[Senate Hearing 111-1000]
[From the U.S. Government Publishing Office]
S. Hrg. 111-1000
EMERGING RISK? AN OVERVIEW OF THE FEDERAL INVESTMENT IN FOR-PROFIT
EDUCATION
=======================================================================
HEARING
OF THE
COMMITTEE ON HEALTH, EDUCATION,
LABOR, AND PENSIONS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
ON
EXAMINING AN OVERVIEW OF THE FEDERAL INVESTMENT IN FOR-PROFIT EDUCATION
__________
JUNE 24, 2010
__________
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COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS
TOM HARKIN, Iowa, Chairman
CHRISTOPHER J. DODD, Connecticut MICHAEL B. ENZI, Wyoming
BARBARA A. MIKULSKI, Maryland JUDD GREGG, New Hampshire
JEFF BINGAMAN, New Mexico LAMAR ALEXANDER, Tennessee
PATTY MURRAY, Washington RICHARD BURR, North Carolina
JACK REED, Rhode Island JOHNNY ISAKSON, Georgia
BERNARD SANDERS (I), Vermont JOHN McCAIN, Arizona
SHERROD BROWN, Ohio ORRIN G. HATCH, Utah
ROBERT P. CASEY, JR., Pennsylvania LISA MURKOWSKI, Alaska
KAY R. HAGAN, North Carolina TOM COBURN, M.D., Oklahoma
JEFF MERKLEY, Oregon PAT ROBERTS, Kansas
AL FRANKEN, Minnesota
MICHAEL F. BENNET, Colorado
Daniel Smith, Staff Director
Frank Macchiarola, Republican Staff Director and Chief Counsel
(ii)
?
C O N T E N T S
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STATEMENTS
THURSDAY, JUNE 24, 2010
Page
Harkin, Hon. Tom, Chairman, Committee on Health, Education,
Labor, and Pensions, opening statement......................... 1
Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming,
opening statement.............................................. 32
Tighe, Kathleen S., Inspector General, Office of the Inspector
General, U.S. Department of Education, Washington, DC.......... 34
Prepared statement........................................... 36
Franken, Hon. Al, a U.S. Senator from the State of Minnesota..... 45
Alexander, Hon. Lamar, a U.S. Senator from the State of Tennessee 47
Brown, Hon. Sherrod, a U.S. Senator from the State of Ohio....... 48
Prepared statement........................................... 49
Merkley, Hon. Jeff, a U.S. Senator from the State of Oregon...... 52
Bennet, Hon. Michael F., a U.S. Senator from the State of
Colorado....................................................... 53
Hagan, Hon. Kay R., a U.S. Senator from the State of North
Carolina....................................................... 55
Issa, Yasmine, Former Sanford-Brown Institute Student, Yonkers,
NY............................................................. 56
Reiter, Margaret, Former Supervising Deputy Attorney General,
Office of the Attorney General, California Department of
Justice, San Francisco, CA..................................... 58
Prepared statement........................................... 61
Parrott, Sharon Thomas, Senior Vice President, Government and
Regulatory Affairs and Chief Compliance Officer, DeVry, Inc.,
Chicago, IL.................................................... 70
Prepared statement........................................... 71
Eisman, Steven, Portfolio Manager, FrontPoint Financial Services
Fund, LP, New York, NY......................................... 83
Prepared statement........................................... 85
Murray, Hon. Patty, a U.S. Senator from the State of Washington.. 111
Prepared statement........................................... 112
Sanders, Hon. Bernard, a U.S. Senator from the State of Vermont.. 113
ADDITIONAL MATERIAL
Statements, articles, publications, letters, etc.:
Emerging Risk?: An Overview of Growth, Spending, Student Debt
and Unanswered Questions in For-Profit Higher Education,
report by
Senator Harkin............................................. 4
Bloomberg News articles (by Daniel Golden):
Marine Can't Recall His Lessons at For-Profit College
(Update 2), December 15, 2009.......................... 16
Apollo Suffers New York Snub as SEC Probes Phoenix
(Update 3), January 19, 2010........................... 22
Homeless High School Dropouts Lured by For-Profit
Colleges, April 30, 2010............................... 28
Senator Casey, prepared statement............................ 132
Letters from:
Kathleen Tighe........................................... 132
Margaret Reiter.......................................... 140
Sharon Thomas Parrott.................................... 178
(iii)
Response to questions of Senator Harkin
Sharon Thomas Parrott.................................... 178
Steven Eisman............................................ 229
Response to questions of Senator Enzi
Kathleen Tighe........................................... 132
Margaret Reiter.......................................... 148
Sharon Thomas Parrott.................................... 184
Steven Eisman............................................ 230
Response to questions of Senator Dodd
Kathleen Tighe........................................... 133
Sharon Thomas Parrott.................................... 185
Steven Eisman............................................ 231
Response to questions of Senator Brown
Kathleen Tighe........................................... 133
Margaret Reiter.......................................... 150
Steven Eisman............................................ 235
Response to questions of Senator Casey
Kathleen Tighe........................................... 134
Yasmine Issa............................................. 139
Margaret Reiter.......................................... 158
Sharon Thomas Parrott.................................... 187
Steven Eisman............................................ 232
Response to questions of Senator Hagan
Kathleen Tighe........................................... 135
Yasmine Issa............................................. 139
Margaret Reiter.......................................... 167
Sharon Thomas Parrott.................................... 189
Steven Eisman............................................ 233
Response to questions of Senator Alexander
Kathleen Tighe........................................... 136
Sharon Thomas Parrott.................................... 194
Response to questions of Senator Coburn
Kathleen Tighe........................................... 137
Margaret Reiter.......................................... 175
Sharon Thomas Parrott.................................... 195
Steven Eisman............................................ 235
EMERGING RISK? AN OVERVIEW OF THE FEDERAL INVESTMENT IN FOR-PROFIT
EDUCATION
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THURSDAY, JUNE 24, 2010
U.S. Senate,
Committee on Health, Education, Labor, and Pensions,
Washington, DC.
The committee met, pursuant to notice, at 10:07 a.m. in
Room SD-124, Dirksen Senate Office Building, Hon. Tom Harkin,
chairman of the committee, presiding.
Present: Senators Harkin, Murray, Sanders, Brown, Hagan,
Merkley, Franken, Bennet, Enzi, and Alexander.
Opening Statement of Senator Harkin
The Chairman. The Senate Committee on Health, Education,
Labor, and Pensions will come to order.
For more than 50 years, the Federal Government has provided
students with grants and loans to help pay for college. That is
a public/private partnership between the government and
students. It is an investment premised on the idea that a
higher education will improve life for the borrower but will
also strengthen our society by giving more Americans the
knowledge and skills to get good jobs and to give back to their
communities.
In 2008, we significantly increased the amount of Stafford
loans that undergraduates could borrow. The American Recovery
and Reinvestment Act of 2009 provided another $17 billion to
the Pell program, and the recent reconciliation law added
another $36 billion over the next 10 years to the Pell Grant
program.
Both the authorizing and appropriations committees which I
chair have made hard choices and decisions to secure increases
for the Pell Grant program, and I am proud of the $17.5 billion
that we appropriated for the program last year. Those Pell
dollars are an investment by Congress in our Nation's students
and, as I said, in our country's future. For that investment to
pay off, we must ensure that students are being well-educated
and that schools are using Federal dollars, taxpayer dollars,
responsibly.
There are growing questions about whether all students and
taxpayers by extension are receiving value for their
educational dollar. Today, I released a report titled
``Emerging Risk'' which takes a close look at what we know
about how for-profit schools are operating today. I want to
take a few minutes to highlight some of the key findings from
that report.
Over the past 20 years, the for-profit higher education
industry has grown and evolved, bringing innovation to post-
secondary education and expanding the number of students it
enrolls. This year, nearly 2 million students were enrolled in
for-profit institutions to pursue everything from technical
certificates to graduate degrees. That is a 225-percent
increase over the last 10 years, and I might also add that now
the online educational aspect of those institutions has had an
explosive growth over the last several years.
There is a chart that I will show and put up on the screens
for everyone to see to indicate what I mean by the growth in
the student population of for-profit schools. If you look from
1998 to 2008, that is the 225 percent increase that I am
speaking about.
Nearly every student who attends a for-profit school
borrows money to pay tuition. That is the second chart to show
the amount of debt that these kids are incurring. While only 38
percent of the 2008 community college students took out loans,
98 percent of for-profit students graduated with debt. As you
will see from the chart, for-profit students were also eight
times more likely to graduate with a loan larger than $20,000.
So not only are the kids in private for-profit schools
borrowing more money, they are borrowing more money at higher
levels, above $20,000 for example, in their debts.
Not surprisingly, for-profit college students are more
likely to default on their loans than their nonprofit peers,
and that you will see in the next chart where you can see the
default rates are much higher. According to one recent analysis
by the U.S. Department of Education, for-profit colleges
accounted for about 10 percent of enrolled students but 44
percent of defaults.
The growth of for-profit colleges has been dependent on
Federal subsidies, including Pell Grants, Federal student
loans, military and veterans benefits, and while the for-profit
share of enrollment has grown significantly, the sector share
of Federal student aid dollars has grown even larger.
The next chart again illustrates this trend. As you will
see, in higher education, about 9.2 percent of the students go
to the for-profit schools, but in the second chart over, you
will see they received almost 23 percent of all Federal Pell
Grants and student loans in 2008. That amounts to more than $20
billion--$20 billion--of taxpayers' money. So 9.2 percent of
the students go to the for-profit schools, but they receive 23
percent of all Federal Pell Grants.
Now, for all our investment in this sector, we know
surprisingly little about whether students are completing
degrees, transferring to other schools, or just dropping out.
What information is available suggests that very large numbers
of students are leaving for-profit schools each year. Exactly
why we do not know. What enrollments we do have show huge
student turnover, and that is the next chart.
It is a rather confusing chart, but here is what it says.
For the four publicly traded schools that disclose detailed
enrollment numbers, more students left over the course of 1
year than were at the school at the beginning of the semester.
Experts describe this as school churn. I think about it this
way. The churn rate in these for-profit colleges that are up
here on the chart is the equivalent of my alma mater, Iowa
State University, turning over its entire student body every
year rather than every 3 or 4 years.
The chart is a little confusing and, quite frankly, it is
somewhat perplexing because if you look at school No. 4, which
is the third one down, you see that they started the school
year with 96,211 students. They ended up with 116,800 students.
They had about a 20,000 student growth in 1 year, but the two
middle bars show that they added 118,500 students and lost
98,300 students.
What does all this mean? I do not know what it means. I do
not really know how to interpret all this. That is one of the
reasons we are having these hearings because we need to find
out what does that mean. It is very, very perplexing.
I think it is highly unlikely that all of these for-profit
students are graduating with degrees. I think the better bet is
that many of them are dropping out. They are being replaced by
new students with new loans and new Pell Grants to boost the
school's revenues.
Given the number of students enrolled in for-profit
colleges, the billions of dollars in Federal aid that these
institutions receive, and the lack--the lack--of clear evidence
of positive student outcomes, is why I think Congress must
devote more attention to this sector and its impact on our
post-secondary education system.
Today marks the first in a series of hearings to look at
the for-profit education sector, to examine its growth, and to
answer these questions of what is happening to students and
what is happening to taxpayers' money. We have a responsibility
to ensure that the taxpayers' dollars are being spent wisely
and that for-profit colleges are serving students, not just the
shareholders.
Now, while our data is incomplete, there are very
disturbing statistics and information coming forward on these
for-profit colleges. I have invited several individuals with
expertise in this field to help us begin our oversight of this
sector, and that is what I look upon these hearings as--as an
oversight. My hope is that they will help the committee
understand what has happened in this sector over the last few
years.
The committee's report that I released makes clear that
there is much we do not know. We do not know how many students
graduate, how many get jobs, how schools that are not publicly
traded spend their title IV dollars, how many for-profit
students default over the long-term. We know some information
about the short term, but we do not know much about the long-
term.
More broadly, we do not know exactly what risks we are
taking. We do not know what risks we are taking by investing an
increasing share of our Federal financial aid dollars in this
sector. I repeat that, we do not know exactly what risks we are
taking by investing an increasing share of our Federal
financial aid dollars in this sector.
Let me conclude by talking about the students who attend
these schools. They are, after all, what matters most. For some
students, the for-profit higher education system has worked
well. The flexible schedules, convenient locations, online
offerings allow working adults to finish their degrees while
also meeting family and job responsibilities. Many for-profit
schools offer students an excellent education that prepares
them for good-paying jobs that will allow them to pay off their
student loans. In short, for many students, attending a for-
profit college is a great decision, and when those students
succeed, they not only pay off their own loans, they also make
good on the Federal investment in their future.
Unfortunately, many students have had a very different
experience at for-profit schools. They have left without a
certificate or degree but saddled with very large debts. Many
students were misled about the value of the education they
would receive. In just the past week, my office has received
hundreds of stories from students who believed they were
exploited by a for-profit institution. You can also find them
in the reporting of Bloomberg News which has brought to light
some of the most compelling stories, and I ask consent to
insert at this point in the record three of those Bloomberg
articles that just came out.
[The information referred to follows:]
Report.--Emerging Risk?: An Overview of Growth, Spending, Student Debt
and Unanswered Questions in For-Profit Higher Education*
(By Senator Tom Harkin)
INTRODUCTION
Postsecondary education is a gateway to the middle class for
millions of Americans. It equips people with the knowledge and skills
they need to perform professional work and compete in the global
economy. To increase access to post-secondary education, the Federal
Government has provided grants and loans to students for more than half
a century, steadily increasing its investment nearly every year. In
fiscal year 2010, Federal funding for financial aid to post-secondary
students is expected to total $145 billion.\1\
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* Scope And Methodology.--This report is based largely on publicly
available information from the U.S. Department of Education and the 10-
k filings of the 14 publicly traded companies that operate for-profit
schools. It is not meant to suggest that any one company or school is
the focus of this report or that similar results would not be found
among for-profit schools that are not publicly traded. In order to
avoid any suggestion that a particular school is a focus, whenever
possible schools have not been identified by name, and the largest
schools have been averaged together to provide a more accurate cross-
section of the industry. The Chairman will provide further information
underlying the charts and statistics in this report upon request.
\1\ U.S. Department of Education. Budget Service. Fiscal Year 2011
Budget Summary. http://www2.ed.gov/about/overview/budget/budget11/
summary/edlite-section3d.html#tables.
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The Federal investment in higher education is a solid investment in
our future. Post-Secondary education results in benefits to the
individual, including greater wealth and better health, and also to the
Nation in the form of a more engaged citizenry and a more skilled
workforce.
However, the United States is playing catch-up. Once first in the
world in post-secondary attainment, the United States now ranks 10th in
the percentage of people with a college degree.\2\ President Obama has
set the goal of making the United States, once again, first in the
world in the proportion of college graduates by 2020. To this end, over
the last 3 years Congress has taken steps to make college more
accessible and affordable by substantially increasing student borrowing
limits, recently committing $36 billion in mandatory Pell grant funding
over the next 10 years included in the Health Care and Education
Reconciliation Act of 2010, through $17 billion in discretionary
funding through the American Recovery and Reinvestment Act of 2009 and
annual discretionary funding, which in fiscal year 2010 was $17.56
billion.
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\2\ Organization for Economic Co-Operation and Development,
Education at a Glance 2009: OECD Indicators, September 2009. http://
www.oecd.org/edu/eag2009.
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For-profit schools are an important part of the mix of post-
secondary institutions. They increase access to higher education by
providing needed capacity as well as innovative options that can make
it easier for students to complete their post-secondary education while
managing work and family obligations. Enrollment in for-profit schools
has grown dramatically over the past decade and, each year has seen a
larger share of Federal student aid dollars flowing to these schools.
Congress and the U.S. Department of Education have a duty to ensure
that for-profit schools spend these Federal dollars efficiently and
effectively.
Evidence suggests that for-profit schools charge higher tuition
than comparable public schools, spend a large share of revenues on
expenses unrelated to teaching, experience high dropout rates, and, in
some cases, employ abusive recruiting and debt-management practices.
What distinguishes for-profit schools from public and non-profit
private institutions is that they have an obligation to maximize
profits for their shareholders. Indeed, securities law sanctifies the
notion that each corporation must act in the interest of its
shareholders. However, this imperative could conflict with the
objective of Federal student aid programs, which is to increase access
to a quality higher education. This evidence, and the potential
conflicts underlying it, points to the need for rigorous government
oversight and prudent regulation to safeguard the investments of
taxpayers and students.
This report draws on publicly available information to shed light
on the scope of the Federal investment in for-profit schools and how
these schools are using those taxpayer dollars. It also seeks to
identify gaps in available information about enrollment, student
performance, and loan debt and repayment--gaps that impede effective
oversight.
GROWTH AND CHANGE IN ENROLLMENT
Over the last 10 years, there has been steady growth in student
enrollment across all types of post-secondary education institutions.
Between 1998 and 2008, enrollment at institutions of higher education
increased 31 percent, from 14.9 million students to 19.6 million
students. For-profit schools have expanded much faster, increasing
enrollment 225 percent over the same period.\3\
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\3\ Majority staff analysis of U.S. Department of Education data.
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Much of this growth has been concentrated in schools run by
publicly traded companies. Currently, the 14 publicly traded companies
in this field have combined enrollment of 1.4 million students, up from
8 companies that enrolled 199,584 students in 1998.\4\ The largest for-
profit school reports current enrollment of 458,600, more than the
undergraduate enrollment of the entire Big Ten conference.\5\
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\4\ Majority staff calculation of fiscal year 2010 quarterly
filings with the U.S. Securities and Exchange Commission; Majority
staff calculation of fiscal year 1998 quarterly and annual filings with
the U.S. Securities and Exchange Commission.
\5\ School #1 fiscal year 2010 quarterly filings with the U.S.
Securities and Exchange Commission; Majority staff compilation of Fall
2009 undergraduate enrollment from Big Ten school Web sites.
The trend toward educating students predominantly online is
transforming for-profit schools. This change was facilitated by the
2005 Congressional repeal of the ``50 percent rule'' which previously
required that schools furnish no more than half their courses online
and have no more than half their students enrolled in distance-learning
courses.\6\ Of the 14 publicly traded schools, at least 7 currently
have more than 50 percent of their students in exclusively online
curriculum.\7\ Since that repeal, some for-profit companies have
purchased small regionally accredited bricks-and-mortar schools and
transformed them into huge entities with primarily virtual curricula,
while also avoiding the time and cost of earning regional
accreditation. For example, in 2005 one company purchased a small,
regionally-accredited, religious school with an enrollment of 332
students on campus. Five years later, with the same accreditation, that
same company has more than 65,000 students, 99 percent of whom attend
class solely online.\8\
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\6\ The Deficit Reduction Act of 2005 (P.L. 109-171). Enacted,
February 8, 2006.
\7\ Four of the fourteen schools have more than 98 percent of
students online, while three schools have more than 50 percent of
students in online courses. See fiscal year 2009 Form 10k filings with
the U.S. Securities and Exchange Commission for schools ranked 3, 7, 8,
9, 10, 11 and 12 by enrollment.
\8\ School 8 fiscal year 2009 annual filing with the U.S.
Securities and Exchange Commission; School 8 fiscal year 2010 quarterly
filing with the U.S. Securities and Exchange Commission.
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GROWTH IN FEDERAL STUDENT AID TO THE FOR-PROFIT SECTOR
The share of Federal aid flowing to for-profit schools is growing
rapidly, and is actually outpacing growth in enrollment, meaning not
just that there are more students enrolling in the schools but that the
schools are receiving more Federal money per student.
The Federal Government offers loans to all students regardless of
their income. For students with financial need, it helps pay for higher
education using two key tools authorized by title IV of the Higher
Education Act: Pell grants in an amount up to $5,350 per year for
fiscal year 2010, and Stafford loans of up to $12,500 per year, which
students repay after leaving school. This financial aid is intended for
the benefit of the student. But, as a practical matter, aside from
education-related expenses, student aid disbursements go directly to
the student's school.
According to U.S. Department of Education data, $4.3 billion in
Pell grants and $19.6 billion in Federal loans flowed to for-profit
schools in 2008-2009, approximately double the share in 1999-2000.\9\
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\9\ Staff calculation of data provided by U.S. Department of
Education.
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Pell grants in particular warrant careful management. Over the last
several years Congress has made hard choices to devote greater Federal
resources to the Pell program over other domestic priorities. Between
1999 and 2009, Congressional allocations for Pell enabled the program
to grow significantly from $7.2 billion in 1999 to $18.3 billion in
2009. During that same period, the Pell Grant maximum award increased
by 51 percent--increasing from $3,125 to $4,731 while the number of
Pell recipients increased from 3.8 million to 6.2 million. While all
sectors received higher levels of Pell funding as a result of these
increases, the for-profit schools enjoyed a disproportionate share of
the increase. In 2009, for profit colleges receive almost one quarter
of all Pell Grants--up from just 13 percent in 1999.\10\
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\10\ U.S. Department of Education. Federal Pell Grant Program 2008-
2009 End of Year Report. http://www2.ed.gov/finaid/prof/resources/data/
pell-2008-09/pell-eoy-2008-09.html.
Federal Pell grants and Stafford loans, together with aid from
smaller title IV programs, make up the lion's share of for-profit
schools' revenues, and the share continues to grow. According to
company financial reports, in 2002, title IV government dollars
accounted for on average 62.9 percent of revenues at the five largest
for-profit schools. By 2009, the same companies reported that title IV
dollars made up an average of 77.4 percent of their revenue.\11\
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\11\ In 2009, the top 5 publicly traded schools by enrollment had
revenues that consisted of the following percentages of title IV
dollars, excluding the Stafford loan increases: School 1: 86 percent;
School 2: 70 percent; School 4: 80 percent; School 5: 81 percent;
School 6: 70 percent. If the Stafford loan increases were included the
shares could be as high as 83 percent.
However, the actual share of Federal dollars received by the
schools is even higher. For purposes of revenue calculation, Federal
law permits the schools to temporarily exclude the recent $2,000 annual
increase in undergraduate Stafford loans for money disbursed after June
2008 and before July 2011.\12\ One for-profit school reported that
title IV dollars make up 86 percent of its revenues this year, but
acknowledged that the excluded loan increases would add another one-
half to 3 percentage points.\13\ A second school told investors that,
with the recent increase in Stafford loans, title IV dollars account
for 88.9 percent of its revenues though the reported figure is 81.3
percent.\14\ Further, other forms of government aid--including
Department of Defense, Department of Veterans Affairs and State
programs--add to the share of public funds that for-profit schools
receive.
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\12\ The Ensuring Continued Access to Student Loans Act of 2008
increased the amount of Stafford loans to undergraduates by $2,000, but
allowed for-profit schools to exclude the increase from calculations of
``the 90/10 rule'' through mid-2011. The 90/10 rule provides that in
order to remain eligible for title IV aid, for-profit schools must have
revenue of less than 90 percent from title IV.
\13\ School 1 Q4 Earnings Conference Call, 10/27/09.
\14\ School 5 fiscal year 2009 annual filing with the U.S.
Securities and Exchange Commission.
While for-profit schools enroll close to 10 percent of all higher
education students, they receive approximately 23 percent of title IV
funds.\15\ They can collect this outsized share of title IV dollars
because they actively recruit primarily low-income students.
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\15\ Majority staff analysis of U.S. Department of Education data.
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GROWING PROFITS
As these schools have increased their percentage of revenue from
Federal student aid, for-profit education companies have become
increasingly profitable. The average operating profit in fiscal year
2005 among publicly traded for-profit higher education companies was
$127 million. The same number in fiscal year 2009 was $229 million, an
increase of 81 percent.\16\
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\16\ Company fiscal year 2005 annual filings with the U.S.
Securities and Exchange Commission; Company fiscal year 2009 annual
filings with the U.S. Securities and Exchange Commission.
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For-profit schools have significant operating profit margins among
companies listed on U.S. stock exchanges. For fiscal year 2009, one
company reported an operating profit of $489 million on revenues of
$1.3 billion, a 37 percent margin. By comparison, this margin was more
than triple that of Raytheon, and double that of Apple.\17\
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\17\ School 6 fiscal year 2009 annual filing with the U.S.
Securities and Exchange Commission; Raytheon fiscal year 2009 annual
filing with the U.S. Securities and Exchange Commission; Apple fiscal
year 2009 annual filing with the U.S. Securities and Exchange
Commission.
To satisfy shareholders, publicly traded schools must generate
higher revenues while keeping down costs, including teaching costs.
They do this by raising tuition and/or increasing the number of
enrolled students, which in turn will increase the amount of Federal
student aid dollars flowing to the schools. With for-profit schools
receiving more title IV dollars every year, one area warranting inquiry
is how they spend this extra Federal money, whether the increased
revenue is used to bolster profits.
SPENDING BY THE FOR-PROFIT SECTOR
Because title IV aid is technically provided to students, the
Federal Government places no restrictions on how revenue from title IV
student aid may be used by schools. There is no requirement that a
school devote any portion of title IV dollars to education.
To recruit new students, some schools spend heavily on television
advertisements, billboards, phone solicitation, and web marketing. An
analysis of the eight publicly traded schools that break out expense
categories shows that, on average, they spend 50.2 percent of costs on
expenses classified as education, 31 percent on recruiting and
marketing, and 15.7 percent on undefined administrative expenses.\18\
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\18\ School 1, School 4, School 5, School 8, School 9, School 10,
School 11, School 12 fiscal year 2009 annual filings with the U.S.
Securities and Exchange Commission.
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Among publicly traded for-profit schools, spending on education
ranges from 32 percent to 63 percent of costs.\19\ At exclusively on-
line schools, the percentage spent on education is even lower.
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\19\ School 2, School 5 and School 8 fiscal year 2009 annual
filings with the U.S. Securities and Exchange Commission.
Moreover, the amount that some for-profit schools spend on
educating students is shrinking. One school reduced spending on
education from 48 percent of costs in 2004 to 40 percent in 2009.\20\ A
second school reduced spending on education from 37 percent of costs in
2006 to 32 percent in 2009.\21\ At least one school spent more on
marketing and recruiting than on education, and another spent just 1
percent more on education than marketing and recruiting.\22\ At the
same time numerous accounts detail marketing and recruiting practices
that are sometimes overzealous or misleading.\23\
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\20\ School 11 fiscal year 2004 and fiscal year 2009 annual filings
with the Securities and Exchange Commission.
\21\ School 8 fiscal year 2009 annual filing with the Securities
and Exchange Commission.
\22\ School 8 and School 11 fiscal year 2009 annual filings with
the Securities and Exchange Commission.
\23\ See: National Association for College Admission Counseling,
``Higher Education Act Fraud Alert,'' May 11, 2010.
For-profit schools' expenditures on marketing and recruitment
relative to the spending on education raise questions about whether
sufficient resources are being devoted to ensuring that students
receive a quality education that results in increased job opportunities
or higher income.
STUDENT OUTCOMES
Given the growing Federal investment in for-profit higher
education, and considering their growing profitability, for-profit
schools should be able to demonstrate significant positive outcomes for
students. However, while publicly available information offers some
transparency as to the revenue and expenditures of for-profit schools,
it is more difficult to ascertain how students attending and graduating
from these schools are faring.
For-profit schools that receive Federal financial aid are required
to report graduation rates to the U.S. Department of Education. By
regulation, schools that advertise job placement rates as a means of
attracting students are required to make available to prospective
students the most recent job placement and graduation rates. However,
there is wide variation in the quality of this information. All data is
self-reported, with no auditing mechanism in place to validate accuracy
outside of the opaque accreditation process.
While for-profit schools report graduation rates (sometimes called
``completion rates'' to encompass certificate programs) to the U.S.
Department of Education, this data is self-reported and only captures
first-time, full-time enrolled students. Considering the large number
of for-profit college students who attend part-time, or who have
previous college experience, a very significant share of enrolled
students fall outside this reporting requirement.
With regard to job placement data, there is no agreed-upon
definition of how placement in a relevant field is calculated. For
example, a restaurant dishwasher or even a janitor might be considered
a ``placement'' by a culinary school. Additionally, while for-profit
schools must report placement to accrediting agencies, the agencies are
not required to disclose these standards or make placement data
available to the public or the U.S. Department of Education, and do not
use consistent standards.
What scant information is available from company documents reveals
a disturbing trend: large numbers of students are departing for-profit
schools each year. For the four schools that disclose detailed
enrollment numbers, an estimate of the number of students graduating or
dropping out each year can be calculated by adding the number of new
students to the number of continuing students and subtracting year-end
enrollment. However, there is no way to tell what portion of these
students graduated, transferred or dropped out.
Using this methodology, it appears that 540,820 out of a total
enrollment of 589,505 left the four schools in 2009. While an unknown
number of these departing students completed degrees or certificates,
it seems likely that a significant portion also dropped out of the
schools.\24\
---------------------------------------------------------------------------
\24\ All four schools offer Associates and Bachelors degree
programs. Three also offer shorter duration certificate programs.
---------------------------------------------------------------------------
Three of the four schools enrolled more new students over the
course of the year than the total number of students at the beginning
of the year. One school started the reporting period with 62,000
students, enrolled 117,000 new students, but ended with just 86,000
students enrolled.\25\ Understanding what portion of these students is
succeeding or failing to complete their degrees is critical to
assessing the value of the Federal investment.
---------------------------------------------------------------------------
\25\ School 5 fiscal year 2009 annual filings with the Securities
and Exchange Commission.
---------------------------------------------------------------------------
INCREASES IN DEBT AND DEFAULT
One way to evaluate whether students at these schools are receiving
an adequate education is to see if they are able to repay the money
they borrow to attend school. As college costs continue to rise, more
students are borrowing to pay for school, and they are taking out
larger loans. This is true across all sectors of higher education, but
students at for-profit institutions are more likely to borrow and
borrow larger loan amounts than their peers at other types of
institutions.\26\ On average, for-profit schools are more expensive to
attend than community colleges or public 4-year schools, and they
enroll many low-income students who rely almost entirely on loans and
Pell Grants to pay tuition. Average annual tuition at a for-profit
school was about $14,000 in 2009, while tuition at community college
averaged about $2,500 and averaged $7,000 for in-state students at 4-
year public colleges.\27\
---------------------------------------------------------------------------
\26\ College Board, How Much Are College Students Borrowing?'' By
Patricia Steele and Sandy Baum. http://professionals.collegeboard.com/
profdownload/cb-policy-brief-college-stu-borrowing-aug-2009.pdf;
Project on Student Debt, ``Quick Facts about Student Debt,''January
2010.
\27\ College Board, Trends in College Pricing 2009.
According to U.S. Department of Education data, 96 percent of for-
profit students who graduated in 2008 took out student loans. Twenty-
four percent of 2008 graduates took out Federal loans in excess of
$40,000.\28\ These rates are higher than at private non-profit or
public schools.
---------------------------------------------------------------------------
\28\ Source: College Board, ``Who Borrows Most? Bachelor's Degree
Recipients with High Levels of Student Debt.'' By Sandy Baum & Patricia
Steele, http://advocacy.collegeboard.org/sites/default/files/Trends-
Who-Borrows-Most-Brief.pdf; College Board, How Much Are College
Students Borrowing?'' By Patricia Steele and Sandy Baum. http://
professionals.collegeboard.com/profdownload/cb-policy-brief-college-
stu-borrowing-aug-2009.pdf.
---------------------------------------------------------------------------
One of the consequences of increased student borrowing is an
increase in the number of defaults. The available information on
default rates paints a bleak picture. While macroeconomic conditions
can affect student loan default rates, persistent high default rates
raise the question of whether students are receiving educational value
sufficient to allow them to afford the debt they incur. Students who
cannot pay their loans face punitive fees and higher interest rates.
Moreover, in most cases, bankruptcy law prohibits a student borrower
from discharging a student loan; the loan follows a borrower for the
rest of his or her life.
In December 2009, the U.S. Department of Education released a
report on ``Three-Year Cohort Default Rates'' that examined the
percentage of students who defaulted on their Federal student loans
within 3 years of leaving school. The chart below depicts the
percentage of students who default on their Federal student loans
within 3 years of leaving school. It divides students up by sector and
the highest degree offered at their institution. The U.S. Department of
Education data clearly shows higher default rates for students who
attend for-profit schools compared with those attending public or non-
profit schools.
Most of the data and analysis on student loan debt and defaults
measure the borrowing and repayment levels of students enrolled at
least 5 years ago. For example, the most recent loan debt numbers for
graduates come from the 2007-2008 National Post-Secondary Student Aid
Survey. Bachelor's degree recipients measured in that study enrolled in
2004. Similarly, cohort default rates measure students who entered
repayment more than 3 years ago, but enrolled at least 2 years before
that (in the case of A.A. recipients).
The consequence of this data lag is that key indicators of debt,
default and government risk do little to pick up rapid changes in
student loan utilization by students or schools. In 2003-2004 the U.S.
Department of Education made $45 billion in Stafford Loans. Just 6
years later they made $63 billion in loans, a 40 percent increase.\29\
How schools are packaging those loans, and how students are borrowing
will have a significant effect on the risk of the Federal Government's
investment in student loans.
---------------------------------------------------------------------------
\29\ Department of Education. ``Loan Volumes.'' http://www2.ed.gov/
about/overview/budget/studentloantables/09ffeldlnet-ay.pdf.
---------------------------------------------------------------------------
The U.S. Department of Education's Inspector General raised
questions about the accuracy of cohort default rates to measure the
full scope of student debt repayment. In particular, the Inspector
General was concerned that the short window (2 years at the time, now 3
years) and the treatment of loan forbearances and deferments obscured
the amount of Federal dollars at risk. In a 2003 report, the Inspector
General recommended the U.S. Department of Education publish lifetime
loan cohort default rates to ``better identify trends in cohorts'
defaults after the 2-year cohort period has ended.'' \30\ Since the
date of that report, both student borrowing and student debt have
soared but the public information available on student loan performance
has not substantially improved.
---------------------------------------------------------------------------
\30\ Department of Education Inspector General. Audit to Determine
if Cohort Default Rates Provide Sufficient Information on Defaults in
the title IV Loan Programs. December 2003, page 2.
---------------------------------------------------------------------------
UNKNOWN INFORMATION
This report has identified numerous gaps in available data on for-
profit colleges. Current publicly available information is limited to
data reported to the U.S. Department of Education and, for the 14
publicly traded schools, quarterly and annual financial filings made to
the Securities and Exchange Commission. As noted, what data is
collected by the U.S. Department of Education has several serious
limitations.
First, the U.S. Department of Education only tracks completion
rates for first-time, full-time enrolled students, a metric that is not
well-suited to the for-profit model where many students enter school
with previous college credit or attend part time. As a result, these
outcomes measures fail to capture many for-profit students and make it
difficult to understand how many students are completing programs,
transferring or dropping out.
Second, job placement information is reported inconsistently and
not subject to uniform standards. This data is self-reported and there
is no audit or verification procedure outside the confidential periodic
accreditation review to ensure accuracy or public access to that
information.
Third, many schools do not consistently publish tuition
information, making it difficult for policymakers or consumers to
compare schools and track tuition increases.
Fourth, default rates that help to elucidate how students leaving
for-profit schools are faring in the workplace are only tracked for 3
years, and do not fully capture students who default outside that
period. And because default data looks at a student population leaving
school several years back, it may not adequately depict the current
economic situation of recent graduates and dropouts, nor a significant
shift in student borrowing.
Finally, for privately held schools, no information is available
about how they spend title IV dollars. Even for publicly traded
schools, annual filings only provide a general understanding of how
title IV dollars are divided between education, administration and
marketing. As a result it is very difficult to make a comprehensive
assessment, particularly of privately held for-profit schools, based on
publicly available information.
This list begins to outline some of the significant gaps in data on
for-profit colleges. Congress should seek to fill those gaps to allow
for an informed discussion and debate over the significant Federal
investment in for-profit institutions.
CONCLUSION
The Federal Government and taxpayers are making a large and rapidly
growing investment in financial aid to for-profit schools, with few
tools in place to gauge how well that money is being spent. Available
data show that very few students enroll in for-profit schools without
taking on debt, while a staggering number of students are leaving the
schools, presumably many without completing a degree or certificate. To
boost enrollment, some for-profit schools recruit large numbers of new
students each year. In some cases, schools enroll more students over
the course of the year than were enrolled at the beginning of the year.
To ensure these enrollment increases, it is necessary for the schools
to devote very large shares of title IV dollars and other Federal
financial aid to marketing activities, not education.
These schools are increasingly relying on Federal financial aid
dollars for revenue. When all title IV, Department of Defense and
Veteran's Administration funds are included, many of these schools are
receiving nearly all of their funds from Federal sources. While
increasing their reliance on Federal dollars as a source of revenue,
for-profit schools are at best spending only slightly more than half of
revenues actually educating students, and in several cases are
shrinking the amount spent on instruction. Yet these same schools are
reporting profit margins of 20 percent and higher to investors.
Students at for-profit schools are also taking on higher amounts of
debt than their peers at public and non-profit schools. Nearly half of
student loan borrowers who entered repayment in 2007 and defaulted by
2009 attended for-profit schools (44 percent), even though less than 10
percent of students attend these schools.\31\
---------------------------------------------------------------------------
\31\ TICAS analysis of U.S. Department of Education 3-year Cohort
Default Rate data for fiscal year 2007.
---------------------------------------------------------------------------
The publicly available data, in tandem with mounting reports of
questionable practices and poor student outcome, yields a mixed
portrait of the for-profit higher education sector that calls into
question the tax payers return on their multi-billion-dollar
investment, and leaves many unanswered questions with regard to whether
a sufficient number of students receive an education that provides them
with the knowledge and skills they need to obtain jobs to repay their
student debt.
______
[December 15, 2009]
(By Daniel Golden)
Marine Can't Recall His Lessons at For-Profit College (Update 2)
Dec. 15 (Bloomberg)--Marine Corps Corporal James Long knows he's
enrolled at Ashford University, one of at least a dozen for-profit
colleges making money off active-duty military with subsidies from
American taxpayers. He just can't remember what course he's taking.
The 22-year-old from Dalton, GA, suffered a brain injury that
impaired his ability to concentrate when artillery shells hit his
Humvee in Iraq in 2006, he said. Long signed up for the online college,
a unit of Bridgepoint Education Inc., after its recruiter gave a sales
pitch this year at a barracks for wounded Marines at Camp Lejeune in
North Carolina. Under base rules, the barracks are off-limits to
college recruiters, said Robert Songer, director of lifelong learning
at Lejeune.
For-profit online colleges are taking over higher education of the
U.S. military, lured by a Defense Department pledge of free schooling
up to $4,500 a year for active members of the armed services, costing
taxpayers more than $3 billion since 2000. The schools account for 29
percent of college enrollments and 40 percent of the half-billion-
dollar annual tab in Federal tuition assistance for active-duty
students, displacing public and private nonprofit colleges, according
to Defense Department and military data.
The shift is leading to educational shortcuts and over-zealous
marketing, said Greg von Lehmen, chief academic officer of the
University of Maryland University College in Adelphi, the adult-
education branch of the State system and one of the earliest and
biggest providers of military education.
FASTER, EASIER
``In these schools, the rule is faster and easier,'' von Lehmen
said. ``They're characterized by increasingly compressed course lengths
and low academic expectations. One has to ask: Is the Department of
Defense getting what it is seeking?''
Some online schools offer free laptops or fast degrees. At Apollo
Group Inc.'s University of Phoenix, the biggest for-profit college,
active-duty military personnel can earn an associate's degree, which
typically takes 2 years of study, in 5 weeks.
Apollo fell $1.13, or 1.8 percent, to $60.93 at 4 p.m. in New York
in Nasdaq composite trading. The company's shares are down 21 percent
this year.
Taxpayers picked up $474 million for college tuition for 400,000
active-duty personnel in the year ended Sept. 30, 2008, more than
triple the spending a decade earlier, Defense Department statistics
show. Any college degree provides a boost toward military promotion,
said James Pappas, vice president for outreach at the University of
Oklahoma. Credentials from online, for-profit schools are less helpful
in getting civilian jobs, especially in a tight labor market, Barmak
Nassirian, associate executive director of the American Association of
Collegiate Registrars and Admissions Officers in Washington, said in an
e-mail.
DISAPPOINTED GRADS
``I'm afraid that the ease with which these outfits hand out
diplomas is matched only by the disappointment of their graduates when
they find out how little their degrees are actually worth,'' Nassirian
said.
Mike Shields, a retired Marine Corps colonel and human resources
director for U.S. field operations at Schindler Elevator Corp., rejects
about 50 military candidates each year for the company's management
development program because their graduate degrees come from online
for-profits, he said in an interview. Schindler Elevator is the North
American operating entity of Schindler Holding AG in Hergiswil,
Switzerland, the world's second-largest elevator maker.
BROADER EXPERIENCE
``We don't even consider them,'' Shields said. ``For the caliber of
individuals and credentials we're looking for, we need what we feel is
a more broadened and in-depth educational experience.'' He does hire
service members with online degrees for jobs on non-leadership tracks,
he said.
Several online for-profit schools have become a concern on military
bases because of practices that exploit soldiers and the Federal
subsidies they are promised, said Songer at Camp Lejeune.
``Some of these schools prey on Marines,'' Songer said. ``Day and
night, they call you, they e-mail you. These servicemen get caught in
that. Nobody in their families ever went to college. They don't know
about college.''
Most online for-profits, such as American Public Education Inc.'s
American Military University, ``do a very good job taking care of
students,'' Songer said.
Executives at for-profit colleges said they pay more attention to
customer service than traditional schools do, and their online format
suits military students who move frequently.
FLEXIBILITY, OPTIONS
``It's about flexibility and options,'' said Rick Cooper, vice
president of military and corporate programs at Columbia Southern
University in Orange Beach, AL. ``You can enroll any day of the week,
any week of the year.''
Columbia Southern grants transfer credits to soldiers for courses
in which they earned grades as low as D. Grantham University in Kansas
City, MO, has handed out free laptop computers and American Military in
Charles Town, WV, gives free textbooks as recruitment inducements.
Online schools such as American Military University have relocated
their headquarters to obtain certification from regional boards with
less demanding standards, according to interviews with for-profit
college officials and accrediting agencies. Or they're approved by less
established organizations, leaving students hard-pressed to transfer
credits to other colleges or find jobs at major corporations.
SALARY COMPARISONS
Holders of master's degrees in business administration from for-
profits Phoenix and American Intercontinental University earn less than
graduates with the same degrees from Oklahoma or Maryland's University
College, according to Payscale
.com, a provider of employee compensation data.
Recent MBA graduates from University College and Oklahoma have
median annual incomes of $78,600 and $68,400, respectively, compared
with $60,200 from Phoenix and $54,600 from American Intercontinental,
the data show. Recent bachelor's graduates from University College earn
a higher median salary ($55,200) than their counterparts at Phoenix
($50,500) and American Intercontinental ($43,100). Oklahoma, at
$41,100, trails Maryland and the two for-profit schools.
Travis Daun, a 33-year-old former Navy lieutenant commander who
trained as a nuclear engineer on a submarine, left the service in
August after receiving an online MBA from American Intercontinental, a
unit of Career Education Corp., based in Hoffman Estates, Illinois.
RIGOR, CHALLENGE
``I was disappointed in the rigor and challenge of the courses,''
Daun said in an interview, adding that each course lasted 5 weeks, with
at most 2 hours a week of class time. ``I don't think I had a 4.0
effort, yet I had a 4.0 grade-point average.''
Daun is unemployed. His college roommate, who also became a nuclear
engineer in the Navy and earned an MBA from the University of
Maryland's University College, did find work, Daun said. ``His MBA from
Maryland definitely helped him a lot more than my AIU degree is helping
me,'' he said.
Daun is working with Lucas Group, an executive search firm that
specializes in placing former military personnel.
``Does his master's from American Intercontinental open a lot of
doors for him? No, it doesn't,'' said Lee Cohen, an Irvine, CA-based
managing partner at Lucas.
American Intercontinental provides a high-quality education for
adult students, said Jeff Leshay, a spokesman for Career Education.
Leshay said the company doesn't track where graduates find jobs.
``NO PROBLEMS''
While deployed in Iraq, Christopher Brotherton earned a bachelor's
degree in homeland security from American Military in 2007. When the
staff sergeant retired from the Army in June, his degree, which
included courses in geography and history, helped him find a job
teaching social studies in a middle school in Ardmore, OK.
``The State, when they saw my transcript from AMU, they had no
problems with any of it,'' Brotherton, 42, said. ``It was a respected
school to them.''
Brian Kilgore's quest for a college degree was set back in 2007.
Then a petty officer first class in the Navy, Kilgore needed two more
courses to earn an associate's degree from Grantham when the online
for-profit college eliminated the software engineering program he was
taking, he said in an interview. Kilgore switched to computer science
and soon left school, still four classes short of that degree. ``I was
upset,'' said Kilgore, 38, who recently retired from the military and
works in aviation maintenance. ``Gosh, I was almost there.'' The
program was eliminated due to lack of interest, Grantham said.
CAREER DISADVANTAGE?
When service members do earn degrees from online for-profits, human
resources executives at Fortune 500 firms are often reluctant to hire
them, said Cohen, citing three where he has placed candidates. ``There
are some firms that are heavily credential-oriented,'' he said.
``McKinsey & Co. is one of them. They might balk. Amazon might balk.
Shell Oil is another one.'' McKinsey, Amazon.com and Shell declined to
comment.
Bradford Rand, chief executive of Techexpo Top Secret in New York,
which runs job fairs for defense contractors recruiting recent
veterans, said a degree from an online for-profit is a disadvantage.
``You have two people of the same caliber, one has a degree from a real
college, one has a degree from a computer, I'm going to favor the one
from the live college,'' Rand said. ``It's more verifiable, more
credible.''
The Defense Department plans to subject online programs to review
by the American Council on Education in Washington, which already
monitors face-to-face classes on military bases, defense officials
said. The new online standards, which the department began to develop
in 2004, have taken longer than expected and are a year away from being
implemented, Tommy Thomas, deputy undersecretary of defense for
military community and family policy, said in an e-mail.
MAXIMUM REIMBURSEMENT
Of the dozen colleges with the biggest active-duty enrollment, five
are for-profits that conduct most or all of their courses online.
Three--American Military University, Apollo's Phoenix, and closely held
Grantham--charge $250 a credit, or $750 a course, which allows them to
receive the maximum reimbursed by U.S. taxpayers without service
members having to pay any out-of-pocket tuition. Publicly funded
community colleges offer classes on military bases for as little as $50
a credit, according to their Web sites.
American Public Education fell 1 cent, or less than 1 percent, to
$34.40 at 4 p.m.
GOVERNMENT INQUIRIES
The expansion of online for-profit colleges into the military comes
as the companies face U.S. Government inquiries into their tactics in
recruiting and educating civilians. The Obama administration is
tightening scrutiny of for-profits, from the content of their pitches
to prospective students to their increasing reliance on Federal
financial aid, Robert Shireman, deputy undersecretary of the U.S.
Education Department, said in an interview.
In addition, the Securities and Exchange Commission's Enforcement
Division has begun an informal probe into how Apollo Group books
revenue. Apollo intends to cooperate fully with the inquiry, the
company said.
By expanding its military business, Phoenix has been able to enroll
more civilian students who are supported by grants and loans from the
Education Department, without violating Federal law that dictates how
much revenue the school can receive from the government. Phoenix
derived 86 percent of its $3.77 billion in revenue in fiscal 2009 from
the Education Department, according to its annual 10-K filing, up from
48 percent in 2001 and approaching the limit of 90 percent set by a
1992 law known as the 90/10 rule.
MILITARY MARKET
Tuition payments to for-profit schools by the military don't count
toward the 90 percent ceiling. One way that Phoenix plans to stay below
the legal threshold is building its military business, Gregory
Cappelli, co-chief executive of Apollo, which is based in Phoenix, said
in a June 29 conference call with investors.
When the law was enacted, for-profits hadn't yet moved into the
military market, so the legislation's sponsors weren't focused on
Defense Department tuition assistance, Sarah Flanagan, who helped draft
the law as the Senate's specialist in Federal student aid, said in an
interview. The law was intended to ensure that for-profit colleges
offered an education good enough that some students were willing to pay
for it, said Flanagan, now vice president of the National Association
of Independent Colleges and Universities in Washington.
``Counting Defense Department funding for servicemen's education as
part of the money that's supposed to come out of consumers' pockets
violates the purpose of the original legislation,'' Flanagan said.
PHOENIX RECRUITMENT
Apollo spokeswoman Sara Jones said in an e-mail that Phoenix began
serving military students long before the advent of ``the misguided 90/
10 rule.''
Phoenix ranks among the top five colleges serving military
students, including about 5,000 in the Army and 2,700 in the Navy,
according to the two services. While Phoenix offers campus-based
graduate programs in education and management at Air Force bases in the
Pacific, most of its active-duty students take classes online, school
officials said. Phoenix has 452 recruiters in its military division, up
from 91 in 2003, said Scott McLaurin, its executive enrollment
counselor at Camp Lejeune, the largest Marine Corps base on the East
Coast.
SOARING ENROLLMENTS
Military enrollment at exclusively online for-profits is soaring.
