indicating that they sometimes gave false or misleading information about costs, available aid, whether or not credits would transfer, and how many students found jobs after completing a course of study.

A former recruiter for ITT, Laura Brozek, spoke at a news conference held by Senator Tom Harkin (chairman of HELP committee) to announce the release of the HELP report. She explained the predatory but highly successful methods of getting “asses in classes” that she and other recruiters used, such as the “pain funnel.” In this technique, recruiters tried to demoralize students by making them feel bad about their current lives, then explained how enrollment at ITT would improve their lives. According to, students would enroll with the ”expectation that if they spend enough money, whether through savings or student loans, their problems would be solved,” Brozek said (click here to view Brozek’s testimony).

According to the HELP committee report, 596,556 or 54% of the students who enrolled during the 2008-2009 school year withdrew by the middle of 2010; those who were working on associates degrees, 298,476 or 63%, were even more likely to leave the school. Part of this problem was due to the fact that once a student was enrolled, available support staff dwindled almost to nothing. Nontraditional students such as full-time workers, members of the military, and older individuals often need individualized support, especially if they have not attended a post-secondary institution before; this is one of the reasons for high “churn” rates and failure of many students to complete their degrees.

The report notes that faculty had to be more concerned with the number of students who enrolled in their classes (which affects revenue) rather than on academic quality. Therefore, courses at many of the for-profits studied were “watered-down” rather than challenging, and rules against plagiarism were not enforced. Also, to reduce benefit costs for its faculty and thereby increase profits, 80% of the faculty at the schools studied were part-time in 2010, and five schools had over 90% part time.

Following the publication of the HELP committee’s report, for-profit colleges suddenly found themselves in the spotlight. Potential students as well as Congress began to question the value of schools which use high-pressure sales tactics, skimp on curriculum and faculty, and focus on numbers rather than quality. Enrollment figures had already dropped slightly in 2011-2012, and dropped even more in 2012-2013. Companies who owned and managed for-profit universities began to post lower revenue gains and sometimes even losses; as a result, the value of their stocks fell precipitously. For example, shares of Apollo Group (the company that operates University of Phoenix) fell from a high of 80.25 in November, 2007, to a low of 16.75 in April, 2013.

The University of Phoenix announced in February, 2013, that it was facing possible loss of accreditation due to the close relationship between the school and its parent corporation, the Apollo Group. The accreditors’ concerns about governance of the school, faculty quality, and assessment methods led them to advise the school that it might be placed on probation for 2 years. Follow-up reports in May, 2013, suggested that the sanction might be a lesser title of “notice” rather than “probation.” A decision is expected some time in June, 2013.

Dark Money

The words “dark money” are commonly used to denote money which flows into political venues but cannot be traced to its source. The main types of entities identified with dark money are two types of non-profits called 501(c)3 and 501(c)4 – named for the sections of the IRS code which describe them. Although the 2 types are similar in that their donors can remain anonymous, there are important differences.

A typical charitable organization involved in education issues, such as the Foundation for Excellence in Education (FEE) or the Chiefs for Change (mentioned in the first money in education post,) can operate under the 501(c)3 classification after approval by the IRS. This type of nonprofit can conduct some lobbying activities but cannot endorse candidates or contribute to campaigns. Donations to 501(c)3’s are tax-deductible, and the organization itself is tax-exempt.

FEE is linked to a 501(c)4, the Foundation for Florida’s Future (FFF). Also called “social welfare organizations,” 501(c)4’s are allowed to participate in some political activities without disclosing their donors as long as their primary work is social welfare, such as education. For example, they can endorse candidates, conduct significant lobbying activities, and spend money on campaigns (but such money is not tax-exempt). Most importantly, they are not subject to prior approval by the IRS, which means that 501(c)4 groups tend to be much “darker” than 501(c)3’s.

In Texas, the Texas Public Policy Foundation (TPPF), which was mentioned in the second post, is a 501(c)3 that has worked closely with ALEC and with State legislators to enact education policies (especially virtual schools), many of which are beneficial to TPPF‘s donors. In February, 2013, TPPF launched an affiliated 501(c)4, Texas Public Policy Action (TPPA).

FreedomWorks is a national organization that advocates school choice, primarily through vouchers (in addition to many other positions such as “lower taxes, less government, privatization of Social Security”). Its structure includes a 501(c)4 (FreedomWorks, Inc)., a 501(c)3 (FreedomWorks Foundation), a SuperPAC (FreedomWorks for America), a national PAC, and affiliated PAC’s in 10 states (including Texas). CBS DFW reported that the group held a rally in Austin on April 27, 2013, to show support for two bills in the Texas Senate – one on expanding charter schools (passed both houses) and the other setting up a voucher program (failed). Legislation created in other states sought to use school choice bills to fight teacher unions. According to Mother Jones magazine, leaked documents showed that 94% of the organization’s 2012 income was in the form of 5- and 6-figure checks from wealthy individuals. Although school choice is only one of the many goals of FreedomWorks, it is definitely supported by Big Money.

The fact that dark money is dark makes it likely that there are many more organizations out there dealing with education issues (like TPPF/TPPA, FEE/FFF, and FreedomWorks) who are receiving and giving large amounts of money anonymously. In addition to contributions being hidden, back room deals that affect education are being created among corporations, wealthy individuals and legislators. The solution to these problems is increased transparency at every level of politics, including lobbying, campaign funding, broadcast communications and any form of policymaking. When all contributions and all “deals” are transparent, the public will have the information needed to make informed decisions.


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