American Military has 36,772 active-duty students, up from 632 in 2000,
it said. It has the most Air Force and Marine Corps students of any
college. Closely held Columbia Southern has 9,582 service members, up
from 649 in 2002, it said. Closely held TUI in Cypress, CA, has more
than doubled active-duty enrollment to 7,665 in the first quarter of
2009, from 3,661 in 2004, it said.
While six public and private non-profit colleges hold face-to-face
classes on Camp Lejeune, none has the highest active-duty enrollment
there. That distinction belongs to American Military, with 1,623
students, up from 11 in 1999. Phoenix's enrollment there has risen to
296 from 15 over the same period.
Active-duty enrollment at public and nonprofit schools has slumped.
The University of Oklahoma, once the leading provider of graduate
degrees to service members, has lost half of its military enrollment in
a decade, said Pappas, the vice president for outreach.
``A decade from now, you may not find traditional national public
and private universities in military education,'' Pappas said. ``That's
one of the real dangers.''
CURRICULUM CONTROL
Faculty members at online for-profit colleges, usually part-timers
with practical experience in their fields, have less control over
curriculum than in conventional academia, said Benjamin Bolger, who has
taught at the University of Phoenix and the College of William & Mary
in Williamsburg, VA. Professors assign reading and writing and
discussion topics prescribed by the school. Students don't have to log
on at a specific time. At their convenience, they complete weekly
coursework and respond to classmates on discussion boards.
While many colleges adopt what are known as ``military-friendly''
practices, the online for-profits go further than most. They accelerate
course and degrees for service members, trimming requirements and
granting abundant transfer credits.
At Phoenix, members of the armed forces can earn an associate's
degree by taking one 5-week online class, ``Written Communication.''
They can make up for the other 19 courses required for an associate's
degree with credits for classes taken elsewhere, military experience
including basic training, and passing grades on tests that gauge
knowledge of a subject area.
FAST TRACK
Civilians seeking the same degree must take at least 6 Phoenix
courses and can use credits from outside sources for no more than 14.
Traditionally, 2-year students must take 10 courses, or half of the
required load, from the school that awards their degrees, so it can
vouch for their training, Nassirian said.
Only a handful of active-duty students choose Phoenix's one-course
option, called the Associate of Arts Degree Through Credit Recognition,
said Mike Bibbee, the university's director of military programs.
At Columbia Southern, students can finish courses in 3 weeks and
gain credit for as many as three classes taken at other colleges in
which they received grades as low as D, according to its catalog. All
exams are open-book.
``QUITE UNORTHODOX''
``It would be quite unorthodox for traditional institutions to
grant transfer credit to coursework completed below a grade of C,''
Nassirian said. Columbia Southern's academic quality is comparable to a
State or nonprofit university, Cooper said. The University of Alabama,
in Tuscaloosa, also accepts D's for transfer courses, according to its
Web site.
On Oct. 16, several Marines waited their turn on benches outside
American Military's office in the education center at Camp Lejeune.
Inside, AMU education coordinator Brian Miller made his pitch to Jyher
Lazarre and Hyunwoo Kim. Lazarre, 19, of Orlando, Florida, and Kim, 20,
of Leonia, NJ, joined the Marines in 2008 and are roommates at Lejeune,
they said.
Of 20 courses needed for a 2-year degree, they could satisfy eight
through basic training and other military experience, Miller said. They
could test out of seven more, leaving them to take five classes.
``I can cut the time of this degree literally in half,'' Miller
told them. ``It's going to make you competitive toward promotion as
well.''
``If we can cut it down, that's really good,'' Kim said.
ACCREDITATION CONFLICTS
Conflicts with accrediting associations that certify academic
quality have dogged several online for-profits. American Military,
founded in Virginia in 1991 by a former Marine Corps officer, applied
in 1998 for accreditation by the Commission on Colleges of the Decatur,
GA-based Southern Association of Colleges and Schools. The southern
association is one of six regional bodies that approve public and
nonprofit institutions and represent the gold standard in
accreditation.
In June 1999, the commission denied American Military a candidacy
visit, an early step in the accreditation process, said Ann Chard,
commission vice president. The university didn't meet the requirements
of having full-time professors and a library, instead relying on part-
time faculty and a lending library network, said James Herhusky, a
trustee.
American Military then shifted its headquarters to West Virginia to
seek regional accreditation by the Higher Learning Commission of the
North Central Association, according to the minutes of a July 2002
meeting of the Virginia Council of Higher Education, based in Richmond.
In 2006, North Central approved American Military, which offers degrees
in fields including homeland security, counter-terrorism studies and
weapons-of-mass-destruction preparedness.
``MORE ACCOMMODATING''
``At the time, North Central was the only region we knew that was
accrediting totally online institutions,'' Herhusky said. ``We found
their criteria to be less prescriptive and more accommodating.''
American Military now has 160 full-time professors and an online
library, Herhusky said. The school has almost quadrupled active-duty
enrollment since 2005, when it hired James Sweizer, former head of
education for the Air Force, to run its military programs.
``I came to AMU with the philosophy of relationship marketing,''
Sweizer said in an interview. ``You cater to the needs of key
influencers.''
Sweizer said he's seen ``dramatic improvement'' in how American
Military manages courses and faculty.
PROBATIONARY PERIOD
American Intercontinental, which ranked 20th in tuition assistance
from the Marine Corps in fiscal 2009, also didn't meet the standards of
the Southern Association of Colleges and Schools. It was placed on
probation from 2005 to 2007 for academic and administrative
shortcomings, including an inadequate number of full-time professors,
according to accreditation records. The school addressed the
association's concerns, and the improvements it made during those 2
years have strengthened the university, Career Education spokesman
Leshay said in an e-mail.
American Intercontinental moved its headquarters this year from
Atlanta to Chicago and was accredited by North Central. American
Intercontinental relocated because its online campus is based there,
Career Education spokesman Leshay said.
Two other for-profits in the military market, Grantham and Columbia
Southern, have a status known as national accreditation. Newer than the
regional groups, the seven national bodies mostly approve for-profit
colleges, including vocational and distance-education programs. Only 14
percent of colleges accept credits transferred from nationally
accredited institutions, according to a 2006 study by the University
Continuing Education Association in Washington.
EXPANDING MARKET
Three policy changes in the past decade opened the military market
to for-profit colleges. The Defense Department, which had paid tuition
assistance mainly to regionally accredited schools, began in 1999 to
reimburse nationally accredited colleges as well. It increased funding
in 2002 from 75 percent to 100 percent of tuition up to the $250-per-
credit ceiling. In 2006 and 2007, the Army cut 233 counselors who used
to guide soldiers through college choices, replacing them with
interactive Web sites that offer information, said Army spokesman Wayne
V. Hall.
These moves coincided with the rise of Internet courses. For-
profits were ahead of most traditional colleges in online education,
which helps service members, deployed worldwide, keep up their studies.
In fiscal 2008, the first year that the Defense Department collected
such data, 64 percent of active-duty students took distance-education
classes.
WAR ZONES
Soldiers even take online classes in war zones. While in
Afghanistan, Army sergeant Patrick Peake earned a bachelor's degree in
criminal justice from American Military, enrolling in as many as four
online courses at a time.
Cavalry scouts ``set up a wireless connection at the mud-brick
building we were at,'' Peake, 29, said in an interview. After studying
counter-terrorism at AMU, Peake said, he told friends in Army
intelligence about terrorist groups in the region. ``This dumb grunt
helped them out a little,'' he said.
Unlike most traditional schools, for-profits vie to offer
inducements to students. American Military gives textbooks for free to
undergraduates, who may resell them to the school's vendor after use
for $30 to $50 per book, Miller said. Columbia Southern is considering
a similar buyback program, according to Cooper.
Grantham, the seventh-biggest recipient of undergraduate tuition
money from the Army in fiscal 2008, gave new laptop computers made by
Dell Inc., from March to July to active-duty students who had completed
at least four courses with grades of C or better. The free laptops were
part of a pilot research project on student retention, said Tim
Arrington, Grantham director of military programs.
LAPTOP LARGESSE
Michael Lambert, executive director of the Distance Education
Training Council, which accredits Grantham, advised the school to stop
the laptop largesse, he said.
``The concern is, schools will outdo each other and we'll have an
arms race,'' he said. ``Free laptops, free Kindles, free iPods, all
coming out of taxpayers' pockets.''
Servicemembers Opportunity Colleges, a Defense Department
Washington-based contractor that develops policies for 1,800 colleges
involved in military education, is also considering guidelines to limit
laptop giveaways and other inducements. ``I don't think it's out of
hand, but the potential is there,'' said Kathy Snead, the group's
director.
FORMER MARINES
Career Blazers Learning Center, a New York-based vocational school,
gave away laptops loaded with instructional software to Marines about
to be deployed to combat zones, owner Paul Viboch said. It also hired
former Marines as recruiters and paid referral fees to students for
signing up other service members. Entire units enrolled, and Career
Blazers received $4.5 million in tuition assistance from the Marine
Corps in 2006, the most of any post-secondary provider.
Career Blazers charged $4,500--the maximum that the military
reimburses in a year--for self-paced lessons on how to perform basic
computer applications or balance checkbooks. Much of the material was
available for less expense at workshops or community college classes on
bases, education specialists said.
``The military overpaid for laptops,'' said Johanna Rose, an
education technician at Camp Lejeune.
Relocated to Martinsburg, WV, and renamed Martinsburg Institute,
Career Blazers stopped giving away laptops 3 months ago. Its tuition
assistance from the Marine Corps slipped to $616,000 in fiscal 2009, as
education officials on some Marine bases discouraged service members
from enrolling, Viboch said. ``I was too successful, too quickly,'' he
said.
``UNDERHANDED'' TECHNIQUES
Unauthorized marketing pitches by for-profit recruiters have become
widespread on military bases.
``Some of these schools are a little underhanded,'' said Pat
Jeffress, branch manager of lifelong learning at Camp Pendleton, a
Marine Corps base in California, said. ``They try to backdoor me. They
come onto the base when they don't have permission and they set up
shop.''
One recruiter for Ashford University recently ignored the anti-
solicitation rule at Camp Lejeune, said Songer, the base's lifelong
learning director. Bridgepoint, based in San Diego, has climbed 57
percent since the company went public on April 14. Bridgepoint fell 21
cents, or 1.2 percent, to $17.37 at 4 p.m. today.
Songer said he told the recruiter, whose husband is in the
military, that she could only meet students at the base's education
center. Instead, she pitched the online for-profit in the recreation
room of a barracks for wounded Marines. About 30 Marines showed up,
said Brad Drake, a corporal who attends Ashford.
``ATTRACTIVE'' RECRUITER
``It helped that she was really attractive,'' said Drake, 23, who
suffered a traumatic brain injury in Afghanistan when a rocket hit his
truck. ``That got everyone's attention.''
The recruiter spoke at the barracks with the approval of the unit's
commanding officer, Bridgepoint spokeswoman Shari Rodriguez said in an
e-mail. ``We keep our students' needs at the forefront of all we do.''
Unit commanders are often unfamiliar with educational rules, Songer
said. He told the recruiter, ``If you cross that line again, you'll
never be allowed on this base,'' he said.
ASHFORD'S ENROLLMENT
Ashford ranked sixth in Marine Corps enrollment in the year ended
Sept. 30, 2009, with 1,018 students. At Camp Lejeune, Ashford had 119
active-duty students, up from 25 in the previous year, and 6 in fiscal
2007. About 8 to 10 wounded Marines signed up for Ashford after the
recruiter's presentation, among them Corporal Long, the brain-injured
soldier, who also walks with a cane.
Long is pursuing a bachelor's degree in organizational management
through Ashford. In his first class, students could retake the final
test until they passed, he said.
``I took it 10 times,'' he said. ``I kept getting the same answers
wrong.''
Long, who aspires to be an occupational or physical therapist, said
he wonders if he can graduate. He is married and says he needs to
provide for his family.
``I got my doubts,'' he said. ``My family's more important than my
doubts. That keeps me going.''
[January 19, 2010]
Apollo Suffers New York Snub as SEC Probes Phoenix (Update 3)
(By Daniel Golden)
Jan. 19 (Bloomberg)--Apollo Group Inc., whose for-profit University
of Phoenix is among the largest colleges in the United States with
campuses in 29 of the 30 most populous States, faces one long-standing
obstacle to staking its claim as the future of higher education: New
York.
During Apollo's 12-year quest to enter the third-biggest State,
founder John Sperling raised money for Eliot Spitzer's 2006
gubernatorial campaign, and the company hired Mel Miller, former
speaker of the New York Assembly, as a lobbyist.
New York has blocked Phoenix's bid for a Manhattan campus,
questioning its academic quality, its dropout rate, how it compensates
recruiters, and even its right to call itself a university, according
to interviews and documents obtained under a State Freedom of
Information Law request. One State review said introductory algebra was
less demanding than a high school course. Phoenix has 455,600
undergraduate and graduate students, slightly less than the State
University of New York's 464,981 enrollment.
``The last thing we need to do is open a college that's not
successful,'' Joseph Frey, New York's deputy commissioner for higher
education, said in a December 11 interview in his Albany office. ``I'm
not bringing anything in front of the Board of Regents until I'm
confident the university is playing by the rules of the U.S. Education
Department and complies with our requirements.''
SEC INVESTIGATION
Investors are beginning to share New York's skepticism. While the
benchmark Standard & Poor's 500 Index of stocks has advanced 8.2
percent, Apollo shares have fallen 17 percent since Oct. 27, when the
company said the Securities and Exchange Commission opened an informal
probe into its accounting practices. Apollo said its accounting is
appropriate, and it intends to cooperate with the inquiry.
Apollo's swoon partly reflects concern that Federal authorities may
follow New York's lead and keep closer tabs on for-profit colleges,
said Trace Urdan, an analyst at Signal Hill Capital Group in San
Francisco.
``In the Obama administration, the pendulum has swung back closer
to where New York State has been the whole time,'' Urdan said in a
telephone interview.
The absence of a New York campus hurts Phoenix's efforts to boost
enrollment and revenue. Phoenix described New York in a June 2004
planning document as having ``the highest number of potential
students'' of any State.
GROWTH ``DECELERATION''
``A `deceleration of growth' in Phoenix's 2-year associate degree
program, which accounts for 45 percent of enrollment, is worrying
investors,'' said Ariel Sokol, an analyst at Wedbush Morgan Securities
in New York. ``The slowing growth reflects the school's shift to
higher-quality bachelor's degree candidates,'' he said. ``The U.S.
Education Department also is prodding Phoenix to disclose more
information about costs and course requirements to prospective
students, which could deter some of them from enrolling,'' he said.
While 39 for-profit colleges operate in the State, including ITT
Educational Services Inc. and DeVry Inc., New Yorkers have to attend
Phoenix online or cross the Hudson River to the university's Jersey
City, NJ, campus. Phoenix, which generated 95 percent of Apollo's $3.97
billion in revenue in the year ended August 31, enrolls students in
face-to-face and online classes.
More than 15,000 New Yorkers are enrolled at Phoenix online ``to
take advantage of our innovative, accredited education to help their
careers during these difficult economic times,'' Sara Jones, an Apollo
spokeswoman, wrote in an e-mail.
NO VOTE
Phoenix's application has never reached a formal vote by the New
York regents, who oversee education in the State, Frey said. Phoenix
students don't qualify for the State tuition assistance program, which
provided $813 million of aid in the 2008-2009 academic year, he said.
New York officials' questions are similar to those that the Obama
administration is asking about the for-profit college industry
generally. The U.S. Department of Education is considering restrictions
on paying recruiters for enrollments and on giving misleading
information to prospective students, and may require for-profit
colleges to show how much their programs increase graduates' earnings,
according to department documents.
The department is examining institutions that increasingly rely on
Federal financial aid, Robert Shireman, the U.S. deputy undersecretary
of education, said in a Sept. 1 interview. Phoenix derived 86 percent
of its $3.77 billion in revenue in fiscal 2009 from Education
Department grants and loans to students, up from 48 percent in 2001,
according to its Oct. 27 10-K filing with the Securities and Exchange
Commission.
LATE REFUNDS
Apollo was late in paying Federal financial aid refunds for
dropouts, according to a government report the company disclosed in its
10-Q on Jan. 7. The findings by the Education Department will cost
about $1.5 million, Phoenix-based Apollo said.
Apollo fell 11 cents, or less than 1 percent, to close at $60.26 in
Nasdaq stock market composite trading at 4 p.m. today.
Most education companies fell today after the Education Department
released draft regulations that might restrict Federal student loans
for schools whose graduates can't repay their debt. The agency released
draft ``gainful employment'' provisions in its aid program that would
require companies to show their students can earn enough to pay back
their loans.
Phoenix's failure to gain approval in New York is one of its few
defeats since Apollo went public in 1994.
Founded in 1976 by John Sperling, a faculty-union organizer and
former San Jose State University history professor, Phoenix pioneered a
model that used part-time faculty with practical experience to teach 5-
week courses to working adults. The university has expanded nationwide,
aided by well-connected board members, campaign contributions and
extensive lobbying.
EDUCATIONAL ACCESS
The quality of Phoenix's educational offerings and its policy of
admitting any applicant who has completed high school or earned an
equivalency degree have driven the university's growth, said Jones, the
Apollo spokeswoman. Phoenix ``provides access to those who otherwise
might not have the opportunity to pursue higher education,'' she said.
In Pennsylvania, Phoenix managed to overturn a ban on for-profit
colleges. In Texas, with the support of then-Governor George W. Bush
and his education adviser, Margaret Spellings, later U.S. Secretary of
Education, it outlasted the State higher education commissioner who
tried to block its entry. For-profits are freer than most nonprofit
colleges to form political action committees and donate to candidates
for State office, said Miriam Galston, a law professor at George
Washington University in Washington.
``In all my time there, New York was the only State we didn't
win,'' Charles Seigel, a former Apollo senior vice president for
government affairs and now vice president for public policy at Cornell
Companies Inc. in a telephone interview.
SAGA BEGINS
The New York saga began in 1995, when Seigel got in touch with New
York education officials. Phoenix applied for a license 2 years later,
seeking to open a Manhattan campus for graduate and undergraduate
students. Three years later, a State review team visited the
university's campuses in Phoenix and Tucson, Arizona. The university
``really wanted New York very badly,'' Miller, Apollo's New York
lobbyist from 1999 to 2006, said in a telephone interview.
By 2001, Phoenix was growing impatient.
``I am beginning to believe all of this is intentional delay,''
Seigel wrote to Gerald Patton, then New York's deputy commissioner for
higher education. ``It is becoming my view that this process will never
end.''
In a January 2002 letter to a university official, Frey proposed a
compromise--licensing Phoenix only for graduate programs, which had
received better reviews than its undergraduate offerings. Against
Miller's advice, Phoenix spurned the offer, Miller said.
``WORST ENEMY''
``The university was its own worst enemy,'' he said.
After a 2002 site visit to a Phoenix campus in Philadelphia, a
State review team found fault with the college's newly designed
general-education courses for undergraduates.
First-year algebra ``is not a college-level mathematics course''
and ``does not demand as high a level of critical thinking as the high
school curriculum'' in New York, according to a 2003 draft report.
Courses in human nutrition and in environmental issues and ethics
lacked basic science, and instructors were unqualified, according to
the report.
``The reviewers continue to question that college-level content in
the liberal arts and sciences, in particular in the math and science
disciplines, can be covered in a 5-week session,'' the authors wrote.
Phoenix's general-education courses ``are at the appropriate level
and quality,'' Manny Rivera, an Apollo spokesman, wrote in an e-mail.
The school continually evaluates and updates its curriculum and has won
Arizona awards for course development, he said.
GRADUATE PROGRAM
While New York criticized Phoenix's undergraduate quality, the
State's graduate-only proposal remained on the table. ``We are ready to
move forward'' with five proposed graduate programs in business, Frey
wrote in April 2004 to Susan Mitchell, a Phoenix vice president who is
now Apollo's senior vice president for government affairs.
This time, Phoenix acquiesced. The school, which didn't offer
enough doctoral programs in academic fields to describe itself as a
university under State rules, would go by ``Phoenix.edu'' in New York,
Mitchell wrote Frey in June 2004.
The New York market had ``astounding'' potential, Phoenix said that
month in a planning document submitted to State officials.
``In the past year, the university has been contacted by 20,000
residents, many of them from the Manhattan area,'' according to the
document. ``These numbers represent the highest number of potential
students approaching the institution in any State.''
LOCAL COLLEGES
The State then canvassed area colleges for their views on Phoenix
opening a graduate campus. Fordham University in the Bronx, Pace
University in Manhattan, Polytechnic University in Brooklyn, and the
Association of Proprietary Colleges in Albany all opposed Phoenix and
requested a public hearing.
``The MBA program is just a foot in the door for the initiation of
additional programs in direct competition,'' wrote David Chang, then
Polytechnic's president and now chancellor of Polytechnic Institute of
New York University.
In response, Mitchell wrote to Frey in November 2004 that Phoenix
``fully understands the limitations on registration and approval in New
York.''
New York has barred Phoenix to protect local colleges, said Thomas
Triscari Jr., an associate professor at Rensselaer Polytechnic
Institute in Troy, NY, who served on the six-member State review team
that visited Phoenix campuses in 2000.
VISION, FORESIGHT
Phoenix's approach to education ``is well-structured, well thought-
out,'' Triscari said in a telephone interview. ``These guys have vision
and foresight. Competition is in the fabric of our society. Why have we
precluded that in academic circles?''
Another member of that team also said the State should approve
Phoenix.
``They're as good as any of those other for-profits operating in
New York,'' said David Breneman, a professor at the University of
Virginia in Charlottesville and former dean of its school of education.
``I don't see any reason you'd single them out for retribution.''
New York was about to schedule a hearing on the local colleges'
objections when the news broke in September 2004 that Apollo had agreed
to pay $9.8 million to the Education Department to settle alleged
violations of a 1992 law banning incentive compensation for recruiters.
The company didn't admit wrongdoing.
State officials pulled back, complaining that Phoenix had failed to
alert them to the Federal probe.
HEARING DELAYED
``We cannot proceed as planned to schedule a hearing,'' Barbara
Meinert, coordinator for the State education department's Office of
College and University Evaluation, wrote Mitchell in October 2004.
Laura Palmer Noone, then Phoenix's president, apologized in a
September 2005 letter to a New York official ``for any embarrassment or
concern this delay in providing the information caused for the Board of
Regents.''
She defended the university's compensation policies.
``There is no correlation between the number of students recruited
and the amount the enrollment counselors were paid,'' she wrote.
``We were set for the final hearing and then everything blew
through the moon,'' Miller said. The hearing on Phoenix's application
for a graduate campus was never scheduled, Frey said.
ANOTHER TACK
Stymied, Sperling took another tack. After meeting Spitzer, then
State attorney general and the frontrunner in the governor's race,
through mutual friends at a dinner, Sperling suggested a fundraiser for
him, said Kristie Stiles, the candidate's national finance director.
``I knew Phoenix wasn't operating in New York,'' she said in a
telephone interview.
At least 15 executives and board members of Phoenix and Apollo
Group attended the 2006 fundraiser in Sperling's Arizona home,
according to campaign finance filings. The event reaped at least
$50,000, Stiles said.
Sperling and Phoenix were accustomed to politics. In his 2000
autobiography, ``Rebel With a Cause,'' Sperling described his skills as
``primarily educational and political.''
Before obtaining a license in Pennsylvania, Phoenix had to persuade
the Legislature to overturn a century-old State law prohibiting a
university from operating as a for-profit, according to Sperling's
autobiography. Phoenix officials met with each member of the State's
House and Senate education committees, and brought some of them to
visit its campuses, Seigel said. The repeal was adopted in 1997 as an
amendment to an elementary-school budget bill, he said.
``BITTERLY OPPOSED''
``The private colleges were bitterly opposed to us, but by the time
they found out'' about the maneuver, ``it was too late,'' Seigel said.
When Phoenix sought entry into Texas in the mid-1990s, Kenneth
Ashworth, then the State's higher education commissioner, was skeptical
of the school's reliance on part-time faculty, he said in a phone
interview.
``I stood in the breach and tried to keep the University of Phoenix
out of Texas,'' Ashworth said.
Phoenix hired Diane Allbaugh, wife of then-Governor Bush's chief of
staff, Joseph Allbaugh, as a lobbyist, according to records of the
Texas Ethics Commission, a State agency based in Austin. Bush's
education adviser, Margaret La Montagne, later Margaret Spellings,
prodded Ashworth to expedite the license, he said.
``UNSHIRTED HELL''
``She called and gave me unshirted hell,'' Ashworth said. ``Why
wasn't I letting Phoenix into Texas?' I said they couldn't meet our
standards.''
While Spellings doesn't recall specific discussions about Phoenix
with Ashworth, she talked to him all the time on educational policy,
Holly Kuzmich, Spellings's spokeswoman, said. Spellings and Bush
supported ``new and innovative developments in higher education,''
including Phoenix, Kuzmich said. Diane Allbaugh declined to comment.
Ashworth's retirement in 1997 cleared the university's path.
Phoenix ``was offering better-quality degree programs than those
offered at some public institutions in Texas,'' Ashworth's successor,
Don Brown, said in a telephone interview. Phoenix's first Texas campus,
in Dallas, was approved in February 2001.
Apollo created a political action committee in 1994, and Sperling
encouraged the company's top seven executives to contribute the maximum
$5,000, he wrote in his autobiography. He soon persuaded the next two
levels of executives to donate, and Apollo formed three more PACs.
POLITICAL CONTRIBUTIONS
``If we were to be in the `game,' it required contributions to
Members of Congress and the Senate, not to mention presidential
candidates--this, on top of a growing number of State legislators and
governors,'' Sperling wrote.
Phoenix studded its board with political insiders such as Richard
Bond, former Republican National Committee chairman; John Burton,
chairman of the California Democratic Party and former president of the
California Senate; Alan Wheat, a former U.S. House member from
Missouri; and William Goodling, former chairman of the House education
committee. Board members were unavailable for interviews, Apollo's
Rivera said.
Sperling and Nancy Pelosi, speaker of the U.S. House of
Representatives, are longtime friends, as well as neighbors in San
Francisco, where Sperling owns a home, Jorge Klor de Alva, Phoenix
senior vice president for academic excellence, said in a Sept. 9
interview at the university's Arizona headquarters.
PELOSI'S ATTENDANCE
Pelosi attended a Democratic Congressional Campaign Committee
fundraiser that Sperling hosted in Arizona last May, according to two
people familiar with the event. In 2003, Pelosi went to a small
gathering at Sperling's home and discussed with him how to position the
Democratic Party to retake the House and make her speaker, according to
a Pelosi aide and to a person acquainted with both Pelosi and Sperling.
Sperling co-wrote a 2004 book, ``The Great Divide,'' advising
Democrats on how to win the ``red'' States and citing Pelosi's views.
Sperling hasn't asked for the speaker's help on any legislation
affecting the university, the Pelosi aide said. Sperling declined to
comment.
Phoenix experienced success with Congress. In 2008, for example,
the university helped pass a provision expanding Federal financial aid
to for-profit colleges beyond vocational programs to include liberal-
arts students, House aides said. Phoenix plans to offer more liberal-
arts courses for aspiring teachers who need degrees in academic fields,
William Pepicello, the university's president, said in a Sept. 9
interview at its Arizona headquarters.
SPITZER FUNDRAISER
In New York, Sperling thought the Spitzer fundraiser ``would take
care of everything. He thought he had positive signals from Eliot,''
Miller said. ``If I was Sperling, I would have been the same way.
`We've done this the honorable way, we get no results, let me try
another route.' ''
Miller said he warned the university that the fundraiser would be
futile because the regents are appointed by the Legislature, not the
governor, and because he thought Spitzer wouldn't go out of his way to
reward contributors.
In July 2006, Spitzer returned $2,000 donations from Sperling and
Hedy Govenar, the founder of Governmental Advocates Inc., a Sacramento,
CA, lobbying firm that represents Apollo. Govenar has served on the
boards of Phoenix and Apollo. The campaign refunded the money after
learning about Apollo's 2004 incentive compensation settlement, Stiles
said. Apollo said in December 2009 that it paid $78.5 million to settle
a lawsuit over the same issue of recruiter compensation. The company
did not admit wrongdoing.
``NICE HOUSE''
Spitzer remembers the fundraiser, not why it was held or why he
gave back the money, he said in a telephone interview.
``I recall being in a nice house, chatting for about 15 minutes,''
he said. ``I raised $40 million around the Nation. People supported
what we were doing.''
Spitzer was elected governor in 2006 and served until his March
2008 resignation.
The fundraiser was Sperling's personal undertaking, ``separate and
distinct from Apollo Group's political activism, which is expressed
through the company's nonpartisan PAC,'' Apollo's Jones said.
Apollo has donated $10,150 to New York State legislators and to
State Democratic Assembly and Senate campaign committees since 2001,
according to campaign finance documents. The company gave $1,000 in
2006 to Ron Canestrari, then chairman of the Assembly's higher
education committee and now majority leader; $400 in 2007 to Kenneth
LaValle, now ranking Republican on the Senate's higher education
committee; and $500 in 2007 to Kevin Parker, a member of that
committee. The university currently doesn't have a lobbyist in New York
and isn't engaging in political activity on behalf of its application,
Rivera said.
DROPOUT RATE
State officials remain concerned that Phoenix's dropout rate is too
high, said Saul Cohen, a regent and a former president of Queens
College in New York. Only 8.9 percent of first-time, full-time college
students who enrolled at Phoenix in 2001 completed their degrees in 6
years, according to the National Center for Education Statistics, in
Washington.
Including transfer students, 26 percent of candidates for associate
degrees finish in 3 years, and 36 percent of students pursuing
bachelor's degrees graduate in 6 years, according to Phoenix's 2009
academic annual report.
``You bring in bodies that may not have much of a chance of
completion,'' Cohen said in a telephone interview. ``That certainly is
part of the issue.'' Apollo is introducing a 3-week orientation course
for unprepared students, the company said, Jan. 7.
WATERFRONT CAMPUS
Phoenix continues to seek approval in New York and is updating the
information in its application at the State education department's
request, Jones said.
At the same time, ``we look forward to continuing to serve our New
York students through our neighboring New Jersey campus,'' Jones said.
At the campus on the Jersey City waterfront, which New Jersey approved
in 2003, about a fourth of the students come from New York, according
to a December 2004 letter from Mitchell to Frey.
Phoenix student Maurice Murphy, a 32-year-old Bronx resident, takes
a subway under the Hudson six days a week to school. If all goes
smoothly, his commute takes half an hour, Murphy said as he headed to
class December 17 in Jersey City. He is majoring in human services
management and wants to become a social worker.
``Now we've got a resource center with TVs and computers,'' Murphy
said. ``This is like I'm really going away to college.''
[April 30, 2010]
Homeless High School Dropouts Lured by For-Profit Colleges
(By Daniel Golden)*
Benson Rollins, 23, poses for a portrait near the Y Haven shelter
in which he is currently living in Cleveland, earlier this week.
Photographer: Ross Mantle/Getty Images for Bloomberg Business Week.
---------------------------------------------------------------------------
* To contact the reporter on these stories: Daniel Golden in Boston
at [email protected].
---------------------------------------------------------------------------
Benson Rollins wants a college degree. The unemployed high school
dropout who attends Alcoholics Anonymous and has been homeless for 10
months is being courted by the University of Phoenix. Two of its
recruiters got themselves invited to a Cleveland shelter last October
and pitched the advantages of going to the country's largest for-profit
college to 70 destitute men.
Their visit spurred the 23-year-old Rollins to fill out an online
form expressing interest. Phoenix salespeople then barraged him with
phone calls and e-mails, urging a tour of its Cleveland campus. ``If
higher education is important to you for professional growth, and to
achieve your academic goals, why wait any longer? Classes start soon
and space is limited,'' one Phoenix employee e-mailed him on April 15.
``I'll be happy to walk you through the entire application process.''
Rollins's experience is increasingly common. The boom in for-profit
education, driven by a political consensus that all Americans need more
than a high school diploma, has intensified efforts to recruit the
homeless, Bloomberg Businessweek magazine reports in its May 3 issue.
Such disadvantaged students are desirable because they qualify for
Federal grants and loans, which are largely responsible for the
prosperity of for-profit colleges. Federal aid to students at for-
profit colleges jumped to $26.5 billion in 2009 from $4.6 billion in
2000. Publicly traded higher education companies derive three-fourths
of their revenue from Federal funds, with Phoenix at 86 percent, up
from just 48 percent in 2001 and approaching the 90 percent limit set
by Federal law.
BI-WEEKLY STIPEND
The privately held Drake College of Business, which trains people
to be medical and dental assistants, relied on taxpayers for 87 percent
of its revenue in 2007. Almost 5 percent of the student body at its
Newark, NJ, branch is homeless, says Jean Aoun, director of admissions
and student services there. Late in 2008, it began offering a $350 bi-
weekly stipend to students who show up for 80 percent of classes and
maintain a ``C'' average.
``It's basically known in the community: If you're homeless, and
you need some money, go to Drake,'' says Carmella Hutson, a case
manager at the Goodwill Rescue Mission in Newark, where about 20
clients have enrolled at Drake in the past 2 years. ``It would put
money in my pocket, help me buy a car,'' adds Jerome Nickens, 45, who
lived at the mission when he talked to a Drake representative but
decided not to enroll.
FORMAL INVESTIGATION
After Bloomberg Businessweek called the Accrediting Council for
Independent Colleges & Schools to inquire about the stipends, the
council opened an investigation into the college's recruitment
practices. The inquiry could lead to revoking Drake's accreditation,
leaving it ineligible for Federal aid.
Chancellor University in Cleveland, which counts Jack Welch as an
investor and features a weekly video for students by the former General
Electric Co. chief executive, explicitly focused recruiting efforts on
local shelters after it realized that Phoenix, owned by Apollo Group
Inc., was doing so. Chancellor has stopped pursuing the homeless, and
Phoenix says any recruiting by its employees in Cleveland shelters was
unauthorized. Phoenix's business code prohibits recruiting at shelters,
and any employee violating the ban could face termination, Apollo says.
Phoenix wants to ensure that ``only students who have a reasonable
chance to succeed enroll in our programs,'' Apollo spokesman Manny
Rivera said in an e-mail.
WELFARE POPULATION
Other schools see nothing wrong with reaching out to the
disadvantaged. ``We don't exclusively target the homeless,'' says Ziad
Fadel, chief executive of Drake, which also sends recruiters to welfare
and employment agencies. ``We are in a community that is low-income and
happens to have a lot of people on welfare.''
The every-other-Friday payment encourages Drake students to stay in
school and graduate, he says. The stipend, which about three-fourths of
Drake's 1,200 students receive, is not ``a gimmick to just get students
in the front door,'' Fadel says. He adds that a sample analysis of 30
graduates placed by Drake's career services office found ``some very
substantial improvements in income.''
While many caseworkers for the homeless are gratified by the
attention, some see only exploitation. The companies ``are preying upon
people who are already vulnerable and can't make it through a
university,'' says Sara Cohen, a case manager at Shelter Now in
Meriden, CT. ``It's evil.''
DEJA-VU
The current state of for-profit education has an element of deja-
vu. Twenty years ago the sector had grown wild and unruly, as fly-by-
night trade schools siphoned off students from welfare and unemployment
lines, ostensibly to train them as truck drivers or hairdressers. Often
these enterprises provided little or no schooling; their aim was the
Federal student aid. Default rates on student loans skyrocketed to 22
percent before Congress enacted tough regulations in 1992. Among them
were limits on default rates for individual colleges as well as a cap
on the percentage of their revenue that they could receive from the
government. The schools were also forbidden to pay recruiters based on
how many students they enrolled.
The reforms injected discipline into the industry and brought down
default rates. Then, a decade later, the Bush administration relaxed
the ban on incentive compensation for recruiters, opening the door for
the aggressive wooing of the homeless.
``Targeting vulnerable populations who are not likely to benefit is
one example of overzealous recruiting that can be driven by paying
based on enrollment numbers,'' says Robert Shireman, Deputy Under
Secretary of the U.S. Education Department, which is pushing to tighten
the rules.
UNLEASHING POTENTIAL
The Bush administration also sought to unleash online education's
potential. Phoenix now boasts 458,600 students, with more than 200,000
in its 2-year online program. Enrollment in for-profit colleges grew to
1.8 million in 2008 from 673,000 in 2000. Revenue rose to an estimated
$29.2 billion this year from $9 billion in 2000, says Jeffrey Silber,
an analyst for BMO Capital Markets in New York. Operating margins
averaged 21 percent in 2009; schools typically charge $10,000 to
$20,000 a year, well above comparable programs at community colleges.
The industry is now fully mainstream. Goldman Sachs Group Inc. owns
38 percent of the for-profit Education Management Corp. in Pittsburgh,
which has 136,000 students in programs ranging from fashion to culinary
arts, and former President Bill Clinton took a position as honorary
chancellor of Laureate International Universities, owned by Baltimore-
based Laureate Education Inc. Investors are flocking to the industry,
drawn by the stability of government funding and the profit potential
of online classes. But some of the unsavory practices that spurred
Congress to act are springing back to life, with a new wrinkle or two.
HOMELESS CIRCUIT
In Cleveland, Chancellor and Phoenix were both hitting the homeless
shelters last year. Byron Thompson, who joined Phoenix in 2009 as a
recruiter, soon made presentations at Y Haven, Salvation Army Harbor
Light and Transitional Housing, all of which serve the city's homeless.
Thompson, 29, says the recruiting served a social purpose: ``I feel
the homeless are a real population that can't be ignored.'' Borrowing
by the homeless to pay tuition ``is no different from a middle-class
student who has to take out a loan,'' he says. He also hoped to boost
his pay. ``The month I signed up two or three women from Transitional
Housing was a good month,'' he admits. (Phoenix recruiters in Cleveland
had a quota of five students a month, according to a former employee.)
LEGAL SETTLEMENT
Thompson, who left Phoenix in January, acknowledges that his bosses
didn't endorse his efforts to recruit the homeless. Apollo Group agreed
last December to pay $78.5 million to settle a Federal lawsuit in
California alleging that compensation for Phoenix recruiters violated
restrictions on incentive pay. The company, which admitted no
wrongdoing, says it's changing its compensation model.
While Thompson says he was ``welcomed with open arms'' at the
shelters, some staff members were wary. ``The question in my mind about
Phoenix was, ``Why are they doing this?' '' says Bruce Shagovac, a
counselor at Y Haven. ``There's got to be some payoff for them.''
One homeless woman whom Thompson steered to Phoenix was Marisol
Lugo. Lugo ran away from her Chicago home at age 12, became a heroin
addict, and lived on the streets for 22 years, eating out of restaurant
trash bins and sleeping in parks and abandoned cars. After detox, she
moved in 2008 to Transitional Housing, obtained a high school
equivalency degree, and got to know Thompson. ``He gave me wonderful
words of encouragement,'' says Lugo.
With Federal grants and loans covering the $10,000-plus annual
tuition, she began pursuing a 2-year business degree online at Phoenix
last August. She soon ran into academic difficulties, failing a course
in critical thinking.
RETAINING INFORMATION
``Sometimes, having used so much drugs, I have trouble retaining
information,'' says Lugo, who now has her own apartment and a
maintenance job at the shelter. According to Phoenix, she left the
school in November. She says she is still registered and there is a
payment dispute.
Phoenix's forays into shelters were noted by a new Cleveland rival.
In 2008, investors bought nonprofit Myers University, which was under
court receivership, and renamed it Chancellor. A year later Welch
acquired a stake in it; the university named its new master's degree
program in business administration after him, and Welch helped develop
the curriculum.
At a faculty function last August, Darius Navran, dean of
Chancellor's School of Professional Studies, sought out Jeffrey Perkins
Jr., an adjunct professor of public administration, and asked how
Chancellor could boost its enrollment of about 400.
NONTRADITIONAL STUDENTS
``If we don't tap into that population, Phoenix will,'' Perkins
says he told Navran, meaning the homeless. The dean agreed.
Chancellor's small classes and low student-to-faculty ratio are
suited to nontraditional students such as the homeless, Perkins says.
He e-mailed managers of Cleveland social service agencies in September,
inviting them to a lunch at Chancellor to ``discuss our new plans to
recruit the economically disadvantaged and at-risk groups. Many of them
are targeted for on-site recruitment at local transitional housing,
halfway houses, and other human service facilities.''
Sixteen human services managers showed up for the lunch. Two days
later, in a memo to Navran, Perkins predicted that the program would
produce ``a minimum of at least 10 enrollees by spring term.''
``HEAVY-HANDED''
In the ensuing weeks, Perkins and other Chancellor officials gave
presentations at a dozen social service programs. Their pitch was
``very heavy-handed,'' says Phillip Hines, housing coordinator for the
Community Women's Shelter. ``It was beating the drum, `Go to
Chancellor. This is what we offer. Financial aid, financial aid,
financial aid.' ''
Afterward, Hines says, Chancellor hounded him with phone calls and
e-mails to ``get these women rolling.'' Chancellor's initiative reaped
only one or two students and was discontinued. It ``had all the best
intentions,'' CEO Bob Barker said in an e-mail, ``but the time and
effort generated very little interest.''
In one view, the rise of for-profit colleges represents a laudable
merger of public interest and the private sector. With public colleges
beset by budget cuts, for-profit colleges offer an opportunity for
people who are down and out to get ahead. Students with no assets or
collateral can tap Federal grants and loans on the theory that degrees
will lead to well-paying jobs that enable borrowers to repay.
TUITION HIKES
The trouble is the cost. Education companies charge high prices
that require students to take on debt. Chancellor charges $9,750 a
year--about four times the $2,400 tab at nearby Cuyahoga Community
College. Poor students can pay Cuyahoga's tuition with Federal grants
and don't have to take out loans. Student advisers from Cuyahoga make
the rounds at Cleveland area shelters, helping the homeless choose
colleges and fill out applications.
And for-profit tuition is rising fast. Drake hiked its tuition from
$4,000 in 2007-2008 to $15,700 this year, which Fadel attributes to new
equipment and additional staff. Borrowers who earned bachelor's degrees
from for-profit colleges in 2007-2008 had a median debt of $32,653,
well above the $22,375 and $17,700 for graduates of 4-year private
nonprofit and public colleges, respectively.
Such burdens can be difficult for homeless people who are more
likely to suffer from mental illness and substance abuse than the
general population. Bad credit doesn't go away easily. In the Cleveland
shelters, you can still find people with trade school debts from 20
years ago. Those who don't repay their student loans may forfeit their
chances for public housing and are also ineligible for Federal
financial aid to return to college.
DEFAULT CONSEQUENCES
``If the homeless have a bad student loan, they can't find a place
to live, they can't go back to school, and in this economy there's not
a lot of work,'' said Ardretta Jones, a case manager at Tacoma Rescue
Mission in Tacoma, WA, ``That leaves a person with no options.''
Because they don't have to repay their educational loans until they
leave school, some homeless students spend beyond their means. Kim
Rose, a recovering crack cocaine addict and ex-offender in Raleigh, NC,
began pursuing an online bachelor's degree in business last November at
Capella Education Co.'s Capella University, based in Minneapolis. At
the time she was staying in a drug-free program with Internet access.
BIG SPLURGE
Rose, 38, receives almost $4,000 each academic quarter in Federal
grants and loans for tuition and living expenses. She splurged last
Christmas, spending $700 of her financial aid on presents for her 7-
year-old son, who has lived with his grandmother. ``I got him
everything he wanted,'' Rose said in a telephone interview. ``Games,
toys. He's a guitar freak, I got him a guitar. To make up for me not
being there.''
In February, Rose moved into a shelter where the only computer was
broken. As a result, she has struggled to keep up, dropping an English
composition course. Rose isn't typical of Capella students, most of
whom are mid-career professionals seeking graduate degrees, says
university spokeswoman Irene Silber: ``We would not intentionally
recruit someone who is in a life crisis, much less one as significant
as homelessness.''
Given the troubled pasts of some homeless students, even a college
education hardly assures a well-paying job. Brenda Torchia, another
recovering crack cocaine addict in Raleigh who has served several
prison terms for drug offenses, was in a shelter and looking online for
work when she saw an ad that asked if she wanted to further her
education. She answered yes and was directed to the Web site of a for-
profit school called ECPI College of Technology based in Virginia
Beach, VA.
PLACEMENT TEST
Torchia applied, passed a placement test, and started ECPI's
medical administration program on March 1. The 40-year-old mother of
four is borrowing about half of the $23,000 tab from the Federal
Government, with grants and scholarships paying the rest. ECPI
officials are aware of her background and ``guarantee me a job in the
field,'' Torchia says. ``My school is very, very supportive of me. I
guess God opened up their hearts to receive me for whom I am.''
Torchia's history would be a red flag for health-care employers
because hospitals and clinics have drugs on site, says Susan Eget,
communications director of the American Academy of Medical
Administrators. While ECPI doesn't promise jobs, President Mark Dreyfus
says, medical administration offers Torchia's best chance because not
all employers check backgrounds and she could process records in a back
office where drugs aren't accessible.
In the end, Benson Rollins didn't succumb to Phoenix's hard sell.
He is taking a class for his high school equivalency degree and hopes
to study law enforcement in college. For now, he would like a job so he
can pay child support for his 1-year-old daughter, whom he rarely sees.
The Phoenix recruiters, he says, failed to mention a critical point: He
would have to take out a government loan at 5 percent to 7 percent
interest to pay the $10,000-plus annual tuition. ``I'm in a homeless
shelter, and money is hard to come by,'' Rollins says. ``It's not worth
going to school to end up in debt.''
The Chairman. This morning we will hear from one of these
students, Yasmine Issa. We will also hear from a former
prosecutor who has extensive experience in the ways that some
schools mislead students about their job prospects after
graduation.
In closing, I know firsthand how a student loan can
transform the life of someone from a background of modest
means. I was reading the article that was in Good Housekeeping.
I will refer to this later as I introduce Yasmine Issa who was
profiled in this article. Mr. Harris Miller of the Career
College Association was quoted as saying that these kids who go
to non-profit colleges and universities are ``the socially
elite.'' Well, I went to Iowa State University. My mother was
an immigrant. My father had a sixth grade education and was a
coal miner. We did not have any money. I went to Iowa State and
I never considered myself or any of my classmates part of the
socially elite. I also took out student loans. I do not know
what Mr. Miller is talking about there.
Low-income students depend on the Federal Government to
provide them with the opportunity to attend college. Congress
has a responsibility to ensure that this opportunity is real
and not just false hopes peddled on a billboard or a pop-up ad
or an enticing phone call.
With that, I will turn it over to our Ranking Member,
Senator Enzi, for his opening statement before I introduce our
witnesses.
Opening Statement of Senator Enzi
Senator Enzi. Thank you, Mr. Chairman, and I appreciate the
work and effort that you went to on this report. I hope that
there is going to be a similar analysis for the traditional 2-
year and 4-year colleges and universities and fill in some of
the gaps of the available data on this. I think it might be
enlightening to us on a lot of the taxpayer dollars that are
being spent and will help to answer more of the questions that
are raised by those charts.
Today's hearing on for-profit institutions of higher
education does come at an important time. These schools are
increasingly reaching more and more Americans who are not
served by traditional higher education. They are an essential
part of our efforts to provide every American with the skills
necessary to be a valuable part of the workforce. As Secretary
Duncan recently said,
``Let me be crystal clear. For-profit institutions
play a vital role in training young people and adults
for jobs. They are critical to helping America meet the
President's 2020 goal. They are helping us to meet an
ever-increasing demand for skills that public
institutions cannot always meet.''
To understand the for-profit sector, we must first get a
better understanding of the variety of institutions in it and
the diversity of the students they serve. As our witnesses will
demonstrate, many of the for-profit schools resemble the
traditional 4- and 2-year colleges where students receive
associates, bachelors, and masters degrees in fields such as
business, nursing, and engineering.
Many others are less familiar to us but provide the
educated and skilled workforce that we rely on today. Among
these are the auto mechanic, truck driving, and beauty schools.
Many more provide courses online providing working adults and
rural communities access to college credit they once did not
have because of the time constraints or distances they would
have had to travel.
In general, the students at each of these schools tend to
be older, lower-income, and more likely to be minorities. Many
have already spent years in the workforce and returned to
school in order to change careers. Others seek to improve their
skills in order to advance in their current jobs, and as is
often the case in today's economy, many have been laid off and
are looking to gain skills that will make them more attractive
to employers.
Thousands of students have chosen for-profit schools
because they offer the flexibility in scheduling and training
not readily available at traditional institutions of higher
education. Furthermore, these institutions provide thousands of
students with a valuable education that will lead to productive
and rewarding careers.
Unfortunately, as in other industries, there are bad
actors. As we have undoubtedly read and will hear about in the
Inspector General's testimony, some for-profit schools have
attempted to game the system in order to gain access to more
Federal dollars. Other schools have recruited at homeless
shelters, misrepresented the quality of the education their
students receive, and made unrealistic promises of high-paying
jobs upon completion. Such actions are simply unacceptable, and
I applaud Secretary Duncan's commitment to ending this kind of
behavior.
However, in combating this behavior, it is essential that
we use a scalpel and not a machete. Whatever protections are
put in place must eliminate bad actors and ensure that we do
not unintentionally harm students in legitimate programs.
Finally, I want to express my disappointment that we did
not have the opportunity to work together in preparing this
hearing. Over the last several years, the HELP Committee has
had a successful history of bipartisan cooperation that has
made it one of the most productive committees in the Senate,
despite the often divergent views of its members.
Mr. Chairman, when Senator Alexander and I wrote to you
asking for hearings on the Department of Education's proposed
regulations, it was our sincere hope that we would work
together in the spirit of bipartisan tradition. That is not the
case with this hearing, and I am concerned that this hearing
will not provide members with a full and objective
understanding of the issues facing the for-profit sector. I am
also concerned that it might set a precedent for future
hearings on this issue and others before the committee.
Therefore, I would like to request that you commit to
working together on future hearings that you hold on this
issue. Doing so will ensure that members of this committee have
a full understanding of all the issues so that our Nation's
students are well served and quality programs are available to
meet their needs.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Enzi.
Now we will go to our witnesses. We have two panels. Our
first panel will be a singular witness and that is Ms. Kathleen
Tighe. Did I pronounce that correctly? Kathleen Tighe,
Inspector General at the U.S. Department of Education. Ms.
Tighe was sworn in as the Inspector General on March 17, 2010.
Prior to this she was the Deputy Inspector General at the U.S.
Department of Agriculture, Counsel to the Inspector General at
the General Services Administration, and a trial attorney with
the Fraud Section of the Commercial Litigation Branch of the
Department of Justice, a distinguished background.
Ms. Tighe, thank you very much for your appearance here and
for your work as the Inspector General. Your entire statement
will be made a part of the record in its entirety, and if you
could please proceed and summarize it for us, we would be most
appreciative.
STATEMENT OF KATHLEEN S. TIGHE, INSPECTOR GENERAL,
OFFICE OF THE INSPECTOR GENERAL, U.S. DEPARTMENT OF EDUCATION,
WASHINGTON, DC
Ms. Tighe. Thank you very much, Chairman Harkin, Ranking
Member Enzi and members of the committee. Thank you for
inviting me here today to discuss the U.S. Department of
Education Office of Inspector General's work involving for-
profit post-secondary institutions, known as proprietary
schools.
This is my first opportunity to testify before this
committee since it approved my nomination as the Inspector
General earlier this year. It is an honor to have received your
support to lead this organization and I look forward to working
with you to improve Federal education programs and operations
so they meet the needs of America's students and families.
As members of this committee know, the Federal student aid
programs have long been a focus of our audit, inspection, and
investigation work as they have been considered highly
susceptible to fraud and abuse. This includes extensive work
involving proprietary institutions.
My written testimony provides more detailed information on
our work, oversight challenges, and recommendations for
strengthening statutes impacting Federal student aid programs.
For purposes of this statement, I will focus on the types of
fraud and abuse our work has identified involving proprietary
schools.
According to the Department, Federal student aid funding
for proprietary institutions grew by over 109 percent from 2004
and 2005 to 2008 and 2009, while funding for public and
nonprofit institutions grew by approximately 40 percent for the
same time period.
In 2005, we testified before Congress on the topic of
waste, fraud, and abuse in the proprietary sector. At that
time, we reported that the majority of our post-secondary
institutional audits and investigations involved proprietary
schools. More than 5 years later, this continues to be the
case.
Since 2005, we issued 37 reports on post-secondary
institutions, 21 of which involved proprietary schools.
Seventy-percent of our current investigations involving post-
secondary institutions are proprietary school-related.
Proprietary institutions have been eligible to participate
in the Federal student aid program since 1972. The sector has
evolved from being predominantly vocational trade institutions
to not including degree-granting institutions. Proprietary
schools have also evolved into two classes of institutions.
Some are privately held and others are parts of much larger
publicly traded corporations. Both are driven by profit and can
also be driven by the need for growth.
The volume of Federal student aid dollars going to the
publicly traded sector has seen tremendous growth in recent
years, as already noted. According to the Department, the title
IV funding going to publicly traded corporations grew from $5.9
billion in 2003 and 2004 to $15.6 billion in 2008 and 2009.
There are several recurring issues of fraud and abuse
involving proprietary institutions that our work has
identified. We have seen a number of instances in which schools
have falsified student eligibility, including enrollment,
attendance, and high school diplomas and GEDs in order to
qualify students to obtain or continue to maintain Federal
student aid.
Refund violations have been a longstanding problem in
proprietary institutions also. When a student ceases to attend
a school, the school must determine if a refund is owed,
calculate the amount of the unearned Federal student aid, and
then return those funds to the appropriate party. Failing to
pay refunds is a criminal offense under the Higher Education
Act. We have seen institutions fail to pay timely refunds,
miscalculate refunds, and fail to pay refunds at all.
In Federal student aid programs, a proprietary school must
derive at least 10 percent of its income from sources other
than title IV. Schools sometimes miscalculate and devise other
creative accounting schemes to make sure that they comply with
what is known as the 90/10 rule.
In the area of distance education, determining whether a
student has enrolled in an online program and is in attendance
for purpose of Federal student aid is difficult and subject to
abuse. We have found proprietary schools have improperly
disbursed and retained Federal student aid funds based on
undocumented or even fictitious enrollment and attendance
status of students.
Although we discuss cohort defaults in our written
testimony in the context of being an oversight challenge, I
also note we have seen the fraudulent manipulation of cohort
default rates by proprietary schools for the purposes of
ensuring that they remain low.
Last week, the Department issued its notice of proposed
rulemaking proposing new regulations for the Federal student
aid program, a number of which address program integrity issues
related to proprietary schools. These include a proposed
definition of a credit hour and changes to rules governing
incentive compensation by eliminating the regulatory safe
harbors. Other changes proposed include the improvement to the
rules protecting students from misrepresentation, governing
ability to benefit testing, and satisfactory academic progress,
and establishing a process to check whether a high school
diploma is valid for student eligibility purposes.
We will comment on the proposed final rules and monitor the
implementation of those rules.
We are committed at the Office of Inspector General to
promoting accountability, efficiency, and effectiveness in all
Federal education operations and programs and will continue to
assist the Department in its efforts to identify and reduce
fraud and abuse to safeguard Federal student aid dollars and
help ensure these funds reach the right recipients.
This concludes my statement and I am happy to answer any
questions.
[The prepared statement of Ms. Tighe follows:]
Prepared Statement of Kathleen S. Tighe
Chairman Harkin, Ranking Member Enzi and members of the committee,
thank you for inviting me here today to discuss the U.S. Department of
Education (Department) Office of Inspector General's work involving
for-profit post-secondary institutions, referred to herein as
proprietary institutions. This is my first opportunity to testify
before this committee since it approved my nomination as the Inspector
General earlier this year. It is an honor to have received your support
to lead this organization, and I look forward to working with you to
improve Federal education programs and operations so they meet the
needs of America's students and families.
Before I begin my testimony, I would like to take this opportunity
to recognize the Department for the release of its Notice of Proposed
Rulemaking last week. I would also like to acknowledge the higher
education community, whose discussions with the Department throughout
the 2009-2010 negotiated rulemaking sessions contributed to the
development of the Department's proposed rules--a number of which
address program integrity issues related to proprietary institutions
that I will talk about today. We will comment on the proposed rules and
monitor the implementation of the final rules, and do what we can to
ensure that they assist in protecting our Nation's students, parents
and taxpayers.
I would also like to take a moment to address the significant
change coming to the Federal student aid programs on July 1, 2010. The
Health Care and Education Reconciliation Act of 2010, Public Law 111-
152, mandated there will be no new Federal Family Education Loan (FFEL)
originations as of July 1, 2010. As a result, in a very short period of
time, the Department must assist schools in transitioning to process
all new loans under the William D. Ford Direct Loan program (Direct
Loan), oversee the wind down of the FFEL program and its billions in
Federal assets and improve its oversight of additional contractors,
while managing the risks presented by post-secondary institutions and
the vulnerabilities that exist with distance education. Ensuring that
the Department's infrastructure, processes, oversight, and monitoring
are effectively operating in order to guarantee that every eligible
American student receives the aid to which he or she is entitled is of
vital concern to this committee as well as to my office and will
continue to be a major focus of our efforts.
BACKGROUND ON THE OIG AND FEDERAL STUDENT AID PROGRAMS
As members of this committee know, the Federal student aid programs
have long been a major focus of our audit, inspection, and
investigative work, as they have been considered highly susceptible to
fraud and abuse. The programs are large, complex, and inherently risky
due to their design, reliance on numerous entities, and the nature of
the student population. The Department provided $129 billion in aid to
students and parents during fiscal year 2009 and has an outstanding
student loan portfolio of more than $600 billion.
OIG has produced volumes of significant work involving the Federal
student aid programs, leading to statutory changes to the Higher
Education Act of 1965, as amended (HEA), as well as regulatory and
Departmental changes. This includes extensive work involving
proprietary institutions. According to the Department, Federal student
aid funding for proprietary institutions has grown by 109.4 percent
from 2004-2005 to 2008-2009, while funding for public and non-profit
institutions grew by approximately 40 percent for the same time period.
The HEA provides eligibility criteria that an institution must meet
in order to participate in the Federal student aid programs. State
educational agencies, accrediting agencies, and the Department all have
responsibility for program integrity to ensure that institutions meet,
and continue to meet, requirements for participation in the Federal
student aid programs. For example:
States provide licensing or other authorization necessary
for an institution of higher education to operate within a state;
Accrediting agencies, recognized by the Secretary of
Education (Secretary) as reliable authorities on the quality of
education or training offered, must establish, consistently apply, and
enforce standards for eligibility; and
The Department assesses and certifies that an institution
meets the HEA's eligibility criteria for administrative and financial
responsibility. It must also conduct program reviews, on a systemic
basis, designed to include all institutions of higher education
participating in the Federal student aid programs.
Institutional eligibility, certification, and oversight
requirements in the HEA are the same for all types opposite
institutions except for two requirements. One of these requirements
applies only to proprietary institutions, and the second applies to
both proprietary and post-secondary vocational institutions.
Statutory Revenue Provision for the Proprietary Sector
The HEA provides a criterion that is unique to proprietary
institutions of higher education. Known as the ``90/10 Rule,'' the
provision requires a proprietary institution to have at least 10
percent of the institution's revenues from sources that are not derived
from funds provided under the student financial assistance programs, as
determined in accordance with regulations prescribed by the Secretary.
Compliance with the 90/10 Rule must be calculated annually, based on
the institution's fiscal year. The Higher Education Opportunity Act of
2008 changed the 90/10 Rule from an institution eligibility criterion
to a condition of program participation, and provided additional
resources to be included as institutional revenue. These amendments
were a significant change that made it easier for institutions to meet
the 90/10 Rule, and institutions that fail to comply with the Rule are
now allowed to continue participation in the Federal student programs
for 2 years while they attempt to meet the Rule. The institution must
report the calculation as a footnote to the institution's annual
audited financial statements. The institution's independent certified
public accountant is expected to test the accuracy of the institution's
assertion as part of the audit of the financial statements.
Statutory Provision for Training Programs
The HEA provides an eligibility criterion that is unique to
proprietary institutions and post-secondary vocational institutions
regarding programs of training. These institutions must provide an
eligible program of training to prepare students for gainful employment
in a recognized occupation. This requirement does not apply to
nonprofit and public sector institutions' associate, bachelors, or
postgraduate degree-granting programs.
ROLE OF THE OIG IN PROGRAM OVERSIGHT
In 2005, OIG testified before Congress on the topic of waste,
fraud, and abuse in the proprietary sector. At that time, we reported
that, historically, the majority of our post-secondary institutional
audits and investigations involved proprietary schools. More than 5
years later, this continues to be the case.
OIG generally opens an investigation as a result of credible
evidence developed from complaints and other sources that may indicate
fraud. Audits or inspections are generally initiated to assess specific
areas of compliance but may also be initiated as the result of a
complaint. Since our 2005 testimony, OIG has issued 37 reports on post-
secondary institutions, 21 of which involved proprietary schools. In
2005, we reported that looking at the previous 6 years of data, 74
percent of our post-secondary institutional investigations involved
proprietary institutions. Today, that number is very similar--70
percent of our current investigations involving post-secondary
institutions are proprietary school-related.
FRAUD AND ABUSE IN THE PROPRIETARY SECTOR
Proprietary institutions have been eligible to participate in the
Federal student aid programs since 1972. This sector has evolved from
being predominately vocational trade institutions and now includes
degree-granting institutions. Proprietary institutions have also
evolved into two classes of institutions: some are privately held and
others are parts of much larger publicly traded corporations. Both are
driven by profit and can also be driven by the need for growth. The
volume of Federal student aid dollars going to the publicly traded
sector has seen tremendous growth in recent years. Over the years, we
have come to identify a relationship between rapid growth and failure
to maintain administrative capability. The following are several
examples of the types of fraud and abuse our work has identified
involving proprietary institutions.
Falsification of Eligibility
Our audits and investigations have identified proprietary schools
that falsify student enrollment, attendance, high-school diplomas,
General Educational Development certificates, ability-to-benefit exam
results, and satisfactory academic progress in order to qualify the
students to obtain or continue to maintain Federal student aid. Schools
also improperly received Federal student aid funds because they failed
to perform or falsified the verification required under the
Department's regulations for students. We have found schools that
enrolled students in programs that do not meet the minimum program
eligibility requirement and institutional locations that do not meet
basic eligibility requirements.
Refund Violations
Refund violations have been a longstanding problem in proprietary
institutions. We continue to identify this problem in our audits and
investigations. Refunds, which are referred to as ``Return of Title IV
Funds'' under the HEA, are triggered when a student ceases to attend an
institution. The institution must determine if a refund is owed,
calculate the amount of the unearned Federal student aid, and then
return those funds to the Department, the FFEL loan holder, or to
another applicable participant in Federal student aid programs within a
specified number of days. Violations of this requirement occur when
refunds are not timely paid, when incorrect calculations result in
returning insufficient funds, and when institutions fail to pay refunds
at all. Failure to pay refunds is a criminal offense under the HEA. We
have found all three types of refund violations in our audits, and
these violations are the frequent subject of our investigations.
90/10 Rule
Defined previously in this testimony, proprietary institutions must
meet the 90/10 Rule every fiscal year to continue participation in
Federal student aid programs. We have identified proprietary
institutions that miscalculate or devise other creative accounting
schemes (e.g., fake institutional scholarships and loans) to make it
appear they met this rule. When this occurs, ineligible institutions
have continued to participate in the Federal student aid programs.
Incentive Compensation
We receive and review complaints of aggressive recruiting and
violations of the HEA's ban on incentive compensation by proprietary
institutions. We have reviewed compensation plans that are clearly
providing direct financial incentives for recruiters to increase
enrollment. However, due to the safe harbors included in the
Department's current regulations, in many cases, schools are shielded
from administrative, civil, and criminal liability. Proprietary
institutions are making full use of the safe harbors in the
Department's regulations to provide financial incentives to drive
enrollment. In 2002, when the Department originally promulgated the
safe harbor rules, we advised the Department that provisions of those
regulations were contrary to the requirements of the HEA and reported
our disagreement to Congress. In its Notice of Proposed Rulemaking
issued last week, the Department proposes to eliminate all safe harbors
and return to the clear ban on incentive compensation stated in the
HEA. This is a significant step to eliminate aggressive recruiting
practices.
Distance Education
Distance education--both at proprietary and non-profit
institutions--is an area that is placing increased demands on our
investigative and audit resources and highlights the need for greater
oversight and statutory or regulatory change. The issue is determining
whether students in distance education are ``regular students, as
defined by the HEA, and actually in attendance for Federal student aid
purposes. Institutions are obligated to return any Federal student aid
received if a student does not begin attendance during the period for
which aid was awarded. Institutions must be able to document attendance
in at least one class during a payment period. Determining what
constitutes a class and class attendance in the on-line environment is
a challenge in the absence of defined class times or delivery of
instruction by instructors. On-line instruction typically consists of
posted reading materials and assignments, chat-room and e-mail
exchanges, and posting of completed student work. The point at which a
student progresses from on-line registration to actual on-line academic
engagement or class attendance is often not defined by institutions and
is not defined by Federal statute or regulations. Without such
definition, or adequate controls at the institutions themselves, we
believe Federal student aid funds are at significant risk of being
disbursed to ineligible students in on-line programs, and that
inadequate refunds will be made for students who cease attendance in
these programs.
EVOLVING OVERSIGHT CHALLENGES
As we noted earlier, the Federal student aid programs are complex
and inherently present risk. Following are several examples of what we
consider evolving oversight challenges that impact both proprietary and
non-profit institutions.
Accrediting Agencies Lack Meaningful Standards for Program Length
In 2009 and 2010, we evaluated regional accrediting agency
standards for program length and the definition of a credit hour. We
examined three of the seven regional accrediting agencies to determine
what guidance regarding program length and credit hours they provided
to institutions and peer reviewers, and the documentation they
maintained to demonstrate how they evaluated institutions' program
length and credit hours. The three accrediting agencies reviewed
represent one-third of the institutions participating in Federal
student aid programs: 2,222 post-secondary institutions with more than
$60 billion in Federal student aid funding. We found that none of the
accrediting agencies defined a credit hour and none of the accrediting
agencies provided guidance on the minimum requirements for the
assignment of credit hours. At two of the accrediting agencies, we were
told that student learning outcomes were more important than the
assignment of credit hours; however, these two accrediting agencies
provided no guidance to institutions or peer reviewers on acceptable
minimum student learning outcomes at the post-secondary level.
While conducting our inspection at one of the agencies, we
identified a serious issue that we brought to the Department's
attention through an Alert Memorandum: the Higher Learning Commission
of the North Central Association of Colleges and Schools (HLC)
evaluated American InterContinental University (AIU)--a proprietary
institution owned by Career Education Corporation (CEC)--for initial
accreditation and identified issues related to the school's assignment
of credit hours to certain undergraduate and graduate programs. HLC
found the school to have an ``egregious'' credit policy that was not in
the best interest of students, but nonetheless accredited AIU. HLC's
accreditation of AIU calls into question whether it is a reliable
authority regarding the quality of education or training provided by
the institution. Since HLC determined that the practices at AIU meet
its standards for quality, without limitation, the Department should be
concerned about the quality of education or training at other
institutions accredited by HLC. Based on this finding, our Alert
Memorandum recommended that the Department determine whether HLC is in
compliance with the regulatory requirements for accrediting agencies
and, if not, take appropriate action under the regulations to limit,
suspend, or terminate HLC's recognition by the Secretary. The
Department initiated a review of HLC and determined that the issue
identified was not an isolated incident. As a result, the Department
gave HLC two options for coming into compliance: (1) to accept a set of
corrective actions determined by the Department; or (2) the Department
would initiate a limitation, suspension, or termination action. In May
2010, HLC accepted the Department's corrective action plan.
In addition, in its Notice of Proposed Rulemaking issued last week,
the Department proposed a definition of a credit hour and procedures
for accrediting agencies to determine whether an institution's
assignment of a credit hour is acceptable.
Borrower Defaults
Considering the economic downturn over the last several years,
combined with escalating student loan debts, a significant concern is
the potential for increased loan defaults as we have seen the national
cohort default rate increase recently. As an example, last year, the
Department announced that the fiscal year 2007 national student loan
cohort default rate increased to 6.7 percent, up from the fiscal year
2006 rate of 5.2 percent. The 2007 cohort default rate for schools
participating in the FFEL Program was 7.2 percent, a 36 percent
increase over the 2006 rate of 5.3 percent. The 2007 cohort default
rate for schools participating in the Direct Loan Program was 4.8
percent, a 2 percent increase over the 2006 rate of 4.7 percent. The
FFEL portfolio has a larger percentage of proprietary schools, which
have higher default rates, and a lower percentage of public and private
4-year schools, which have lower default rates. Fiscal year 2007
national cohort default rate was 6.7 percent, while the proprietary
school default rate was 11 percent.
In a 2003 audit report we concluded that cohort default rates do
not appear to provide decisionmakers with sufficient information about
the rate of default in the student assistance programs. Currently, to
identify defaults, cohort default rates track the cohort of borrowers
entering repayment in a fiscal year, through the following fiscal year.
After the second fiscal year, subsequent defaults by the borrowers in
the base-year cohort are not included in cohort default rate
calculations. While the Higher Education Opportunity Act of 2008
changed this calculation to track borrowers over 3 years, this change
will still not adequately reflect all defaults.
Not addressed by this change were two issues noted in our earlier
report. In that report, we identified that cohort default rates were
not a true representation, as they were reduced by: (1) a statutory
change to the HEA's definition of default from 180 days of delinquency
to 270 days of delinquency; this 90-day delay excludes a significant
number of defaulters from the cohort default rate calculation; and (2)
an increase in the use of deferments and forbearances. Deferment
entitles a borrower to have periodic installment payments of principal
deferred during authorized periods; forbearance permits the temporary
cessation of payments. We found that deferments and forbearances had
more than doubled in the period we examined. Borrowers in deferment or
forbearance do not make payments on their loans, so they are not
counted as defaulters, but they continue to be counted with other
students in the cohort, thus reducing the cohort rate. While we
recognize that the Congress has provided additional repayment
flexibilities, when borrowers reach the limits on deferments and begin
repayment they may still lack the income and eventually default and are
not accounted for in the cohort default rate.
Estimating future loan defaults is a very difficult process. As
part of the requirements related to the Federal Credit Reform Act of
1990, as amended, the Department must annually estimate loan volumes
and the attendant costs, and in doing so, factor in economic
conditions. Our financial statement auditor has raised concerns about
the Department's estimation process, including its failure to take into
account recessionary conditions, and has made a number of
recommendations for improvements. The Department's credit reform
estimates continue to be reported in our audit of the financial
statements as a significant internal control deficiency.
Direct Loan Program
Guaranty agencies have always had a responsibility to enforce the
requirements for school participation in the FFEL program and have
served as an important source of possible waste, fraud, or abuse
referrals for our office. As guaranty agencies move away from
guaranteeing and performing oversight of loans for currently enrolled
students, they will no longer serve as a source of oversight and
information on school participation in the loan programs.
In the transition to the Direct Loan program, the Department will
have to itself perform the school loan oversight function previously
performed by guaranty agencies. Loan origination and servicing
functions previously performed by lenders and guaranty agencies in the
FFEL program are now the responsibility of the Department. The
Department relies on contractors to perform these functions in the
Direct Loan program. The Department had to modify its loan origination
system, assure all institutions are capable of using the system, and
contract with four new loan servicers last year to service the loans it
purchased from lenders and handle the increased volume in the Direct
Loan program.
Because the Direct Loan program will become the largest lending
program within the Federal Government, we are examining the
applicability of Federal banking statutes to determine if similar
statutory provisions for enhanced program integrity should be
recommended for the Department, as they have been for other Federal
lending programs.
OIG RECOMMENDATIONS FOR STRENGTHENING LAWS/REGULATIONS
In your invitation for me to testify today, you asked me provide an
assessment of whether current laws are sufficient to protect students
and taxpayers. Congress could address two areas that would increase
accountability in post-secondary education and the Federal student aid
programs, as well as provide additional oversight tools and assist in
reducing fraud and abuse in the programs: amending the Internal Revenue
Code to permit an Internal Revenue Service (IRS) income match for
student loan applicants and reconsider the cost of attendance for
individuals engaged in on-line education courses.
IRS Match
Since 1997, we have recommended implementation of an IRS income
data match, which would allow the Department to match the information
provided on student's application for Federal student aid with the
income data that is maintained by the IRS. While the HEA has been
amended to permit this match, a corresponding amendment to the Internal
Revenue Code has not been enacted. This action would go a very long way
to identifying income inconsistencies and eliminating an area of fraud
and abuse within the student financial assistance programs.
While the Department began a pilot project this January to allow
applicants the choice to have the Department obtain income data
directly from the IRS, we do not believe it likely that those
individuals intent on defrauding the program by providing false income
information would select the IRS option. Leaving this area unaddressed
creates additional burdens for institutions to verify an applicant's
income and victimizes unsuspecting students and parents who are advised
by unscrupulous financial aid consultants to commit this type of fraud.
Our investigations have found that some officials at proprietary
institutions have encouraged students to falsify their income and
dependents to qualify for Federal student aid.
Cost of Attendance Calculations for Distance Education Programs
Since 2001, OIG has recommended that the HEA be amended to address
cost of attendance (COA) calculations for on-line learners. Currently,
students in on-line programs and residential programs can be eligible
for the same amount of Federal student aid based on the same COA. The
COA as defined by the HEA primarily includes:
Tuition and fees normally assessed a student, including
the costs for rental or purchase of any equipment, materials, or
supplies;
An allowance for books, supplies, transportation, and
reasonable miscellaneous personal expenses, including a reasonable
allowance for the documented rental or purchase of a personal computer;
An allowance for room and board costs incurred by the
student which shall be an allowance for (a) students without dependents
residing at home with parents, (b) students without dependents residing
in institutionally owned or operated housing, and (c) for all other
students an allowance based on the expense reasonably incurred for room
and board; and
An allowance for dependent care for students with
dependents.
The HEA limits the COA for students engaged in correspondence
courses to tuition and fees, and, if required, books, supplies, and
travel. There is no similar limitation for on-line students. With the
explosion of on-line education in recent years and the number of full-
time working individuals that take these courses, a COA budget that
includes an allowance for room and board for on-line learners may not
be in the best interest of American taxpayers and may allow students to
borrow more than is needed. We also note that under the Post-9/11 GI
Bill, Congress has already determined that active duty personnel and
veterans enrolled exclusively in on-line programs should receive
reimbursement only for tuition and fees and not receive a housing
allowance. Congress should reconsider the COA calculation for distance
education programs under the HEA, which could reduce loan borrowing,
decrease loan debt, and reduce the amount of funds available above
tuition and thus obtainable by individuals who seek to defraud the
Federal student aid programs through on-line fraud schemes.
CLOSING REMARKS
In closing, I would like to once again mention the Department's
recently proposed regulations governing the Federal student aid
programs, many of which we have previously identified and recommended
to the Department through our audit, inspection, and investigative
work. The Department has proposed a definition of a credit hour and
changes to the rules governing incentive compensation by eliminating
regulatory safe harbors. Other changes proposed include improvements to
the rules (1) protecting students from misrepresentation, (2) governing
ability-to-benefit testing and satisfactory academic progress, and (3)
establishing a process to check whether a high school diploma is valid
for student eligibility purposes. Again, we will comment on the
proposed rules and monitor the implementation of the final rules. We
believe changes in all these areas will improve protections for
students and taxpayers. In the meantime, let me reiterate that OIG is
committed to promoting accountability, efficiency, and effectiveness in
all Federal education operations and programs. We will continue to
assist the Department in its efforts to identify and reduce fraud and
abuse, to safeguard Federal student aid dollars, and to help ensure
that these funds reach the intended recipients.
On behalf of the OIG, I want to thank you for the support this
committee has given to this office over the years. We look forward to
continuing to work with Congress in furthering our goals and achieving
our mission.
This concludes my written statement. I am happy to answer any of
your questions.
The Chairman. Well, Ms. Tighe, thank you very much. I think
that correctly sums up your more extensive statement which I
read last evening.
In the course of your office's audit work, can you describe
how for-profit schools use deferments and forbearances to lower
their cohort default rate? Explain that, please.
Ms. Tighe. Yes. I would like to explain it in two different
ways. One is not fraudulent and one is fraudulent.
Often schools will look at students who have withdrawn and
contact those students and work with them to give them
information on deferment and forbearance options, and they will
continue to work with those students until the students have
reached the point where they would not be included in the
cohort default rate. Now, that can be sometimes a benefit to
the student because it is nice to know options. It is nice to
have those put before you, but it will also benefit the school
because the students may not default until after the cohort
period has ended.
The Chairman. What is a cohort period? Is that 3 years?
Ms. Tighe. Well it has been changed to be 3 years.
Currently it is 2 years, but beginning for fiscal year 2009--it
will not be calculated for the first time until fiscal year
2012 as a 3-year period.
The Chairman. Are you telling me in plain English that I
can understand that if a school can get a student who is
nearing default to put off their default status for 2 years or
3 years, then when that student defaults, it does not show up
on the student's records?
Ms. Tighe. That is correct.
The Chairman. I understand that now.
And you say this is being done.
Ms. Tighe. That is being done.
Now, where we see problems that have led to criminal
investigations is where essentially the schools--we had a
school, one involving a school called TCI where the school
repaid the students' accounts, students who withdrew from
school. The school went in, repaid the school accounts to avoid
having them considered in the cohort default numbers. Then they
turned around and charged the students for the tuition costs.
They gave the students a very short time period to pay the
school back and subsequently referred them to collection
agencies. All of that effort to avoid the cohort default rate.
We have also seen schools that have literally forged the
students' names to deferment notices and sent them in on behalf
of the students without the students' knowledge.
The Chairman. In my time, let me ask you to elaborate a bit
on your findings regarding refund violations. Now, we know that
schools have to refund depending on how long the student is
there at a certain prorated amount.
Can you explain the requirements Congress has put into
place to try and ensure title IV is returned to the Federal
Government when a student withdraws? And what specific
practices have your audits shown that violate these
requirements?
Ms. Tighe. There are a number of rules related to the
return of title IV funds. There is a calculation that is
predetermined. There are time periods the schools have to do it
by, and that is audited annually by outside auditors.
However, what we have seen in the course of looking at
different schools is essentially either miscalculation errors--
I mean, that is not a really significant problem. They are
trying to do it. They are just not doing it correctly. We have
also seen them fail to pay it timely. I think it is a 45-day
limit. We have seen schools that had paid it longer than the 45
days.
Where we see the really big problems is when they just do
not return the money at all, and we have had a number of
criminal cases based on that problem.
The Chairman. Last, let me just ask you about the
accrediting agencies' definition of a credit hour. You
mentioned that and you found that none of the accreditors you
looked at actually define a credit hour. Yet, my understanding
is that many for-profit schools set tuition based on a credit
hour charge. Do you have an understanding of how credit hours
might compare from one for-profit school to another?
Ms. Tighe. Well, I think the problem--because there is no
definition of a credit hour, it would be difficult to compare
school to school. I think in the traditional 4-year institution
where it may be the former Carnegie method which is 1 hour of
seat time and 2 hours of homework, you could compare some
schools. Other schools, even though they use a definition of
credit hour or they may say credit hour, it is not really
defined in any meaningful sense. That is what our audit work in
looking at the accrediting agencies ended up--we looked at them
to see whether they were requiring that and their failure to do
so we believe is a problem.
The Chairman. Well, if you cannot define a credit hour, how
can you set tuition based upon a credit hour? That is the
question I have.
Ms. Tighe. Well, I think it is a problem. What we have
found is that credit hours can, in fact, be inflated.
The Chairman. Inflated.
Ms. Tighe. Inflated. In other words, the tuition may be
higher than is needed for what the student is getting out of
it. Then if they are taking our student loans, those loans may
be higher than is needed for the value the student is getting
out of it.
The Chairman. I see. My time has expired. Thank you, Ms.
Tighe.
Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman.
It reminds me. I went to a GED graduation at Casper
College. They put out a tremendous number of GEDs at Casper
College, and they told me that our requirement for seat time on
hours was too long, that that discourages a lot of kids from
getting their GED. This credit-hour discussion I think should
be pursued and we should find out more about it.
Ms. Tighe, you mentioned that 70 percent of your
investigations are in the for-profit area. Are those all
criminal investigations?
Ms. Tighe. Yes, they are criminal investigations.
Senator Enzi. What percentage of the for-profits make up
that 70 percent of your investigation work? Is it all of them?
Ms. Tighe. Well, yes, all of them are for-profit. Of the 70
percent of the institutional investigations we have, 70 percent
are for-profit.
Senator Enzi. Yes, I understand that. But of all the for-
profits, are they all in that category of being investigated or
is it 10 percent, 20 percent, 50 percent?
Ms. Tighe. Well, they are all in that category, and what we
say is they are proprietary school-related because what we get
sometimes are bad actors associated with the school, and in
fact, the proprietary school can be a victim. They may have a
bad actor within the school taking advantage, and maybe their
problem is that they do not have the controls in place to have
caught it. Or maybe they do. We do actually get referrals from
some proprietary schools.
Senator Enzi. So you are investigating all proprietary
schools then.
Ms. Tighe. We are not investigating all the schools that
exist. We just have--of our caseload related to post-secondary
institutions, 70 percent are proprietary schools. We have other
investigations involving nonproprietary schools. That is 30
percent of the other part of our caseload. We also have other
cases that do not involve schools of higher education. I am
sorry.
Senator Enzi. I am more confused than when I started.
Ms. Tighe. I am probably not----
Senator Enzi. So 70 percent of all of the schools are for-
profit schools, so that you are investigating 70 percent of
your caseload. It is about an equal number of people that are
violating things in both sectors.
Ms. Tighe. Taken apart from our caseload, I do not know how
many, just in general, schools are proprietary and whether we
match up evenly in terms of our numbers. We do know we have a
large number of proprietary schools in our----
Senator Enzi. You have just given me the impression,
though, that you are investigating 100 percent of the for-
profits.
Ms. Tighe. No, if I gave that impression, I am sorry.
Senator Enzi. What I was trying to get at is what
percentage of them are you investigating.
Ms. Tighe. I don't know if we have an answer to that. No,
we do not know the answer to that. I am sorry for confusing
you.
Senator Enzi. Do you have widespread evidence of abuses
throughout the for-profit sector?
Ms. Tighe. Well, yes. I have given you a flavor of the
kinds of cases we see. We certainly get more--our work comes in
through referrals, and so we see--the reason our cases
involving proprietary schools--we have more of them because we
tend to get more referrals on those cases. Now, whether they
cross the gamut of all the different kinds of proprietary
schools there, I do not know if we can say. I do not think we
have studied it quite that way.
Senator Enzi. Well, thank you.
Congress did take a number of steps to address for-profits
in the Higher Education Opportunity Act, and we are now working
on the reauthorization of the Elementary and Secondary
Education Act. Do you have any recommendations for policy
changes that we should make particularly with regard to the
high school diplomas?
Ms. Tighe. Well, I think the high school diplomas--I know
that the recent proposed rules, at least as something to
tighten up the problem of the diploma mills, at least requires
school procedures for checking the validity of those diplomas.
One thing we have recommended in the context of the ESEA
reauthorization is a recommendation for reporting fraud issues
to the Inspector General's office. There is something in the
Higher Education Act. Something similar in ESEA we think would
make sense, and we carry it down to the level where we think we
need to be in terms of having schools know they have somebody
they can come to if they see problems.
Senator Enzi. Thank you. My time is about to expire.
The Chairman. Thank you, Senator Enzi.
In order, I have Senator Franken, Senator Alexander, and
then Senator Brown, Senator Merkley, Senator Bennet, and
Senator Hagan.
Senator Franken.
Statement of Senator Franken
Senator Franken. Thank you, Mr. Chairman, and thank you for
your report and thank you for this very, very important
hearing.
It just is shocking to me how much of you give Pell Grants.
You want to give Pell Grants to kids. My wife's dad died young
and there were five kids in the family and they used Pell
Grants and they went to public or not-for-profit schools.
Seventy percent of the schools you are investigating are
proprietary. What percentage of schools are proprietary as
opposed to not proprietary? In other words, how many
proprietary schools are there versus not-for-profit?
Ms. Tighe. In total number? Off the top of my head, I do
not know the answer to that.
Senator Franken. Are there more proprietary schools----
Ms. Tighe. Schools than there are----
Senator Franken. I would very much doubt that.
Ms. Tighe. There are more public and nonprofits, I
understand, than there are numbers of proprietary--
Senator Franken. And I would think by quite a factor,
right? These proprietary schools are much, much, much, much
more likely to be investigated.
Ms. Tighe. Yes, they are, at least looking at our workload,
yes.
Senator Franken. Now, you in your testimony just now said--
you used words like ``fictitious enrollment,'' ``forging
names,'' ``credit hours inflated.'' This is all fraud.
Ms. Tighe. Yes, it is. I think one of the areas that we are
particularly seeing problems in is the online environment. A
lot of the schemes we see where you are really able to get by
with fictitious enrollment is when you are enrolling students
for online courses. We had one case where it combined diploma
mill and the fictitious enrollment and student aid
applications, which is somebody ran a student to get a high
school diploma. Students came in for 2 weeks of self-study, got
a diploma that obviously meant nothing, a high school diploma,
and then they used the application information from the
students to apply to online schools on their behalf and apply
for student aid. You know, I agree with you that it is
shocking.
Senator Franken. My staff gave me this. Less than 10
percent of students attend for-profit schools, and yet 70
percent of the fraud cases are for-profit schools. There is a
real problem here.
Now, I agree with the chairman. I agree with the Ranking
Member. These schools serve a purpose, and some of them do a
good job. But there is obviously an incredible number of bad
actors. I would like to shut them down.
We went through this to get the health care bill done. We
increased the amount of Pell Grants. Well, if they are going to
use fraud--what are the salaries? What is the salary of the top
for-profit school CEO?
Ms. Tighe. I am not sure.
Senator Franken. I think it is somewhere in the range of
like what--$40 million? It is ridiculous.
What is the salary of the President of Harvard? It is like
a factor of 100 or something.
What is the graduation rate at Harvard? What is the
graduation rate of a typical one of these schools?
What kind of laws do we need to shut down the bad actors?
Again, I am saying that a lot of these schools or a number
of these schools are absolutely necessary. They do a great job,
but the bad actors who are doing fictitious enrollment, forging
names, inflating credit hours, should be shut down. What kind
of laws do we need to pass to shut them down? You are
prosecuting them, I guess.
Ms. Tighe. Yes, and we are able to get them. I think some
of the changes--actually the proposed rule that just came out
will help some of the practices we have seen. For example, they
have expanded the definition of misrepresentation. I think that
is a good thing for students because if the schools are
required to accurately market themselves, the students will get
good information. I think to the extent that they have to
publish placement rates, I think that is a good thing for
students too because I think accurate information can allow
students to make good judgments. I think we will certainly
continue to make this a priority in our workload and make sure
we get the bad guys.
I do think also another thing to mention is the incentive
compensation. We have never been able to really successfully
prosecute a case, even though we got a lot of complaints in the
area of incentive compensation because of the safe harbor
rules.
Senator Franken. Now, incentive compensation is like----
Ms. Tighe. It is when recruiters get paid based on
enrollment.
It is very easy under the safe harbors in order to show
that there is some factor other than enrollment that allows the
recruiters to get paid and get salary increases. I think that
it is an area that we have received a number of complaints, and
never been able to really do anything about. A lot of qui tam
cases have been filed under the False Claims Act. They have
never been really successfully pursued.
Senator Franken. Well, my time is done. We talk about
waste, fraud, and abuse around here, and I am thinking we are
hearing it today.
The Chairman. Thank you, Senator Franken.
Senator Alexander.
Statement of Senator Alexander
Senator Alexander. Thanks, Mr. Chairman, and thank you for
having the hearings. I think the hearings are important and I
think we should be doing it. Oversight is a big part of our
responsibility.
Mr. Chairman, I remember when I was Education Secretary in
the early 1990s, we were just completing what was a very
bipartisan effort by this committee. Well, maybe it was another
committee, Senator Nunn's committee, Permanent Investigations
Committee, at the time. It did a lot of good and made a big
difference. The bill passed in 1992 to change things, and I
spent my time and then Dick Reilly after me. This could be very
productive. I would be glad to work with you on this in the
same way we are working on the Elementary and Secondary
Education Act, if you would like.
Right after World War II, 1944, the GI Bill gave veterans a
voucher that they could spend anywhere to complete their
education. Some went to high school. Some went to Catholic
school. Some went to Jewish schools. Some went to Europe. Some
went to the University of Tennessee. Some went to Iowa State.
From that has come the current system of grants and loans that
allow American college students to choose among about 6,000
autonomous institutions which most people think is the best
system of higher education in the world.
I believe that keeping that choice, keeping that autonomy,
and keeping the generous grants and loans are an essential part
of it. I think that our 6,000 institutions are overregulated by
grants and loans, and they usually are overregulated by
concerns like this because we have bad actors who are stealing
money and performing fraud. So we rush in with a new set of
rules and pile up loans that stack up--I mean regulations that
stack up this high.
My goal is that we find ways in this hearing to get rid of
the bad actors, whether in for-profit or nonprofit, but not
diminish the quality and the choices that come from
overregulation.
I appreciate Secretary Duncan's effort on this. I thought
his first efforts on dealing with it would have been like
shooting quail with a cannon. You would miss the target and
probably hit some innocent people, and I think he has come up
with some pretty good suggestions.
We have 6,000, as I said, autonomous institutions in the
country. 3,000 are for-profit; 3,000 are not. About 10 percent
of the students go to for-profit institutions, and the
graduation rates are much higher in the nonprofit institutions,
the 6-year graduation rates, but in the 2-year programs, the
for-profit sector has about a 60 percent graduation rate. The
community colleges, the to-profit public universities or public
universities are about a third of that, about 22 percent.
I am anxious to get into this, and I do not want the bad
actors to be discrediting a good program, which is what we
have. I welcome the Inspector General's work.
Is the 70 percent--you said you are investigating
nonprofits--for-profits are 70 percent of your investigation.
Since they are only a small part of the students, 10 percent,
why are you not investigating more of the nonprofits? Because
it seems to me that there is likely to be abuse there, or if
there is not, we need to know there is not.
Ms. Tighe. No, I understand that. We investigate based on
complaints, by and large, that come to our hotline or come to
us in some other ways through referral. Better or for worse,
most of the complaints have come in the proprietary sector.
Now, it may be--and one can speculate as to why that is--that
students are paying large tuitions and want value for their
money and get upset. That is where most of the complaints have
come in. We do not traditionally sort of reach out to schools
without a reason to do so.
Senator Alexander. The Department of Education is about to
become the sixth largest bank in the country based upon volume
of student loans. It is going to be making $100 billion of
loans a year because of changes in the law that I thought were
ill-advised, but it is the law now. What is that going to do to
the ability of the Department of Education to check on the
integrity of those loans? Because formerly you had lots of
other entities around the country who were responsible for
that. Are you concerned that the Department of Education may
not be prepared to do that, making whatever problem exists
worse?
Ms. Tighe. Well, I think it is something we are keeping a
close eye on. You are right that the Department has a
significant responsibility now. The guarantee agencies were a
source of information for us and some level of oversight in
some ways. That responsibility now rests with the Department.
We are doing some audit work related to just the mechanics of
the transition to the direct loan program, looking at contract
issues and the systems capacity issues.
I think our one big area, if I were to label the biggest
area of concern right now, is on whether they are going to be
able to provide sufficient oversight over the contractors, the
four new service providers. FSA has not had a good history of
contract oversight, and I think that it is an area we are
watching carefully.
Senator Alexander. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Alexander.
Senator Brown.
Statement of Senator Brown
Senator Brown. Thank you, Mr. Chairman. Senator Enzi and
Chairman Harkin, thank you for the really very important
hearing.
I think that examining so many of these proprietary
schools, especially those that are growing so rapidly, is the
right thing to do. As Senator Franken's question suggests, the
rapid growth of these for-profit institutions, compared to
other institutions, is a particularly great concern and
particularly sort of a risky proposition for taxpayers and for
those students.
I would point out--and I know that others have done this--
that the good proprietary schools that we all have in our
States are so important. In my State, there is a 40-year-old
institution called the Ohio Technical College that trained
diesel mechanics. In its first year, it was called the Ohio
Diesel Technical Institute at that time--and good-paying jobs
and all of them found jobs when they graduated. DeVry Institute
in Ohio is a different kind of institution but generally many
of the same good graduation rates and good training of students
and doing things generally the right way.
I want to go to comments in your written testimony, and I
want to sort of explore where you are going with these when you
see the especially rapid growth in some of these schools, again
contrasted to other either for-profits or community colleges or
whatever.
You wrote,
The volume of Federal student aid dollars going to
the publicly traded sector has seen tremendous growth
in recent years. Over the years we have come to
identify a relationship between rapid growth and
failure to maintain administrative capability.
Talk that through. Administrative capability in terms, I
assume, of accountability, in terms of maintaining coursework,
all the kinds of things that that rapid growth would suggest in
terms of administrative ability to manage it.
[The prepared statement of Senator Brown follows:]
Prepared Statement of Senator Brown
Today's hearing comes at a critical time.
The President has challenged the Nation to reach the goal
of once again having the highest proportion of college
graduates in the world by 2020.
With the American Recovery and Reinvestment Act and Health
and Education Reconciliation Act, this Congress has made
unprecedented investments in education and job training to
revitalize our economy and make the 2020 goal a reality.
Americans have heeded the call. During this Great
recession, they have gone back to school in record numbers.
While we need all hands on deck to create the educational
capacity to meet our 2020 goal, we cannot lose sight of our
obligation to protect students.
This is not about painting one sector of the higher
education community with a broad brush. Career colleges have
played an important role in expanding access to post-secondary
education and training.
We have plenty of examples in Ohio.
Ohio Technical College, family-owned and operated for over
40 years, has provided high quality education in diesel engine
repair in the Cleveland community. DeVry University has been a
real partner to our public schools, offering dual enrollment
opportunities to students in Columbus city schools. Graduates
from career colleges across the State have offered testimonials
as to how their career college education has helped them build
better lives for themselves and their families.
For institutions whose primary mission is education,
whether they are public, non-profit or for-profit, it is in
their interest to safeguard the integrity of higher education
and student financial aid programs.
We have received some warning signs.
Last year, the General Accountability Office reported that
some institutions were falsifying ability to benefit tests and
enrolling ineligible students. The Department of Education's
Inspector General has pointed to concerns about the
relationship between rapid growth and the failure to maintain
administrative capability. Since 2004-2005, Federal student aid
funding to the proprietary sector has grown by more than 109
percent--more than twice the rate for the other sectors.
There have been a series of reports in the national media
about the for-profit higher education sector.
In April, Bloomberg reported on recruiting practices of
some for-profit institutions at homeless shelters in Cleveland.
In a push to boost their enrollment, some institutions marketed
to our most vulnerable citizens. In the article one recruiter
was quoted saying that borrowing by the homeless to pay tuition
``is no different from a middle-class student who has to take
out a loan.''
Students in the for-profit sector borrow more than other
students. They also default on their loans at much higher
rates. Although students in the for-profit sector are only 9
percent of the overall student population, they account for 44
percent of the student loan defaults.
Unfortunately, students at for-profit institutions often
borrow private loans in addition to Federal student loans. Some
publicly traded companies have reported that they will write-
off more than 50 percent of the private loans made to their
students.
Students' inability to repay their student loan seems to
have no negative impact on the bottom line of these higher
education companies. Yet, for the student, the debt cannot even
be discharged in bankruptcy. Once again, Wall Street profits,
and Main Street pays the debt.
Our legislative and regulatory tools must be up to the task
of protecting students and taxpayers in a rapidly growing and
changing higher education environment. We do not want to stifle
innovation or create barriers to access. But we cannot create a
system where the incentives put enrollment growth and expansion
of student aid revenues ahead of the educational quality and
outcomes for students.
I would like to applaud the Department of Education's
efforts to update its regulations regarding program integrity.
But this committee has an important role to play too. Thank you
Chairman Harkin for your leadership in launching this series of
hearings.
I would like to thank the witnesses for joining us today. I
am eager to hear your views about how we can strengthen our
oversight in this area.
Ms. Tighe. Yes. No, that is exactly right. A good example
in our fairly recent work was a school called TUI, which is a
very rapid-growth school. We went in and did essentially a
review to look at how they were managing the title IV fund
process in general. So we look at different aspects of it. The
school, unfortunately was a--forget the issue of returning the
title fund. They had not even gotten to the point of figuring
out if students were still enrolled or not and were dispensing
title IV money to students that were not even there. They were
not really administrative-capable. They really were not doing
anything very well. It is really sort of across-the-board
issues that we find.
Senator Brown. Were some of these students accumulating--
these were typically grants. These were loans. Were students
accumulating debt and not even still enrolled in the school?
Ms. Tighe. Well, they were kids who had withdrawn from
school I think in part, and the school had not figured out that
they were not there. Or, in fact, I think there were some who
had not enrolled to begin with, that had maybe quit before
there was any coursework being done, and still they were
getting money.
Senator Brown. Were most of these grants or loans?
Ms. Tighe. I think they were loans. I can check. Both
grants and loans.
Senator Brown. So what happens? Have you been able to trace
what happens?
I go back to this. My wife was first in her family to go to
college, graduated from Kent State University in Ohio, and had
debt of less than $2,000. That was in the late 1970s. It was a
different era and Government played a more significant role in
many ways. She had no family money. It was all grants and
loans, mostly grants and scholarships and all that, but more
typical in those days of not accumulating that kind of debt.
To me the most tragic part--I do not know the most tragic
part, whether it is all the dollars taxpayers put into this
without the return that the GI Bill--for instance, one of
America's great programs--had, or whether it is that these kids
end up no longer in school without a diploma and have huge
debt.
Have you examined the students at TUI or other places that
have either not enrolled or not enrolled very long that have
left that are still accumulating debt and what happens to them?
Are you able to do that?
Ms. Tighe. We have not looked--what we recommend when we
find that situation is that--well, we recommend the loans be
returned. To the extent they have gotten money and they are not
in school, they should not be using the money. So they return
the loans. That is, in the end, better for them. They are not
going to be in the position of having to pay them back.
Senator Brown. Are there examples where these students have
left, they are continuing to--what happens with their debt? Is
the school paying it back? Are they trying to pay it back?
Ms. Tighe. If the student withdraws, if a student has a
student loan and he withdraws and he is not in school any
longer and has no deferment or forbearance, they are paying the
loans back if they are no longer in school and do not have a
reason like being in school or unemployment or whatever that
would give them a deferment. So they are going to have to be
paying the loans back.
TUI's problem was it just was not managing the title IV
funds very well. I think we also recommended they pay the money
back. They just were not doing what they needed to.
Senator Brown. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Brown.
Senator Merkley.
Statement of Senator Merkley
Senator Merkley. Thank you very much, Mr. Chair, and thank
you for your testimony.
I wanted to start with your written testimony, and you have
made reference to this earlier. It notes that HEA has a ban on
incentive compensation to recruiters, but due to safe harbors
included in the current regulations, schools are shielded from
administrative, civil, and criminal liability. Proprietary
institutions are making full use of the safe harbors to provide
financial incentives to drive enrollment.
I understand that when in 2002 the safe harbor was extended
in this fashion, some folks warned that this would lead to
abuses. You are finding those abuses. Can you describe an
example of how that abuse manifests itself in the field?
Ms. Tighe. Well, yes. I think what you see are some of the
things I think that have been in the news of aggressive
recruiting because that is what the incentive compensation
rules were intended to--it is the homeless. I do not think we
have personally gone out and seen schools recruiting the
homeless, but that has certainly been in the news.
We do see aggressive recruiting, and when you are paid
based on the number of students you bring in, then it leads to,
I think, all sorts of abuses like that. You want to have
students coming to schools that want to be there, that they
know what they are getting in terms of an education, that they
understand what the cost is going to be and they understand
what they are going to get when they get out of it. To the
extent that none of that information is being provided to
students, which is certainly something we have seen, I think
you are seeing a problem.
Senator Merkley. Thank you.
Let me turn next to the distance learning issues. Also in
your written testimony, you note that institutions must be able
to document attendance in at least one class during a payment
period. Well, that seems like a pretty low standard: One class.
Then you go on to note:
``The point at which a student progresses from on-
line registration to actual on-line academic engagement
or class attendance is not defined by institutions and
is not defined by Federal statute or regulations.''
There is a standard for which there is no definition and
therefore you are basically unable to enforce it, even though
it is such a tiny standard, one attendance.
Ms. Tighe. Yes. It leads into some gray areas. We had a
fairly recent audit involving Capella University where we went
in and looked. They were essentially counting--it was an online
environment, distance education environment, where they were
essentially counting students' questions about the course as
academic engagement. We disagree with that.
Senator Merkley. Inquiring about the course.
Ms. Tighe. Yes.
Senator Merkley. Essentially we have aggressive recruiting,
which may be any warm body, to get their name signed up. We
will get you the aid, and so there is kind of no action. And
then whether they ever attend or not is something hard to
enforce as well.
OK, let me go on. As you look at different States, do you
find that the rules that some States have, the laws that they
have passed, result in lower levels of abuse, and if so, what
insights are there for us at a Federal level?
Ms. Tighe. Yes, I think States have passed laws. I do not
know--we have not really done audit work to assess the State
laws in this area. I think to the extent they have passed laws,
it would be instructive to look at it, but we have not done
work in that area.
Senator Merkley. Mr. Chair, that is something that I think
would be very helpful. Oregon requires all schools that receive
title IV money to enroll students only term by term, and that
has resulted in a significant drop in abuse. I think strategies
like that, that different States have employed, can be the
State laboratories. I think it would be very helpful to bring
those to bear on this discussion.
My time is wrapping up here, but when I think about the
fact that you are pursuing these investigations and they are
criminal investigations, how is it that some schools can be so
comfortable with so many types of abuse? Do you have
insufficient investigators? Is the safe harbor just too broad?
Why are schools not doing what they should be doing, given that
they are subject to potential investigations?
Ms. Tighe. Well, you would like to think that our work
should provide some deterrence value. That is one of the points
of doing criminal investigations. Yes, you put the bad guys
away, but it should provide a deterrence to other people. We
hope it does, but we do not have anywhere near the resources to
cover every school or even every proprietary institution. So we
do what we can.
We are happy when the U.S. Attorney's Office publicizes the
results of cases because I think that is a shot across the bow
of other schools. We have to sort of rely on that mechanism, I
think, to fully cover it because I do not think we will ever
have the resources to do every case that comes our way.
Senator Merkley. Thank you.
The Chairman. Thank you, Senator Merkley.
Senator Bennet.
Statement of Senator Bennet
Senator Bennet. Thank you, Mr. Chairman. Thank you so much
for holding this important hearing.
I believe the abiding concern of everybody on this
committee and every committee of this Congress ought to be that
we are at risk of being the first generation of Americans to
leave less opportunity, not more, to our kids and our
grandkids. I think that increasing affordable access to
college, especially for low-income students, is one of the most
critical investments we can make in our future, and we need to
do it.
Between 1992 and 2002, we created 6 million new jobs that
require a college degree and lost a half million jobs for
people that have no high school diploma. Twenty-two of the
thirty fastest-growing occupations will require a college
degree between now and 2016, and just about 10 or 15 years ago,
we led the world in the production of college graduates. Today
we are about 15th in the world in the production of college
graduates.
For-profit universities can play a constructive role in
increasing access but we need to make sure that we are
delivering on our promises to our students.
Ms. Tighe, I appreciate your testimony very much and the
work that you have been doing.
I have looked at the proposed rules as well and think they
are going to help with many of the concerns that I have heard
in my State, while not limiting access for students. But this
is not just about access. It is also about the quality of the
education people are getting.
In your testimony, you described some of the problems you
have identified in the accreditation process. I wonder what
else we can do to ensure that accreditation is something that
can drive quality or reassure us that students are actually
receiving a quality education?
One issue I am aware of is when a proprietary school takes
over a school with a regional accreditation, that accreditation
applies to the new school. Can you talk about accreditation a
little bit?
Ms. Tighe. Well, yes. It is, I think, a very important
process since really the Department of Education itself cannot
get into quality of education. It is really up to the
accrediting agencies to do their jobs well because they are the
people who have to determine that in some fashion.
I think from our audit work and inspection work, it is
clear that some accrediting agencies do better jobs than
others.
Senator Bennet. Is there a means of giving that feedback
back to the accrediting----
Ms. Tighe. Yes, we have. In our latest round of reviews, we
looked at three of the seven regional accrediting agencies, and
they were the three who had the most title IV funding. That was
how we picked them. For each of those, we actually gave them a
report back with our recommendations for improvement or
suggestions, I guess, because we do not know how much authority
we have to make them listen to anything we have to say. But we
did give them suggestions for improvement.
I will say we did another round of this in 2002. Actually
one or two of those accrediting agencies we looked at back then
and made some suggestions. They actually took a number of our
suggestions and did make some improvements.
We found additional issues when we went back just last
fall, but I think that we saw them take some steps in the right
direction.
Senator Bennet. I had the experience working for the Denver
public schools. The first round of online environment that
charters and others provided turned out to be a disaster for
everybody. The second round I think has been very effective
because we were able to put some things in place to make sure
that people were really getting quality. I think going forward
both for K-12 and higher ed, online is going to be a very
important part of the delivery system, a hugely important part.
Can you talk a little bit about how you think about the
regulation of that environment in a way that does not stifle
the very important online part of this universe?
Ms. Tighe. Yes. I would not want to stifle it either. I
think it is very useful.
I do think one of the big areas is one we talked about
earlier, which is how can you show academic engagement. There
are clearly some proprietary schools who do a much better job,
for their online units or online schools, of tracking that
students are actually academically engaged. They post homework.
They take tests online. They do all the things that you do when
you are actually going to school. Some do not do such a good
job of that. Our efforts have been to sort of make
recommendations for improvements in those areas.
Senator Bennet. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Bennet.
Senator Hagan.
Statement of Senator Hagan
Senator Hagan. Thank you, Mr. Chairman, and thank you for
holding this hearing today and for all of the witnesses that
are here to discuss this important topic.
An investment in higher education is an investment in our
future, and as the for-profit education industry continues to
rapidly grow and as the Federal Government continues to invest
Federal dollars through title IV and the Department of Defense
and VA, it is critical that we take a look at the practices of
these institutions.
One of the things that I am concerned about--and I am not
sure if you have the answer to this or not--is how much money
is in default of these loans right now? Do we actually age
these receivables and how much do we actually collect? Do you
have any of that information?
Ms. Tighe. Well, I think the default rate is an interesting
question. I think that the Department needs to do a better job
of figuring that out. Right now, the most publicized default
rate is the cohort default rate we talked about earlier, which
is a very limited perspective on defaults because all it does
is take a base year of, say, 2003 and then calculate the next
year. When the amendments go into effect fully, it will
calculate the next 2 years.
In our audit work a few years ago, we actually recommended
that they do a lifetime cohort default rate, which is, say, for
a cohort base year of 2003, you go back each year and calculate
all the defaults that resulted from people who went into
repayment in that year. And I think you get a better view.
As part of the financial statements and a part of the
credit reform process, the Department has to estimate defaults
and they have to do some long-term estimating in order to
calculate subsidy costs.
Our financial statement auditor has made, I think, some
very good recommendations to the Department about how to factor
in better information, since we are in a recession--
recessionary information. You know, you do not just look at
employment rate. Look at availability of credit. Look at the
housing market. Look at some other things to factor in. Get a
better picture of what default rates are.
Senator Hagan. I am not really talking about the future
default rates. I am talking about right now.
Ms. Tighe. Right now? Yes. I do not know if I have that
figure.
Senator Hagan. If you could get that information for us.
Ms. Tighe. Absolutely.
Senator Hagan. OK, thank you.
That is all, Mr. Chairman. Thank you.
The Chairman. Thank you, Senator Hagan.
I am told that neither Senator Murray or Senator Sanders
wish to ask any questions at this time. Ms. Tighe, thank you
very much for being here, for your excellent testimony, and
thank you for the work that the Inspector General's Office is
doing.
Ms. Tighe. Thank you very much, Mr. Chairman, Ranking
Member Enzi.
The Chairman. Now we will call our second panel.
On the second panel we have Yasmine Issa, who completed a
certificate program in ultrasound technology at Sanford-Brown
Institute in White Plains, NY. I held up the Good Housekeeping
magazine earlier. This is how we found Yasmine Issa because
there is an article in the June 2010 Good Housekeeping magazine
about Ms. Issa and about the for-profit schools.
After Yasmine, we will hear from Margaret Reiter, who
worked for 20 years as a consumer prosecutor with the
California Attorney General's Consumer Law Section. Ms. Reiter
served as the supervising California Deputy Attorney General
during the agency's suit against Corinthian Colleges,
Incorporated.
The next witness is Sharon Thomas Parrott, Senior Vice
President, Government and Regulatory Affairs and Chief
Compliance Officer at DeVry, Incorporated. Ms. Parrott came to
DeVry in 1982 and previously worked at the U.S. Department of
Education in student financial aid and as a training
specialist.
Last we have Mr. Steve Eisman, Senior Portfolio Manager,
FrontPoint Financial Services Funds in New York City. Mr.
Eisman was featured in Michael Lewis' best seller, The Big
Short, which I read, for his foresight into problems in the
subprime mortgage industry. He has extensive experience
analyzing companies over the last 2 decades.
Again, we welcome you all here. As I said earlier, your
statements will be made a part of the record in their entirety.
We will just go from left to right. If you could sum up in 5,
6, 7, 8 minutes--I will not be hard and fast on 5 minutes, but
if you can sum up your testimonies, we would certainly
appreciate it.
Ms. Issa, we will start with you. I briefly introduced you
as the featured person in this Good Housekeeping magazine
article. I understand you are from Yonkers, NY, the mother of
twin daughters, and your story is a very compelling one that I
read about in the magazine. Welcome to the committee and please
tell us your story.
STATEMENT OF YASMINE ISSA, FORMER SANFORD-BROWN INSTITUTE
STUDENT, YONKERS, NY
Ms. Issa. Thank you for inviting me today. My name is
Yasmine Issa.
I thought that going to school to learn a marketable skill
would allow me to provide for my family. Instead, it has left
me more than $20,000 in debt and unable to be hired in the
field I trained for.
In 2005, I was 24 years old and recently divorced with 3-
year-old twin girls. I needed a good job in order to support
myself and the twins, but I had been a stay-at-home mom up to
the point and I did not have a college degree or any
professional training. My aunt works in the radiology
department at a hospital and told me that was a promising and
rewarding path. So I started looking online for ultrasound
schools.
I found a Sanford-Brown Institute in White Plains near my
home in Yonkers, NY, and went to the campus and spoke with a
school representative. The first day I went to visit, I was
told to take an entrance exam, which I passed. They said I
needed at least 32 college credits to enter the program and I
already had 59 credits from when I attended Manhattanville
College for 2 years. That was not a problem.
The program was 12 months of accelerated classes plus a 6-
month internship in a doctor's office and/or hospital. The
recruiters explained that I could sit for the certification
exam by either having a bachelor's degree or working full-time
for 1 year as an ultrasound sonographer. They made it sound so
easy, and they assured me I would have no problem finding a job
to meet this requirement as soon as I completed the program.
They said that career services at the school would not stop
until I had a position. Their job placement services sounded
really helpful, so it seemed like a sure thing.
The recruiters kept calling me and pressuring me to sign up
for the program. They said that the seats were filling fast and
the registration deadline was just days away. With a family to
take care of, I did not have time to waste being unemployed and
I needed skills. I decided to enroll and I was very excited
about my new career.
The program cost me a little over $32,000. I paid for a lot
of the costs with savings and child support, but I also had to
take out $15,000 in Federal student loans through Sallie Mae.
Using some of the child support money that I received for my
daughters was the only way I could pay for school, but I
believed going back to school and getting trained would yield a
good return on my investment.
After a lot of hard work, I completed the program in June
2008. I began looking for a job aggressively, applying for
every ultrasound job in the tri-state area. I posted my resume
on Monster.com and other job-hunting Web sites. In the
beginning, I would call to check in with Michelle Rawlins, the
lady in charge of job placement at Sanford-Brown. I told her
where I applied and asked her if there was anything else I
should do. She told me to keep looking and check in with her
every week. She said she would fax my resume to any job
openings she was aware of. She sent one or two e-mails to my
entire class with job openings, and I applied for those as
well. Overall, career services did not end up being very
helpful at all.
After a few months, I was getting the same answers
everywhere I went. The hospitals and doctors' offices all
wanted one of two requirements: either for the ultrasound tech
to be certified by the American Registry for Diagnostic Medical
Sonographers or to have 2 to 5 years of experience working as
an ultrasound tech. I could not sit for the registry's exam
until I had experience, and I could not get real experience
without being certified.
The more I did not use my ultrasound skills, the more I was
losing the skills. I asked Michelle Rawlins if I could get
another internship in a hospital to keep up my skills and
better my chances of being hired there. She transferred me to
the dean of the school who sounded sympathetic but never
followed up or returned my calls. I tried in all kinds of ways
to get help from Sanford-Brown, but they avoided me and had
nothing to offer.
When I visited a hospital in New Jersey, the supervising
ultrasound tech informed me that if I had attended an
accredited school, I would have been able to sit for the
registry exam immediately after graduating. This was how I
found out that Sanford-Brown Institute's ultrasound program was
not accredited. The school as a whole is accredited but their
ultrasound program is not. I could not believe it.
I looked on the ARDMS Web site and found that Bergen
Community College in New Jersey offers an accredited ultrasound
program for about half what I paid Sanford-Brown. I called to
see if I could take a few more ultrasound courses through
Bergen so I could qualify to sit for the registry exam. I was
told no because my credits would not transfer.
I never felt so alone in my life. Five months after
finishing the program, I had no prospects for employment but
still had a family to take care of, rent, bills, and now the
outstanding student loans. I was depressed. I felt like I
wasted my time and money on a phony school and fell for their
false promises.
I went online to see if there were any complaints about
Sanford-Brown and found several from students in New York and
across the United States. Their stories were, if not exactly
the same, very similar to mine. They all felt like victims of a
scam, just like I did.
It has now been 2 years since I completed the program and
the interest on my unpaid loans is growing. I currently owe a
little over $21,000, including about $4,000 from my 2 years of
college. The closest I have come to a real ultrasound job was
the 2 months when I worked as a temp for a private doctor while
his ultrasound tech was on vacation. It is hard to find any
work without a marketable skill, but going to Sanford-Brown to
get one has left my family and me worse off than if I had never
gone back to school.
Thank you.
The Chairman. Ms. Issa, thank you very much for being here
and for telling us your story. I think this is what we have got
to hear, what is happening to young people like you.
Now we will turn to Margaret Reiter. Ms. Reiter, again,
please proceed.
STATEMENT OF MARGARET REITER, FORMER SUPERVISING DEPUTY
ATTORNEY GENERAL, OFFICE OF THE ATTORNEY GENERAL, CALIFORNIA
DEPARTMENT OF JUSTICE, SAN FRANCISCO, CA
Ms. Reiter. Thank you, Chairman Harkin, Ranking Member
Enzi, and distinguished members of the committee.
As the Chairman mentioned, I worked as a prosecutor in the
Consumer Law Section at the California Attorney General's
Office for 20 years. Before that, I was an investigator in
consumer matters for 4 years, and I recently served as the
primary negotiator in the department's negotiated rulemaking on
program integrity as the negotiator for consumer interests.
Among the many types of consumer fraud cases I have
prosecuted or supervised others in prosecuting, a number of
them have been against proprietary schools. Based on my
knowledge of investigations and cases against proprietary
schools over the years, including the ones I have been involved
in and others that I am aware of, and based on my experience in
investigating different types of consumer fraud, in my opinion
the consumer abuses in the proprietary school industry are
among the most persistent, egregious, and widespread of any I
have seen. The schools now are larger, richer, more likely to
be publicly traded, and the students likely to wind up with
much larger debts than when I first prosecuted proprietary
schools in the late 1980s, but the abuses are strikingly
similar.
I just want to give a few highlights from my written
testimony about the case that we settled in 2007 against one of
the largest publicly traded, for-profit schools. I think the
case is representative of some of the problems in the industry
today. Although it settled, so there was no judgment, the
information I am providing is based entirely on either the
company's own statements, public statements, or sworn testimony
or sworn declarations of its former employees, of students, and
of hundreds, literally hundreds, of declarations we got from
employers where the school claimed that their students had
found employment after graduation and that they had found that
employment within 6 months of leaving school, had been employed
for at least 60 days for at least 32 hours a week, which was
the standard definition of employment in California at that
time.
Our investigation focused almost entirely on the oral
representations and the written required disclosures about job
placement and salaries of the school's graduates. The evidence
showed that whichever way we looked and whatever we looked at,
the evidence was the same, that the claimed placement rates and
the claimed salaries were inflated.
The school's advertising primarily reached people through
TV, radio ads, ads in the unemployment offices, and touted the
life-changing career training that was being offered that is
highly valued by employers. The school's statements said that
they were committed to helping students find a job. Many of
them are students who are women. About half of them were
minorities according to the students. In fact, a regional
director was telling her staff that she should target low-
income Hispanic students and even telling people to talk to the
employees when they went through drive-in fast food places to
try to recruit students.
When the students contacted schools, the admissions
counselors used inflated job and salary claims. We checked in
this way with nine secret shoppers who went to the schools
asking about enrolling in the school. These undercover or
secret shopper investigations went on over a 2-year period and
we went to six different locations of this school across
California.
In one instance, as an example, the secret shopper was told
that about 85 percent of the students who graduate in the
medical administrative assistant program get jobs. However, the
school's written disclosures, which were required at that time
to prepare under California law, showed that only 50 percent of
them in the 2 years preceding and only 60 percent in the year
before had actually gotten jobs instead of the 85 percent
claimed.
There are other examples--I could go on with that--of the
oral disclosures.
There were also oral disclosures about salaries that were
inflated. One of our secret shoppers, for example, was told
that the starting salary for medical billers was about $18 an
hour, around $37,000 a year, but the school's own written
disclosure form showed that of the 19 graduates in that program
from the year before, 16 of them earned between approximately
$14,000 and $26,000, not $37,000.
As I mentioned, the schools at that time were required to
provide both oral and written statements to consumers about
what the job placement rates were. We found that either they
did not give them, or they denigrated them. They said they were
out of date, and so in many instances, they did not get either
the oral or the written disclosures that were accurate
according to the school's own records.
Most surprising I think--maybe not so much surprising, but
astounding to us was that when we then looked at the school's
written records that they used to declare these are our
accurate placement and salary information, we then went out and
got declarations from the employers and we found that in fact
their employment and their salary disclosures were inflated
even in the school's prepared written statements and
disclosures of what their placements were.
For example, in the sonographer program, in the written
disclosure the school had said their placement rate was 80
percent. We found it was really 43 percent or lower.
In the dental assistant, they said 73 percent. We found it
was really 51 percent or lower.
In the business office assistant program, they said 72
percent. We found it was really 57 percent.
In most courses, only 30 percent to 52 percent of the
graduates obtained employment, according to the evidence that
we gathered.
While we concentrated on employment and salaries, we also
stumbled across other information of wrongdoing, the school
referring students who needed to have a high school diploma to
a place where they could buy one. Also some of our secret
shoppers were encouraged to lie about their income so they
could qualify for financial aid. This kind of thing was also
corroborated by declarations or testimony from former employees
as well.
The massive evidence we gathered I think shows that the
problems were systemic, that this is a problem where the school
is exploiting people's need and desire for well-paid and secure
jobs, and routinely lying to students in order to get as many
students to enroll as possible.
I am happy to take questions. Thank you for this
opportunity.
[The prepared statement of Ms. Reiter follows:]
Prepared Statement of Margaret Reiter
I worked as a Deputy Attorney General, then a Supervising Deputy
Attorney General in the Consumer Law Section of the California Attorney
General's Office for 20 years, until I retired at the end of 2008. The
first cases I prosecuted in the late 1980s and early 1990s and one of
the last prosecutions I supervised before I left were against post-
secondary proprietary schools for unfair, unlawful, and fraudulent
business practices and untrue and misleading advertising. The main
difference between the 1990s and now is that for-profit schools now are
more likely to be publicly traded, be larger and richer, and have much
greater political clout, and the students wind up with much larger
debts, including high cost private loans. In contrast, the abuses
remain strikingly similar.
By the mid-1990s, I thought, naively it turns out, that we had
turned the corner on fraud and abuse in the proprietary school
industry. The AG had brought several successful cases against
proprietary schools, California had established a strong State law
(which required, among other provisions, a 100 percent pro-rata refund
policy, and completion by 60 percent of students and job placement of
at least 70 percent of graduates), the newly established independent
California agency to oversee proprietary schools moved aggressively to
police the area (putting 159 schools out of business by 1995
[California Post-Secondary Education Commission, Effectiveness of
California's oversight of Private Post-Secondary and Vocational
Education, 10/1995]) the Federal student loan provisions had been
tightened up (including by requiring at least 15 percent of a school's
revenues to come from other than Federal student aid and instituting
cohort default rate criteria), and the Inspector General's Office of
the Department of Education had become more active in enforcement. So
for a number of years, the Consumer Law Section, which handles all
types of consumer fraud cases, switched focus from proprietary schools
to other types of the businesses.
By the late 1990s reports of abuse in the proprietary school sector
again began to rise By the mid-2000s, continuing reports of rising
amounts of fraud and abuse among proprietary schools again focused our
attention on this area. By then, the strong independent California
oversight agency had been eliminated. Federal safeguards had been
watered down (including the requirement for 15 percent of revenues to
come from other than Federal aid was reduced to 10 percent, the cohort
default provisions were weakened, and the prohibition on incentive
compensation for recruitment had been regulated into a number of large
loopholes. Meanwhile, many more proprietary schools had become large,
publicly traded entities with dozens of locations around the State.
Once again the California Attorney General's Office, under Attorney
General Lockyer began an investigation into proprietary schools.
My testimony primarily summarizes the case developed against one
large publicly traded proprietary college that resulted in entry of a
stipulated judgment in 2007. A stipulated judgment means the matter did
not come to trial, there was no judicial determination of liability,
and the school did not admit any wrongdoing, but did agree to the terms
of the judgment. The following is a summary of the allegations of the
complaint, evidence that was to have been used to obtain a preliminary
order enjoining certain unlawful conduct if there had not been a
settlement, and the terms of the judgment.
SUMMARY OF ALLEGATIONS IN THE COMPLAINT
The complaint alleged Corinthian Schools, Inc., a subsidiary of
Corinthian Colleges, Inc. (and a related corporation) offers vocational
programs at approximately 14 schools--in California. It alleged the
programs offered typically last from 6 to 13 months, for which the
school typically charges $7,000 to $15,000, with some longer courses
costing as much as $27,000. The complaint alleged that the vast
majority of students enrolled pay for those high cost courses through
financing that the school offers or arranges via government grants,
government-subsidized loans, high-cost private loans and the school's
own credit programs. The complaint also alleged students who are unable
to obtain a good-paying job in the field they studied may be saddled
with the debt and the negative consequences of that debt for years to
come, because, with a few limited exceptions, student loan debt is not
dischargeable in bankruptcy.
The complaint alleged the school engages in a persistent pattern of
unlawful conduct; that the school's own records for many courses show
that a substantial percentage of students do not complete the programs
and, of those who complete the program, a large majority do not
successfully obtain employment within 6 months after completing the
course; and that the percentages of former students the school's
documents claim successfully obtained employment are inflated. The
complaint also alleged that in some instances, the school's records
even list non-existent businesses as the students' places of
employment; and the salaries the school's records claim its former
students earn are also often incorrect and inflated. The complaint also
alleged the school places intense pressure on its staff, particularly
on those who recruit students and those who supervise them, to meet a
pre-set quota of ''starts.'' The complaint alleged that means the
employees are to enroll at least a certain number of students who stay
in school beyond the 5-day period during which students may withdraw
from school and obtain a full refund under the California Education
Code in effect at the time. The complaint alleged the school uses
various untrue and misleading statements to induce students to enroll
and not cancel, despite the poor chances of success, and engages in
other unfair, unlawful or fraudulent business acts and practices.
SUMMARY OF EVIDENCE RE: REPRESENTATIONS ABOUT JOB PLACEMENT AND
SALARIES
The Attorney General's Office gathered evidence to support the
allegations in the complaint and to support an application for a
temporary restraining order and preliminary injunction against the
school. Any evidence gathered to support the allegations of the
complaint, but not needed to support the request to enjoin certain
conduct during the pendency of the action is not included in the
summary that follows. The evidence summarized here includes statements
from the school's own records or its public statements, and oral
testimony and written declarations given under oath. The evidence
consists primarily of hundreds of sworn written declarations from
employers where the school claimed its graduates obtained employment,
but also includes declarations or testimony from former students,
former employees and secret shoppers. This section summarizes that
evidence:
Students Solicited With Ads About Job Training and Careers
In 2005, the school enrolled at least 11,350 students in its
schools in California in various vocational programs. The school admits
its students are not the typical college-bound high school students who
spend months and years choosing their college and carefully planning
their future careers.\1\ Instead, its students, the majority of whom
are women, over 21 years of age, and minorities, enroll after seeing or
hearing an advertisement on television, radio, or posted in an
unemployment office, that promises quick and easy job training for
lucrative careers.\2\ The school's students typically invest in an
expensive education at this school for one primary reason--to obtain
skills that will lead to a job that pays more than minimum wage and
therefore leads to a better life for themselves and their families.\3\
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\1\ See Statement of David. G. Moore, CEO, Corinthian Colleges,
Inc., before the Committee on Education and the Workforce, U.S. House
of Representatives, Serial No. 108-63 (June 16, 2004) (``Moore
Statement'') at p. 33.
\2\ Id. at p. 36 [``Of our 66,000 students, approximately 73
percent are female, 70 percent are over 21 years of age, and about one-
half are minorities''] and p. 39 [60 percent of students at Bryman
College, San Bernadino, are Hispanic and African-American; ``about half
'' of the students at Bryman College, Anaheim, are Hispanic or ``other
minorities'']; see also transcript of the telephonic deposition of
[Former employee] at PP. 34-35 [one of Corinthian's regional directors
of admissions told a new director of admissions for the Reseda campus
that her admissions representatives should ``[t]arget [recruitment
efforts] towards low-end Hispanic students,'' including by talking to
McDonald's employees while using the drive-thru window]; Declarations
of Students (``Student Decls.'') TMB [student enrolled after seeing
Defendants' ad in unemployment office].
\3\ See, e.g., Declaration of EH at 7; Student Declarations TMB,
SG, MB and BC.
---------------------------------------------------------------------------
The school's advertisements focus on students' employment-related
motivation. The school's printed advertisements promise ``[l]ife
changing career training,'' ``education and training you'll need to
accomplish your career goals,'' and the ``education you need to build a
successful career for years to come.''\4\ Similar statements include:
---------------------------------------------------------------------------
\4\ Declaration of RH Ex. 2; Declaration of SR Ex. 5.
Our education is recognized and valued by employers, and
so are our graduates. We are dedicated to helping people change their
careers and their lives.
[Our] College has helped thousands of students train for a
new career and build a better life. We are dedicated to helping you
succeed. This means that in addition to providing you with career
education and training, we're also committed to helping you find a job
that's right for you.\5\
---------------------------------------------------------------------------
\5\ Declaration of IS Exs. 9, 29.
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Written Employment Disclosures Then Required by California Law Inflated
or Falsified
Under the then-current law, schools could count a student as having
obtained employment if they could document that the student was
employed: (1) within 6 months after completing the program; (2) for at
least 32 hours per week for a period of at least 60 days; (3) ``in the
occupations or job titles to which the program was represented to
lead,'' and a student who worked less than 32 hours per week if the
student completed a handwritten statement ``at the beginning of the
program and at the end of the program which states that the student's
educational objective is part-time employment.''
The Attorney General compared the school's records for certain
courses offered in Alhambra, West Los Angeles (``West L.A.''), and San
Jose schools for 2003 and 2004. Hundreds of declarations by former
students and employers listed in those records,\6\ contradicted the
information contained in the school's records.\7\
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\6\ Declarations of Employers (``Employer Decls.''); Student Decls.
\7\ For the purposes of comparing the employment percentages based
on this evidence to the employment percentages disclosed by the school,
the AG counted only two groups of students who completed their programs
as not having obtained employment: (1) students the school stated did
not meet one or more of the criteria of Education Code sections; and
(2) students or employers from whom the Attorney General obtained a
declaration showing that the students' employment did not meet one or
more of the required criteria. If the AG was unable to locate the
student and/or employer to verify the information the school reported,
for purposes of comparison, the AG assumed that the student had been
employed as the school reported.
The school excluded from its calculations students who decided not
to obtain employment and within 6 months of completing the program
enrolled in a program to continue their education. Although the school
should not have used that exclusion for its calculation under the
applicable California law, the AG did not add those students back in
for purposes of this comparison. If he had, the percentages would have
been even lower.
---------------------------------------------------------------------------
The discrepancies between the school's records and the evidence the
AG obtained is calculated in the following charts, showing the school
inflated the percentage of its students who obtained employment by at
least 2 to 37 percentage points. The chart also shows that for many
programs, the school did not meet the then-mandated State placement
rate of 70 percent.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Defs.' Defs.' Defs.'
Reps. to People's Reps. to People's Reps. to People's
Alhambra 2003 Students Evidence San Jose 2003 Students Evidence West L.A. 2003 Students Evidence
[In [In [In [In [In [In
percent] percent] percent] percent] percent] percent]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Business Office Asst.............. 72 57 Dental Asst.......... 68 59 Bus. Mgmt. Asst...... 79 60
Business Office Mgmt.............. 72 65 Med. Asst............ 50 44 Dental Asst.......... 73 51
Dental Asst....................... 73 53 ................... Diagnostic Med. 80 43
Sonographer.
Medical Admin. Asst............... 56 51 ................... Echocardiographer.... 63 40
Medical Asst...................... 60 52 ................... Medical Asst......... 45 39
Medical Billing & Coding.......... 66 51 ................... Medical Billing & 38 36
Coding.
X-Ray Tech........... 46 43
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Defs.' Defs.' Defs.'
Reps. to People's Reps. to People's Reps. to People's
Alhambra 2004 Students Evidence San Jose 2004 Students Evidence West L.A. 2004 Students Evidence
[In [In [In [In [In [In
percent] percent] percent] percent] percent] percent]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Medical Asst...................... 53 48 Med. Asst............ 36 30 Med. Asst............ 47 40
Medical Billing & Coding.......... 42 34
--------------------------------------------------------------------------------------------------------------------------------------------------------
Under the law in existence then, different reporting criteria
applied to some courses, such as massage. Schools could count students
who ``secure employment in the field for which they were trained.''
As with the above programs, students and employers listed in the
school's records for the massage therapy courses provided declarations
that contradicted information in the school's records.\8\ For purposes
of comparing the school's records with student and employer
declarations showing whether massage therapy students obtained
employment, the Attorney General counted as not having obtained
employment (1) students that the school admitted did not work as
massage therapists; (2) students that the school admitted worked fewer
than 10 hours per week or 40 days total; (3) students who the school
showed started employment more than 6 months after finishing their
courses; and (4) students for whom declarations from the students or
employers the school identified that showed the students never worked
as massage therapists, were employed fewer than 10 hours per week or 40
days total, or who did not start their employment within 6 months of
completing their massage therapy programs. Those the AG was unable to
locate to verify employment, were assumed, for comparison purposes, to
have secured employment.
---------------------------------------------------------------------------
\8\ Employers Decls.; Student Decls.
---------------------------------------------------------------------------
For all three massage therapy programs, the school consistently
reported students as being employed at non-existent, fake businesses
that the students invented as part of a class assignment in order to
learn how to make business cards.\9\ The school's required disclosures
gave an inflated count of the employment percentages for all three
programs checked, the difference ranging from at least 14 to 28
percentage points.
---------------------------------------------------------------------------
\9\ See, e.g., Student Decls., nos. 2600, 2608; nos. 2874, 2891,
2907, 2919, 2930, 2938, 2943.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Defs.' Defs.' Defs.'
Reps. to People's Reps. to People's Reps. to People's
San Jose 2004 Students Evidence West L.A. 2003 Students Evidence West L.A. 2004 Students Evidence
[In [In [In [In [In [In
percent] percent] percent] percent] percent] percent]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Massage Therapy................... 68 40 Massage Therapy...... 89 66 Massage Therapy...... 57 43
--------------------------------------------------------------------------------------------------------------------------------------------------------
In summary, for every single program for which the AG contacted
students and/or employers, the employment percentages that the school
reported on the written disclosures required by California law were
inflated, by up to 37 percent. In most courses, only 30 percent to 52
percent of graduates obtained employment. Ten of nineteen programs had
placements rates of less than 50 percent; 15 had placement rates of
less than 55 percent.
Required Disclosures About Salaries Graduates May Earn Are Inflated or
False
The school also makes both express and implied claims regarding the
salaries of their graduates. The school's brochures are laced with
statements like, ``Top Ten Reasons for an Education . . . 1. To make
more money;'' and
Why pursue an education beyond high school? Return on
investment . . . The time and money you invest in your
education can deliver benefits once you graduate. In many
cases, the increased earnings after only 1 year will justify
the cost of a student's education. A $5.00 wage increase per
hour equals an extra $10,000 per year.\10\
---------------------------------------------------------------------------
\10\ Declaration of JT, Ex. 16; IS Decl., Ex. 8; and Declaration CT
Ex. 6.
The school tells potential students how much they can expect to
earn after graduating.\11\ In addition, the school makes implied claims
regarding the future salary potential of enrolling students. For
example, while discussing financial aid, the school told RF that she
would make ``way more than $9,000 [tuition cost]'' in her job as a
medical biller and that she would earn ``more than triple'' that
amount.\12\
---------------------------------------------------------------------------
\11\ See, e.g., ML Decl. at 21-24 [Defendants stated that
potential student could earn between $11 and $18 per hour after
completing medical assisting program].
\12\ Declaration of RF at 18.
---------------------------------------------------------------------------
Because the school makes such claims, it was required under
California law to disclose its students' starting salaries. Because its
salary disclosures are based on the same records provided as to
students who completed the programs and many of those students did not
meet the employment criteria or were not employed as the school
reported, its statements about the salaries earned were also inflated
or untrue.
Oral Job Placement Claims Falsely Higher Than Even the School's Own
Inflated or False Written Job Placement Disclosures
Over the course of 2 years, nine secret shoppers, posing as
potential students at six different school locations received false or
misleading information that concealed or contradicted the school's
written disclosures about employment success, as well as the salaries,
of their students. Those experiences are corroborated by declarations
from former employees and students.
In May 2006, for example, at the school's San Jose campus, the
school told PW that the employment percentage for massage therapy
``right now'' is ``closer to 80 percent'' for its graduates.\13\
According to the written disclosures provided, however, only 68 percent
of San Jose massage therapy students scheduled to graduate in 2004
found employment (compared to a worse rate of 63 percent in 2005).
Similarly,
---------------------------------------------------------------------------
\13\ PW Decl. at 10.
In October 2006, the school told CT that ``about 85
percent'' of students who graduate from the medical administrative
assistant program get jobs.\14\ The school's written disclosures
stated, however, that only 50 percent of medical administrative
assistant graduates in 2004, and 60 percent in 2005, had obtained
employment.
---------------------------------------------------------------------------
\14\ CT Decl. at 20.
---------------------------------------------------------------------------
In October 2006, the school told ML that the Reseda campus
graduates had achieved an employment rate of 90.1 percent.\15\ The
school's written disclosures for the program in which ML had indicated
an interest, medical assisting, stated that only 54 percent of medical
assisting graduates in 2004, and 63 percent in 2005, had found
employment. According to the school's disclosures, the aggregate
employment rate for all Reseda graduates was 62 percent in 2004 and 65
percent in 2005, not 90.1 percent.
---------------------------------------------------------------------------
\15\ ML Decl. at 18.
---------------------------------------------------------------------------
In January 2006, the school told RF that 51 percent of the
medical billing program graduates at the West L.A. campus found
employment, while the written disclosures stated that 33 percent of
2004 medical billing graduates found employment.\16\
---------------------------------------------------------------------------
\16\ RF Decl. at 31.
---------------------------------------------------------------------------
In August 2005, the school told JT that their accrediting
agency ``holds us to certain guidelines for our students'' including
``placing at least 69 percent of the students in the position that they
went to school for.'' \17\ The school's written disclosures for the
program in which he stated an interest in medical assisting, stated
that only 60 percent of medical assisting graduates in 2003, and 54
percent in 2004, had found employment.\18\
---------------------------------------------------------------------------
\17\ JT Decl. at 7.
\18\ PW Decl., Ex. 4.
---------------------------------------------------------------------------
A former director of admissions at the Reseda campus who supervised
the admissions representatives reported that, in every single interview
that she witnessed, admissions representatives told potential students
that the Reseda campus had ``an extremely high placement rate'' of
between ``85 and 90 percent . . . in qualified jobs,'' regardless of
the program the potential students were interested in, or enrolling
in.\19\ Even as a supervisor of these admissions representatives, she
never witnessed any of them orally disclose the actual employment
percentages for the program in which the student was enrolling.\20\
---------------------------------------------------------------------------
\19\* Decl., Ex. 27 at p. 110.
\20\ Id. at p. 118.
---------------------------------------------------------------------------
The school also tells potential students to disregard disclosures
because they are purportedly outdated and the ``current'' employment
percentages of graduates are higher. In October 2006, for example, the
school told IS that the 2004 employment percentage for pharmacy
technician program graduates at the San Francisco campus, the
disclosure the school was required by law to make, was outdated. The
school told her that the more accurate rate was 54 percent for that
year to date.\21\ The school's written disclosures for this pharmacy
technician program, however, stated that only 40 percent of pharmacy
technician graduates in 2004, and 43 percent of pharmacy technician
graduates in 2005, had found employment. A former director of education
reported seeing the same practice at the San Jose campus.\22\
---------------------------------------------------------------------------
\21\ IS Decl. at 25, 26.
\22\ Declaration of MJ at 18.
---------------------------------------------------------------------------
The school also provided older, outdated employment disclosures,
rather than more recent disclosures stating lower employment
percentages. In September 2006, for example, the school gave RH written
employment disclosures for 2001 graduates and orally stated that the
form was correct that ``80 percent'' of ``medical dental billing''
graduates at the Alhambra campus found jobs.\23\ The school's more
recent disclosures, however, stated that only 53 percent of medical
assisting graduates in 2004 had found employment.
---------------------------------------------------------------------------
\23\ RH Decl. at 13, Ex. 3.
---------------------------------------------------------------------------
The school also overstated the likelihood that a potential student
would obtain a job, in light of the employment percentages of the
school's graduates. The school told JT that there's ``no way that you
can't'' get a job unless you ``just bombed at school'' and that this
happened to less than 5 percent of the school's students.\24\ Yet, as
set forth above, the employment rate for 2004 graduates of the program
in which JT was interested was 54 percent. Similarly, the school's
admission representative told SR that the school is ``like the UCLA of
vocational schools'' and that, although he could not guarantee it, as
long as she did well at school she would not have ``any problem getting
a job.'' \25\ According to the school's written disclosures, however,
the employment rate for 2004 West L.A. graduates from the medical
assistant program was only 47 percent.
---------------------------------------------------------------------------
\24\ JT Decl. at 19.
\25\ SR Decl. at 10, 11.
---------------------------------------------------------------------------
Required Job Placement Disclosures Not Made
The school either did not provide, or denigrated the employment
disclosures then required by California law. In seven of eight secret
shopper visits in which an oral disclosure was then required by
California law, the school failed to disclose orally the employment
statistics stated on their written disclosures.\26\ In the one
remaining visit, although the school orally disclosed the employment
rate reflected on the disclosure, this disclosure was undermined by a
statement that the rates were ``out-of-date'' and that the potential
student would be enrolling in a program with a higher employment
rate.\27\
---------------------------------------------------------------------------
\26\ See RF Decl.; RH Decl.; ML Decl.; Declaration KM; JT Decl.; SR
Decl.; and CT Decl.
\27\ IS Decl. at 25, 26.
---------------------------------------------------------------------------
The school did not provide the required written disclosures in the
three visits of CT, ML and even KM, who actually enrolled.\28\ With
respect to the other six secret shopper visits, the written disclosures
were undermined and/or contradicted in various ways. The school did not
provide the disclosures to PW, SR, or RH until they enrolled during
their second visits and only after the school had orally represented
false and inflated employment rates.\29\ Similarly, although the school
provided the written employment disclosure to IT on his first visit, it
did so only after it had orally represented false and inflated
employment statistics.\30\ In none of these cases did the school point
out the disclosures to correct the false information previously
provided. Finally, with respect to IS and RF, although the school may
have asked them to sign the written disclosure on the second visit, it
did not provide them with a copy.\31\
---------------------------------------------------------------------------
\28\ See CT Decl.; ML Decl.; KM Decl.
\29\ PW Decl. at 10, 36; SR Decl. at 11, 25; RH Decl. at
13, 45.
\30\ JT Decl. at 7, 15
\31\ IS Decl. at 25, 26; RF Decl. at 14, 29, 31.
---------------------------------------------------------------------------
And, each time one of the secret shoppers enrolled, the school
rushed them through the signing of the employment disclosures, without
affording them time to review them as required by law. A former
director of admissions routinely saw a similar practice at the Reseda
campus, where the admissions representative downplayed or concealed the
significance of the employment disclosure by including it in a large
stack of documents and saying, ``just go ahead and sign this.'' \32\
She never witnessed a single admissions representative actually explain
the employment disclosure.\33\
---------------------------------------------------------------------------
\32\ *Decl., Ex. 27 at p. 114.
\33\ Ibid.
---------------------------------------------------------------------------
Oral Misrepresentations About Salaries That Can Be Earned; Concealment
of Salary Information About Graduates
The school told JT and RH, who visited the Alhambra campus in 2005
and indicated an interest in the medical assisting program, that they
could earn salaries that were higher than the salaries the school's
written records showed its graduates earning. Referring to
www.salary.com, the school told JT that he could earn an average salary
of $31,000 per year and told RH that he could earn $29,000 per year and
even had the potential to earn $72,000 per year.\34\ The school gave JT
a print-out from the Web site containing this information, yet never
provided him with or showed him a copy of its own salary
disclosures.\35\ According to the school's own written disclosures, the
vast majority (34 out of 47) of 2003 Alhambra medical assisting
graduates who obtained employment earned between $14,412 and $22,200
per year.\36\ Only 2 of the school's graduates were reported as earning
$29,000 or more per year.\37\ In addition, the school reported only one
2004 graduate as earning $28,800 or more per year, while it reported
176 out of 188 medical assisting graduates from 2004 earning between
$12,012 and $21,600 per year.\38\
---------------------------------------------------------------------------
\34\ JT Decl. at 13, 18; RH Decl. at 18-21.
\35\ JT Decl., Ex. 5.
\36\ * Decl.; RH Decl., Ex. 34.
\37\ * Decl.
\38\ * Decl., Ex. 16.
---------------------------------------------------------------------------
The school engaged in similar tactics in the 6 other secret shopper
visits:
When, in September 2006, IS asked what salary she could
expect to earn on graduation, the school told her to check
www.salary.com; although the school asked her to sign a number of
documents on her second visit, which included a written salary
disclosure, the school did not give her a copy of the written
disclosure.\39\
---------------------------------------------------------------------------
\39\ IS Decl. at 10, 27.
---------------------------------------------------------------------------
In July 2006, the school showed KM a Web site regarding
salaries and stated that she could earn a salary of $35,000 a year as a
medical assistant, and that there were even some graduates making
$38,000 a year; the school never provided her with a written or oral
salary disclosure for that program for the campus she visited, the San
Jose campus.\40\
---------------------------------------------------------------------------
\40\ RF Decl. at 11, 31, 37.
---------------------------------------------------------------------------
In January 2006, the school told RF that the Web site
``monster.com'' lists starting pay for medical billers as $18.00 per
hour (approximately $37,000 per year); although the school had her sign
a written salary disclosure, the school did not give her a copy of it
and never orally disclosed the information on it.\40\ According to
written salary disclosures for the West L.A. campus, 16 of 19 medical
billing graduates from 2004 earned between $14,412 and $26,400 per
year, while only 3 earned more than $28,812 per year.\41\
---------------------------------------------------------------------------
\41\ * Decl., Ex. 18.
---------------------------------------------------------------------------
In October 2006, the school told ML that she could earn
between $11.00 and $18.00 per hour (approximately $22,800 to $37,000
per year) after completing the medical assisting program at the Reseda
campus. The school also stated that she could earn her tuition of
$13,000 back in 4 to 5 months (total earnings of $52,000 to $65,000).
The school did not provide her with the required oral or written salary
disclosures.\42\
---------------------------------------------------------------------------
\42\ ML Decl. at 21-24, 30.
---------------------------------------------------------------------------
In May 2006, although the school showed PW a ``fact
sheet'' with information about salaries on his second visit, they did
not provide him with a copy.\43\
---------------------------------------------------------------------------
\43\ PW Decl. at 35.
---------------------------------------------------------------------------
Finally, although the school implied that CT could
increase his earnings by enrolling, the school never provided him with
any salary disclosures, oral or written.\44\
---------------------------------------------------------------------------
\44\ CT Decl. at 22, Ex. 6.
These practices are corroborated by the testimony of two former
employees. A former director of education at the San Jose campus
witnessed admissions representatives quoting salary ranges to potential
students, even though these ranges were not paid to the school's
graduates according to its own data.\45\ A former director of
admissions from the Reseda campus witnessed admissions representatives
engage in a practice of providing the salary disclosures in a large
packet of documents to be signed, with statements like, ``You know how
all this paperwork is. Just sign all these. And, you know, they're not
for money or anything, so don't worry about it.'' \46\
---------------------------------------------------------------------------
\45\ MJ Decl. at 19.
\46\ * Decl., Ex. 27, at p. 120.
---------------------------------------------------------------------------
Other Unlawful Business Practices
The school also has referred students who do not have high school
diplomas to a business that provides fake diplomas for a fee. When ML,
for example, indicated an interest in enrolling in a program for which
the school required a high school diploma, the school told her that
they could refer her to a business where she could get a high school
diploma by paying $250.00 and attending only one day of class.\47\ A
former director of admissions for this same campus similarly testified
that the school referred potential students who did not have high
school diplomas to a business called ``Victory,'' where they could get
a diploma in 1 week by paying $400.00, a practice about which the
regional director of admissions and other corporate-level employees
were aware.\48\
---------------------------------------------------------------------------
\47\ ML Decl. at 35.
\48\ * Decl., Ex. 27 at PP. 83-85.
---------------------------------------------------------------------------
With three different secret shoppers at two different campuses, the
school encouraged JT, RH and SR to lie about their incomes, or told
them how much income they should report on their applications.\49\ In
addition, the former director of admissions at the Reseda campus
routinely witnessed the regional director of admissions and other
employees from the corporate offices telling potential students what
income amount to write into their financial aid applications and
encouraging them to (1) have a parent co-sign the loan documents while
they were drunk; (2) forge their parents' signatures on the loan
documents; (3) steal and use the social security number of a parent or
relative; and (4) make up or guess their incomes.\50\
---------------------------------------------------------------------------
\49\ JT Decl. at 23; RH Decl. at 27-29; SR Decl. at 17.
\50\ * Decl., Ex. 27 at PP. 18-21, 87-89, 94.
---------------------------------------------------------------------------
SUMMARY OF THE TERMS OF JUDGMENT
The Judgment required the school to provide $5,800,000 in
restitution to students in the form of cash and cancellations of
contracts, pay up to $100,000 for administration of the restitution
program, pay $500,000 into the unfair competition law fund (a State-
mandated fund in which civil penalties are deposited) and $200,000 in
expenses to the AG, for a total monetary amount of $6.6 million. It
enjoined the school from unfair, misleading and unlawful conduct
alleged in the complaint and required the school to stop offering nine
of its lowest performing programs for at least 18 months.
CONCLUSIONS
I believe the evidence summarized here has importance beyond the
particular school in question.
The Current System Allows the Kind of Poor Outcomes Described Above
The primary lobbying group for proprietary schools describes itself
as an organization of private post-secondary schools that ``provide
career-specific educational programs.'' \51\ You don't have to watch
much TV to know proprietary schools hold themselves out as great places
to get career education. Under the law, proprietary schools' programs
are only eligible for Federal student aid if the program prepares
students for gainful employment. But despite the focus on employment/
career education, the truth is, for decades, Federal student aid has
been provided to virtually any school that is accredited, or can buy an
accredited school, without regard to whether the programs can prepare a
student for employment, whether there is any need for such employment,
or whether the remuneration from the employment would be adequate to
pay the student's loans and other living expenses.
---------------------------------------------------------------------------
\51\ CCA press release 6/9/2010.
---------------------------------------------------------------------------
The student aid program applies no uniform standards to determine
whether schools required to prepare students for gainful employment
actually do so. There is no uniform standard definition of what
constitutes employment, much less, what is the minimum level of
employment success a school must meet, what data must be collected and
maintained to support statements of employment success or how such data
must be verified to ensure it is accurate.
Accreditation Does Not Prevent Poor Outcomes, Fraud or Abuse
Virtually every school the California AG has sued since the late
1980s, including the school described here, was accredited;
accreditation did not stop the harmful practices. Even after the AG
accumulated the evidence described here, the school's accreditors or
potential future accreditors showed no interest in examining the
evidence. Private accrediting agencies do not have uniform or specific
standards as to what constitutes a job placement. In any event, they
are simply not equipped or designed to police the conduct that harms
students and saddles taxpayers to pay this massive, but little
understood Wall Street subsidy.
Numerous IG, GAO and other reports and studies over the years
affirm that accreditation is inadequate to the task. (See e.g., IG
Report, Accrediting Agency Recognition Process Does Not Serve as an
Effective Control in Determining the Reliability of Agencies that
Accredit Numerous Problem Schools, 1991; IG Report, Managing for
Results, Review of Performance-Based Systems at Selected Accrediting
Agencies, 1995.) In 2003 the Inspector General found that:
``[T]here is no assurance that the [U.S. Department of
Education unit charged with recognizing accrediting agencies]
evaluated accrediting agency standards and procedures in a
consistent and effective matter.''
Current Means of Redress for Students Are Inadequate to Effectuate
Change
Although the president of the Career College Association recently
stated on Frontline that if students are misled, the government could
wipe out their loans, that is not the state of the law. The Department
does not just refund students their loan money if the school misled
them or did not prepare them for gainful employment. The circumstances
in which the Department of Education can ``discharge'' a student's loan
debt due to a school's conduct are currently limited to a few
circumstances, such as if the school falsely certified the student was
eligible for student aid, or the school closed before the student
completed the program. In any event, the current limited after-the-fact
method of relieving students from liability, while providing much
needed relief in limited circumstances, does nothing to change the
system, primarily because the chances that the school and lender will
be held liable for discharged amounts are small.
Similarly, schools, lenders and investors are insulated from
students defaulting on their loans. Students cannot discharge student
loans (even loans made by private companies) in bankruptcy, except in a
few very limited circumstances. That is a unique benefit for private
lenders not available to other types of private creditors.
Prosecutions or Private Litigation Are Not the Whole Answer
Prosecutions, while helpful, are expensive and time consuming.
Government agencies' resources are dwarfed by those of the industry.
There would never be enough resources to adequately police conduct.
Without specific requirements, such as we had in California, for the
job placement rate a school must meet, cases are much more amorphous.
It is much more difficult to discover and prove that a school misleads
its students as a general practice if there is no required standard or
disclosure to test the representations against. In any event, lawsuits
are after the fact, often years after harm has occurred.
Private litigants and State and local prosecutors alike are barred
from enforcing the student aid provisions directly. Private litigation
is sometimes initiated by former employee whistle blowers who know the
ways a school received student aid for students based on false
information. Few attorneys have the expertise or the tremendous
resources needed to bring a case on behalf of former employees or to
represent impoverished former students in cases brought under State
laws.
The Problem is Not Just a Few Bad Apples
Because proprietary schools are not required to demonstrate they
really can prepare students for careers that pay adequately to support
student loan payments, we have no data to support the often stated
notion that most are doing an adequate job. What we do know is that
despite the difficulties and expense of litigation, there has been a
rising tide of administrative actions, prosecutions and lawsuits. These
actions are not limited to fringe operators. Many of these actions are
against some of the largest, most visible proprietary schools for their
recruitment practices, including their misrepresentations about
accreditation, transfer of credits or their graduates' success in job
placement and obtaining good salaries. That rising tide, however, is
likely the tip of the iceberg. Many private cases are settled, often
with confidentiality provisions, so there is no public document
identifying the lawsuit or the amount of the settlement, much less the
evidence obtained in the course of the litigation. Confidential
settlements may explicitly or implicitly prevent students from
contacting public agencies about the alleged wrongful conduct.
Simply Adding More Disclosure Is Not the Answer
As demonstrated by the evidence discussed above, disclosures can
easily be avoided or manipulated to prevent their impact by: providing
them in a stack of documents; denigrating them as out-of-date or not
anything important as they are not about money; or requiring students
to sign them, but not giving them a copy. Of course, even if
disclosures were given, because there is currently no standard
definition of what constitutes a job placement, such disclosures would
also be largely meaningless. More fundamentally, we know the task of
enforcement is difficult and expensive for government agencies. We
cannot expect that students would be able to police the expenditure of
billions of dollars in taxpayer funds, especially since they have no
ability to sue directly for violations of the Higher Education Act.
The Current System Fuels a Race to the Bottom
Since proprietary schools were included in the GI Bill after World
War II, commentators and legislators have repeatedly recognized that
these schools disproportionately account for poor outcomes, fraud and
abuse. Yet the current system continues to fuel a race to the bottom.
The kinds of conduct described are the natural outcome of a system that
allows a 90 percent Federal subsidy for private sector, for-profit
schools, but doesn't measure employment success or require any minimal
level of success. Consequently, the schools are measured by Wall Street
on their ``starts,'' not their finishes.
Based on my knowledge of other investigations and cases against
proprietary schools over the years and my experience in investigating
and prosecuting all types of consumer fraud cases, in my opinion, the
consumer abuses in the proprietary school industry are among the most
persistent, egregious and widespread of any industry.
The Department of Education has proposed some much-needed
regulations to attempt to fix the problem. That is a good start, but
fixing this problem will require stronger, tougher regulations than the
Department of Education has yet proposed. It will also require
legislative measures that finally get to the heart of the problem.
The Chairman. Ms. Reiter, thank you very, very much for
that statement.
Now we turn to Ms. Parrott. Ms. Parrott, welcome. Please
proceed.
STATEMENT OF SHARON THOMAS PARROTT, SENIOR VICE PRESIDENT,
GOVERNMENT AND REGULATORY AFFAIRS, AND CHIEF COMPLIANCE
OFFICER, DeVRY, INC., CHICAGO, IL
Ms. Parrott. Thank you. Chairman Harkin, Ranking Member
Enzi, and members of the committee, thank you for inviting me
to testify this morning and thank you for the investment that
you make in educating America's students.
I am really happy to be here today to represent the
colleges and universities in the DeVry family and the over
100,000 students, 17,000 faculty and staff at over 100 campuses
and online.
First, I would like to tell you a little bit about myself
and why this is so important to me.
I was born and raised and still live on the south side of
Chicago. There were and continue to be enormous institutional
barriers for young African-Americans who want to go to college.
With the help of wonderful parents and awesome teachers, I
graduated from the Chicago public schools. My first job was
teaching at my high school.
After a number of years as a college professor and
administrator, I went to work for the U.S. Department of
Education in the student financial assistance area, both in
compliance and training, before coming to DeVry over 28 years
ago.
I see myself in the students DeVry serves. Our mission is
very simple. We seek to empower our students to achieve their
educational and career goals. We achieve that mission by
offering high quality certificates and degree programs in
allied health, business, technology, nursing, and medicine
taught by dedicated and experienced faculty that love to teach
and share their own real-world experience with their students.
Empowering our students means putting their needs front and
center. Their success is our success. It means offering classes
at times and at locations that meet their schedules. We go
where our students need us to be, or if we cannot be there, we
give them online tools to come to us.
We have a long history. Our flagship institution, DeVry
University, was founded in Chicago in 1931. After World War II,
we helped many a returning veteran transition to new careers.
Today we are a comprehensive university offering associate,
baccalaureate, and graduate degrees. Since 1975, over 200,000
men and women have earned those degrees. The top five employers
of our alums are AT&T, Verizon, General Electric, Intel, and
IBM. They hire our graduates because they see the quality and
value of a DeVry education.
As you know, the bulk of our country's higher education
capacity is still filled by public State-supported schools, but
institutions like ours grow for a reason. There is an enormous
unmet need, especially among the so-called nontraditional
students. We grow capacity. In fact, our oldest college founded
in 1889, Chamberlain College of Nursing, is opening two new
campuses in July, one just across the river in Arlington, VA,
and a second at the request of Mayor Daly in Chicago.
The reality is that nearly 75 percent of students today are
defined as nontraditional but are really the new majority. They
are first in their family to go to college--minorities, recent
immigrants, and career changers. Many of them work full-time
and have children. In the past, they could support themselves
and their families with only a high school education. This is
no longer the case.
President Obama's college attainment goal means that we
will need to produce an additional 8.2 million post-secondary
graduates by 2020. Secretary Arne Duncan, at our policy forum
held this past May, said that DeVry is a vital partner in the
education field, which is what we need to meet the President's
goal of having the most educated, the most competitive
workforce by 2020.
That will require innovative approaches like the DeVry
University Advantage Academy, a dual enrollment program we
started with Secretary Duncan when he headed up the Chicago
public schools and have now taken to Columbus, OH. It gives CPS
students, both Columbus public schools and Chicago public
schools, the opportunity to graduate from high school and earn
an associate degree by the end of their high school years at no
cost to the student using no financial aid dollars. It works
with a dual degree graduation rate of 92 percent over 6 years.
In America, the shortage of nurses is projected to be 1
million by 2020. Yet we are turning away 99,000 qualified
applicants every year because of a lack of capacity in our
nursing schools. This is where nursing programs like ours are
part of the solution.
Issues like student debt and graduation rates are a serious
concern for all sectors of higher education, but I am not
interested in drawing false distinctions between what motivates
a private sector school and what motivates a State-funded
public school. At the end of the day, if we are student-
centric, the ties that bind will be greater than the lines that
divide. No matter what kind of institution it is, it needs to
serve students well or it will not and it should not survive.
At the end of the day, our country needs to produce an educated
workforce that can thrive in a rapidly changing global economy.
It is in the best interest of all of us to work together to
solve these issues.
I thank the committee for holding these hearings and look
forward to working with my colleagues in higher education to
serve our Nation's students. Thank you.
[The prepared statement of Ms. Parrott follows:]
Prepared Statement of Sharon Thomas Parrott
On behalf of the students, faculty and staff of the DeVry family of
U.S.-based post-secondary institutions including Apollo College,
Chamberlain College of Nursing, DeVry University and Western Career
College, thank you for the opportunity to submit written testimony to
the Senate Committee on Health, Education, Labor, and Pensions. It is
an honor to represent our students and, on their behalf, thank the
Congress for the investment made toward their educational pursuits and
career success.
I have devoted my adult life to this effort because each student we
empower and each graduate success matters. My passion for this field is
embodied in Harvard's Sara Lawrence Lightfoot's comment, ``You have to
feel deeply about wanting your students to succeed, in some sense you
have to see yourselves in the eyes of those you serve or at least see
your destiny reflected in them.'' In 1982 I joined DeVry after working
for the U.S. Department of Education in the area of student financial
aid. Prior to that, I was director of academic support programs at
Loyola University of Chicago and held faculty and administrative
positions at Harlan High School in Chicago, Dominican University,
Northeastern Illinois University and George Williams College in
Illinois. I have had the privilege to serve on the National Research
Council's Panel on Quality Improvement in Student Financial Aid
Programs and The College Board's National Committee on Standards of
Ability to Pay; as well as on numerous student financial assistance
committees and the board of directors of the National Association of
Student Financial Aid Administrators (NASFAA). Since graduating from
Harlan High School, a public school on the south side of Chicago,
education has been my vocation and aspiration and is what brought me to
DeVry. My parents knew that a college education was an imperative and
kept me focused and on track until I completed my undergraduate and
graduate education at the University of Illinois. Unfortunately, much
like then, there continues to be enormous institutional barriers for
young African-Americans and other traditionally underrepresented and
underserved populations who want to go to college. It is by no accident
that my journey brought me to DeVry.
DeVry is a global educational provider serving students in
secondary through professional education as well as the accounting and
finance professions. Although my written testimony primarily focuses on
our U.S.-based, post-secondary undergraduate serving institutions, our
overarching purpose is unchanged; empowering our students to achieve
their educational and career goals. We work to democratize education.
We achieve our mission by providing high-quality educational programs
across a wide spectrum of disciplines including but not limited to
allied health, electrical engineering, network systems design, health
information technology, nursing, medical and veterinary studies. Our
institutions serve more than 100,000 students at 120 campuses across
the country. Our programs are taught by academically qualified,
practitioner-oriented faculty who are passionate about teaching and
choose to share what they have learned in both an academic setting and
after years of professional experience. Apollo College, Chamberlain
College of Nursing, DeVry University and Western Career College offer
more than 75 undergraduate and graduate degree and certificate programs
onsite, online and through blended delivery.
Our colleges and universities are not new to the higher education
arena. Chamberlain College of Nursing was established in 1889. DeVry
University was founded in 1931, Western Career College in 1967 and
Apollo College in 1975. Our institutions are accredited by regional and
national accrediting bodies including the Higher Learning Commission of
the North Central Association of Colleges and Schools (HLC), the
Accrediting Commission for Community and Junior Colleges of the Western
Association of Schools and Colleges (WASC) and the Accrediting Council
for Independent Colleges and Schools (ACICS). In addition, many of our
programs are programmatically accredited by specialized accrediting
bodies (Appendix A, Table 1). These bodies are recognized by the U.S.
Department of Education.
We partner with the greater higher education community to regain
our Nation's prominence as the world's higher education leader. We can
achieve this goal only by working together and focusing our collective
attention on enrolling and graduating students, especially those deemed
``non-traditional'' but who have quickly become the new majority:
working adults looking to switch or broaden their career paths, single
parents balancing work and life responsibilities, returnees to higher
education with a renewed focus on obtaining the skills and education to
succeed in a career of their choosing and recent high school graduates
looking for career-
focused educational opportunities that will enable them to enter the
workforce with both a strong theoretical foundation and hands-on
experience (Appendix B).
From admissions to graduation, we are focused on developing world-
class customer service--all with the singular focus to empower our
students to achieve their career ambition. We offer students high-
quality educational opportunities, the support and resources necessary
to complete their education and, once they have earned a certificate or
degree, lifelong, first-class career services.
The financial aid process is integrated into the enrollment
process. Prospective students are introduced to the financial aid
office on their initial visit. They are given information tailored to
their status (dependent/independent), assistance with financial aid and
scholarship applications if needed and information regarding their
financial aid eligibility. Our goal is to deliver a complete disclosure
covering the first year's costs, financial aid and financial
obligations prior to a student commencing their enrollment. The
disclosure consists of a personalized financial plan with expected
costs for their first year of studies and the method by which they will
pay for those costs. Loan obligations, including repayment terms and
timing, are explained either in the financial advising session or
through Web-based counseling. All students must successfully complete a
loan ``quiz'' prior to the disbursement of loan funds.
We have expanded our student services function to include more
academic advisors and success coaches whose role is to help students
overcome obstacles that have historically prevented many from
completing their education. We continuously monitor attendance and
academic performance to identify potential issues. We offer extensive
academic support through onsite advisors and telephone contact centers.
We have online resources available to help students with questions
ranging from where they can send payment to updating their personal
computer applications to planning their course of study. We measure
student satisfaction with each course.
Our 200-plus career services professionals support new graduates by
connecting students with internship opportunities and facilitating
student, graduate and employer interaction at career fairs and
networking opportunities. Our career services professionals provide
group and individual career advising sessions, career development
courses, interview preparation and practice and resume and cover letter
guidance. Our graduates have lifetime access to these services.
Student debt burden is often attributed to private sector tuition
costs. Critics allege that private sector school costs are
significantly higher than public not-for-profit schools. It is true
that private sector tuition rates are typically higher than in-state
public tuition rates, but this is due to the lack of taxpayer subsidies
rather than an actual cost differential. Private sector institutions
actively contain unnecessary and unproductive costs to control student
debt. When considering actual revenue based on full-time equivalency,
private sector schools show much greater cost efficiencies than either
the public or independent sectors. According to the National Center for
Education Statistics, the revenue received per full-time equivalency
for private sector schools in 2006-2007 was $14,815 versus $29,306
received for public schools and $61,586 for independent schools.
DeVry's net income margin for Fiscal Year 2009 was 11 percent.
Substantially all of these profits were retained to re-
invest in the future. Our retained earnings are our students'
endowment. During this past fiscal year, more than $100 million has
been re-invested into new equipment and facilities, upgraded
classrooms, redevelopment of curricula, expanded academic offerings and
additional staff serving to meet our students' goals.
At DeVry, we are focused on doing well by doing good. DeVry offered
over $90 million this year alone in tuition scholarships and waivers.
We contribute to our communities through educational programs and
partnerships including Passport to College, a tuition-free summer
program where high school students earn college credit and HerWorld, an
event designed to encourage young women to pursue careers in science
and technology. Our students and staff participate in world-wide relief
and service projects, contributing the knowledge and skills they have
developed in their studies. As part of their curriculum, some of our
Chamberlain College of Nursing students participate in the Brazil
International Nursing Service Project, donating their time and skills
to offer critical nursing care in that country. DeVry University
students in Colorado spent hundreds of hours this past year rebuilding
computers for student use in Africa. To improve high school graduation
and college-going rates in Chicago, we developed the DeVry University
Advantage Academy with then-CEO of the Chicago Public Schools, Arne
Duncan. The DeVry University Advantage Academy is a dual enrollment
program currently operating in Chicago and Columbus, OH. This program
allows public school students to take their junior and senior year
courses from certified high school teachers while simultaneously taking
college courses from DeVry professors. At the end of those 2 years,
including one summer, students graduate with both a high school diploma
and an associate degree at no cost to them or their families, and
without using Federal or State student financial aid. Since its
inception, Chicago students have graduated and earned an associate
degree at 92 percent and Columbus has been perfect at 100 percent. As
you all know, urban school districts graduate only about 50 percent of
their students.
Given the impossible budget choices State legislatures have had to
and will continue to have to make, public sector schools alone do not
have the capacity to meet President Obama's goal to educate 8.2 million
additional post-secondary graduates and close educational gaps by 2020.
Capacity is being cut at the precise time that it needs to be
increased. Achieving the President's 2020 goal will not and cannot
happen without the private sector. The President's goal requires adding
capacity--quickly, with quality and integrity.
With an overall student population of 2.8 million students and
capacity to grow without taxpayer subsidy, private sector schools can
help achieve that goal. We will need every single part of our higher
education system to deliver high-quality opportunities to an
exponentially growing student population. Institutions like Chamberlain
College of Nursing are a crucial part of meeting our country's future
nursing workforce needs. With nearly 99,000 applicants turned away from
nursing schools each year, not due to lack of qualifications but
because existing nursing programs are at capacity, our ability to meet
practical challenges including new demands on health care hang in the
balance (Association of Colleges of Nursing). Private-sector schools
like those within our system have the capacity to help meet this
national imperative and are very much a part of higher education's
future. Secretary Duncan, in remarks made at our policy forum held in
May 2010, stated,
``For-profit institutions play a vital role in training young
people and adults for jobs and for-profits will continue to
help families secure a better future for themselves. They are
helping America meet the President's 2020 goal and helping us
meet the growing demand for skills that our public institutions
cannot begin to meet alone, especially in these economically
challenging times.''
Georgetown University's Center on Education and the Workforce
recently released a study on jobs and education requirements through
2018 substantiating very daunting numbers. They project that ``by 2018,
America will need 22 million new college degrees, but will fall short
of that number by at least 3 million post-secondary degrees,
Associate's or better'' and that ``. . . America's colleges and
universities would need to increase the number of degrees they confer
by 10 percent annually, a tall order.'' The study very clearly
demonstrates how difficult it will be for those with only a high school
diploma and how post-secondary education has ``become the gatekeeper to
the middle class and the upper class.'' Their study shows that between
1970 and 2007, the percentage of high school graduates defined as
middle class dropped from 60 percent to 45 percent. These trends have
significant economic and workforce development implications and impact
our democratic foundations. A healthy democracy depends on a large,
educated middle class for its very survival. The Georgetown study shows
an erosion of our middle class foundation--a worrying trend that seems
likely to continue.
Private-sector educators are an integral part of today's higher
education landscape. Even so, there is a wealth of misinformation
concerning our institutions and sector. For years, private-sector
education was a fairly small part of higher education. And although the
private sector is not ``the'' solution to all of the challenges we face
in education, about 10 percent of all higher education enrollments are
attributed to our sector. Institutions like ours are growing for a
reason--there is an enormous unmet need for higher education,
especially among traditionally underserved populations. And to our
credit, institutions like DeVry recognized the needs of these students
and adapted providing prudent, reasoned growth. To paraphrase Secretary
Duncan, students vote with their feet. Federal student aid goes to the
student and the student chooses which college is the right fit for
them. This indicates a healthy and adapting but still competitive
system of higher education. Alternatives generate competition which
drives accountability to the customer, whether a student, an employer
or the taxpayer. A system without alternative opportunities for access
to education is a system geared toward only educating the economic and
social elite. We have moved beyond that type of system, much to our
country's benefit, and the benefit of our citizens.
There has been much debate concerning the role that private sector
institutions play within the greater higher education arena especially
in terms of ``good actors'' and ``bad actors.'' Please make no mistake,
when an institution does something wrong and in conflict with the best
interest of students, they must be held accountable. However, I submit
that rather than limiting oversight to one sector over another or one
``actor'' over the ``other,'' policymakers consider that there are
``good acts'' and ``bad acts'' of which no sector is immune. And just
as acts of impropriety must be addressed, institutions must also remain
capable and emboldened to act nimbly and with quality to address
society's education needs. This includes allowing for innovation like
blended online and onsite learning and year-round study. The problems
of the few should not erase the continuous service and work of the
many.
The post-secondary education community must ensure public and
congressional confidence in our institutions. We must protect and
preserve the integrity of our programs. Consistent guidelines are
required for the sound administration of educational and financial aid
programs. Performance rather than sector should be the basis of any
unique requirement. Not only is the promulgation of separate
regulations for different post-secondary sectors unequal treatment, it
would be redundant and costly, putting an additional cost burden on the
American taxpayer. Preventative measures based on the quality of
educational outcomes are more effective and less costly than punishment
after the fact.
The institutions that perform well should continue to participate
fully in the programs. Institutions that are poor performers should be
required to improve and adhere to more regulatory requirements. Abusers
should have their eligibility suspended or terminated.
Our colleges and universities are responsible for meeting Federal
and State statutory and regulatory requirements. At DeVry, we adhere to
these requirements, including title IV compliance and State
authorization, through a centralize approach involving a staff with
over 200 years of experience. We must ensure that our institutions
obtain and maintain authorization to operate and confer degrees or
other recognized credentials, have the appropriate authorization to
recruit students through compliance with statutes, regulations and
policies. This is achieved through clear internal operating procedures,
internal quality controls, regular and standardized professional staff
development, seasoned outside auditors and internal quality assurances.
We also maintain strong communications with governmental entities and
professional associations including the College Board, American Council
on Education (ACE) and National Association of Student Financial Aid
Administrators (NASFAA).
The dilemma facing higher education and the Congress is how to
ensure quality and accountability, and to prevent abuse without
creating overly burdensome regulations that could have the unintended
consequence of precluding students from receiving the education
required for a sustainable, thriving global economy.
The biggest challenge facing most students is having the
appropriate school information to make good decisions. All students
should have information available to them regarding their total cost of
education, an understanding of how they will pay for those costs and
reasonable expectations for employment or graduate school following
completion of their studies. Their second biggest challenge is having
the right financing in place to assist with paying for their education.
The Higher Education Opportunity Act (HEOA) of 2008 addressed both of
these issues with expansion of consumer disclosures, requirement of
school certification of private loans (allowing schools to intercede
where students were choosing more expensive loans over Federal loans)
and increasing the maximum Pell Grant award as well as extending Pell
Grant coverage for year-round students. This last provision addressed
an inequity borne by many year-round nontraditional students and will
help lower the overall debt burden for these students. Despite the
increased disclosure requirements, there still is no assurance that
prospective students will have an understanding of their total
financial commitment, nor their postgraduation opportunities. In
response to the Secretary's proposed rules (during Negotiated
Rulemaking) regarding the requirement that certain programs of study
prepare students for gainful employment in a recognized occupation, we
proposed a robust disclosure process to assure students have the
appropriate information needed to make informed educational decisions.
We are pleased that the Secretary has adopted this suggestion with the
issuance of his Notice of Proposed Rulemaking (NPRM), but are
disappointed that it is limited only to enrollments in certain programs
of study. This is a protection that should be assured all prospective
students.
Congress is once again revisiting regulations around higher
education. We welcome this and will continue to engage the Congress,
Department of Education and educational stakeholders on behalf of our
students to assure that they are fairly and well-served. Issues
including institutional quality, student indebtedness, time-to-
degree, persistence and graduation rates are a serious concern for all
sectors of higher education. We are ill-served by drawing false
distinctions between what motivates a private-sector school like DeVry
and what motivates a State-funded public or eleemosynary institution.
All institutions must serve students well or they will not survive. Our
country needs to produce an educated workforce that can thrive in a
rapidly changing global economy, or we will not maintain our leadership
position. It is in the best interest of all of us in higher education
to work together to solve these issues. The future of this Nation
depends on an educated workforce for as H.G. Wells' asserted, ``Human
history becomes more and more a race between education and
catastrophe.''
______
Appendix A
Table 1
------------------------------------------------------------------------
Institution Accrediting Body Program/Locations
------------------------------------------------------------------------
Apollo College.................. Accrediting All Apollo College
Council for locations.
Independent
Colleges and
Schools (ACICS).
Apollo College.................. Joint Review Medical
Committee on Radiography.
Education in
Radiologic
Technology
(JRCERT).
Apollo College.................. Committee on Respiratory
Accreditation for Therapy.
Respiratory Care.
Apollo College.................. Commission on Dental Hygiene.
Dental
Accreditation.
Apollo College.................. Accrediting Bureau Medical Assisting.
of Health
Education Schools
(ABHES).
Chamberlain College of Nursing.. Commission on Bachelor of
Colligate Nursing Science in
Education (CCNE). Nursing (Addison,
IL, Columbus, OH,
Phoenix, AZ, St.
Louis, MO).
Chamberlain College of Nursing.. National League Bachelor of
for Nursing Science in
Accreditation Nursing
Commission (Columbus, OH,
(NLNAC). St. Louis, MO).
Chamberlain College of Nursing.. Higher Learning All Chamberlain
Commission of the locations.
North Central
Association of
Colleges and
Schools.
DeVry University................ Higher Learning All DeVry
Commission of the University U.S.
North Central locations.
Association of
Colleges and
Schools.
DeVry University................ Technology Bachelor of
Accreditation Science in
Commission of Biomedical
ABET. Engineering
Technology
(Columbus, OH,
Decatur/
Alpharetta, GA,
Federal Way, WA,
Ft. Washington,
PA, Irving, TX,
Kansas City, MO,
Fremont, CA,
Phoenix, AZ).
DeVry University................ Technology Bachelor of
Accreditation Science in
Commission of Computer
ABET. Engineering
Technology
(Addison, IL,
Arlington, VA,
Chicago, IL,
Columbus, OH,
Decatur/
Alpharetta, GA,
Federal Way, WA,
Ft. Washington,
PA, Houston, TX,
Irving, TX,
Kansas City, MO,
Long Island City,
NY, Fremont, CA,
Orlando, FL,
Phoenix, AZ,
Miramar, FL, Long
Beach, CA,
Pomona, CA,
Sherman Oaks, CA,
Westminster, CO).
DeVry University................ Technology Bachelor of
Accreditation Science in
Commission of Electronics
ABET. Engineering
Technology
(Addison, IL,
Arlington, VA,
Chicago, IL,
Columbus, OH,
Decatur/
Alpharetta, GA,
Federal Way, WA,
Ft. Washington,
PA, Houston, TX,
Irving, TX,
Kansas City, MO,
Long Island City,
NY, North
Brunswick, NJ,
Paramus, NJ,
Fremont, CA,
Sacramento, CA,
Orlando, FL,
Phoenix, AZ,
Miramar, FL, Long
Beach, CA,
Pomona, CA,
Sherman Oaks, CA,
Westminster, CO).
Western Career College.......... Accrediting All Western Career
Commission for College
Community and locations.
Junior Colleges
of the Western
Association of
Schools and
Colleges (WASC).
Western Career College.......... Commission on Dental Hygiene.
Dental
Accreditation.
Western Career College.......... American Medical Assisting.
Association of
Medical
Assistance.
Western Career College.......... Committee on Respiratory
Accreditation for Therapy.
Respiratory Care.
Western Career College.......... Accreditation Surgical
Review Committee-- Technology.
Surgical Tech
(ARC-ST).
Western Career College.......... American Veterinary
Veterinary Technology.
Medical
Association.
Western Career College.......... American Society Pharmacy
of Health-System Technician.
Pharmacist
Pharmacy
Technician.
------------------------------------------------------------------------
______
Appendix B.--DeVry University
About DeVry Inc. DeVry's purpose is to empower our students to
achieve their educational and career goals. Our colleges and
universities offer 75 certificates through graduate and professional
degree programs serving undergraduate and graduate students in
business, healthcare technology and medicine. DeVry serves students in
secondary through post-secondary education as well as accounting and
finance professions. DeVry is a global provider of educational services
and is the parent organization of Advanced Academics, Apollo College,
Becker Professional Education, Chamberlain College of Nursing, DeVry
Brasil, DeVry University, Western Career College and Ross University
Schools of Medicine and Veterinary Medicine.
About DeVry University. DeVry University helped pioneer accessible
post-secondary education to populations too often underserved by higher
education. DeVry was one of the first institutions to fully integrate
online courses with onsite program delivery, further expanding the
flexibility in course offerings needed by today's learners.
Since 1975, nearly 238,000 undergraduate students systemwide have
graduated from DeVry University. Over 90 percent of graduates active in
the job market were employed in career-related positions within 6
months of graduation.
Founded in 1931;
Over 76,000 students nationwide;
Year-round on-site and online classes allow flexibility;
and
Over 90 campus locations in 26 States offering 26
programs.
About DeVry University Advantage Academy. Since 2004, DeVry
University Advantage Academy has partnered with the Chicago Public
Schools offering dual enrollment opportunities to area high school
students. Since its inception, Chicago high school participants have
achieved a 92 percent high school graduation rate and earned an
associate degree in Network Systems Administration.
DeVry graduate employers include: AT&T; Boeing; Department of
Defense; General Electric; Intel; IBM; JP Morgan Chase; Kaiser
Permanente; Kelly Engineering Resources; Northrop Grumman; Sprint
Nextel; and Verizon.
DeVry University Student Profile*
------------------------------------------------------------------------
------------------------------------------------------------------------
Fall 2009 Undergraduate Enrollment........................ 59,518
(U.S.)
Fall 2009 Graduate Enrollment............................. 16,958
Male...................................................... 54%
Female.................................................... 46%
------------------------------------------------------------------------
------------------------------------------------------------------------
Undergraduate Graduate [In
[In percent] percent]
------------------------------------------------------------------------
Percent African-American................... 26 36
Percent Hispanic........................... 16 9
Percent White.............................. 42 35
Percent Asian.............................. 5 7
Percent Alaskan Native/American Indian..... 1 1
------------------------------------------------------------------------
Note: 72% of DeVry's students are adult learners.
*Fall 2009 IPEDs.
------------------------------------------------------------------------
Graduate
------------------------------------------------------------------------
2008-2009 Total Degrees Conferred......................... 12,924
2008 Graduation Rate for First-time, Full-time............ 31%**
2008 Full-time New Transfer Students...................... 56%
------------------------------------------------------------------------
**As a frame of reference, the median graduation rate of public 4-year
institutions, including highly selective institutions, in the States
in which DeVry University operates, is 44 percent. The first-time,
full-time metric applies to less than 60 percent of fall 2002 entering
students.
------------------------------------------------------------------------
Associate Baccalaureate
Degree Degree
------------------------------------------------------------------------
Median Loan Debt (2009).................... $30,970 $32,184
Cohort Default Rate (2007): (7.9%).........
------------------------------------------------------------------------
most popular programs*
Associate Degree: Electronics and Computer Technology; Health
Information Technology; Network Systems Administrations.
---------------------------------------------------------------------------
* Programs and delivery vary by location.
---------------------------------------------------------------------------
Bachelor's Degree: Business Administration; Computer Information
Systems; Electronics Engineering Technology; Game Simulation &
Programming; Technical Management.
Master's Degree: Accounting and Financial Management; Business
Administration; Electrical Engineering; Information Systems Management.
______
DeVry University provides rigorous, career-oriented associate,
baccalaureate and graduate degree programs integrating technology,
science, business and the arts. Students access these programs at
campus locations and online, meeting the needs of a diverse and
geographically dispersed student population.
ACCREDITATION
DeVry University is accredited by The Higher Learning Commission of
the North Central Association, one of six regional accrediting agencies
for public and private colleges and universities in the United States
that are recognized by the U.S. Department of Education. DeVry received
a 10-year re-approval from the commission in 2002.
EMPLOYER TESTIMONIALS
``It is critical to our continued success in the high technology
arena that we deliver to our customers systems that are sophisticated,
exceed quality standards, delivered on time and within budget. From the
beginning, DeVry graduates have exceeded our expectations with a
terrific team attitude. Their ability to grasp new ideas, investigate
technologies, and apply these concepts to projects has allowed PSI to
continue our commitment to excellence.'' (As a result of their DeVry
experience, they already possess the technical blocks needed for a
smooth integration into the specific . . . systems we service.)--Walter
Johnson, President of Precision Systems Inc., Horsham, PA.
``We have success with DeVry students for a very specific reason.
As a result of their DeVry experience, they already possess the
technical blocks needed for a smooth integration into the specific
electrical/electronic systems we service. We will continue to rely
heavily on DeVry for our future personnel need.''--Edward M. Rogers,
Director of Operations, API, Inc., Washington D.C. Metro.
STUDENT AND ALUMNI TESTIMONIALS
Armed with my [DeVry University] accounting degree, I took a CPA
review course right out of college and, as a result of my DeVry
education and the review course, I was able to successfully pass the
exam the first time. In addition, the ``applied learning'' curriculum
at DeVry and interactive format of the classes gave me the skills
needed to start asking ``why'' from day one. This approach has been
tremendously successful for me in my career advancement. (``. . . the
applied learning curriculum at DeVry and interactive format of the
classes gave me the skills needed to start asking `why' from day
one.'')--Shawn McCracken, 1992 BS, Accounting, DeVry University
(Columbus, OH), Director, Accounts Maintenance and Control (AM&C)--
Acquisition, Defense Finance and Accounting Service.
``Obtaining a bachelor's degree in Business Administration at DeVry
allowed me to pursue opportunities in a variety of career fields. I was
not limited to a technology job or an operations job . . . I was able
to have a career that requires a fusion of both business and
technology. The confidence and experience I've gained at DeVry has
helped me achieve success.''--Shamsa Chaudhry, 2002 BSBA Graduate,
DeVry University (Addison, IL), Marketing Dashboards Manager, OgilvyOne
Worldwide.
``The instructors at DeVry are people who have worked in the
industry and know what's going on. The instructors are there to help,
and as a student you definitely see that. I was able to graduate with a
Bachelor's degree from DeVry University in June 2009, which made me the
first in the Messenger family to graduate from college.''--Andrew
Messenger, 2009, BS, Game & Simulation Programming (Gainesville, FL),
Production Assistant, Ignition Entertainment.
______
Chamberlain--College of Nursing
ABOUT DEVRY INC.
DeVry's purpose is to empower our students to achieve their
educational and career goals. Our colleges and universities offer 75
certificate through graduate and professional degree programs serving
undergraduate and graduate students in business, healthcare technology
and medicine. DeVry serves students in secondary through post-secondary
education as well as accounting and finance professions. DeVry is a
global provider of educational services and is the parent organization
of Advanced Academics, Apollo College, Becker Professional Education,
Chamberlain College of Nursing, DeVry Brasil, DeVry University, Western
Career College and Ross University Schools of Medicine and Veterinary
Medicine.
ABOUT CHAMBERLAIN COLLEGE OF NURSING
Since its founding in St. Louis, MO over 120 years ago, Chamberlain
College of Nursing (formerly Deaconess College of Nursing) has
continually provided quality and innovative nursing education programs
to its students. The College offers programs with a strong historical
foundation, broad general education background and an extensive
clinical practice component that culminates in compassionate and
clinically proficient graduates. As a result, Chamberlain graduates
generally pass the NCLEX-RN licensure exam at rates on par or greater
than the national average.
Chamberlain features a diverse student body: registered nurses
completing bachelor's and master's degrees, traditional high school
graduates seeking a quality nursing education experience close to home
and working adults looking to switch their career path and enter the
nursing field.
CHAMBERLAIN COLLEGE OF NURSING PROFILE
Founded in 1889; Year-round onsite and online classes allow
flexibility; Campuses in Arizona, Florida, Illinois, Ohio, Missouri and
Virginia; State-of-the-art nursing simulation labs and equipment;
Experienced, highly skilled and dedicated faculty; 2009 NCLEX-RN Pass
Rates: 90 percent--98.55 percent.
Chamberlain College of Nursing Student Profile*
------------------------------------------------------------------------
------------------------------------------------------------------------
Fall 2009 Undergraduate Enrollment........................ 5,108
Fall 2009 Graduate Enrollment............................. 119
Male...................................................... 9%
Female.................................................... 91%
------------------------------------------------------------------------
------------------------------------------------------------------------
Undergraduate Graduate
[In percent] [In percent]
------------------------------------------------------------------------
Percent African-American................... 14 13
Percent Hispanic........................... 4 3
Percent White.............................. 69 62
Percent Asian.............................. 5 1
Percent Alaskan Native/American Indian..... 1 1
------------------------------------------------------------------------
Note: 80 percent of Chamberlain's students are adult learners.
*Fall 2009 IPEDs.
------------------------------------------------------------------------
Graduate
------------------------------------------------------------------------
2008-2009 Total Degrees and Graduate Certificates 945
Conferred................................................
2008 Graduation Rate for First-time, Full-time Students... 35%**
2008 Graduation Rate for Full-time New Transfer Students.. 42%
------------------------------------------------------------------------
**The first-time, full-time metric applies to only 16 percent of fall
2002 entering students.
------------------------------------------------------------------------
Associate Baccalaureate
Degree Degree
------------------------------------------------------------------------
Median Loan Debt (2009).................... $24,108 $18,562
Cohort Default Rate (2007): 2.9%...........
------------------------------------------------------------------------
TYPICAL CHAMBERLAIN GRADUATE NURSING PROFESSIONS
Clinical Informatics; Community Nurse; Clinical Products
Specialist; Homecare; School Nurse; Staff Nurse; Supervisor/Manager
Charge Nurse; Telephonic Advice Nurse.
UNDERGRADUATE PROGRAMS*
Licensed Practical Nurse to Registered Nurse (onsite and online);
Associate Degree in Nursing (onsite and online); Bachelor of Science in
Nursing (onsite); Registered Nurse to Bachelor of Science in Nursing
(online).
GRADUATE PROGRAMS*
Master of Science in Nursing (online).
---------------------------------------------------------------------------
* Programs and delivery vary by location.
---------------------------------------------------------------------------
______
ACCREDITATION
Chamberlain College of Nursing is accredited by The Higher Learning
Commission of the North Central Association of Colleges and Schools,
one of the six regional agencies that accredit U.S. colleges and
universities at the institutional level. The bachelor of science in
nursing degree program at the St. Louis and Columbus campuses and the
associate of science degree in nursing program at the Columbus campus
are accredited by the National League for Nursing Accrediting
Commission (NLNAC). The bachelor of science in nursing degree program
at the Addison, Columbus, Phoenix and St. Louis campuses is accredited
by the Commission on Collegiate Nursing Education (CCNE). Accreditation
provides assurance to the public and to prospective students that
standards of quality have been met.
EMPLOYER TESTIMONIALS
``Saint John's recruits from Chamberlain because they have highly
qualified, highly competent, highly skilled graduates. They have the
right combination for us. At Saint John's we look for graduates that
are able to not only deliver quality care but deliver great service and
Chamberlain has repeatedly delivered that for us.'' (``We look for
graduates that are able to not only deliver quality care but deliver
great service and Chamberlain has repeatedly delivered that for
us.'')--Kimberly McGrath, Nurse Manager, Saint John's Mercy Medical
Center, St. Louis, MO.
``The bridge programs that Chamberlain offers are very beneficial.
We actually have an employee population here . . . who've often been
here for a number of years and started their career as, say, a licensed
practical nurse. Well, as the market changes and . . . as things
develop, it is more beneficial for them to be a registered nurse
because their scope is that much wider. And so we've had a number of
our own LPNs go through the Chamberlain bridge program and they can
become an RN in less than a year, particularly with their hands-on
clinical experience, and the education that is provided through
Chamberlain.''--Casey Cook, HR Generalist, Forest Park Hospital, St.
Louis, MO.
``We're really looking forward to working the Chamberlain nursing
students. The Chamberlain students will be getting an exceptional
technical training, here at the campus. They have state-of-the-art
facilities, but those technical skills can only take a student so far.
So by coming to the Adventist Midwest Hospitals, they will have the
opportunity to practice with patients, and work with mentors, and other
seasoned, experienced registered nurses who can role model positive
interactions with patients, and teach them some of the decisionmaking
skills that are so important for nurses in this day and age.''--Jackie
Conrad, Chief Nursing Officer & VP for Patient Care Services, Glen Oaks
Adventist Hospital, Glendale Heights, IL.
``I personally hire a lot of new graduates and I wouldn't hesitate
to hire a new graduate from Chamberlain College due to the fact that
they're very well prepared when they are in the program and clinically
knowledgeable and definitely willing to learn.'' (``I wouldn't hesitate
to hire a new graduate from Chamberlain College due to the fact that
they're very well prepared . . . and clinically knowledgeable . .
.'')--Lisa Palmer, Director of Nursing, Palm Valley Rehab and Care
Center, Goodyear, AZ.
STUDENT TESTIMONIALS
``What's it like being a student at Chamberlain? It's awesome
because . . . for once, I'm able to get into a career that I've always
loved. I'm able to become the nurse that I've always dreamed of
becoming.--Towana Sullivan, Chamberlain student, Columbus, OH.
``I think the reason one should choose Chamberlain is the
dedication of the staff. I think when you have them behind you, you can
achieve what you want.''--Debra Reider, Chamberlain student, St. Louis,
MO.
Apollo College
ABOUT DEVRY INC.
DeVry's purpose is to empower our students to achieve their
educational and career goals. Our colleges and universities offer 75
certificates through graduate and professional degree programs serving
undergraduate and graduate students in business, healthcare, technology
and medicine. DeVry serves students in secondary through post-secondary
education as well as accounting and finance professions. DeVry is a
global provider of educational services and is the parent organization
of Advanced Academics, Apollo College, Becker Professional Education,
Chamberlain College of Nursing, DeVry Brasil, DeVry University, Western
Career College and Ross University Schools of Medicine and Veterinary
Medicine.
ABOUT APOLLO COLLEGE AND WESTERN CAREER COLLEGE
With over 15,000 students, Apollo College and Western Career
College are leading providers of post-secondary healthcare education in
the western region of the United States. The Colleges provide 45 high-
quality, career-oriented healthcare diploma, associate and bachelor's
degree (July 2010) programs ranging from Medical Assisting, Dental
Assisting, Pharmacy Technology, and Healthcare Administration, to
advanced programs such as Nursing, Dental Hygiene, Surgical Technology,
Medical Sonography and Respiratory Therapy.
These program offerings capitalize on powerful demographic and
secular trends that are driving the increasing demand for highly
qualified healthcare professionals in the United States.
APPOLLO COLLEGE PROFILE
Founded in 1975; Ten campuses in six States Arizona, Idaho, Nevada,
New Mexico, Oregon and Washington.
WESTERN CAREER COLLEGE PROFILE
Founded in 1967; Nine campuses across northern and southern
California.
------------------------------------------------------------------------
------------------------------------------------------------------------
Apollo College Student Profile:
Fall 2009 Enrollment..................................... 9,275*
Male..................................................... 19%
Female................................................... 81%
African-American......................................... 5%
Hispanic................................................. 25%
White.................................................... 46%
Asian.................................................... 3%
Alaskan Native/American Indian........................... 5%
Western Career College Student Profile:
Fall 2009 Enrollment..................................... 6,381*
Male..................................................... 15%
Female................................................... 85%
African-American......................................... 16%
Hispanic................................................. 21%
White.................................................... 32%
Asian.................................................... 13%
Alaskan Native/American Indian........................... 1%
2008-2009 Total Degrees and Diplomas Conferred............. 7,325
Apollo College........................................... 4,288
Western Career College................................... 3,037
2008 First-time, Full-time Graduation Rate (combined)...... 59%
Apollo College........................................... 60%
Western Career College................................... 58%
*Fall 2009 IPEDs.
------------------------------------------------------------------------
Associate
Apollo College Diploma Degree
------------------------------------------------------------------------
Median Loan Debt (FY 2009)......................... $8,402 $20,850
Cohort Default Rate (2007) : 7.2%
------------------------------------------------------------------------
------------------------------------------------------------------------
Associate
Western Career College Diploma Degree
------------------------------------------------------------------------
Median Loan Debt (FY 2009)......................... $10,125 $14,975
Cohort Default Rate (2007) : 10.2%
------------------------------------------------------------------------
APOLLO COLLEGE ACCREDITATION
Apollo College is accredited by the Accrediting Council for
Independent Colleges and Schools (ACICS) to award Bachelor of Science,
Associate of Science and Associate of Occupational Studies degrees.
ACICS is recognized by the U.S. Department of Education and by the
Council for Higher Education Accreditation.
WESTERN CAREER COLLEGE ACCREDITATION
Western Career College is accredited by the Accrediting Commission
for Community and Junior Colleges of the Western Association of Schools
and Colleges (WASC), an institutional accrediting body recognized by
the Council for Higher Education Accreditation and the U.S. Department
of Education.
EMPLOYER TESTIMONIALS
``. . . Apollo students have been an integral part of our clinic .
. . The faculty act as excellent role models and provide up-to-date
clinical education . . .''--Dr. Kathy Lopez-Bushnell, RNC, EdD, MPH;
The University of New Mexico Hospitals, Albuquerque, NM.
``. . . Apollo College provides us with knowledgeable Medical
Assistant students to complete their externships . . . Our University
Health Center has hired graduates with great success. We believe in
Apollo College . . .''--Betsy Johnson, RN, BSN: Supervisor, Boise State
University Health Services, Boise, ID.
ALUMNI TESTIMONIALS
``My life has changed significantly since graduating. I have more
self-esteem and confidence.''--Karen Solari, 2006 Western Career
College Pharmacy Technician graduate, Sacramento, CA.
``I have been working nonstop since receiving my nursing license--
and I love what I do! I finally got my dream job working at a major
hospital.''--Theresa Morin, 2005 Western Career College Vocational
Nursing graduate, Elk Grove, CA.
``My experience at Apollo has been amazing. The hands-on training
makes learning easier and more enjoyable. My instructors were 100
percent top-notch. The class sizes are small so you get a lot more
help. I can't say enough great things about Apollo.''--Jamie Martinez,
Apollo College Dental Assisting student, Mesa, AZ.
The Chairman. Ms. Parrott, thank you very much for being
here and for your excellent testimony.
Now we turn to Mr. Steve Eisman. Mr. Eisman, welcome and
please proceed.
STATEMENT OF STEVEN EISMAN, PORTFOLIO MANAGER, FRONTPOINT
FINANCIAL SERVICES FUND, LP, NEW YORK, NY
Mr. Eisman. Good morning, Chairman Harkin and Ranking
Member Enzi, and members of the committee. Thank you for
inviting me to testify this morning.
My name is Steve Eisman and I am the Portfolio Manager of
the FrontPoint Financial Services Fund. My firm has spent a
great deal of time studying the for-profit education industry
and understanding how it operates and derives its revenue. It
has been an eye-opening experience.
My testimony comes today largely from a recent presentation
I gave at an investor conference entitled ``Subprime Goes to
College.'' The for-profit industry has grown at an extreme and
unusual rate driven by easy access to Government-sponsored debt
in the form of title IV student loans, where the credit is
guaranteed by the Government. Thus, the Government, the
students, and the taxpayer bear all the risks and the for-
profit industry reaps all the rewards. This is similar to the
subprime mortgage sector in that the subprime originators bore
far less risk than the investors in their mortgage paper.
The for-profit education industry accounts for 9 percent of
the students, 25 percent of all title IV disbursements, and 44
percent of all defaults. There is something wrong with this
statistical progression.
At many major for-profit institutions, Federal title IV
loan and grant dollars now comprise nearly close to 90 percent
of all revenues, and this growth has driven even more
spectacular company profitability and wealth creation for
industry executives.
For example, ITT Educational Services, one of the larger
companies in the industry, has a roughly 40 percent operating
margin versus the 7 to 12 percent margins of other companies
that receive major Government contracts. ITT is more profitable
on a margin basis than even Apple. This growth is purely a
function of Government largesse, as title IV has accounted for
more than 100 percent of revenue growth.
One major reason why the industry has taken an ever-
increasing share of Government dollars is that it seeks to
recruit those with the greatest financial need and put them in
high-cost institutions. This formula maximizes the amount of
title IV loans and grants that these students receive. If the
industry, in fact, educated its students and got them good jobs
and enabled them to receive higher incomes and to pay off the
student loans, everything I just said would be irrelevant.
Let us first look at some dropout data. I have presented to
the committee a very long PowerPoint presentation. If you look
through it, you will see that we calculate dropout rates of
most schools ranging anywhere from 50 percent to 100 percent
per annum. How good could the product be if dropout rates are
so stratospheric? These statistics are quite alarming,
especially given the enormous amount of debt most for-profit
students must borrow to attend these schools.
We have every expectation that the industry's default rates
are about to explode. Because of the growth in the industry and
the increasing search for more students, we are now back to
late 1980's levels of lending to for-profit students on a per-
student basis. Back then, defaults were off the charts and
fraud was commonplace.
How do schools such as this stay in business? The answer is
to control the accreditation process. The scandal here is
exactly akin to the rating agency role in subprime
securitizations. Accreditation bodies are nongovernmental,
nonprofit, peer reviewing groups. Schools must earn and
maintain proper accreditation to remain eligible for title IV
programs.
The relationship of the for-profit education industry and
the national accrediting boards is, in my view, similar to the
relationship between the rating agencies and the investment
banks. There, Wall Street paid the rating agencies handsomely
for ratings on subprime securitizations that turned out to be
euphemistically overly optimistic. Here, the industry, we
believe, controls the national accrediting boards by actually
sitting on the boards of those very same institutions. The
lunatics are running the asylum.
The core of the problem in both the subprime and the for-
profit education industry in my view is a problem of
incentives. In subprime brokers were incentivized to make as
many loans as possible because they were paid on volume. They
faced no risk of loss due to bad decisionmaking because the
loans were sold off to investors. In for-profit education,
every segment of the institution is incentivized to enroll as
many students as possible. Recruiters are paid on volume.
Instructors are compensated based on completions, and
executives and shareholders are paid based on growth and none
bear the risk of losses should the students not get their
money's worth or, even worse, default on their loans. The
incentives to grow far outweigh the incentives to educate, and
thus, like in subprime, rather than having a fundamentally
sound industry with a few bad actors, it is my belief you have
a fundamentally unsound industry but with a few good ones.
Let me end by driving this subprime analogy to its ultimate
conclusion. By late 2004, it was clear to me and my partners
that the mortgage industry had lost its mind and a society-wide
calamity was going to occur. It was like watching a train wreck
with no ability to stop it.
Are we going to do this all over again? We have just loaded
up one generation of Americans with mortgage debt they cannot
afford to pay back. Are we going to load up a new generation
with student loan debt that they cannot afford to pay back?
The industry is now 25 percent of title IV money, quickly
on its way to 40 percent. If it is policed, the problem can be
stopped. It is my hope that this Administration and the
committee sees the nature of the problem and begins to act now.
If nothing is done, then we are on the cusp of what I
believe is a new social disaster. If present trends continue,
over the next 10 years almost $500 billion of title IV loans
will have been funneled to this industry. My team and I
estimate total defaults of approximately $275 billion and
because of fees associated with defaults, for-profit students
will owe approximately $300 billion on defaulted loans over the
next 10 years.
Mr. Chairman and the committee, I would be happy to answer
any questions that you have.
[The prepared statement of Mr. Eisman follows:]
Prepared Statement of Steven Eisman
Good morning. Chairman Harkin and members of the committee, thank
you for inviting me to testify this morning. My name is Steven Eisman
and I am the portfolio manager of the FrontPoint Financial Services
Fund. My firm has spent a great deal of time studying the for-profit
education industry and understanding how it operates and derives its
revenue. It has been an eye opening experience. Until recently, I
thought that there would never again be an opportunity to be involved
with an industry as socially destructive as the subprime mortgage
industry. I was wrong. The for-profit education industry has proven
equal to the task.
My testimony today comes largely from a recent presentation I gave
at an investor conference entitled ``Subprime goes to College.'' The
for-profit industry has grown at an extreme and unusual rate, driven by
easy access to government-sponsored debt in the form of title IV
student loans, where the credit is guaranteed by the government. Thus,
the government, the students and the taxpayer bear all the risk and the
for-profit industry reaps all the rewards. This is similar to the
subprime mortgage sector in that the subprime originators bore far less
risk than the investors in their mortgage paper.
The for-profit education industry accounts for 9 percent of the
students, 25 percent of all title IV disbursements but 44 percent of
all defaults. And the President of the largest for-profit institution
is paid nearly 25x the compensation level of the President of Harvard.
There is something wrong with this statistical progression.
In the past 10 years, the for-profit education industry has grown
5-10 times the historical rate of traditional post-secondary education.
From 1987 through 2000, the amount of total title IV dollars received
by students of for-profit schools fluctuated between $2 and $4 billion
per annum. But when the Bush administration took over the reigns of
government, the DOE gutted many of the rules that governed the conduct
of this industry. Once the floodgates were opened, the industry
embarked on 10 years of unrestricted massive growth.
Federal dollars flowing to the industry exploded to over $21
billion, a 450 percent increase.
At many major for-profit institutions, Federal title IV loan and
grant dollars now comprise close to 90 percent of total revenues, up
significantly vs. 2001. And this growth has driven even more
spectacular company profitability and wealth creation for industry
executives. For example, ITT Educational Services (ESI), one of the
larger companies in the industry, has a roughly 40 percent operating
margin vs. the 7 percent-12 percent margins of other companies that
receive major government contracts. ESI is more profitable on a margin
basis than even Apple.
This growth is purely a function of government largesse, as title
IV has accounted for more than 100 percent of revenue growth. Here is
one of the more upsetting statistics. In fiscal 2009, Apollo, the
largest company in the industry, grew total revenues by $833 million.
Of that amount, $1.1 billion came from title IV federally funded
student loans and grants. More than 100 percent of the revenue growth
came from the Federal Government. But of this incremental $1.1 billion
in Federal loan and grant dollars, the company spent only an
incremental $99 million on faculty compensation and instructional
costs--that's 9 cents on every dollar received from the government
going towards actual education. The rest went to marketing and paying
the executives.
One major reason why the industry has taken an ever-increasing
share of government dollars is that it has turned the typical education
model on its head. And here is where the subprime analogy becomes very
clear.
There is a traditional relationship between matching means and cost
in education. Typically, families of lesser financial means seek lower
cost institutions in order to maximize the available title IV loans and
grants--thereby getting the most out of every dollar and minimizing
debt burdens. Families with greater financial resources often seek
higher cost institutions because they can afford it more easily.
The for-profit model seeks to recruit those with the greatest
financial need and put them in high cost institutions. This formula
maximizes the amount of title IV loans and grants that these students
receive.
With billboards lining the poorest neighborhoods in America and
recruiters trolling casinos and homeless shelters (and I mean that
literally), the for-profits have become increasingly adept at pitching
the dream of a better life and higher earnings to the most vulnerable
of society.
But if the industry in fact educated its students and got them good
jobs that enabled them to receive higher incomes and to pay off their
student loans, everything I've just said would be irrelevant.
So the key question to ask is--what do these students get for their
education? In many cases, NOT much, not much at all.
Here is an example of an education promised and never delivered. In
the Powerpoint presentation before you, there is an article detailing a
Corinthian Colleges-owned Everest College campus in California whose
students paid $16,000 for an 8-month course in medical assisting. Upon
nearing completion, the students learned that not only would their
credits not transfer to any community or 4-year college, but also that
their degree is not recognized by the American Association for Medical
Assistants. Hospitals refuse to even interview graduates.
But let's leave aside the anecdotal evidence of this poor quality
of education. After all the industry constantly argues that there will
always be a few bad apples. So let's put aside the anecdotes and just
look at the statistics. If the industry provided the right services,
drop out rates and default rates should be low.
Let's first look at drop out rates. Companies don't fully disclose
graduation rates, but using both DOE data, company-provided information
and admittedly some of our own assumptions regarding the level of
transfer students, we calculate drop out rates at most for-profit
schools are 50 percent+ per year.
How good could the product be if drop out rates are so
stratospheric? These statistics are quite alarming, especially given
the enormous amount of debt most for-profit students must borrow to
attend school.
We have every expectation that the industry's default rates are
about to explode. Because of the growth in the industry and the
increasing search for more students, we are now back to late 1980s
levels of lending to for-profit students on a per student basis. Back
then defaults were off the charts and fraud was commonplace.
Default rates are already starting to skyrocket. It's just like
subprime--which grew at any cost and kept weakening its underwriting
standards to grow.
By the way, the default rates the industry reports are artificially
low. There are ways the industry can and does manipulate the data to
make their default rates look better.
But don't take my word for it. The industry is quite clear what it
thinks the default rates truly are. ESI and COCO supplement title IV
loans with their own private loans. And they provision 50 percent-60
percent up front for those loans. Believe me, when a student defaults
on his or her private loans, they are defaulting on their title IV
loans too.
There is no such thing as a profitable loan where the loan loss
provision is 50 percent-60 percent. So why do these companies make
unprofitable non-FFELP loans? The private loan is much smaller than the
FFELP loan and the companies don't bear any losses on FFELP loans, only
on private loans. As a result, the losses on the private loans are just
loss leaders to get more students in the door.
Let me just pause here for a second to discuss manipulation of
statistics. There are two key statistics. No school can get more than
90 percent of its revenue from the government and 2-year cohort default
rates cannot exceed 25 percent for 3 consecutive years. Failure to
comply with either of these rules and you lose title IV eligibility.
Lose title IV eligibility and you're company's a zero.
With respect to the default statistics, it is my belief that they
are manipulated. Since the rule currently revolves around the 2-year
default rate, the companies have every incentive to keep that statistic
below 25 percent.
Isn't it amazing that Apollo's percentage of revenue from title IV
is 89 percent and not over 90 percent. How lucky can they be? We
believe (and many recent lawsuits support) that schools actively
manipulate the receipt, disbursement and especially the return of title
IV dollars to their students to remain under the 90/10 threshold. And
again, unprofitable private student loans is also a way to keep below
the 90/10 threshold.
The bottom line is that as long as the government continues to
flood the for-profit education industry with loan dollars AND the risk
for these loans is borne solely by the students and the government,
THEN the industry has every incentive to grow at all costs, compensate
employees based on enrollment, influence key regulatory bodies and
manipulate reported statistics--ALL TO MAINTAIN ACCESS TO THE
GOVERNMENT'S MONEY.
In a sense, these companies are marketing machines masquerading as
universities. And when the Bush administration eliminated almost all
the restrictions on how the industry is allowed to market, the machine
went into overdrive.
How do such schools stay in business? The answer is to control the
accreditation process. The scandal here is exactly akin to the rating
agency role in subprime securitizations.
There are two kinds of accreditation--national and regional.
Accreditation bodies are non-governmental, non-profit peer-reviewing
groups. Schools must earn and maintain proper accreditation to remain
eligible for title IV programs. The relationship of the for-profit
education industry and the national accrediting boards is, in my view,
similar to the relationship between the rating agencies and investment
banks. There, Wall Street paid the rating agencies handsomely for
ratings on subprime securitizations that turned out to be overly
optimistic. Here, the industry, we believe, controls the national
accrediting bodies by actually sitting on the boards of those very same
institutions. The lunatics are running the asylum.
Historically, most for-profit schools are nationally accredited but
national accreditation holds less value than regional accreditation.
The latest trend of for-profit institutions is to acquire the dearly
coveted Regional Accreditation through the outright purchase of small,
financially distressed non-profit institutions and then put that school
on-line. In March 2005, BPI acquired the regionally accredited
Franciscan University of the Prairies and renamed it Ashford
University. On the date of purchase, Franciscan (now Ashford) had 312
students. BPI took that school online and at the end of 2009 it had
54,000 students.
When I was researching the subprime mortgage industry in 2005 and
2006, I found that not every lender was bad--just most of them. A few
subprime lenders actually used considerable discretion and really tried
to make good loans to lower-income borrowers that made sense for them.
In the for-profit industry, the same is probably true. There are
probably a few good institutions that truly try to educate their
students.
The core of the problem in both the subprime and the for-profit
education industries is a problem of incentives. In subprime, brokers
were incentivized to make as many loans as possible because they were
paid on volume. They faced no risk of loss due to bad decisionmaking
because the loans were sold off to investors. In for-profit education,
every segment of the institution is incentivized to enroll as many
students as possible--recruiters are paid on volume, instructors are
compensated based on completions, and executives and shareholders are
paid based on growth. None bear the risk of loss should the students
not get their money's worth or even worse, default on their loans. The
incentives to grow far outweigh the incentives to educate. And thus,
like in subprime lending, rather than having a fundamentally sound
industry with a few bad actors, you have a fundamentally unsound
industry with few good ones.
Therefore, the best way to change this industry's conduct is to
change the law and force it to bear some of the losses that it creates.
In my power-point presentation, I show what would happen to several
companies if they bore various loss percentages. The industry still
stays very profitable. Just less profitable.
Let me end by driving the subprime analogy to its ultimate
conclusion. By late 2004, it was clear to me and my partners that the
mortgage industry had lost its mind and a society-wide calamity was
going to occur. It was like watching a train wreck with no ability to
stop it. Who could you complain to, The rating agencies?--They were
part of the machine; Alan Greenspan?--He was busy making speeches that
every American should take out an ARM mortgage loan; or The OCC?--Its
chairman, John Dugan, was busy suing State attorney generals,
preventing them from even investigating the subprime mortgage industry.
Are we going to do this all over again? We just loaded up one
generation of Americans with mortgage debt they can't afford to pay
back. Are we going to load up a new generation with student loan debt
they can never afford to pay back. The industry is now 25 percent of
title IV money on its way to 40 percent. If its growth is stopped now
and it is policed, the problem can be stopped. It is my hope that this
Administration sees the nature of the problem and begins to act now.
But if nothing is done, then we are on the cusp of a new social
disaster. If present trends continue, over the next 10 years almost
$500 billion of title IV loans will have been funneled to this
industry. We estimate total defaults of $275 billion, and because of
fees associated with defaults, for-profit students will owe $330
billion on defaulted loans over the next 10 years.
Mr. Chairman and members of the committee, I will be happy to
answer any questions that you have.
______
[June 24, 2010]
HELP Oversight Hearings on For-Profit Colleges
(Presentation by Steven Eisman--FrontPoint Partners)
Disclosures
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have regard to the specific investment objectives, financial situation
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for all persons, and recipients must make their own investment
decisions using their own independent advisors as they believe
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relating to economic and market conditions generally. Although these
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that the author believes to be reliable, we do not guarantee their
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constitute the judgment of the author as of the date of this document
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shall supersede this information in its entirety.
For Profit Education: Subprime goes to College*
before we begin, some statistics . . .
1. Tuition and fees at private for-profit institutions averaged
$14,174 in 2008-2009. This is more than twice the average in-state
tuition and fees at public 4-yr institutions ($7,020/yr) and more than
5 times the annual tuition and fees at public 2-yr colleges ($2,544/
yr). This implies that you could send 5 students through community
college for every 1 student sent to a for-profit school.
---------------------------------------------------------------------------
* Source: College Board, Trends in College Pricing and Trends in
Student Aid 2009: U.S. Dept of Education trial 3-yr default data.
---------------------------------------------------------------------------
2. In 2007-2008, 88 percent of students in the for-profit sector
took out Stafford Loans, compared to 42 percent of public 4-year
students, and only 10 percent of public 2-year college students. For
every one community college student that borrows Federal Financial Aid,
there are 9 for-profit students who borrow.
3. Students at for-profit institutions received more than 20
percent of all Pell Grant Aid in 2008-2009. Roughly 94 percent of all
Pell Grants were awarded to households with less than $50,000 in annual
income; 62 percent of all Pell awards went to families with less than
$30,000 in annual income.
4. Of bachelor degree recipients at for-profit schools, 57 percent
graduate with $30,000 or more in debt, versus 12 percent of public
school bachelor degree grads.
5. For-profit institutions now account for almost 10 percent of all
student enrollments, 25 percent of all Federal Financial Aid
disbursements, and 44 percent of all student loan defaults.
Background: Not your typical growth story . . .
The business model: Churn 'em and burn 'em . . .
What results from this combination of profit-motive and lack of
quality control is an expensive education that is highly questionable.
[East Bay News, March 19, 2010]
Everest College Students Angry Over Certification
(By Tomas Roman)
Hayward, CA (KGO)--Nearly three dozen Everest College students are
furious they haven't received the medical certification they paid for.
They refused to go to class until they get some answers.
Whether they attend class or not, the students have to pay $100.
Some of the students have been attending school for 8 months. Three
weeks ago they found out that the college does not supply them with a
certificate they were told they would get, in order to obtain the
medical positions they want.
The students are all studying medical assisting and they paid
$16,000 for an 8-month course. They were told the credits earned at the
school do not transfer to any community or 4-year college and that has
many of them angry.
NEWS ARTICLE SUMMARY
Students paid $16,000 for an 8-month course in medical
assisting at an Everest College campus in Hayward, CA.
Students recently learned that:
Credits earned at the school do not transfer to any
community or 4-year college.
Degrees granted at the school are not recognized by
the American Association for Medical Assistants (AAMA).
Hospitals will not interview students for potential
jobs.
ABC7 talked to the State Medical Assistant's Education
Review Board and found the Hayward Campus is one of several Everest
operates in California that the board say is not accredited to
credential medical assistants.
REPORTED STATISTICS . . . COHORT DEFAULT RATES (CDRS)
Cohort Default Rates (CDRs)
CDRs are the percentage of a school's borrowers who enter
repayment on a Federal Loan during a particular Federal fiscal year
(Oct 1 to Sep 30), and default prior to the end of the next fiscal
year.
Effectively a 2-yr snapshot of the total students in
default.
CDRs are an important measure of quality--if default rates
breach the federally mandated threshold of 25 percent (soon to be 30
percent), schools can lose eligibility to title IV.
Can Easily Be Manipulated to Mask True Defaults
Deferrals and forbearances used en mass to carry students
over the 2-year reported timeframe.
Schools used to partner with Sallie Mae and other lenders
to delay or manage down defaults through the 2-year timeframe in
exchange for guaranteed loan volumes.
Schools pay down student government loans with internal
money and collect directly from students.
REPORTED STATISTICS . . . THE 90/10 RULE
The 90/10 rule
90/10 says a for-profit may become ineligible to
participate in title IV programs if it derives more than 90 percent of
its cash basis revenue from title IV programs.
Applies only to for-profit institutions, effectively a cap
on total title IV dollars that can flow to a company as a percentage of
revenues.
Intended to create a structural boundary for growth from
title IV dollars.
Can Also Be Manipulated
Over-returning title IV dollars to the government when
students drop out and then billing students directly.
Pursue alternative government entitlement programs not counted
under the title IV umbrella (military educational loans grants).
When all else fails, raise tuition! Students will have to find
alternative (non-title IV) funding sources to close the gap between
tuition and the amount of total title IV loans.
REPORTED STATISTICS . . . COMPLETIONS AND PLACEMENTS
Completions (Graduation Stats)
Company-reported metric that measures the number of students who
complete a program (graduate) in 150 percent of normal time (for
example, 6 years of graduation data for a 4-year bachelors program).
Non-traditional student body doesn't graduate together,
and often takes much longer than normal to complete, so hard to
understand actual graduation by class.
No independent verification of graduates.
Placements (Employment Stats)
Company-reported metric that measures the number of
students who are placed in a job they were trained for (gainful
employment).
This is gainful employment?
Trained nurses become janitors at hospitals.
Homeland security degree grads become nighttime
security guards at shopping malls.
And for those grads who cannot find employment . . . hire
them! Most schools hire unemployed graduates internally to boost
reported placement stats.
As long as the government continues to flood the for-profit
education industry with loan dollars,
AND
the risk for these loans is borne SOLELY BY students and the
government . . .
THEN
the industry has every incentive to:
: Grow at all costs
Compensate employees based on enrollment
Influence key regulatory bodies
Manipulate reported statistics and other regulatory
measures
ALL TO MAINTAIN ACCESS TO THE GOVERNMENT'S MONEY.
The pace of the growth of the for-profit education industry and
their growing claim to Federal monies will require greater scrutiny to
protect students and the integrity of title IV lending.
The primary revenue and profitability driver for the for-
profit companies is unrestricted access to the U.S. Government's title
IV loans and grants.
For-profit education companies are now among the most
profitable businesses in the world due to government largesse.
Regulations built around company-reported statistics are
ineffective, and the Accreditation process for for-profit schools and
programs is compromised.
Disaggregation of risk from reward is the fundamental
cause of all problems.
Like sub-prime lending, this is an incentives problem--the
incentives to grow far outweigh the incentives to educate.
Solutions: Gainful employment
In summary, gainful employment has nothing to do with student
access; it has everything to do with making money at for-profit
institutions.
Many for-profit education companies have raised tuition
nearly 20 percent over the last 4 years, which has led to extraordinary
profitability gains.
Most schools were rapidly growing enrollments and opening
campuses throughout the last 4 years, even though tuition levels were
less than they are today.
A 8 percent/10-year repayment gainful employment measure
would force many schools to cut tuition back to 2006 levels to remain
in compliance.
Industry claims of gainful employment displacing students
are an effort to avoid tuition cuts; the reality is that with proper
tuition adjustments, very few programs would actually close.
Industry proposed alternatives (12-15-percent ratio, 15-
20-year repayment) would allow most every school to raise tuition, and
thus will increase student debt loads.
Solutions: Risk Sharing
What would a risk-sharing agreement look like and what would be
some likely outcomes?
Make for-profit companies share in a portion of the losses
on Federal loans.
This will immediately change behavior at every level of
the organization because companies will be punished for poor
underwriting.
Aggressive recruiting and tuition hikes slow, companies
improve educational quality, and retention.
Graduation and placements become more important than
growth because companies are penalized financially when students fail.
Appendix and Supporting Pages
The Chairman. Thank you all for your testimony. Very
sobering.
Mr. Eisman, I would like to start with you. I read your
testimony last evening and it was also very eye-opening. There
is one paragraph in your testimony that you did not read while
you were testifying here, and I would like to read it.
You said,
``One major reason why the industry has taken an
ever-increasing share of Government dollars is that it
has turned the typical education model on its head.
Here is where the subprime analogy becomes very clear.
There is a traditional relationship between matching
means and cost in education. Typically families of
lesser financial means seek lower-cost institutions in
order to maximize the available title IV loans and
grants, thereby getting the most out of every dollar
and minimizing debt burdens. Families with greater
financial resources often seek higher-cost institutions
because they can afford it more easily. The for-profit
model seeks to recruit those with the greatest
financial need and put them in the high-cost
institutions.''
Is that what you mean by turning it on its head?
Mr. Eisman. Yes, Mr. Chairman.
The Chairman. Well, I can associate with that because I
remember when I went to college, I knew where I wanted to go to
college but I could not afford it. It was always my dream to go
to Notre Dame. I could have gotten in. My grades were good
enough. I had plenty of good grades, everything like that. But
I could not afford it. I went to Iowa State University which I
could afford. I understand what you mean about turning that
model on its head. Now you go after lower-income students, but
they go to the highest-cost students now.
Mr. Eisman, let me get to a different point here. I read
about you, of course, in the book, The Big Short. I have
followed that. I had never met you personally until just now.
Someone was questioning why you would be here, and some
said, ``Well, you know, Mr. Eisman has a stake in this.'' I
would like to ask you pointblank, do you have a financial stake
in the success or failure of for-profit education companies?
Mr. Eisman. Thank you for the question, Mr. Chairman.
Yes, I do have a stake. I have been very transparent about
my views on this industry and that I have investment positions
in this industry.
But let me just be clear. I am a money manager who has the
ability to go long and to go short. My clients, my investors
are universities, pension funds, and individuals who have given
me their life savings and have asked me to give them a decent
return with the appropriate amount of risk.
I must tell you I take their charge as a sacred trust, and
because I do that, we are fanatics about research because we
feel that unless you do great research, you cannot make the
appropriate investment decisions. That research process over
the years leads us to conclude that sometimes individual
companies are good longs and sometimes industries are good
longs. Sometimes it leads us to conclude that individual
companies are good shorts. Once in a very blue moon, it leads
us to conclude that an entire industry is a short.
In 2005 and in 2006, that research process led us to
conclude that the entire mortgage sector was a short because it
had become delusional and that the rating agencies and the
investment banks were in cahoots with the whole process, and we
shorted them too. That exact research process has led me to the
similar type conclusions about the for-profit education
industry.
However, back then in 2006-2007, it never dawned on us that
there would even be the possibility of us going to people in
authority and saying, ``Look, this is what is going to
happen.'' You really should do something about that because
there was nobody to talk to. Who would you speak to? Alan
Greenspan? He was making speeches telling everybody to take out
an adjustable rate mortgage loan and speaking about how great
the risk management processes of the investment banks were.
John Dugan of the OCC? He was busy suing State Attorney
Generals, preventing them from even investigating subprime
mortgage companies.
The reason why I am here today is that it is my hope that
there is still time to do something, and that is why I am
testifying here today.
The Chairman. Well, I appreciate that. I wanted to get that
on the record to find out if, in fact, you have an interest in
them failing, why would you be here to try to save them.
Mr. Eisman. Oh, I do not have an interest in them failing,
Senator. I definitely do not want this industry to fail. I
think there are very bad things going on in this industry. I
think there are some very bad actors and things should be done
with that. I do think there is a definite role for this
industry, and so a lot of things have to change. I am not here
to see the demise of this industry.
The Chairman. The more that we have come to understand
about the subprime mortgage mess, the more we have come to
understand that the rating agencies did not do the job they
were supposed to do. Now, you mentioned that. And you do see a
parallel there? Can you elaborate on that just a little bit
more?
Mr. Eisman. Absolutely, Senator. The rating agencies were
paid for their ratings on subprime securitizations. The amount
that they were paid was approximately 5 to 10 times per rating
than what they would do on normal straight debt. They were
usually incentivized to see that the machine, the volume would
continue to go on.
With respect to this industry, there are two types of
accreditation processes. There is the national accreditation
process and there is the regional. As I said in my testimony,
most of the for-profit industry is nationally accredited, and
what I find problematic about it is that they actually sit on
the boards of the national accreditation bodies and I think
they control the process.
The more recent innovation by the for-profit education
industry is that they have always wanted the more dearly
coveted regional accreditation. They have never really been
able to get it. What they have done is they have bought--I will
give you an example.
There is a school that--BPI, one of the public companies,
bought a very small school with 300 students in 2005. That
school had, as I said, just 300 students at day of closing.
They put it online and today that school has 60,000 students.
The Chairman. I am very much aware of that school. It is
located in my State of Iowa. I am very much aware of that.
In closing, talking about accreditation, would it surprise
you to learn that of the schools owned by publicly traded
companies, of the 23 that are regionally or partially
regionally accredited, 18 are accredited by an agency called
the Higher Learning Commission? Eighteen of twenty-three by one
accreditation agency. That seems to indicate something to me,
that they would all go to that one agency to get accredited.
Does that surprise you at all?
Mr. Eisman. No. In the rating agency world in subprime,
they used to call that ``forum shopping.'' If you could not get
a good rating from Moody's, you would got to S&P and get the
good rating from them.
The Chairman. Thank you very much, Mr. Eisman.
I have more questions. Ms. Issa I mean to engage you in
some questions, Ms. Reiter and Ms. Parrott also, but we will do
that in the second round.
Thank you very much.
Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman.
I wish Senator Alexander were here because he was talking
about how--in discussions that I have had with him--how when he
was the Secretary of Education, one of his jobs was to accredit
the rating agencies, and he actually had to fire a rating
agency during the time that he was the Secretary. There seems
to be some capability to do something about the rating
agencies, that it is not quite the same way that the rating
agencies work for businesses. We should look into that. I hope
that that is not the case.
I will start with Ms. Parrott. I got the impression from
the first person to testify, the Inspector General, that 70
percent of the for-profit firms are involved in criminal
activity. Would you agree with that figure and would you
exclude DeVry from that number?
Ms. Parrott. Well, absolutely I would exclude DeVry from
that number. I think the 70 percent is the percentage of cases,
and I think that what we are really looking for is numerically
how many cases are there and of those cases, how many are at
the for-profit institutions that constitute 50 percent of the
total number of institutions in post-secondary education and
how many are at for-profits. I would encourage us to get that
information.
Clearly, I would not see DeVry as in that, and we have no
investigation going on that I am aware of.
Senator Enzi. I appreciate that.
Can you tell me a little bit about your placement rate for
graduates and how the placements are related to their field of
study?
Ms. Parrott. Yes, sir. Our students are in business and
technology and related health care fields. At DeVry University,
for example, our students that actively pursue employment
opportunities using our career services get jobs in their
educational field of study, on average since 1975, 90 percent
of the time within 6 months of graduation.
Senator Enzi. Thank you.
Ms. Parrott. You are welcome.
Senator Enzi. Since I am limited on time, I will move on to
Mr. Eisman and Ms. Reiter. Secretary Duncan recently made the
following remarks about for-profit schools.
``For-profit institutions play a vital role in
training young people and adults for jobs, and for-
profits will continue to help families secure a better
future for themselves. They are helping America meet
the President's 2020 goal and helping us meet the
growing demand for skills that our public institutions
cannot begin to meet alone, especially in these
economically challenging times.''
Given the need identified by the Secretary, how do we
eliminate the bad actors while ensuring that the good actors
can fulfill that needed role? How do you suggest that we
separate those two out?
Ms. Reiter. I think that what we have is a system that is
lacking in standards so that we cannot even tell which ones are
bad actors and which ones are the good actors. For example,
placement records that are reported by some schools to their
accrediting agency are not transparent. We do not know the data
that those are based on.
As we pointed out, there were some courses that were worse
than others at the school we looked it. It may not be a
question of bad actors and good actors, but bad programs and
good programs. The schools, because they can get money for all
of them and because it is to their benefit to show they have
more and more students starting, have continued offering
programs that even they themselves, if they took an honest
look, would say this program just does not cut it.
I think that there are a number of ways in which the
regulations are just littered with loopholes that make it easy
for schools that want to do bad to do it and make it hard for
schools that want to do good to ignore what their competitors
are doing.
For example, the incentive compensation that we talked
about earlier that people are being paid by the head to bring
people in. Back in the late 1980s one of the schools we
prosecuted called it ``bringing in the fishes.'' Recently in
one Department of Education's administrative actions that I
read, I think they called it, if you excuse the language,
``putting asses in classes.''
There is a way that you can deal with some of these things,
and there have been some proposals by the Department in their
proposed regs that would deal with it. We could go through an
extreme list and I could talk about some of these things, but
we do not have time for that here, but I am perfectly happy to
work with people in the future. There are ways to segregate
which are the bad, which are the good, but it will take a lot
of work and a lot of tightening up and making clear what the
regulations are that apply.
Senator Enzi. Well, I appreciate the expertise that you
have and the past experience that you have and would appreciate
it if you would give us a more definitive list in writing. That
would be very helpful, much more helpful than a hearing, in
fact.
Mr. Eisman.
Mr. Eisman. Thank you, Senator.
I am not an expert in education and I do not presume to be
but I do think I have a good background in loan data and
incentives. So I will just confine myself to that.
With respect to defaults, the rule now is you have to
maintain your 2-year cohort default rate below a certain level.
I think it is 25 percent and then we are going to 3 years I
think in a couple years. The data that is put out showing the
default rates by the industry on a 2-year basis is without
question in mind manipulated by the industry. The industry
manages that data down so that they never get close to that
threshold. I am quite convinced that that is the case because
if you look at 2-year cohort default rates versus 3-year cohort
default rates by vintage, you will see that they almost always
double or more than double in 1 year. That is an unnatural
progression of loan data and it means that the industry is
manipulating the data downward in the 2-year rate and letting
it go in the 3-year rate. If you move to a 3-year rate, they
will manipulate the data to the 3-year rate.
What I would recommend is changing rules so that you do not
just look at a 2-year rate or a 3-year rate but a multiyear
rate. That would be one recommendation.
The other recommendation I would say is that the incentives
of the industry are all messed up because it bears no risk, and
I think something that should be looked at is risk-sharing. The
industry should bear some of the losses that it creates.
Senator Enzi. Thank you. Very helpful.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Enzi.
I will first call on the Senators who have not been called
on before. We will start with Senator Murray.
Statement of Senator Murray
Senator Murray. Thank you very much, Mr. Chairman, and
thank you for having this hearing.
Ms. Issa, I want to start with you and thank you for
sharing your story. Why did you choose to attend a for-profit
school over a community college or a traditional 4-year school?
Ms. Issa. Well, I just wanted to go straight to a career
rather than figuring out what I wanted to do, what career path
I wanted to take.
Senator Murray. Did you know of any other options? Did you
know it was a for-profit, or were you unaware of that?
Ms. Issa. No. I was unaware.
Senator Murray. Ms. Parrott, thank you. I wanted to ask you
what type of services DeVry provides for students who
traditionally struggle through college, are first-generation,
or minority students, that you would think the traditional
schools do not have available.
Ms. Parrott. Well, let me first say that I believe that
there are some traditional institutions who serve very similar
populations to ours who do have those services. What we do is
provide success coaches for each and every one of our students
that work with them on a plethora of areas, including academic
support, financial aid support, more traditional student
services kinds of support, helping them find child care if that
is what they need, monitoring their attendance and making sure
that they come to class and if they do not come to class,
checking to see where they were and making sure they get back
because they are trying to do multiple things. They are
multitasking. They are working. They have families. They have
people in their communities who are not always impressed by the
fact that they have chosen to go to school. We try to work with
the whole student and not just the student in the classroom
both through our faculty and staff but also with assigned
student success coaches to work with their students.
Senator Murray. One of the concerns I do have is the overly
aggressive marketing that for-profit colleges have which
targets individuals who are eligible for a high amount of
Federal assistance. I am particularly concerned about heavy-
handed marketing targeted at the homeless and our veterans, two
populations I have long been an advocate for.
Ms. Parrott, I wanted to ask you how DeVry's advertising
and marketing and admissions practices stack up compared to
traditional institutions.
Ms. Parrott. I think they stack up very well. I actually
was an admissions counselor in an independent institution a
number of years ago.
We recruit students whether they are in the 18 to 24
traditional student area or as working adults by talking with
them and trying to match what they are interested in doing with
what we have to offer, and if it does not match, we do not
offer it to them. For example, we go into 8,000 high schools
across the country and do college and career workshops that are
not designed to get all the schools in those 8,000 high schools
to come to DeVry but for students in those schools, many of
them in urban areas, to have their students think about options
after high school. Some of them end up coming to DeVry. I would
say a very few of them end up coming to DeVry, but many of them
use the output from those workshops to talk with their students
about how they can find the right college for them. It is much
more important----
Senator Murray. Are you unique in the for-profit world?
Ms. Parrott. I really have only worked at DeVry for the
past 28 years. I really cannot answer for the rest of the
industry. We are very committed to a more educated population
in the United States, and I am personally very committed to
that as well. I stay there because our missions match.
Senator Murray. Ms. Reiter, what if any role did
advertising and marketing play in some of the cases you
prosecuted?
Ms. Reiter. It plays a very big role. That is in my
experience how people find out about the school. As the school
itself says, I believe the students are not your typical high
school student who spends months and years figuring out what
college they want to go to. They are people who often are out,
have graduated from high school or have not graduated from high
school and they are out in the world, and they are without a
job or stuck in a low-paying job. The advertisements and the
solicitations and the brochures at the unemployment offices and
on TV and on radio, which you cannot watch without seeing, are
telling people, come to us. We will help you get a career. You
will have the white lab coats or whatever that makes it look
like this is wonderful. Then that is followed up when people do
go in with the statements from the admissions recruiters along
the same lines assuring people they are not going to have to
worry about these student loan payments because they are going
to earn so much money, they will be able to pay them back and
they get some grant money besides. It is a whole string of
representations from the broad public advertising through the
admissions recruiters and then continued throughout the early-
enough part of the course so that they are there long enough--
the school with its front-loaded refund policies can collect
all the money even if a student later drops out.
Senator Murray. Well, thank you. Mr. Chairman, I am out of
time, but I will have some questions to submit for the record
as well. Thank you.
[The prepared statement of Senator Murray follows:]
Prepared Statement of Senator Murray
Thank you Chairman Harkin, Ranking Member Enzi, and members
of the committee, for holding this hearing. The topic we are
discussing today is one that I view as particularly important,
and I welcome the opportunity to learn more from the witnesses
we have here today.
As a member of the Senate Budget and Appropriations
Committees, in addition to the HELP Committee, I believe it is
absolutely critical that we invest our Federal education
funding carefully and wisely.
At a time when State resources are scarce and college
degrees are more important than ever, we must make sure that we
are providing as many students as possible with the Federal
financial aid they need to graduate and go on to a good-paying
job.
I know that in my home State of Washington and across the
country, many private-sector colleges are doing great work
preparing our students for career success. These schools serve
a disproportionate amount of at-risk students including those
living below the poverty line, veterans, and first generation
college students who may require additional resources.
I applaud any school that steps up to the plate to educate
these vulnerable and oftentimes underserved populations. I
believe we need to be careful not to paint all private-sector
institutions with a broad brush as we move forward with these
hearings.
At the same time, in Washington State, 44 percent of post-
secondary institutions are for-profit, and in the 2008-2009
school year, for-profits in Washington State received over $31
million in Federal Pell grant funding.
Clearly, there is a lot at stake here--for our schools and
for our students. I'm looking forward to hearing from our
panelists about how we can continue making sure our Federal
investments are being directed properly to help our students
get the education they need.
The Chairman. Thank you, Senator Murray.
Senator Sanders.
Statement of Senator Sanders
Senator Sanders. Thank you, Mr. Chairman. Thank you all,
panelists for being here.
Mr. Eisman, you and your co-workers, as I understand, have
done a lot of research on for-profit educational institutions.
As I hear you, your fear is that large numbers of students
lured into for-profit institutions by sophisticated marketing
are misleading claims, billions in government grants, including
Pell Grants, are creating a situation where a large number of
these students will drop out of school for whatever reason, not
earn the income that they were promised or led to believe they
would earn, and eventually default on their loans.
So my question to you is A, what happens to these
individuals who went into these for-profit institutions with
all kinds of high expectations, what kind of numbers are we
talking about? And maybe more importantly, what are the
implications for our entire economy?
In other words, as you talked about, the subprime mortgage
crisis led to the greatest recession since the 1930s. We're
suffering that today. What kind of fears do you have if present
trends continue will be the national implications for our
economy of the for-profit educational institutions and what's
going on?
Mr. Eisman. Just in terms of numbers, Senator, like I said
in my testimony, given the growth in the industry, we believe
about $500 billion worth of title IV loans will be funneled to
this industry pretty much over the next 10 years. Our estimates
are roughly that slightly less than $300 billion will be
default out of those loans.
Those are big numbers. Unfortunately for all of us, we're
now used to a lot of big numbers that sound very, very bad. The
implications for the economy are not as broad as the subprime
mortgage sector. Because while those numbers do sound big, the
numbers from the mortgage sector dwarf those numbers.
I would just point out that it's a tragedy for the people
who will be suffering those defaults. I don't know if everyone
here is aware, but student loans are not dischargeable in
bankruptcy. So if you default on a student loan, the only thing
that's going to separate you from your student loan is death.
Senator Sanders. For the rest of their lives, in one way or
another----
Mr. Eisman. You're married, without potential for divorce,
forever. And that debt, you cannot get rid of it.
The Chairman. Would the Senator yield for a question?
Senator Sanders. Sure.
The Chairman. Mr. Eisman, isn't it true that in the
subprime market, the people who took out these mortgages and
who have these debts, they can discharge those in bankruptcy?
Mr. Eisman. The mortgage actually is not dischargeable in
bankruptcy, Senator, but you can walk away from your house.
The Chairman. Well, that's what I mean. You can just----
Mr. Eisman. You can walk away from your house and----
The Chairman. House?
Mr. Eisman [continuing]. Then the debt will just leave you.
The Chairman. Definitely.
Mr. Eisman. Here, you're stuck.
The Chairman. But a student default, like Ms. Issa, her
debt, she has until she pays it off or dies.
Mr. Eisman. Or dies.
The Chairman. She can't walk away from it?
Mr. Eisman. Never.
The Chairman. Thank you.
Senator Sanders. In other words, picking up on Senator
Harkin's point, for the rest of their lives, people are going
to be carrying around tens and tens and tens of thousands of
dollars in debt, which impacts their credit ratings, obviously,
right? Their ability to get a home, ET cetera, ET cetera. Are
you aware of what kind of number--you talked about $300 billion
in defaults. How many individuals are we talking about?
Mr. Eisman. I haven't calculated that off--I don't have
that statistic offhand, Senator.
Senator Sanders. All right, let me ask Ms. Issa, you heard
what Mr. Eisman said. Are you one of those people in that
situation? So you're carrying that debt right now on your back?
Ms. Issa. Yes, I am.
Senator Sanders. What does that mean if you may--you've
been so kind to come here and share your experience. What does
that mean to you as a young person, the mother of a couple of
kids?
Ms. Issa. It's very stressful. It's like bricks on my
shoulders. I don't know what to do.
Senator Sanders. OK. Ms. Reiter, you, I gather, are aware
of many other people in Ms. Issa's position. Tell us about what
you observe with what happens to these folks.
Ms. Reiter. Absolutely. In addition to things that have
already been mentioned, they don't qualify for other Federal
programs. They can wind up turning 65 and having Social
Security benefits taken to pay. They can have their income tax
refunds diverted to pay. They can have their wage garnished
without court procedure because the special procedures that the
higher education act allows for collection. Their lives are
basically ruined.
Senator Sanders. No, what I'm--excuse me for interrupting
you. Mr. Chairman, when we see on television where they
advertise a drug, and they say here are the side effects, it
may cause A, B, C, irritated bowel or whatever it may cause,
I'm almost thinking that maybe these for-profit institutions
might put the side effects that you're talking about?
Ms. Reiter. If I could just add. There were some provisions
in the last couple of years that allow for income-based
repayment, extended payments and things like that, that are a
help to some students.
But it still doesn't help them, because they--it helps them
with eventually after 25 years, getting rid of the debt. They
still don't have the skills. They can't get new student loans
to get a career, because they have the defaulted student loan
already. So they're not eligible for a new student loan. They
can't get a career. The rest of their lives is probably if
you're thinking critically avoiding making money, because any
money you make is going to go for that debt. And you have no
way to really get----
Senator Sanders. Let me ask anybody up on the panel, maybe
Ms. Parrott or anybody else, or Ms. Reiter, do you think that
most people who enter one of these schools are aware that if
they don't pay off that government grant, the government loan,
that they may get their Social Security cut when they reach 65?
Do you think anyone knows that?
Ms. Parrott. Well, I can tell you that for our students, we
provide that kind of financial literacy counseling as part of
their entrance into our institutions.
Senator Sanders. Ms. Reiter, is it your understanding that
most of the institutions provide that kind of financial
information?
Ms. Reiter. I think that most institutions are required to
provide a number of disclosures. Students often receives a
stack of documents, half an inch thick. In that stack of
documents, there may very well be that kind of disclosure.
Not to the extreme that I've explained it, but there are
those disclosures. Most students are coming in and being told
you're going to have grants. Don't worry, that'll be taken care
of. And the loans, don't worry, you're going to get this high
paying job. You'll easily be able to pay it back within X
amount of short time.
The focus, the whole focus is then I'm going to better my
life. What they're really doing is taking away that student's
life and their dreams of having a better life by saddling them
with this debt.
Senator Sanders. Mr. Chairman, thank you.
The Chairman. Thank you, Senator Sanders. Now, Senator
Franken.
Senator Franken. I want to thank you all for your
testimony. Ms. Parrott, thank you for yours. DeVry has a long
history and a stellar reputation.
Ms. Parrott. Thank you.
Senator Franken. You said you don't know about the other
for-profit schools, but you--what you're hearing must sound
familiar. It must bother you that while my State, we have good
for-profits and do a good job--doesn't it bother you that there
are these bad actors?
Ms. Parrott. Absolutely. It bothers me that when I see that
happen in any institution to any student. Yes, it bothers me.
Senator Franken. Yes. Ms. Reiter, you're very familiar with
stories like Ms. Issa's, right? This is not unfamiliar to you?
Ms. Reiter. That's right. In fact, I've heard stories that
are virtually identical.
Senator Franken. And it's the overpromising. It's the bad
data. You pointed out to all this bad data about how they say
what money you're going to make when you get out and what
percentage of students we place. These are just lies, right?
Ms. Reiter. Yes.
Senator Franken. They're just lies.
Ms. Reiter. Yes.
Senator Franken. OK.
Ms. Reiter. If I could just add to that, though. Part of
the problem is, they are lies. Another part of the problem is
that there is no standard definition of what is employment. How
long you have to be on the job, how many hours of work a week
you have to work, whether you have to go through the school's
placement agency in order to even be considered in that pool.
Because there is no standard, it is difficult if you don't have
that kind of standard to prove that it is a lie.
Senator Franken. It seems then that what we have to do is
change the rules, right? And that's kind of our job. We're
Senators, so we have to change our laws and our rules, so we
can tell which schools are the good schools, and which schools
are the bad schools. That's what we have to do. That's what our
job is here. That's why we're having this oversight hearing.
And that's what we're going to do.
We need to have good information. We need to have data. We
need to know who the good actors are and who the bad actors
are. And we need to be able to have the kind of information
where we can delineate one from the other and act against the
bad actors.
Because I think $300 billion is a lot of money. It's the
taxpayers money. The result on what happens to Ms. Issa. I'm
going to ask about accreditation. Mr. Eisman, you compared the
credit rating agencies and the securitization subprime market
with what's going on with for-profit colleges. And you
explained that some for-profit colleges are essentially running
the organizations responsible for accrediting them.
It is my understanding that 11 of the 15 board members of
the accrediting counsel for independent colleges and schools
are currently executives at for-profit colleges. The parent
companies of the for-profit colleges they're being accredited
by the counsel, is that right?
Mr. Eisman. One hundred percent, Senator.
Senator Franken. One hundred percent right?
Mr. Eisman. Correct.
Senator Franken. OK, well, can't we do something to prevent
this conflict of interest? Would you suggest that maybe that's
our job?
Mr. Eisman. Senator, I wasn't presuming to tell you what
your job is, but I'm presenting the problem.
Senator Franken. Presume away.
Mr. Eisman. And I think----
Senator Franken. Presume away.
Mr. Eisman [continuing]. I think you should do something
about it. Just like you tried to do something about the rating
agencies.
Senator Franken. Then, look, DeVry again, there--Secretary
Duncan is right. There is a place for for-profit schools and
where students can go. And the good actors are good actors and
do a good job.
We have a job here. Part of it is to look out for Ms. Issa,
look out for the taxpayer. I'll be damned if I'm going to be a
Senator and not do that job. Thank you.
The Chairman. Thank you, Senator Franken. I will just
intervene here with one thing. Ms. Parrott, before I turn to
Senator Merkley next, if Senator Merkley would so let me
proceed for just a couple of minutes now, I would appreciate
that.
Ms. Parrott.
Ms. Parrott. Yes, sir.
The Chairman. I was looking at the figures here on DeVry.
DeVry increased their students in 1 year by 25.6 percent.
Twenty-five point six percent. This is from your own data.
Ms. Parrott. Yes.
The Chairman. From spring of 2009 to 2010. You have a
profit margin of 16.1 percent--16 percent profit margin. Yet,
by your own data, DeVry reported that education accounted for
only 54.6 percent of your total costs. Fifty-four cents out of
every dollar you got went to education. I mentioned that to a
college president the other day, and he said that's shocking.
Only 50--half, 50 cents out of every dollar goes to education.
Ms. Parrott, is it not true that on June 23, 2009, DeVry
paid $4.9 million to settle a lawsuit with a former employee
who worked as a recruiter at DeVry campus in Ohio. The lawsuit
alleged violations of the ban on incentive compensation. That
is paying recruiters based on the number of students they
enroll.
The Department of Justice declined to intervene in the
lawsuit, but approved the $4.9 million settlement. Is that not
true?
Ms. Parrott. That is true.
The Chairman. Thank you very much. And if you want to
follow up on that.
Ms. Parrott. I would like to follow up on that.
The Chairman. Later on, when I get my turn back.
Ms. Parrott. Yes, sir.
The Chairman. Senator Merkley.
Senator Merkley. Thank you very much for all of your
testimony. And Ms. Issa, you used the word scam in your
testimony. You said you looked at complaints from other
students online. Their stories were very similar. They all felt
like victims of a scam, just like I did.
You feel you've been a victim of a scam. Why?
Ms. Issa. Because the ultrasound program I was in was not
accredited.
Senator Merkley. Yes. Now Mr. Eisman, I believe you made a
comment that accreditation is normally necessary for folks to
access title IV funds. I'm wondering why--and you may not be in
a position to know this specifically, but I'm wondering why a
program that was unaccredited was able to be in a position of
having its students have access to title IV funds. If anyone
can answer that.
Mr. Eisman. I think I can answer that, Senator. There are
different types of accreditation. The accreditation that I was
speaking about is national accreditation or regional
accreditation of a school. You might have a program, let's say,
medical assistant program, where the school is accredited by
the accrediting bodies that I mentioned, but is not recognized
by let's say the medical assistant organization of the United
States of America. Or in Ms. Issa's case, was not recognized by
the organization that oversees the specialty that she was
trying to do.
The school can advertise and say, ``Hey, come to our
school, we are an accredited school.'' But they didn't tell her
that this--the entities that need to recognize her specialty
don't recognize the school. That happens unfortunately, I
think, more often than not in this industry.
Senator Merkley. We have a complicated system of
accreditation in which a student, who's responding to an ad
they might have seen on television or in the newspaper, they're
being told you come and get this degree, there's a market
waiting for you. It implies accreditation. And yet, when you
went to get a job, you were told, what?
Ms. Issa. That the program was not accredited.
Senator Merkley. Yet, you found out there was a local
community college that had an accredited program at half the
cost. Well, to me, I think the use of the word scam is very
appropriate. I hadn't really focused on the other piece of
this. I'm glad you all brought it to our attention, that the
loan incurred follow you throughout your entire life. And thus,
we are allowing victims of scams to be haunted and punished
throughout their entire life, affecting not just the victim,
but the family. Because as you wrestle with your finances, it
affects what you can do, whether or not you can afford to go
get an accredited program, if you will. You've lost time.
You've lost money. That affects opportunities you might be able
to provide for your children. Is that a fair characterization?
Ms. Issa. That's correct.
Senator Merkley. OK. Thank you. I really appreciate your
willingness to come and share your story to help us understand
the challenge.
Ms. Parrott, you own a school in Oregon. By all counts, a
very solid program. As far as I've ever heard, do you use
incentive payments in Oregon or in others for recruiting?
Ms. Parrott. We do not.
Senator Merkley. OK. Has that been a conscious decision and
you see your competitors using those payments?
Ms. Parrott. We use a merit-based system. We pay everyone
in our organization based on the goals and objectives that are
set for the amount in annual basis. That's what I know. I can
say that I was around, someone mentioned to Senator Nunn in the
hearing to the Permanent Committee on Investigations in the
1990s. I was around then. There were a number of conversations
around incentive compensation that had to do with independent
contractors and people who were paid for the lack of the better
way to put this, for piece work in the way that you pay people
in the garment district. That is a 20-year-old view of what
goes on from my understanding today. But again, I can only
speak from where I sit.
Senator Merkley. Thank you. My time is up. I'll just note,
I'll be curious to follow up, Mr. Chair, as to whether the
Sanford-Brown Institute is being investigated by anybody for
the type of scam or fraud we've heard testimony about today, so
that other folks are not victims down the road. Thank you.
The Chairman. Senator Bennet.
Senator Bennet. Thank you, Mr. Chairman. I'd like to thank
the panel for your excellent testimony. Ms. Issa, I'd like to
thank you in particular for being willing to come share your
experience. In hearing your testimony and also Ms. Parrott's
observation which I agree with completely that there is
enormous unmet need out there. There are people that are
working, who can't go to school during the day. There are
people that can't get their degree in 4 years. There are places
where there's a shortage of nursing training. All of that is
true. The only thing I care about is that the deals that are
made are kept, and that the quality of the education be high,
whether it's public or whether it's private.
I just wanted to ask you first, Ms. Parrott, what internal
metrics, if any, does DeVry use to determine whether or not the
program that it has is a quality program and whether the
outcomes are quality outcomes?
Ms. Parrott. We have internal controls in every aspect of
our business. Specifically, with relation to quality outcomes,
we look at our DeVry University at the numbers of students who
graduate from our institutions and are then employed in
education-related careers within 6 months of graduation.
At our nursing colleges, we look at Enclicks (phonetic)
pass rates. Our Chamberlin College of Nursing's pass rates are
between 90 and 98 percent, depending on the location. That's
over and above the national average of about 88 percent.
We're looking at whether or not we have provided to the
students that we educate the education that will allow them to
pursue the careers that they are interested in going into. We
look at that specifically related to whether or not it's
educationally related as opposed to did you get a job anywhere?
Senator Bennet. OK. And just a question for anybody in the
panel that wants to answer it. Mr. Eisman might have an answer
because you've been studying so closely or Ms. Parrott. Is
there a difference in who the faculties are in these schools?
Can you describe any difference between private schools and
public or among private schools? Who are the people that are
teaching?
Ms. Parrott. The requirements for faculty are in the States
where we operate--State-determined. They tell you in order to
be a licensed college or university in our State, your faculty
must meet this standard. That standard is not diluted for any
sector of education.
I will say that we probably have more practitioner-based
faculty, people who in addition to----
Senator Bennet. We, meaning DeVry?
Ms. Parrott. We, meaning DeVry. I'm sorry. We, DeVry have
more practitioner based faculty, meaning that in addition to
meeting the academic credentials that they need to meet to
teach in an associated baccalaureate or graduate degree
program, they also have work experience in their fields.
Senator Bennet. Ms. Reiter.
Ms. Reiter. Some of the declarations that we got from
students about the quality of the training from the faculty
indicated that the instructors in one course, they had a new
device for some kind of medical thing, brand new device which
they touted. Neither the instructor nor anybody else knew how
to use it.
One instructor would bring in her friend to show the
massage therapy techniques because the instructor herself
didn't know them. When that instructor left, then they brought
a chiropractor person in who didn't know massage techniques.
In other words, there is quite a bit of problem in the
schools that we've seen with the instruction not being quality
instruction. I think some of the schools in the industry
themselves indicate that a lot of their instructors are part-
time.
There isn't the kind of faculty that you would expect in a
public institution, that is there, that has a track record.
[Interruption]
Senator Bennet. No, I have 45 seconds left. I can't trick
the Chairman. Mr. Eisman, I just want to end with you. I have
spent much more time in K-12 education than I have higher ed,
and came to believe that the alignment of our incentives and
disincentives in public education are largely out of whack in
terms of the outcomes that we really want for our kids.
You talked in your testimony a little bit about realigning
the incentives when it comes to private universities. I wonder
if you could talk a little bit more about what that would look
like, what would it look like to have investors or others with
more skin in the game? How should we be thinking about that?
Mr. Eisman. One thing that I suggest----
Senator Bennet. Can I ask one other question? In your
research, when you observe that there were some good actors in
the space you thought, is there a reason that you could
determine why those places are quality places versus places
that weren't? Any of that I'd love to hear the answer to.
Mr. Eisman. In the PowerPoint presentation that I presented
to the committee, you'll see at the back I present a matrix for
each company that shows what would happen if a company bore the
first 5 percent of loss, the first 10, the first 15, the first
20. What would happen to the earnings of each company? I would
suggest you just look at that.
In most cases, using what I would think would be a
reasonable amount of what these companies should bear of
losses, the companies are still quite profitable. They're just
not as obscenely profitable as they are today. I also think
that would have an impact on defaults because with skin in the
game, you would be more careful in terms of your underwriting
in terms of who got a student loan.
Senator Bennet. Thank you Mr. Chairman.
The Chairman. I think that's a good point, Mr. Eisman. It
just seems to me that what we have here is that we have all
these students with debt, but we have the companies with
profit. I mean, huge profits. I'm not against profit. If
someone makes something and they use their ingenuity to build
something, they can beat the competition and they can make a
lot of money. God bless them.
In this case, we're talking about for-profit schools.
Ninety percent or maybe more of their money comes from the
taxpayers. This is not like Apple Computer building a new iPod
or something like that. This is not the same situation. They
build a better iPod or a something like that, and they can make
good profits. Wonderful.
But in this case, where the money comes basically from the
taxpayers, we have to question that. So again, it seems to me
that the students aren't the real beneficiaries here.
It's not the students, it's the companies. As you said, a
for-profit company, for-profit schools that provide some good
services in the past, but I want to go back. I want to go to
Ms. Parrott--let you respond to those points I made about
DeVry. Twenty-five percent increase in 1 year. Profit margin,
16 percent. Spending only 54 cents of every dollar on
education.
Ms. Parrott. OK.
Senator Bennet. And settling a lawsuit just last year on an
incentive compensation case. Bring us up to speed on it.
Ms. Parrott. OK. Thank you. With respect to the 54 percent
of our budget on education services, actually, we've looked at
that against all sectors of education. That is slightly higher
than the not for-profit and independent institutions when you
take into account the tax subsidy. We'd certainly like for it
to be more. We are working to do that.
Our after tax----
The Chairman. Let me get that straight.
Ms. Parrott. Yes, sir.
The Chairman. Let me just make sure I understand correctly
what you just said.
Ms. Parrott. Yes, sir.
The Chairman. You said that your 54.6 percent that you
spend on education is slightly higher----
Ms. Parrott. Yes, sir.
The Chairman [continuing] Than the amount of money per
dollar of income coming in at private not-for-profit schools,
colleges?
Ms. Parrott. Yes, spent on instruction versus dollars that
are spent doing other things. Yes, sir.
The Chairman. Well, the information I have is that when you
compare it on an apples to apples comparison of for-profit
schools to nonprofit, that an institution like Harvard, for
example, may spend less than 50 percent on instruction because
they have all--they have the hospitals. They have the research
institution that they spend money on research. If you take out
that element, which basically DeVry doesn't have, and doesn't
engage in, and compare it just on the basis of the student
population and the education they receive, and the money that
comes in, would you still maintain that you are spending more
on education than the private, not for-profit?
Ms. Parrott. I will go back and look at that. Where I
pulled my numbers from were the National Center for Education
Statistics.
The Chairman. Because obviously, DeVry and other entities
that we have, that I think the data I put up there earlier
showed how much we're spending on advertising.
Ms. Parrott. Our advertising spend is about 14 percent.
That's transparent data that is in our annual report.
The Chairman. And that's how much you spend on advertising?
Ms. Parrott. Yes.
The Chairman. How much?
Ms. Parrott. Fourteen percent of our revenues.
The Chairman. How much do you spend on recruiters and
recruiting then?
Ms. Parrott. Our recruiting costs average about $2,100 per
enrollment versus about $2,300 in not-for-profit sectors
according to the National Association of College Admission
Counselors.
The Chairman. Well, these are interesting figures. And you
will provide those for the committee?
Ms. Parrott. I absolutely will.
The Chairman. You said, Ms. Parrott, that since the 1970's
on average, DeVry has placement rates close to 90 percent.
Ms. Parrott. Yes, students employed in an educationally
related job. Yes, sir.
The Chairman. I don't know that I understand what you just
said.
Ms. Parrott. OK, we don't actually place the student in a
job.
The Chairman. I understand that.
Ms. Parrott. We educate students for careers.
The Chairman. Right.
Ms. Parrott. And then they look at them. We could use
placement if that's a more comfortable term, but yes.
The Chairman. You're saying that since the 1970s, on
average----
Ms. Parrott. Yes.
The Chairman [continuing]. Placement rates for the students
that you have educated are close to 90 percent?
Ms. Parrott. Placement rates for graduates who have
participated actively in a job search with us. Yes.
The Chairman. Would you share with this committee your
methodology on how you track, record, and report these?
Ms. Parrott. I would absolutely be pleased to.
The Chairman. And the placement results?
Ms. Parrott. Yes, sir.
The Chairman. I appreciate that very much.
Ms. Parrott. I'd like to also answer the other question
that we left hanging.
The Chairman. Yes.
Ms. Parrott. If you wouldn't mind. With respect to the
incentive compensation case that you brought up, we actually
won in the lower court. It was dismissed in the lower court.
Then the plaintiffs went to appeal. We concluded that the cost
of appeal was greater than any settlement we would come up
with, and that we needed to get back to the business of
educating students, not litigating. That was a decision that we
made. But the lower court had ruled in our favor.
The Chairman. Do you think that 16.1 percent is a fair
profit?
Ms. Parrott. Our after tax profit is about 11 percent,
which is actually within the range that Mr. Eisman mentioned
for most companies.
The Chairman. Most education companies?
Ms. Parrott. No, no, most--no actually I guess it's low for
education companies, but for in general companies. He mentioned
8 to 12 or something rate on return--on investment. Our after
tax income is about 11 percent.
The Chairman. Well, would you share with this committee the
methodology?
Ms. Parrott. Yes, sir. Absolutely.
The Chairman. I appreciate that very much. Ms. Issa, I
haven't had a chance to, again, to ask you a couple of
questions. I guess you already talked about a lot of things.
I'm interested in your debt that you say is about $21,000 now?
Ms. Issa. That's correct.
The Chairman. How much did you borrow?
Ms. Issa. Well, to attend Sanford-Brown I borrowed $15,000.
The Chairman. Yes.
Ms. Issa. About.
The Chairman. Then, the rest was leftover college debts?
Ms. Issa. Yes, yes.
The Chairman. We have about $21,000 right now. And your
interest rate is?
Ms. Issa. From Sanford-Brown was 6.8 percent.
The Chairman. Six point eight percent. And you have to be
making payments on that? Are you making payments on that?
Ms. Issa. No, it was deferred.
The Chairman. Deferred. I just want to ask my staff when a
debt is deferred, the interest rates still accumulates?
Ms. Issa. That's correct.
The Chairman. So even though you got it deferred, the
interest rate clock is running all the time?
Ms. Issa. Yes.
The Chairman. I asked my staff to tell me at 6.8 percent,
at 7 percent--Mr. Eisman, when does a debt double? At 7 percent
uncompounded, when you compound it, it doubles in about 10
years if I'm not mistaken, if you didn't make any payments.
So again, students get on this treadmill and it's very hard
to get off. And the debt just keeps following you.
I wanted to point out as it's been pointed out many times
that you can't discharge that debt. You have to pay for it. And
here you are, you can't even get a job to pay for it.
Thinking of other young people like yourself who are out
there, what advice would you give to them if they're looking at
one of these proprietary schools? What advice would you give
them?
Ms. Issa. Not to go to them. Go to a traditional college.
The Chairman. Did you have a community college available to
you?
Ms. Issa. At the time, I didn't know there was one, because
of advertising. When I googled ultrasound schools, I saw
Sanford-Brown.
The Chairman. Yes.
Ms. Issa. I didn't know that there was one near me.
The Chairman. You mentioned in your testimony that you had
repeated phone calls from the recruiter or from someone at
Sanford-Brown, urging you to hurry up and sign up?
Ms. Issa. That's correct.
The Chairman. Tell me more about how that proceeded?
Ms. Issa. Well, they just, like I said, they just kept on
calling me, pressuring me to sign up because the seats were
filling fast. The deadline was days away.
The Chairman. Ms. Reiter, why do for-profit schools have so
many women enrolled in the programs? That struck me as kind of
odd also.
Ms. Reiter. I'm not sure. I don't have data to say why that
is. What I can say is that there are a number of programs,
possibly, of the kind that would attract more women than men.
If you look at the numbers of different kinds of programs, but
I don't have any empirical evidence of that. What I do know is
that they are designed to and do attract more low-income people
as I had mentioned previously.
The Chairman. In 2002, as it's been said before, and I want
to repeat, the Department of Education put out some exceptions
to the ban on paying recruiters according to the number of
students they enroll. They put out exceptions to this. Do you
think this change in the regulations allowed the types of
abuses you saw in your investigation to happen?
Ms. Reiter. It was one of the factors that certainly fueled
that. I couldn't say it's the only thing, because there were
some other changes that were also detrimental.
As we've talked about before, the cohort default rate was
changed so that a person had to be behind in their payments for
a longer period of time and the 2 years limiting it. The
requirement that proprietary schools had to get at least 15
percent of the revenues from something other than student aid,
which changed only 10 percent, and then even more recently, it
was changed so that they could include other Federal moneys.
There are a number of factors, but that's certainly one that
fueled it.
And from a prosecutor's viewpoint, it's the one that caused
us, when we were looking at what the problems were, to not even
try to prosecute--because of the loopholes, it would have spent
all of our resources fighting about is this required or isn't
it required? The loopholes were so big, that it just made
prosecution unmanageable. I'm very impressed that there were
some private litigants who are able to actually get
multimillion dollar settlements on this issue, because the
loopholes were so extraordinary.
The Chairman. Ms. Reiter, I've heard the trade
associations say repeatedly that nationally accredited for-
profit schools have to report placement information to
accreditors. Doesn't that mean that all of the schools
accreditors at least have placement information?
Ms. Reiter. There are two kinds of accreditors that can be
used as been discussed. Regional and the nationals.
Starting with the regional, the last time I looked at it in
depth, none of them had placement requirements. That could have
changed, but I don't believe so because I understand from the
president of the Proprietary Schools Association, in his recent
remarks, he emphasized nationally accredited, and didn't
mention regionals.
The IG has looked at this in the past and said the
regionals really need to have outcomes placement. I don't
believe they do. Or if they do, it's a few of them.
Even if you look at the nationally accredited agencies and
the schools they accredit, every school where you prosecuted, I
believe in California, was nationally accredited.
The school that I gave the details about was nationally
accredited and had supposedly placement requirements of 70
percent or so, according to what the school was telling the
students. Obviously, they weren't accurate. They weren't being
checked. Then, the accrediting agencies don't--that's not a
standard amount. What is a job? Is it 1 week on the job? How
many hours a week? Two hours a week?
With some of them, the standards are so vague, I don't know
how you could possibly enforce them. Then you have things as
Ms. Parrott was mentioning from DeVry, when they're looking at
that placement statistics, apparently, and I don't know whether
that's because of the regional--their accreditor, whatever.
They're only looking at students that actively use their
placement services. So that leaves students out, we don't know
what percentage of the graduates that includes. It's very
difficult to say, ``Oh, these placement records show us
something, because they're all over the map.'' We don't know
what they show us.
If I could just mention one other thing. That is, and I
think Mr. Eisman has touched on this, the accrediting agencies
are very small bodies. They are based on traditional
educational sense that you're looking at people who want to
give a good education. They're really not equipped in numbers
or resources or in the way of having investigators to really
look at this kind of thing, so that it makes it so that you
can't rely on this information.
The Chairman. I'm trying to get one of my graphs put back
up on the screen that I'd like to ask you about.
Mr. Eisman. Mr. Chairman, could I make a comment on that--
the placement issue?
The Chairman. Yes. Yes, sir.
Mr. Eisman. This may sound extreme, but I don't trust a
single statistic that's generated by this industry, other than
its audited financials. The audited financials I trust because
they're so good. There's no reason to think that the industry
lies about them.
Statistics like placement, I don't believe a single number
that I see. I'll give you an example. I spoke to a woman who
worked at one of the for-profit colleges. Her job had been in
the placement office, but she quit. The school that she was
working for had grown extremely rapidly, and was having trouble
making its placement numbers that it was required to make from
the accrediting bodies.
Two things that she told me was that the school had made
monetary donations to companies in the neighborhood, who in
exchange for which hired students for a day. That day
employment was counted as a placement.
The people in the placement office went through the files
of all the students. If a student, let's say, was a working
adult, and had a job when they came to the school, let's say
graduated and still had the same exact job at exactly the same
pay as when they started, that was also counted as a placement.
You have a measurement program because other than--as I
said, the audited financials, it's very difficult to trust any
of these self generated statistics put out by this industry.
Ms. Parrott. Mr. Chairman, if I might, I think that we have
to inspect what we expect.
The Chairman. We have to what?
Ms. Parrott. Inspect what we expect. We do that at DeVry.
You've asked me to provide you with the materials that show you
what goes into our calculation, who's in, who's out, and why.
I'm happy to do that and to share that with all members of the
committee.
The Chairman. Well, I appreciate that. I look forward to
that. And as I said, this is the first in a series of hearings.
We're going to be delving into this. What Mr. Eisman just
brought up is one aspect that we want to look at.
Ms. Parrott. Absolutely.
The Chairman. Statistics and data can be very self-serving
when they are produced by the entity that's getting the
taxpayers' dollars. We want to look at how they're coming up
with some of these figures.
I've looked at some of them myself. I raise serious
questions about these placement rates, and how they calculate
them. Mr. Eisman just touched on a couple of them and how they
distort what is really happening in the real world out there.
We want to look into those. And to find out exactly how
that data is being generated.
I had this chart put back up on the screen. I'm trying to
find my own packet of information here that I used earlier. See
if I can find it here. Yes, this is the one I referred to in my
opening statement.
Ms. Parrott. Find it?
The Chairman. Which I said was very perplexing. I just took
school 4 and I said at the beginning of the enrollment, they
had 96,211 students. At the end of that year, they had 116,800
students. In 1 year, they went up 20,000 students.
Well, OK, fine. They got 20,000 students. But in between
that time, they added 118,500 new students and 98,300 departed.
Well, I can understand the first figure. I can understand the
last figure, but I don't know that I understand those two in
between.
Can anyone explain how they got 118,500 new students and
98,300 departed? Did they graduate 98,300? Where did they go?
Mr. Eisman. They dropped out, Senator. They evaporated.
Ms. Parrott. Some dropped out.
Mr. Eisman. This industry has exceptionally high dropout
rates. And one statistic actually that you don't capture here,
which nobody captures, but we suspect is happening is some of
these schools is there is massive intra quarter churn.
For example, the companies report quarterly.
The Chairman. Right.
Mr. Eisman. What they'll report is we had 100 students at
the beginning of the quarter. We brought in 50 new students. We
ended the quarter at let's say 125 new students. Simple math
said 25 students either dropped out or graduated. Well, they
don't really give the graduation rate so you would have to make
assumptions about what those are.
What they don't tell you is that intra quarter, there were
people who showed up and left and dropped out. Those don't show
up in anybody's statistics. We suspect, and again, this is just
my opinion, that those numbers among these schools can amount
to the hundreds of thousands of people.
Ms. Parrott. Actually, the Department of Education requires
as part of the external audit that institutions get that they
look at a retention rate across an academic year. So, they look
at the number of students that start--that are enrolled at the
beginning of the year and how many of those students, those
same students are still enrolled at the end of the year.
There is a test that is about anything over a 33-percent
attrition rate in that persistence over a year ends up putting
you on a list to be looked at by the Department of Education.
That data is available. I think it is actually now even
available on the web--on the department's Web site by
institution.
The Chairman. I'm informed by my staff, Ms. Parrott, that
those figures from the Department of Education are for first-
time, full-time students only.
Ms. Parrott. That is the--no, no, no, not the college
navigator student. College navigator program looks at first-
time full-time students, and looks at how they're doing against
a cohort graduation rate.
The retention rate data that is available, and if it's not
available on the department's site, it's certainly in the
department's records, and they have the ability to make it
public at any point, is based on a look at how many students
were enrolled at the beginning of the year, how many of those
students withdrew during the year, and what your 1-year
retention rate is going into the next academic year. That is
available information. I'm happy to provide it.
The Chairman. Well, could I go to the Department of
Education, for school No. 4, and we know who school No. 4 is.
Ms. Parrott. Of course you do.
The Chairman. Could we go to the Department and find out
exactly what happened to those 98,300 students?
Ms. Parrott. You could go and find out whether they
graduated or dropped out.
Mr. Eisman. I don't think so.
Ms. Parrott. Yes.
The Chairman. I'm told that that is impossible to find out
right now. That's what this committee is trying to figure out
is how we find out--for example, we know 96,200 started. We
know 116,800 ended. We don't know what happened in between.
There's a churn going on, but we don't know what's happening in
there.
Ms. Parrott. In order for those numbers to roll up, they
have to be able to roll back. You have to be able to go back
and get to the number. It may not be pretty, it may not be
easy, but you have to be able to go back to get to the number.
That's why data, and not anecdote, is so important.
The Chairman. Well, again, this is one of the reasons we're
having these hearings, to try to figure it out and get to the
bottom of it.
Ms. Parrott. Absolutely. I'm happy to work with anyone that
would like to do that.
The Chairman. Because we have asked, this committee has
asked, and I've asked my investigations team, but we will
follow up, we've asked on graduation rates and dropout rates.
And we can't get a handle on it. We cannot get a handle on how
many students are being churned in there, that come in, and
drop out, come in, and drop out.
Again, we know the beginning. We know the end. We know
that, but we don't know what's happening in between because we
can't get the data for it. If you have some advice for us on
how to get that data, please let us know.
Ms. Parrott. I would be happy to.
The Chairman. Because there's something happening in there
that raises a lot of serious questions. It's true in all the
schools that I have listed there. I believe these schools are
listed with the SEC, and are accredited schools.
Ms. Parrott. Yes.
The Chairman. Because the University of Phoenix, one of the
reasons I said about first-time, full-time, and we're going to
get into that, reported in a 2004 brochure that the graduation
rates for first-time full-time students captures about 3
percent of their enrollment.
Ms. Parrott. Right.
The Chairman. Mr. Eisman, on the risk-sharing, I will at
the end of this hearing, I will ask the record to remain open
for 10 days for questions that other Senators want to submit. I
might ask you if you talked about risk-sharing and getting
these schools to do more risk-sharing. I looked at your
PowerPoint presentation. My question is how? I don't know
exactly how we get them to do risk-sharing?
Mr. Eisman. Senators, to my knowledge, you have to pass
legislation.
The Chairman. Yes.
Mr. Eisman. Excuse me, what I outline in my PowerPoint is,
assuming for example that the--basically what you would do is
you would pick a number of how much these schools should bear
of the losses. They should be in first loss position.
In other words, just pick out a random number. The school
generates $100 million in losses over a period of time from
student loans. They should be on the hook for the first 5, 10,
15, or 20 percent of those losses. So they eat the first
losses. Then, the taxpayer would eat the losses afterwards.
That would obviously eat into their profit margins, but it
might make them somewhat more selective on their recruiting.
The Chairman. Yes.
Mr. Eisman. That way, they would be incentivized, I think,
to do the right thing.
The Chairman. Well, that's what I want to look at--if we go
down that road, I don't know, but how we get them to bear more
of the risk-sharing, and we'll look at your suggestion.
You pointed out in your written testimony, that in the
fiscal year 2009 Apollo, the largest company in the industry,
grew total revenues by $833 million. Of that amount, $1.1
billion came from title IV. More than 100 percent of the
revenue growth came from the Federal Government. You point out,
of this $1.1 billion in Federal loan and grant dollars, the
company spent only an incremental $99 million on faculty
compensation and instructional costs. Nine cents on every
dollar received from the government going towards the actual
education of students. The rest went to marketing and paying
the executives.
Could you elaborate on that just a little bit? How did you
get that figure?
Mr. Eisman. These are probably audited financials of the
companies. The reason why I chose to just mention Apollo in my
written testimony is that it's difficult to get from some of
the other public companies how much money they actually spend
purely on education. We just chose Apollo because a disclosure
was better. Just to repeat your statistics, in fiscal 2009, the
company had a little bit more than $800 million incremental
revenue. They had over $1 billion in incremental revenue from
the government, which meant that more than 100 percent of the
revenue growth came from the government. Of that $1.1 billion,
they only spent $99 million on education.
Now I don't know about you, but I find that pretty
shocking.
The Chairman. I do find that shocking. Ms. Reiter, does
that kind of comport with anything that you might have looked
at in your investigations in terms of how much is being spent
of the growth in government money going to these institutions?
Ms. Reiter. Our investigation really didn't get into that.
The Chairman. OK.
Ms. Reiter. I've seen certainly the statistics which I
think you've already heard today as to the tremendous growth
and how much of it is coming from that. I really don't have
anything to add on that point.
The Chairman. OK. Well, I have no more questions. Are there
any other things that any one of you wanted to bring up, that
you wanted this committee to know or that you want to put in
the record right now? Ms. Issa, is there anything else that you
wanted to impart to us at all? Ms. Reiter?
Ms. Reiter. Well, there was one point that I just neglected
to mention in my statement that I had intended to mention when
I was talking about the school statistics on placement. Among
other things we found were that the massage therapy students
placement records included consistently fictitious businesses.
We discovered in talking to former students that those names
were business names they had come up with in a class that was
to teach them how to make business cards. The school actually
used those fictitious names to say that that's where the
students were placed when there were no such businesses. I
think it just gives a little flavor that perhaps the other
examples might not have.
The Chairman. Ms. Parrott.
Ms. Parrott. No, sir. Just to let you know that we are
happy to participate in the hearings. And we're happy to work
with you in finding good solutions.
The Chairman. I appreciate your forthrightness on it. Thank
you.
Ms. Parrott. Thank you.
The Chairman. Mr. Eisman.
Mr. Eisman. Nothing more, Senator, thank you.
The Chairman. Well, I thank this panel very much. I thank
all of our witnesses. We'll leave the record open for 10 days.
I called this hearing for all of the members to gain a better
understanding of the role of for-profit education. We've heard
information that's very concerning. There's a lot we don't
know. We will continue ahead with this.
There's something happening out there, that compels us to
look at this. The huge amount of taxpayer dollars that are
going into Pell Grants and students loans, the number of Ms.
Issa's that are out there, what's happening with the churning?
Companies are increasing their revenues so much each year, but
all of it's coming from government money. And they have huge
profit margins. As I said, I don't mind profit. That's good if
someone's making a new iPod or something like that. If this is
education, and it's taxpayers' money, we really have to
question seriously the profit margins of these companies, and
where that money's going, how much is being used for
recruiting? How much is being used in advertising and
marketing? And how much is actually going into instruction?
It also seems to me, in preparing for this, in reviewing
this over the last couple of months, and reading as much as I
can about it, it seems that we have a situation that has
developed in the last several years. I won't put a deadline, a
cutoff. Maybe 2002 with the changes in the Safe Harbor, maybe
some other things that happened in that decade.
It seems that we have a situation where the bad actors are
pulling the good actors. Now what I mean by that is that a
company that may be a good actor, maybe DeVry, who has a long
history, and other companies like that are being pulled into
this vortex, because their competitors are doing it. Their
competitors are sucking up all of this Federal money. And
they're making big profits. They're paying their executives
extremely high salaries. And they're getting bigger. They're
growing bigger. And so, a school that in the past has been a
great school maybe, has done really good stuff, has abided by
rules, says wait a minute, if we miss this train, we're out of
luck. Maybe we got to get on that train, too.
We find those that have known how to game the system in the
last 10 years, to increase their profits, to increase their
income, churn the students, and kind of then pull into this
vortex a lot of good schools that otherwise would not be doing
that.
I think that also is something that appears to me to be
happening. Again, it really compels us and this committee and
this Congress to do something about it and to stop it before it
goes too far.
We'll continue these series of hearings next month and
beyond to look at what we have to do legislatively, and what
maybe the Department of Education has to do in its regulatory
framework to get on top of this. I don't think anyone who is
reasonably objective about this can say that there's nothing
wrong, we don't have to do anything. Something's got to be
done. I don't know exactly what. I might want to go all the
way, but something needs to be done. I don't think any
objective person involved in the industry or in any way in
education or involved in the business sector, like you, Mr.
Eisman, I don't think anyone objective can say we can just sit
by and let nothing happen. And this committee, I can tell you,
we're going to make something happen. We just cannot continue
to let this go on like it is.
With that, I thank the panel for coming here. I thank you
for your testimony. The committee will stand adjourned.
[Additional material follows.]
ADDITIONAL MATERIAL
Prepared Statement of Senator Casey
Thank you, Chairman Harkin, for holding this important
hearing. The United States has a growing population of high
school graduates seeking higher education to better themselves
and lead to rewarding careers. Unfortunately, higher education
today is an expensive endeavor that too many students struggle
to afford, particularly in the current economic downturn.
I've been proud to work with the Chairman and members of
this committee to pass record increases in Federal financial
aid to students. At the same time, it is critical that
institutions receiving this Federal aid deliver quality
educations to their students. As Pennsylvania's Auditor General
and State Treasurer, I fought for a decade to stop waste,
fraud, and abuse involving tax dollars. Allegations of fraud
against certain career colleges should be fully investigated
and those engaged in these practices should be severely
sanctioned.
Career colleges serve a growing population of non-
traditional students who are more likely to be working while
attending school and may be the first in their families to
attend college. These institutions should be held accountable,
but we must be careful not to limit the choices available to
students. It is my hope that these hearings will shine a light
on how career colleges, and all institutions of higher
education, are using Federal student aid to serve students.
------
U.S. Department of Education,
Office of Inspector General,
July 15, 2010.
Hon. Tom Harkin, Chairman,
Committee on Health, Education, Labor, and Pensions,
U.S. Senate,
Washington, DC 20510.
Hon. Mike Enzi, Ranking Member,
Committee on Health, Education, Labor, and Pensions,
U.S. Senate,
Washington, DC 20510.
Dear Chairman Harkin and Ranking Member Enzi: Thank you and all of
the members of the Committee on Health, Education, Labor, and Pensions
for the opportunity to follow up on my testimony before the committee
on June 24, 2010. Attached are my answers to your questions.
Should you have any additional questions or require further
information, please do not hesitate to contact me directly at (202)
245-6900, or our Congressional Liaison, Catherine Grant at (202) 245-
7023.
Sincerely,
Kathleen S. Tighe,
Inspector General.
______
Response to Questions of Senator Enzi, Senator Dodd, Senator Brown,
Senator Casey, Senator Hagan, Senator Alexander, and Senator Coburn by
Kathleen S. Tighe
QUESTIONS OF SENATOR ENZI
Question 1. In your testimony, you indicated that 70 percent of
your investigations involving institutions of higher education involve
for-profit institutions. How many schools does this represent? What
percentage of all for-profit institutions has your office investigated
over the past 5 years?
Answer 1. The percentage reported in my testimony is based on 103
open investigations involving post-secondary institutions. Seventy-two
(70 percent) involve for-profit schools or their officials or
employees. All schools certified to participate in the student aid
programs receive a unique identification number, known as an OPEID
number. Some schools operate multiple campuses and locations in
multiple States under a single OPEID number. Other schools under common
ownership are separately certified with separate OPEID numbers. There
are over 2,000 for-profit schools with unique OPEID numbers certified
to participate in the student aid programs. Counting the separate OPEID
numbers as separate schools (as the Department of Education
(Department) does when reporting the number of participating schools),
our 72 investigations involve 108 for-profit schools separately
certified by the Department to participate in the student aid programs.
This figure represents approximately 5 percent of all currently
certified for-profit schools.
Since October 1, 2005, the Office of Inspector General (OIG) has
conducted a total of 128 investigations related to for-profit schools.
We cannot at this point readily determine the exact number of schools,
or unique OPEID numbers, covered by these investigations so as to give
an accurate percentage. Many of the investigations are now closed and
OIG's investigations case tracking system identifies investigations by
entity type rather than OPEID number.
Question 2. You indicated that you have evidence of widespread
abuses throughout the for-profit sector? Specifically, what is that
evidence?
In my written and supplemental oral testimony I slated that of our
audits and investigations of abuses by post-secondary schools, there is
a higher percentage of cases related to the for-profit sector than to
the public and non-profit sectors. While the areas of abuse that I
identified in my testimony are recurring and significant, we cannot
conclude that the abuses are ``widespread,'' as we can only report on
the abuses of which we are aware.
QUESTIONS OF SENATOR DODD
Question 1. Ms. Tighe, can you elaborate on the Department's
relationship with the accrediting agencies that are giving these
schools their stamp of approval? What authority does the Department of
Education have to direct these agencies to improve their standards of
accreditation? Outside of this authority, how has the Department tried
to work with these agencies to raise the standards, amidst the concerns
you raised? With what response has this outreach been met?
Answer 1. The Department has very little authority over the
standards used by accrediting agencies. The General Education
Provisions Act, 20 U.S.C. 1232a, and the Department of Education
Organization Act, 20 U.S.C. 3403, prohibit the Department from making
determinations on curriculum or programs of instruction or from
supervising accrediting agencies. In the 2006-2007 higher education
negotiated rulemaking session, the Department did attempt to develop
criteria for the requirement in the Higher Education Act of 1965 (HEA)
that accrediting agencies establish standards related to student
achievement. At the end of 2007, Congress prohibited the Department
from promulgating or enforcing any revision to the regulations
governing accrediting agencies. Department of Education Appropriations
Act, 2008, 305 enacted in Division G of the Consolidated
Appropriations Act, 2008, Pub. L 110-161, 121 Stat. 1844, 2198 (2007).
In the Higher Education Opportunity Act of 2008 (HEOA), 495(3), Pub.
L. 110-315, 122 Stat. 3078, 3327, Congress prohibited the Department
from promulgating any regulation with respect to standards of
accreditation, including standards for student achievement. As a
result, the Department can only determine if an accreditation agency
has standards; it cannot direct an agency to improve or raise its
standards.
Question 2. To your knowledge, after discovering that many
accrediting agencies lack credit hour definitions, did any of these
agencies begin to define a credit hour? Do they now have these
definitions in place voluntarily?
Answer 2. We can speak only to the regional accrediting agencies we
evaluated. At the time of our inspections, none of them had begun to
develop a definition of a credit hour and none indicated plans to do
so.
QUESTIONS OF SENATOR BROWN
Question 1. Besides more meaningful standards for programs length,
are there other areas that need strengthening in the accreditation
process or in the Department of Education's process for recognizing
accrediting agencies?
Answer 1. As the Department is prohibited from developing criteria
for an accrediting agency's standards for accreditation, the Department
is very limited in its ability to require meaningful standards for
accreditation. Removing the restrictions on the Department's authority
to regulate the standards for accreditation could strengthen the
recognition process and help ensure that accrediting agencies fulfill
their obligation to serve as reliable authorities of the quality of
education funded by Federal taxpayers.
Question 2. In your testimony, you state that over the years, you
have identified a relationship between rapid growth and failure to
maintain administrative capability. Can you give us some examples from
higher education?
Answer 2. The student aid programs under title IV of the HEA are
very complex and there are many requirements for the Financial Aid
Administrator (FAA) at a school to account for the funds, assure all
students are eligible for the awards, assure students are in
attendance, disburse the funds, assure students are maintaining
satisfactory academic progress, determine when students stop attending,
and calculate and pay refunds of title IV funds. These are key factors
in assessing the statutory requirement for a school to have
administrative capability to manage the title IV programs. As
enrollment of students increases at a rapid rate, the school has to
assure it has sufficient knowledgeable and trained FAA staff to keep
current with all the title IV requirements. For example, at TUI
University, private investors purchased the school from Touro
University and continued to increase enrollment in an all distance
education environment. Our audit found that TUI did not have adequate
policies and procedures in place as it grew for ensuring student
eligibility for title IV funds at the time of disbursement and for
identifying students who had withdrawn from the institution. Other
examples include Capella University that could not assure students were
attending or that it calculated refunds correctly and the University of
Phoenix that has been cited several times for incorrectly calculating
refunds.
QUESTIONS OF SENATOR CASEY
Question 1. The President has set the goal of the United States
leading the world in college graduates by the year 2020. In your
opinion, what is the role of for-profit colleges in trying to achieve
this goal?
Answer 1. As required by the HEA, proprietary schools must offer
programs of instruction that prepare students for gainful employment.
It is critical that the programs they are offering lead to successful
employment opportunities that provide the graduates the ability to
repay their student loan debt. It also is critical that the proprietary
schools do not use high-pressure recruiting tactics, do not overstate
the future earnings potential for graduates, and provide programs with
high graduation and placement rates. In this capacity, proprietary
schools providing quality programs that result in skilled graduates for
existing employment opportunities at reasonable earnings potential, can
be an asset to achieving the President's goal.
Question 2. What are for-profit schools currently required to
report to the Department of Education around graduation rates and
placement rates? How are placement rates tracked?
Answer 2. The HEA requires all institutions to disclose graduation
rates to students and to the Department through the Integrated Post-
Secondary Education Data System, known as IPEDS. These rates are posted
on the Department's College Navigator Web site as consumer information.
The graduation rates are not audited numbers, so they depend solely on
the accuracy of school reporting. We are not aware of any requirement
for the schools to report placement rates.
Question 3. What, if any, statutory or regulatory changes should be
made to strengthen the rules governing for-profit colleges? Are the
penalties strong enough to hold these institutions accountable?
Answer 3. The 90/10 rule applies only to proprietary schools and
reflected a judgment by Congress that schools should be of sufficient
quality to attract at least 10 percent of their funding from sources
outside the HEA. The HEOA, however, weakened this rule by allowing
additional revenues to count towards the institutional 10 percent. The
90/10 rule was designed as a proxy for quality, but most schools have
met this rule over the years. Congress could explore alternatives to
the 90/10 rule, such as requiring minimum graduation and placement
rates in occupations that allow students to repay student loan debt.
Also, Congress could explore and consider limitations on the amount of
title IV funds revenues received by the schools that can be used to pay
for advertising, marketing and recruiter salaries, or other non-
instructional costs. Regarding available penalties, the HEA and the
Department's regulations do contain effective remedies that would allow
the Department to hold institutions accountable when violations are
discovered.
Question 4. What regulations are currently in place to prevent
schools from misleading students about things like program
accreditation?
Answer 4. 34 CFR Part 668, Subpart F authorizes the Department to
limit, suspend, terminate or fine an institution that misrepresents the
nature of its education programs and financial charges or the
employability of its graduates. Prohibited misrepresentations under
these regulations are limited and difficult to prove. In its Notice of
Proposed Rulemaking (NPRM) published June 18, 2010, 75 Fed. Reg. 34806,
the Department has proposed significant changes to improve these
regulations and expand the definition of prohibited misrepresentations.
QUESTIONS OF SENATOR HAGAN
Question 1. Inspector Tighe, in your testimony you state that
distance education both at proprietary and non-profit institutions is
an area that is placing increased demands on your investigative and
audit resources, and that there is need for greater oversight and for
regulatory authorities to evolve with the industry. I believe that
there is great value in distance learning and online education. Can you
elaborate on the concerns surrounding online education and offer your
recommendations for ensuring that students who are interested are able
to receive a quality education online?
Answer 1. We have found that distance education schools lack
adequate internal controls to assure that students are enrolled and
attending and thus are eligible for title IV funds. This issue needs to
be addressed in law and/or regulation with a common definition of
attendance and academic engagement in the distance education
environment. Common definitions would provide for better oversight by
regulatory authorities and help ensure students are provided a quality
education at the post-secondary level. As we have separately reported,
accrediting agencies have not established standards to determine credit
hour and program length for either online or traditional programs. In
addition, online programs are particularly vulnerable to fraud
committed by would-be beneficiaries as there is no requirement for
confirmation of the identity of student aid applicants. We have an
extensive number of cases involving gangs that have defrauded
institutions and the title IV programs by posing as regular students to
obtain cash disbursement of title IV funds for non-institutional
charges such as living expenses. Congress and the Department could
explore practical options to confirm identity of applicants and reduce
the opportunity for this type of fraud.
Question 2. At the end of fiscal year 2010, there are estimated to
be over $700 billion in outstanding, federally backed student loans.
Taxpayers are backing almost all of those loans. I realize that this
question can apply equally to non-profit institutions as well, but
since we're talking about the for-profit industry today, could any of
the witnesses tell me what specific, quantitative measurements we have
across the industry to tell us what the taxpayers are getting for all
that money? What sort of industry-wide performance measures are
available to help us better understand the performance of institutions
that survive on the largess of the taxpayer?
Answer 2. Other than graduation rates, we are not aware of a
quantitative measure applicable to all title IV participating
institutions that is currently required and available to assess the
investment of taxpayer dollars provided through the title IV programs.
As I cautioned in a prior answer, graduation rates are not audited and
depend solely on the accuracy of school reporting.
Question 3. Some say that the for-profit sector is highly regulated
with oversight from the U.S. Department of Education, State licensure
agencies and accrediting bodies. Others may disagree, citing that much
more needs to be done. That said, what are your thoughts on how can we
better align the goals of each of these agencies so that everyone is
demanding the highest quality outcomes for every institution?
Answer 3. In our experience, we have seen very little oversight of
the for-profit sector by State licensing agencies and accrediting
agencies that identifies the types of abuses we continue to find in the
for-profit sector. We believe that accrediting agencies need to be held
accountable for developing and enforcing meaningful standards and that
States need to have standards to assess the quality of institutions for
which they provide authorization to operate in their State. Congress
could consider statutory changes to ensure accrediting agencies have
meaningful standards, and that accrediting agencies are required to
share information with State licensing agencies.
Question 4. Many of you in your testimony mention the ``90/10
rule'', the provision that requires proprietary institutions of higher
education to have at least 10 percent of the institution's revenues
from sources that are not derived from funds provided through Federal
financial aid. Is there a way to more accurately track the percentage
of title IV dollars that schools receive?
Answer 4. In our experience, determining the actual title IV
dollars received has not proved an administrative difficulty in
properly applying the 90/10 rule. The major difficulty has been
determining whether schools have, in fact, received in excess of 10
percent in non-title IV revenue. We have found that many institutions
have not calculated the 90/10 rule percentage correctly. Despite errors
in calculation, schools generally have not failed the rule. Congress
could consider alternatives to the 90/10 rule, such as requiring
minimum graduation and placement rates in occupations that allow
students to repay student loan debt. If investment of taxpayer dollars
was providing a reasonable return on investment by students benefiting
from the programs and not being saddled with unmanageable loan debt,
then providing more than 90 percent of institutional revenue from title
IV should not be as great a concern.
Question 5. As you know, the purpose of this hearing is for all of
us to get a better sense of how well the for-profit education industry
is serving students. We know that there are good actors as well as bad
actors in the for-profit education industry. For those of us who want
to ensure that anyone who has the drive and desire to get a high-
quality education is able to do so, how do you suggest we work together
to better identify those schools that are getting the job done and
those that aren't?
Answer 5. We believe the Department's current effort to define
``gainful employment'' and establish data metrics that would
demonstrate that students, particularly student borrowers, have
obtained ``gainful employment'' is worthwhile. The Department's
proposal to eliminate all ``safe harbors'' from the incentive
compensation rules should help reduce the financial incentives that
lead to title IV violations. We have repeatedly recommended
establishing requirements for completion and placement rates, which
could also establish that students are benefiting from taxpayer-
supported education. Providing statutorily mandated minimum graduation
and placement rates, requiring those rates to be substantiated through
the annual audit process, and requiring the reporting of the rates to
the Department and posting on its Web site would provide for reliable
consumer information. Congress could also require that accrediting
agencies provide publicly disclosed serious issues they identify with
in the quality of education provided by member schools.
QUESTIONS OF SENATOR ALEXANDER
Question 1. One of my concerns is that there does not seem to be a
very adequate set of data tools to look at institutions of higher
education and fairly distinguish between a ``good'' actor and a ``bad''
actor. What data would you recommend that we should start gathering so
that we can make these distinctions fairly and accurately?
Answer 1. We share your concern that using data to effectively
identify and distinguish ``good'' and ``bad'' actors is a challenge.
Working in conjunction with the Department, we have utilized and
analyzed program data to identify possible high risk institutions. Much
of this data though does not in and of itself allow a determination
that a school is a ``bad'' actor. Additional audit, investigative, or
program review is needed to determine actual violations of title IV
requirements. While certain data, such as failure to pay refunds or
excessive default rates, can allow an adverse judgment to be made, most
data allow only a conclusion that some institutions are more high risk
than others.
We recommend pursuing data that allows Congress to conclude that
Federal funds are being effectively spent and that students are
benefiting from education received. In this regard, we believe the
Department's current effort to define ``gainful employment'' and
establish data metrics that would demonstrate that students,
particularly student borrowers, have obtained ``gainful employment'' is
worthwhile. We have repeatedly recommended establishing requirements
for completion and placement rates which could also establish that
students are benefiting from taxpayer-supported education.
The June 24 hearing raised concerns that certain institutions may
be devoting only a small fraction of title IV revenue to actual
instruction. At some institutions, a disproportionate share of Pell
Grant funds and loan indebtedness incurred by students may be
effectively devoted to marketing, compensation of recruiters and other
non-instructional costs, rather than to provision of education that
could improve the employability of students.
Question 2. Do you believe that the proposed regulations on credit
hour still provide enough flexibility for institutions of higher
education to develop new and innovative program offerings like a 3-year
degree, delivery of instruction through new technology platforms, and
other ways that we may not even be able to envision today?
Answer 2. We believe the proposed regulation on credit hours will
provide flexibility for institutions to develop new and innovative
programs; however, the onus will be on accrediting agencies and the
degree of rigor they bring to their reviews of the assignment of credit
hours by institutions that do not use the 1 hour of instruction and 2
hours of outside preparation as the standard for their credit hour
assignment. Furthermore, even with the definition of a credit hour,
there is concern over whether the instruction being offered by the
institutions is actually at the post-secondary level. It is also worth
noting that because of the cycle of accreditation, any definition of a
credit hour finally adopted this year will not be fully evaluated at
every institution participating in the Federal student aid programs
until 10 years after July 1, 2011 (the earliest date that any new
regulation finalized this year can take effect).
Question 3. You cite the conversion to the Direct Loan program as a
significant issue for you and your staff at the Inspector General, as
well as the staff at the Department since the Department will now have
to perform school loan oversight previously performed by guaranty
agencies, like the Tennessee Student Assistance Corporation. What types
of requirements do you think need to be added to ensure the smooth
operation of the Direct Loan program? Now that the Department of
Education is the 6th largest bank, do you think that there are any
changes that need to be made to the Department's Federal Student Aid
office to preserve the integrity of the program? What legislative
changes do you recommend?
Answer 3. Last year, the Department awarded new contracts to four
of the largest loan servicers in the FFEL program to service FFEL loans
purchased under the ECASLA programs and to service all the new Direct
Loans along with its existing Direct Loan servicer. Providing adequate
contract oversight of the servicers and other contractors by the
Department will be critical. Regarding the oversight of schools, we are
aware that the Department is in the process of hiring additional
program reviewers with the technical skills to increase its oversight
of compliance by schools, but we have not reviewed the adequacy of the
Department's staffing plan. We are currently examining the
applicability of Federal bank fraud statutes to determine if similar
statutory provisions for enhanced program integrity should be
recommended for the Department, as they have been for other Federal
lending programs.
QUESTIONS OF SENATOR COBURN
Question 1. What role do States play--above and beyond the role
currently played by the Federal Government--in ensuring the quality and
integrity of post-secondary degree programs? Are States best positioned
to make qualitative judgments about post-secondary institutions and to
police improper behavior?
Answer 1. While we have not performed a comprehensive review of the
oversight role performed by the States, in our experience States do not
consistently provide effective oversight of proprietary schools or
actively police improper behavior. The Department of Education
described concerns that exist over inconsistent State oversight in its
June 18, 2010 NPRM in connection with its proposal to define the State
authorization required to establish eligibility to participate in the
Federal student aid programs. 75 Fed. Reg. 34812-13. The Department
noted that substandard institutions and diploma mills set up operation
in States that provide very little oversight. The Department also
stated its concern that some States are deferring all or nearly all of
their oversight responsibilities to accrediting agencies.
Question 2. How do the cohort default rates of for-profit colleges
compare to 2-year colleges and minority serving institutions?
Answer 2. On May 2, 2010, the Department released draft fiscal year
2008 cohort default rates: http://www.ifap.ed.gov/eannouncemems/
043010FY08DraftStuLoan
CDR.html. The Department provided a comparison (attached) of the draft
fiscal year 2008 cohort default rates with the final fiscal year 2006
and fiscal year 2007 rates, broken down by school type. According to
the draft rates, all proprietary schools had a fiscal year 2008 cohort
default rate of 11.9 percent (106,019 borrowers in default); 2-3 year
public institutions had a fiscal year 2008 cohort default rate of 10.3
percent (50,379 borrowers in default). However, the cumulative lifetime
default rates and budget lifetime default rates are significantly
higher. For example, the 2007 budget lifetime default rate for 2-year
proprietary schools is 47.0 percent.
COMPARISON OF FY 2008 DRAFT COHORT DEFAULT RATES
TO PRIOR TWO OFFICIAL CALCULATIONS
CALCULATED JANUARY 2, 2010
The Department does not currently publish a report on the cohort
default rates of minority serving institutions. The cohort default rate
for individual schools is available at http://wdcrobcolp01.ed.gov/
CFAPPS/COHORT/search_cohort.cfm.
Question 3. Under the new 3-year cohort default rules slated to
take effect, what rewards accrue to a college or university with low
cohort default rates? What sanctions do colleges or universities incur
for high cohort default rates in the first, second and third year of
high rates (over 30 percent)?
Answer 3. Under the rules published October 28, 2009, 74 Fed. Reg.
55,626, there are no new benefits or regulatory relief afforded to
schools with a low cohort default rate. Institutions with a cohort
default rate greater than 40 percent in a single year lose eligibility
to participate in the Direct Loan program; schools with cohort default
rates over 30 percent for 3 consecutive years lose eligibility to
participate in both the Direct Loan and the Pell Grant programs. There
are no sanctions for exceeding 30 percent in the first 2 years. The new
cohort default rate calculation will be effective beginning with the
fiscal year 2009 cohort, so the first official 3-year cohort default
rate will not be issued until September 15, 2012. However, no
institutional sanctions will be taken based on the new calculation
until 3 consecutive cohort years of the new rates have been calculated.
During the transition period, sanctions will be based on calculations
made according to the pre-HEOA calculation.
Question 4. In your testimony, you discuss the recent changes to
the student loan program and the need for the ED-OIG to be vigilant in
its oversight in the coming months and years. Please elaborate on this
point. What is the ED-OIG's oversight plan for monitoring both the
transition and long-term implementation of the Federal Direct Loan
Program? For those of us who want to ensure that anyone who has the
drive and desire to get a high-quality education is able to do so, how
do you suggest we work together to better identify those schools that
are getting the job done and those that aren't?
Answer 4. We have conducted a preliminary assessment of the
Department's plans regarding the Direct Loan program to assure it has
the technical capacity to originate all Direct Loans at the peak
processing period of mid-August. We are performing a separate quick
assessment to determine if the Department has made adequate revisions
to key contracts, if deliverables under contracts have been met, and if
there is a contingency plan; we are also identifying how the Department
is providing technical assistance to schools during the transition.
This review should be issued in early August.
During the next fiscal year, we are planning reviews of the new
title IV servicers and additional reviews at the Department to assess
its oversight of contractors, how it identifies risks that schools
present to the title IV programs, and how it performs oversight of
school compliance. As part of our annual audit of the Department's
Financial Statements we will be evaluating how the Department is
accounting for Direct Loan originations, the status of those loans, and
subsidy costs. As part of our annual FISMA audit, we will be evaluating
the IT security at selected Department contractors. As part of our
long-term plan, we will continue to assess and identify any new
emerging areas of risks in the Direct Loan program.
Response to Questions of Senator Casey and Senator Hagan by Yasmine
Issa
QUESTIONS OF SENATOR CASEY
Question 1. The President has set the goal of the United States
leading the world in college graduates by the year 2020. In your
opinion, what is the role of for-profit colleges in trying to achieve
this goal?
Answer 1. For-profit schools have a financial interest in
attracting high enrollment to attain government funding and there is no
evidence showing a corresponding high focus on instruction.
Additionally, there is no evidence showing improvement in the quality
of education afforded students and no assurance that outcomes promised
to students upon enrollment are realized after graduation.
Question 2. What are for-profit schools currently required to
report to the Department of Education around graduation rates and
placement rates? How are placement rates tracked?
Answer 2. While I am not an education policy expert, my experience
leads me to believe that government funding to for-profit colleges
should include reasonable thresholds requiring minimum graduation
percentage and acceptable levels of job placement.
Question 3. What, if any, statutory or regulatory changes should be
made to strengthen the rules governing for-profit colleges? Are the
penalties strong enough to hold these institutions accountable?
Answer 3. The penalties are clearly not strong enough because, in
my view, there have been little or few repercussions when for-profit
colleges have failed to meet promises to students or to the government,
who funds them. The experience I described during my testimony is an
example of false promises made and a placement that was never realized.
QUESTIONS OF SENATOR HAGAN
Question 1. At the end of fiscal year 2010, there are estimated to
be over $700 billion in outstanding, federally backed student loans.
Taxpayers are backing almost all of those loans.
I realize that this question can apply equally to non-profit
institutions as well, but since we're talking about the for-profit
industry today, could any of the witnesses tell me what specific,
quantitative measurements we have across the industry to tell us what
the taxpayers are getting for all that money? What sort of industry-
wide performance measures are available to help us better understand
the performance of institutions that survive on the largess of the
taxpayer?
Answer 1. A major difference between not-for-profit and for-profit
colleges is that many for-profit colleges make ``promises'' and
``guarantees'' to students as a selling point to attract them to their
institutions. Not-for-profit schools do not necessarily offer
guarantees for placement yet, in my experience, they offered an
accredited degree, which would have made all the difference in
placement. Given those facts, students take on a higher risk for their
loans at for-profit colleges.
Question 2. Some say that the for-profit sector is highly regulated
with oversight from the U.S. Department of Education, State licensure
agencies and accrediting bodies. Others may disagree, citing that much
more needs to be done.
That said, what are your thoughts on how can we better align the
goals of each of these agencies so that everyone is demanding the
highest quality outcomes for every institution?
Answer 2. No Response.
Question 3. Many of you in your testimony mention the ``90/10
rule,'' the provision that requires proprietary institutions of higher
education to have at least 10 percent of the institution's revenues
from sources that are not derived from funds provided through Federal
financial aid.
Is there a way to more accurately track the percentage of title IV
dollars that schools receive?
Answer 3. No Response.
Question 4. As you know, the purpose of this hearing is for all of
us to get a better sense of how well the for-profit education industry
is serving students. We know that there are good actors as well as bad
actors in the for-profit education industry.
For those of us who want to ensure that anyone who has the drive
and desire to get a high-quality education is able to do so, how do you
suggest we work together to better identify those schools that are
getting the job done and those that aren't?
Answer 4. Government funding for for-profit schools should be
linked to agreed upon standards, such as the demonstration of
successful graduation and placement rates. Looking back on my
experience, I would have been more wary had I known that students who
attended my program faced challenges getting a job because of their
accreditation status. I don't think what happened to me should
continue.
______
July 12, 2010.
Hon. Michael B. Enzi, Ranking Minority Member,
Committee on Health, Education, Labor, and Pensions,
SD-428, Dirksen Senate Office Building,
Washington, DC 20510.
Re: List of Suggestions for Eliminating the Bad Actors, While Ensuring
the Good Actors Can Fulfill Their Role
Dear Senator Enzi: During the hearing, ``Emerging Risk?: An
Overview of Growth, Spending, Student Debt and Unanswered Questions in
For-Profit Higher Education,'' held on June 24, 2010, you asked what
could be done to eliminate the bad actors among post-secondary
proprietary schools, while ensuring the good actors can fulfill their
role. I indicated that there was not time to go into all of the things
that could be done to eliminate the bad actors among post-secondary
proprietary schools, while ensuring the good actors can fulfill their
role. You asked me to supply a list after the hearing and I agreed.
In making these suggestions, I am aware of the long reported
history of fraud, abuse, and failure to adequately train students in
the proprietary school sector. Past efforts at the Federal level and in
some States to sort the good from the bad have at times made progress,
but have often been insufficient. I believe that good schools can
continue to flourish under the changes listed below. In general, most
of the suggestions are remedies that have been used by California or
other States or are revisions to laws that were enacted after the Nunn
hearings, but have been weakened over time. Some remedies have been
widely discussed, and I will only mention them briefly as you are
undoubtedly already familiar with them. First, I list the suggestions.
More detail about each suggestion is then included in the body of this
letter:
1. Define and Enforce the Longstanding Requirement that Proprietary
Programs (and certain other programs) Prepare Students for Gainful
Employment.
2. Strictly Prohibit Quotas and Incentive Compensation for
Recruiting and Financial Aid.
3. Publish and Base Continued Eligibility on Life-time Cohort
Default Rates.
4. Require Real Standards for State Authorization Agencies.
5. Reform Accrediting Agency Role and Requirements.
6. Revise 90/10 Requirement.
7. Change Incentives for Private Lenders and Schools by Ensuring
the Existing FTC Holder Rule Is Enforced Against Lenders.
8. Study and Establish Appropriate Standards for Distance
Education.
9. Require Cancellation Periods and Pro-rata Refunds, and Prohibit
Contractual Obligation or Payment Beyond One Term or 4 Months.
10. Require Ability to Benefit Testing, Either for All Students, or
at Least for All Students Who Did Not Graduate From a Public High
School; Eliminate 6 Unit Alternative Measure for Entrance Until
Sufficient Study at Proprietary Schools Has Occurred.
11. Expand Bases for Loan Discharge and Require Reimbursement from
School or Lender or Allow Students to Seek Remedies Directly from
School and Lender.
12. Consider Establishing Tuition Recovery Fund.
13. Require a Higher Ratio of Current Assets to Liabilities.
14. Direct More Federal Funds to Community Colleges.
1. DEFINE AND ENFORCE THE LONGSTANDING REQUIREMENT THAT PROPRIETARY
PROGRAMS (AND CERTAIN OTHER PROGRAMS) PREPARE STUDENTS FOR GAINFUL
EMPLOYMENT
Congress apparently first noted the widespread exploitation of
students by proprietary schools after enactment of the GI bill after
World War II. The House Select Committee to Investigate Educational,
Training, and Loan Guaranty Programs under GI Bill, 2/14/1952
describing the abuses in the GI Bill from 1944 to 1950 in connection
with recommending safeguards for veterans of the Korean War noted,
inter alia:
``Exploitation by private schools has been widespread.''
``There was a rapid uncontrolled expansion of private profit
schools . . .''
``Many schools have offered courses in fields where little or
no employment opportunity existed.''
``Training programs have been approved for unskilled or semi-
skilled occupations where little or no training was required,
resulting in needless expenditure of funds and waste . . .''
With reason, when Congress later added proprietary schools to the
Higher Education Act, it specified that only schools that prepared
students for gainful employment were eligible. However, the Department
of Education has never defined, much less made much of any attempt to
enforce this requirement. In the negotiated rulemaking on program
integrity the Department initiated in 2009, the Department proposed a
definition that is a modest step toward enforcement of this
requirement. The proposal, which it has yet to officially propose,
would set a flag to identify programs for which the students' median
loan debt would be more than 8 percent of the projected salaries (at
the 25th decile of salaries determined by the Bureau of Labor
Statistics for the occupations for which the training is to prepare
students). Programs that could not meet that standard would still be
eligible if the school could demonstrate that the median debt load is
less than 8 percent of the actual salaries graduates of those programs
earn, or if 90 percent of the graduates of the program did not default
(with ``default'' defined more accurately than under the current cohort
default rate standards).
Given that the 8 percent standard is usually used by lenders to
determine the amount of all non-housing debt a borrower should
reasonably carry, and that many students at proprietary schools are
older and already have other debts such as auto loans and credit card
debts, the 8 percent standard may be too high, especially for those
whose salaries would be less than 150 percent of the poverty level.
Nevertheless, it is a modest, reasonable first step. I believe the debt
load of those who enroll, but do not complete also needs to be
considered, so that there is no temptation for the bad actors to
discourage those with the highest debt loads from completing the
course, in order to lower the median debt load of students in a
program.
The Department's proposal, however, deals only with the ``gainful''
part of the phrase, not with the ``employment'' part. If a school does
a poor job of training students, even if the program met the 8 percent
or related criteria mentioned above, it might still have a minority of
graduates who could actually obtain employment. Consequently, a
requirement that proprietary school programs' graduates meet a certain
level of employment is a necessary accompaniment. In California, for
example, for 19 years, proprietary schools were required to have at
least 70 percent of the graduates from a program obtain employment
within 6 months, in a position that lasted at least 60 days, for at
least 32 hours a week. (Part-time employment could also count if the
student had specified in advance of the program and at the end that the
student only wanted part-time employment.) As was obvious from my
testimony, there needs to be some way to verify that claimed employment
levels are true. One suggestion for accuracy in employment statistics
is to require use of State unemployment insurance data, which some
States already do for community colleges.
A current provision under the Higher Education Act, which was
enacted back when most programs were much shorter, applies only to
short courses. The Department has now proposed to apply it more
broadly, so far, as a reporting device only. Based on my experience,
while accurate reporting would be helpful, the existing provision would
not be useful. The provision is very flawed, inter alia, in that the
documentation of employment allowed would not demonstrate that the
employment really meets the standard.
And, as noted above, completion rates also need to be tracked, and
a standard set to insure schools are not manipulating the data by
discouraging completion by students they consider least likely to be
able to get a job. In California, for example, after certain
exceptions--death, military service, those who canceled within the 100
percent full refund cancellation period, etc.--authorized programs had
to show 60 percent of those enrolled completed the program.
I view such standards as critical to separating out the good from
the bad actors. Good schools would continually evaluate their programs,
eliminating or revising those that have high debt levels in comparison
to salaries available or whose graduates are unable to find work in the
field in which they trained. The proprietary schools' lobbying arm,
CCA, has represented that more than 80 percent of the programs it
surveyed would meet the 8 percent flag, and likely additional programs
would meet one of the two alternatives, although CCA did not run the
numbers for the alternatives. It is unclear how many programs would
meet a 70 percent employment requirement, but most national accrediting
agencies already claim to have that high, or a higher standard. In
California, until 2008, that was the standard schools were required to
meet. The requirement did not seem to have slowed the development of
proprietary schools in California (although the State agency charged
with enforcement apparently did little to enforce the law).
Schools should also be required to report on their Web sites, if
they have one, their statistics for each program offered, as well as to
provide a fact sheet to every prospective student showing the
information for the program in which the prospective student has
expressed an interest. Currently, there is no competition among schools
based on such quality factors because those factors are not
transparent. Making them transparent, if they are verified/monitored
for accuracy, would provide some possibility of competition arising
based on these quality criteria. Such real competition would help the
good schools.
Of course there might need to be provisions related to an
employment requirement to address extraordinary circumstances, such as
limited employment available in a particular region after a major
disruption, e.g., after hurricane Katrina, or to address the time lag
for getting the results from licensing exams.
2. STRICTLY PROHIBIT QUOTAS AND INCENTIVE COMPENSATION FOR RECRUITING
AND FINANCIAL AID
The recent Department of Education proposed regulation on incentive
compensation goes a long way to restoring the full intent of the
statute prohibiting incentive compensation. I am concerned however,
that a few possible loopholes may still exist and will be working with
others to comment on the proposed rule. In addition, I also recommend a
statutory change to make very clear that the use of quotas in
connection with compensation for such staff is prohibited. From the
information I have seen, it appears schools may be trying to get around
the prohibition on incentive compensation by setting quotas and
punishing in some way or firing those who do not reach the quota. While
this may well be covered under the current statute, additional clarity
would be advisable.
The payment of incentive compensation or the use of quotas for
those involved in or supervisors over admissions or financial aid tasks
is particularly pernicious. Prospective students are likely to trust
the ``admissions advisor'' or ``financial aid advisor'' as a person
there to assist them. Prospective students don't readily realize they
are dealing with commissioned sales persons, as they would when, e.g.,
buying a car.
Good schools can compete on the basis of quality, and need not
compete on incentives. The natural result of incentives/quotas is to
encourage some of the types of abuse noted at the hearing, including
misrepresentations, enrolling students ill-suited to a particular
training program, or providing training that does not qualify the
graduates for employment.
3. PUBLISH AND BASE CONTINUED ELIGIBILITY ON LIFE-TIME COHORT DEFAULT
RATES
Proprietary schools first came fully into the Higher Education Act
financial aid programs in 1972. By the mid-80s, stories of fraud and
abuse and high default rates were accumulating. One of the provisions
enacted after the 1992 hearings by the Senate Permanent Subcommittee on
Investigations was to eliminate from eligibility schools with high
default rates. Initially, that change had an impact, but the rule has
been watered down over the years, and schools have learned how to
manipulate the data to prevent defaults from showing up within the time
(2, soon to be 3 years) in which defaults are measured. Both the
Inspector General and the GAO have pointed out that the cohort rate is
a misleading indicator. It is a mere snapshot in time that does not
give a full picture of default trends.\1\
---------------------------------------------------------------------------
\1\ See, e.g., U.S. Department of Education, Office of Inspector
General, ``Final Audit Report: Audit to Determine if Cohort Default
Rates Provide Sufficient Information on Defaults in the Title IV Loan
Program'', ED-OIG/A03-C0017 (December 2003); General Accounting Office,
``Student Loans: Default Rates Need to be Computed More
Appropriately,'' GAO/HEHS-9-135 (July 1999).
---------------------------------------------------------------------------
There are problems not only with the time period, but also with the
cohort rate calculation method. In addition, the default measure does
not include borrowers that are current, but struggling with overly
burdensome debt or borrowers that are delinquent, but not yet in
default. These problems are expected to grow as interest rates rise
along with borrowing levels.
Unless cohort default rates are tracked for life, schools will
continue to be able to manipulate this limitation. Additionally, the
default rate cut-off applied to each interval of time should be a
reasonable measure of defaults in similar credit markets that are not
skewed by an influx of Federal loans.
4. REQUIRE REAL STANDARDS FOR STATE AUTHORIZATION AGENCIES
Traditionally, the Higher Education Act has depended on the triad
of oversight, requiring a school to be accredited by a recognized
accrediting agency, to be ``legally authorized within [the State in
which it operates] to provide a program of education beyond secondary
education,'' and to submit to the provisions of a participation
agreement with the Department of Education. Currently, however,
proprietary schools and their allies, the accrediting agencies, have
successfully lobbied many States to rely on accreditation for most, if
not all of their State oversight responsibilities. The Department of
Education recently proposed a regulation that would require States to
undertake at least some of the responsibilities contemplated by law,
but apparently under pressure from some schools and accrediting
agencies, failed to fully address the statutory requirements for State
oversight. Current law requires the State agency to notify the
Department of Education promptly of any fraud or substantial violation
of the Higher Education Act, but the proposed rule does not require the
State to have any mechanism by which it would be likely to notice such
conduct.
The Department has never had sufficient resources to adequately
police the fraud and abuse in the proprietary sector. In my experience,
local or State agencies are in a much better position to learn about
problems early. As discussed below, accrediting agencies are not
designed to fulfill this role. The Department's proposed regulation
needs to be strengthened or the law needs to be revised to make clear
that schools are not eligible if the State agency in the State in which
the school operates relies on accrediting agencies for its essential
functions. State agencies must themselves approve schools, monitor
their compliance with provisions of the Higher Education Act or with
State provisions that are as strong, or stronger than the Higher
Education Act, and act to revoke authorization of schools that are not
in compliance.
5. REFORM ACCREDITING AGENCY ROLE AND REQUIREMENTS
As was pointed out at the hearing, the advisory commission that
recommends to the Department of Education about accrediting agency
recognition is heavily loaded with representatives or employees of
schools that live or die by accreditation; there is an incestuous
relationship between accrediting agency boards and the schools they
accredit; and schools are using purchase of small, previously
accredited schools to gain accreditation, then expanding the schools
beyond all recognition of the school and programs originally
accredited. As I pointed out, virtually every school I have prosecuted
was accredited, but accreditation did not address the poor outcomes,
nor stop abuse and fraud. Typically, among other limitations,
accrediting agencies have very small staffs, rely on staff from members
to evaluate other members, do not have trained investigators or
prosecutors involved in designing their oversight activities, do not
set specific enough ``standards'' so that one can tell if they have
been violated, have non-transparent procedures, and keep information
about problems gathered confidential.
At a minimum, the advisory commission needs to be revised so that
the majority represents consumer and student interests, not the
interests of schools that depend on accreditation. To the extent the
financial aid programs continue to rely on accrediting agencies, the
Department needs to specify minimum uniform criteria, particularly
outcome criteria which all recognized accrediting agencies will monitor
for compliance. Criteria, such as how much work is required for a unit
of credit should not be based on accrediting agency determinations, but
should be set by the Department, and monitored by accrediting agencies.
6. REVISE 90/10 REQUIREMENT
One of the requirements that came out of the 1992 hearings on
proprietary school fraud and abuse was the requirement that at least 15
percent of a school's revenues should come from other than Federal
funds. This provision was derived from, but did not track the
requirement for Veterans' programs. The rule for Veterans' programs was
that at least 15 percent of the students must not use the GI benefit to
pay for their schooling. This requirement was established because after
the first GI bill, proprietary schools developed to capture the
veterans benefits proliferated, and fraud and abuse were rampant (see
above). Proprietary schools later successfully reduced the percentage
not from Federal funds to 10 percent, and then got the law changed to
allow non-title IV Federal funds to be included in that 10 percent.
Nevertheless, proprietary schools continue to operate near the 90
percent title IV subsidized margin. Some proprietary schools now offer
school financing, on which they admit they expect to collect less than
50 percent, apparently, in part, to come up with enough non-Federal
funding to meet the watered down 10 percent. Apparently and perversely,
some proprietary schools are increasing their fees above the amount
available in title IV grants and loans so that at least 10 percent of
the cost cannot be from title IV funds.
Even if one looks at just independent students taking 4-year
programs at public, nonprofit, and for-profit schools, the percentage
of borrowers varies dramatically. In the publics and non-profits, 24
percent to 31 percent of students have no Federal loans, but at the
for-profits, only 4 percent do not have Federal loans. The concept of
the Veterans' 85/15 limit is that in the marketplace, a good school
could attract at least 15 percent of its students without reliance on
the Veteran benefit. The 90/10 limit under title IV needs to be
restructured to be 85/15 and to apply not to revenues, but to the
numbers of students who take out loans. Proprietary schools will likely
argue that because they attract a lower income student, such a
restriction would not be possible for them. One has to wonder, however,
if they are providing a good education, why they are not also
attracting some higher income students. Some higher income students do
want to become radiologists, vocational nurses, computer technicians or
obtain Bachelors' or advanced degrees in career-focused fields. This
change would incentivize proprietary schools not to raise tuition, but
to lower it, as they would have to compete for students in the market
generally, rather than just trying to maximize the financial aid the
school can collect by selling dreams of a career to poor people.
This change would have to be accompanied by a strict requirement
that the school must first make known to the student all financial aid
the student can qualify for, before offering information about private,
non-Federal loans so that schools would not just push students into
even higher interest, less favorable private loans. It would also have
to be accompanied by some changes in private loans, as discussed below.
7. CHANGE INCENTIVES FOR PRIVATE LENDERS AND SCHOOLS BY ENSURING THE
EXISTING FTC HOLDER RULE IS ENFORCED AGAINST LENDERS
Under the Federal Trade Commission's rule, commonly referred to as
the ``Holder Rule,'' sellers of consumer goods and services are
required to include a provision in credit contracts they assign to a
lender, or in loans if they refer the consumer to the lender or arrange
the loan, that makes the creditor subject to the same claims and
defenses the purchaser could assert against the seller. This standard
rule prevents a seller from selling a defective product, but having the
payments due to another party who claims the right to collect, even
though the product is defective. Unfortunately, some courts have held
that if the seller (in this case, the school) does not see to it that
the provision is in the credit document, the creditor is not bound by
the rule.
The FTC does not regulate lenders, so it cannot require them to
include the provision, and the agencies that do regulate lenders have
failed to promulgate a parallel rule. This means that lenders need have
little concern about whether the school is good or not. This
inconsistency needs to be addressed so that lenders will have incentive
to provide credit only for students at good schools, or to require
schools to put up a deposit to cover potential future claims or
defenses to payment.
In connection with the ``holder'' issue, schools which regularly
select lenders to offer loans to their students, should be required to
certify that the student has exhausted all means of Federal financing,
before the school may suggest or offer the more expensive private
loans, which do not have the same relief measures as Federal loans.
This would also insure that when schools are determining their
students' loan debt, they are including any private loans the student
may have.
8. STUDY AND ESTABLISH APPROPRIATE STANDARDS FOR DISTANCE EDUCATION
This is probably the fastest growing segment of proprietary schools
and the area most susceptible to abuse. Before 2006, eligible schools
were limited to providing distance education, including correspondence
courses, for no more than 50 percent of their students and no more than
50 percent of their courses. Despite caution from the GAO \2\ that
removing this limitation without better controls would lead to
increased fraud and abuse, the limit was lifted as to
telecommunications courses (those offered by electronic means), but not
as to correspondence courses. The only limit on telecommunications
courses is that they must provide regular and substantive interaction
between the student and teacher, but that interaction need not be
synchronous. The only clarification of those terms states that the
interaction must be at regular intervals and not be trivial.
---------------------------------------------------------------------------
\2\ General Accounting Office, ``Distance Education: Improved Data
on Program Costs and Guidelines on Quality Assessments Needed to Inform
Federal Policy,'' GAO-04-279 (February 2004).
---------------------------------------------------------------------------
This provision leaves the student financial aid programs wide open
to fraud and abuse. Among other issues, for-profit schools may purchase
a small, reputable school, then turn the school into a massive online
college, with virtually no oversight. A further concern must be that
schools that may have been providing good, needed hands-on programs at
an on-site facility, will be tempted to reduce costs by going to all,
or almost all on-line programs. Although telecommunications programs
are required to be accredited, the GAO has found the same lack of
accrediting agency standards here as noted above.
In her testimony, the Inspector General also noted her concern
about the lack of measures to insure Federal dollars are not being
spent for little or no benefit because of the lack of oversight of
distance education programs. The 50 percent limitation on on-line
programs needs to be restored until the means to prevent abuse can be
studied and implemented. There needs to be a study to establish what
requirements and monitoring needs to be implemented to prevent the
massive potential for problems in this burgeoning area.
9. REQUIRE CANCELLATION PERIODS AND PRO-RATA REFUNDS, AND PROHIBIT
CONTRACTUAL OBLIGATION OR PAYMENT BEYOND ONE TERM OR FOUR MONTHS
Each of these suggestions have in common that they offer a measure
of self-help to students who may find themselves in one of the ``bad
actor'' schools, and that they have been used in one or more States, to
curb abuses, but without preventing good schools from flourishing.
In California, the State law for 19 years required proprietary
schools to provide a full refund (except for a modest registration fee)
to any student who canceled the program within the first 5 class days.
That way, there was a chance the student would discover if the
equipment or facilities were lacking, or if teachers were untrained or
had no practical experience before the student had spent thousands of
dollars on a worthless education. Other States prevent the school from
keeping even a registration fee if the student cancels on or before the
first day of class. While bad actor schools become adept at giving a
good first impression, some students may discover the problems in this
initial period.
For 19 years, California required proprietary schools to provide a
full pro-rata refund throughout the program. That requirement reduced
the churn from schools constantly admitting new students and ignoring
students' needs once they passed an arbitrary 50 or 60 percent of the
course. Oregon has used a similar concept, prohibiting schools from
collecting from students or obligating students for more than one term
or four months. Again, students under this system might lose some money
on a bad school, but when they realize that things are not as
represented, they are free to leave, without being obligated for many
months more. Often students say that the school responds to their
complaints by saying, the student already owes all the money, so there
is no point to quitting out of dissatisfaction with the program.
10. REQUIRE ABILITY TO BENEFIT TESTING, EITHER FOR ALL STUDENTS, OR AT
LEAST FOR ALL STUDENTS WHO DID NOT GRADUATE FROM A PUBLIC HIGH SCHOOL;
ELIMINATE 6 UNIT ALTERNATIVE MEASURE FOR ENTRANCE UNTIL SUFFICIENT
STUDY AT PROPRIETARY SCHOOLS HAS OCCURRED
To be admitted, students are supposed to have a high school
diploma, or pass a test demonstrating their ability to benefit from the
program being offered. Needless to say, this has been a well-known area
where fraud occurs. The Department has recently proposed much-needed
changes, but I believe those are inadequate to clean up this problem
area.
There has been no definition of ``high school diploma,'' so that
proprietary schools could turn a blind eye to bogus diplomas which
could be obtained for a fee. The Department has proposed to require
schools to have procedures to deal with suspect diplomas, but the
proposed rule still leaves a lot of room for turning a blind eye.
Additionally, a high school diploma may not be adequate to determine if
a prospective student has the basic skills needed for the coursework
for particular careers.
Current rules require an ability-to-benefit test to be administered
to non-high school graduates by an independent tester. This requirement
has had limited impact, however, as testers are generally selected by
the school, give the tests at the school, and rely on the school to
maintain the tests and answer sheets. Apparently, the so-called
``independent'' testers do not run a business in which they have the
facilities to guard the tests themselves. Recently, the GAO found in
undercover operations that tests were not administered properly, but
instead were compromised to ensure the student could be admitted.
Under the law, the Department is charged with determining
appropriate test scores to allow eligibility. This is also problematic
because the Department has not interpreted the law to require ability
to benefit from the specific program for which a student is enrolling,
but rather, to be simply the equivalent of having a high school
diploma. Obviously, the beginning skills for, say, security guard, may
be different from those required for a sonographer or radiologist or
cosmetologist.
In addition, recently, on the basis of a study carried out in
community colleges, an alternative measure--the successful completion
of 6 units--is now allowed to determine whether a student may be
eligible for Federal financial aid. This provision has been enacted,
but there are virtually no regulations to prevent abuse. Those schools
that simply want more students can easily manipulate this provision to
claim students have successfully completed some course that is
available to complete some program.
In short, the current ability-to-benefit process needs overhaul.
Tests should be related to the skills that are needed to succeed in the
particular program in which the student is enrolling. Tests should be
administered at a location away from the school, by persons not
recruited by the school, who have sufficient resources to guard tests
and answer sheets from being compromised. If all students are required
to be tested, unless they graduated from a public high school, the
problem with bogus high school diplomas can be reduced, if not
eliminated. Testing of all students, even if they have a public high
school diploma, would help prevent students enrolling in programs for
which they do not have the basic skills necessary. And the 6-unit
alternative should be allowed in proprietary schools only after
adequate study in proprietary schools to show it is comparable to
testing.
11. EXPAND BASES FOR LOAN DISCHARGE AND REQUIRE REIMBURSEMENT FROM
SCHOOL OR LENDER OR ALLOW STUDENTS TO SEEK REMEDIES DIRECTLY FROM
SCHOOL AND LENDER
Students could play a role in program integrity if they had tools
to do so. Currently, however, students may only have their student
loans canceled (discharged) by the Department of Education in very
narrow circumstances, such as the school's false certification of the
student's ability to benefit, the school's failure to properly return
title IV money, or the school's closure. The student's burden to prove
the false certification discharge is very difficult, given that the
Department (in some cases) and the school have the needed records,
which the student does not have. Additionally, the Department has been
very limited in agreeing to cancellation for groups of students, even
if there is a judgment finding the false certification applied to an
entire group of students, or if the Department has similar claims from
students in its files evidencing the alleged false certification by the
same school. Additionally, to be effective in stopping bad actors, the
Department needs to be aggressive in recovering money from schools that
have falsely certified eligibility. Sometimes, of course, the
Department's failure to collect is because the school has closed,
without funds to repay the loan.
The other traditional remedy for fraud and abuse, a civil action,
is not readily available. It is not allowed under current Federal law.
Employees who have witnessed false claims for Federal money by the
school may sue and recover a share of the money paid in the judgment.
Students, however, have no right to sue under the Higher Education Act.
They may be able to assert claims under State law. But even there, they
are often thwarted because the school requires arbitration in which the
students' ability to discover needed facts is limited, rather than
allowing a lawsuit.
In addition to the limits on these means of redress by students,
claims students do pursue successfully are generally not publicly
known. Arbitration proceedings are generally private, not public, like
courts. Schools often require students' confidentiality to settle a
claim and often also prohibit the student from discussing their
grievance with others. Sometimes such confidentiality provisions seem
to prevent the student even from contacting government agencies about
the issue. Typically, evidence of wrongdoing in private arbitrations or
actions that settle is hidden away, not available to the Department,
accrediting agencies or law enforcement agencies.
These limits on redress and on public information about settlements
of disputes both artificially depress Congress' and the public's
awareness of problems, and prevent students from playing a larger role
in program integrity. These limitations should be re-examined to
increase the part students play in program integrity. In particular,
notice of settlements should be provided to the Department and law
enforcement agencies, and evidence developed that points to violations
of the Higher Education Act should be required to be made available to
the Department and law enforcement agencies.
12. CONSIDER ESTABLISHING TUITION RECOVERY FUND
One remedy that has been used in States, including in California,
is the establishment of a tuition recovery fund, funded by fees on
schools, based on numbers of students or amount of tuition. Students
can collect from such a fund if they obtain a judgment against a school
which they cannot collect, or if they were enrolled in programs which
the school stopped offering before the student could complete it or if
the school itself closed before the student could complete the program.
13. REQUIRE A HIGHER RATIO OF CURRENT ASSETS TO LIABILITIES
One recurring problem is when a school takes in tuition fees in the
form of Federal aid, then closes before students can complete their
programs. Because the proprietary schools' educational quality often
does not measure up to non-profit or public schools, the credits the
students have already received are not transferable. Sometimes so-
called ``teach-outs'' are offered at another school, but often they are
inadequate or require additional expenditures to complete the program
the student has already paid for. Currently, only a 1 to 1 ratio of
current assets to liabilities is required under Federal law. A 1 to 1
ratio is, in essence, a penny away from bankruptcy. The ratio is too
low. In other businesses, ratios of 2 to 1 are considered appropriate.
In California schools had to have at least a 1.25 to 1 ratio (excluding
such intangible assets as good will). The requirement, if enforced,
could reduce the number of such closures while still allowing stable
schools to flourish.
14. DIRECT MORE FEDERAL FUNDS TO COMMUNITY COLLEGES
I believe there are sound grounds to direct funds to public
community colleges which perform some functions similar to proprietary
schools, but at a much lower cost to students and the government.
Proprietary schools tend to concentrate their recruitment efforts in
low-income, urban areas, which may skew the share of Federal student
aid flowing to these areas. The increased Federal student aid flowing
to those areas because of poor schools, however, does not provide a net
benefit to those urban areas. Meanwhile, it may mean less Federal money
is available to fund post-secondary education in less populated regions
of the country. In contrast, State community college systems reach
throughout the country. In many cases, State community college systems
have the flexibility in schedules and in developing new programs that
proprietary schools tout. Students who go to community colleges,
however, borrow much less, wind up with less debt service after they
finish, and, if they want to continue their education, generally can
transfer credits to other public schools in the State. I think we need
to seriously look at whether funds would be allocated more equitably,
and whether we would be better able to serve the population if more
funds were directed to community colleges, rather than continuing the
massive increases in the dollar amount and proportion of Federal funds
spent supporting proprietary schools.
CONCLUSION
I have tried to list some of the most salient improvements I
believe are needed, based on my experience as a prosecutor. Others with
expertise in different aspects of the student financial aid programs
may suggest other valuable provisions, so I don't contend the list is
necessarily comprehensive. Also, to the extent some changes are made,
others may be less (or more) necessary. As a former prosecutor, I find
it very frustrating that the main way to address the fraud, abuse and
waste currently seems to be by expensive, resource-intensive, time-
consuming litigation, including prosecutions. I recognize that
implementation of these suggestions would require careful drafting. I
am quite willing to cooperate with you and the other members of the
committee in drafting provisions so that the incentives can be turned
around to operate to reduce the waste in the use of Federal financial
aid in the proprietary school sector. Please feel free to contact me
about this letter or any other questions you may have.
Sincerely,
Margaret Reiter.
______
Response to Questions of Senator Enzi, Senator Brown, Senator Casey,
Senator Hagan, and Senator Coburn by Margaret Reiter
QUESTIONS OF SENATOR ENZI
Question 1. Congress enacted a number of changes in the Higher
Education Opportunity Act to address many of these problems. What
additional changes would you suggest to address problems like the ones
you have detailed in your testimony?
Answer 1. In the letter I sent to you on July 13, 2010, I responded
to the question you asked at the hearing about what could be done to
eliminate the bad actors among post-secondary proprietary schools,
while ensuring the good actors can fulfill their role. I believe the
detailed answers in that letter address this similar question. A copy
is attached for your reference.
Question 2. We have heard a lot of individual instances of wrong
doing within the for-profit sector. We are all in agreement that the
behavior each of the witnesses has described is wrong and must be dealt
with swiftly in order to protect students. However, before Congress or
the Department acts, it is important that we do so with a full
understanding of what is going on within the sector. Your experience is
primarily in California. Do you have evidence of widespread abuses
within the sector? Please explain that evidence?
Answer 2. As you know, I was a prosecutor in California, so the
cases in which I was directly involved are limited to California. I
believe a number of other types of information, however, point to the
abuses being nationally widespread within the sector.
First, the kinds of perverse incentives I pointed out, that allow
and encourage the abuses, are not unique to California, but rather, are
systemic in Federal student aid programs. For example, there is no
nationwide standard schools must meet to show they do prepare students
for gainful employment; revenues are based on starts, not finishes; and
the cohort default rate limits can easily be manipulated.
Second many proprietary schools are nationally accredited. The
national accrediting associations are active throughout the country. As
I pointed out they are ineffectual at stopping the type of abuses I
described (discussed in my prior letter to you).
Third, the high and rising default rates of proprietary schools
cannot be entirely explained just by the types of students they
recruit. The proprietary schools' own lobbying arm's study showed that
even accounting for those differences, proprietary schools' default
rates are double those at non-profit and public schools. Such high
default rates are an indicator that students are not able to get jobs
adequate to pay off their student loans.
Fourth, the activities I described were those of a large publicly
traded company, not a local California company. The school certainly
has never indicated that it operated in a worse way in California than
elsewhere. I have seen no evidence to suggest that companies operate in
a vastly different way in California than elsewhere.
Fifth, I am aware of numerous and increasing public reports of
abuses across the Nation, but even those reports are artificially
depressed. The traditional remedy for fraud and abuse, a civil action,
is not readily available to students. It is not allowed under current
Federal law. Employees who have witnessed false claims for Federal
money by the school may sue and recover a share of the money paid in
the judgment. Students, however, have no right to sue under the Higher
Education Act.
Students may be able to assert claims under State law, but few
attorneys have the expertise and the financial wherewithal to bring
such private suits, which ordinarily would need to be done on a
contingency basis. Those claims students do pursue successfully are
generally not publicly known. Schools often require arbitration and
prohibit access to court adjudication. Arbitration proceedings are
generally private, not public, like court proceedings. Even court
proceedings do not necessarily provide much public information. Schools
often require students' confidentiality to settle a claim and often
also prohibit the student from discussing their grievance with others.
Sometimes such confidentiality provisions seem to prevent the student
even from contacting government agencies about the issue. Generally,
cases against schools do not reach judgment, or if they do, the
judgment is likely to be mooted out by settlement during an appeal.
Typically, evidence of wrongdoing in private arbitrations or actions
that settle is hidden away, not available to the Department,
accrediting agencies or law enforcement agencies.
These limits on means of re-dress and on public information about
settlements of disputes artificially depress the amount of public
disclosure of abuses in this sector.
Nevertheless, I am aware of a growing number of actions by the
Department and private litigants, some of which have already resulted
in major settlements against some of the largest, most prominent
publicly traded schools in the industry. I have not prepared a complete
list of these actions, nor have I seen a comprehensive list elsewhere,
but I have seen partial lists others have prepared. See, e.g., http://
www . nacacnet.org/LegislativeAction/LegislativeNews/Documents/
HEAFraudAlert
051110.pdf, and http://www.studentloanborrowerassistance.org/blogs/wp-
content/www . studentloanborrowerassistance.org/uploads / File/
policy_briefs/FTCguides
1009.pdf.
Question 3. To your knowledge, has the Department of Education
initiated, or completed a broad based examination of the for-profit
sector to determine if there is widespread abuse throughout the sector?
Answer 3. Generally, the types of investigations I am aware of that
the Department has undertaken seem to relate to specific schools at
which wrongdoing has been brought to its attention, rather than a
broad-based investigation of the entire sector. (My information is
limited to publicly available information.) As I understand the
Inspector General's testimony, like many investigative agencies,
investigations at the Department are often triggered by complaints they
receive. Consequently, the fact that 70 percent of their investigations
involve proprietary schools, although only about 37 percent of the
eligible schools are proprietary schools (78 Fed. Reg. 34863 [June 18,
2010]), and proprietary schools have less than 10 percent of the
students, suggests that the problems are more widespread in the
proprietary school sector, as has been the case historically. Other
more broadly-based types of investigations of the Department with which
I am familiar are those done by the Inspector General that focus on an
issue, then look at a variety of schools or accrediting agencies
related to that issue, e.g., cohort default rates or institutional
eligibility process.
Question 4. Many of the traditional institutions of higher
education have told us that they do not have the capacity to handle a
higher volume of students. What other options are available to students
who are now currently attending for-profit institutions of higher
education?
Answer 4. I am not quite sure I understand the assumption or reason
underlying the question, and the answer depends on that assumption or
reason. So I will offer several thoughts, which may be relevant to the
intent of your question.
If your question is directed to those students currently attending
a for-profit school, who wish to transfer or to obtain a higher
certificate or degree: Many students currently attending for-profit
schools who wish to change schools have limited options, for a number
of reasons, apart from whatever capacity limits there may be at public
or non-profit schools. Constraints include the inability to transfer
credits that are substandard, lack of basic skills needed to pass
entrance exams at other schools, already high debt burdens which may
make transfer attempts prohibitively expensive, and inability to find
work in the field studied so students cannot work to support themselves
through higher level studies. While I am familiar with public reports
in which students offer these descriptions of problems enrolling at
other schools, I am not familiar with any students explaining that they
chose the for-profit school because of lack of availability at a non-
profit or public institution, or that lack of capacity kept them from
transferring to another school when they left a for-profit school.
Whatever capacity limits there may be do not seem to have a major
impact in this context.
If your question assumes that changing regulations or laws to
reduce abuses, fraud, and unsuccessful programs among for-profit
schools will result in massive numbers of students seeking education
elsewhere: Two points are salient.
First, based on my experience, changes over the years in
requirements have sometimes eliminated numerous problem schools, but
there has not been any problem with lack of capacity for students
elsewhere. For example, in the few years in the early 1990s when
California had a strong, independent oversight agency, it closed more
than 150 schools. At the same time, several schools the Attorney
General sued for fraud also closed, including at least one large,
publicly traded school. I am aware of no reports of students being
unable to get into college elsewhere in California. In part, this may
be because some percentage of students those fraudulent schools would
have otherwise induced to enroll did not have the ability to pass
entrance exams at legitimate schools. (The GAO recently reported how
some for-profit schools manipulated or falsified ``ability to benefit''
tests, which are required if a student does not have a high school
diploma. Also, I am aware that some for-profit schools either steer
prospective students to companies from which they could buy a high
school diploma, or rely on such diplomas. This is known from
investigations in which I was involved and from investigations about
which I have read. At the negotiated rulemaking sessions, the
representative of for-profit schools provided lists of bogus high
schools her school had identified.) In part, other for-profit schools
may have expanded to reach more students. In part, public and non-
profit schools were available to students.
Second, concerns that massive numbers of students would be denied
higher education if tighter rules were imposed on for-profits are
overstated. As I explain in my prior letter, the various proposed
changes would affect bad apples; good schools that do really prepare
their students for gainful employment would continue to do well. The
for-profit schools' lobbying arm's own study suggested that more than
80 percent of programs surveyed would pass the Department's draft 8
percent debt to salary initial flag. And additional schools would
likely meet one of the draft alternative tests for gainful employment
even if they did not meet the 8 percent flag. For-profit schools have
also shown themselves time and again to be very adaptable to changed
conditions. (Of course, some studies have indicated that that
adaptability is sometimes manipulation of loopholes, allowing bad
schools to continue to operate badly.) With improved regulation,
schools may not be able to keep making extremely high profits because
they would have to put more money into instruction, and they would
probably need to do a better job of enrolling students who are likely
to graduate and succeed. But these regulations will not disrupt the
basic for-profit model or impact schools that do a good job educating
students.
Having said this, however, I agree that we need to focus on making
sure that good, reasonably priced alternatives are available. As I
indicated in my prior letter, one of the possibilities that must be
considered is more direct use of funds to support public community
colleges, and I would add, State colleges and universities. I grew up
on a farm and worked to support myself, with help from my parents
through college, and then on my own, with only $15,000 in student loans
through law school. Even as late as the 1980s, the schools were
affordable enough that I could do that. Now our great American public
higher education system suffers from too little support. Personally, I
think that the experiment of shifting an ever-
increasing portion of the higher education dollar to proprietary
schools has shown itself time and again to be extremely costly, not
just in money, but in the failure to prepare Americans in highly
skilled jobs and in the damage to former students' working lives. These
failures will drag down the economy as students without jobs and high
student loan debts cannot support the consumer-based economy this
Nation relies on. In this competitive world, we cannot continue to
afford to waste money that we need for training our future generations.
We have two ways to address the problem--set requirements to stop the
abuses where they are most prevalent, in the for-profit sector, and
insure stronger financial resources for the public State systems that
generally are not fraught with fraud.
QUESTIONS OF SENATOR BROWN
Question 1. What are the types of legislative measures that you
would recommend to improve accountability to students and taxpayers in
the current system?
Answer 1. I have compiled a list of suggestions, some of which
could be accomplished by regulations or by legislation, and others of
which would require legislation. In general, most of the suggestions
are remedies that have been used by California or other States or are
revisions to laws that were enacted after the Nunn hearings, but have
been weakened over time. Some remedies have been widely discussed, and
I will only mention them briefly as you are undoubtedly already
familiar with them. First, I list the suggestions. More detail about
each suggestion then follows:
1. Define and Enforce the Longstanding Requirement that Proprietary
Programs (and certain other programs) Prepare Students for Gainful
Employment.
2. Strictly Prohibit Quotas and Incentive Compensation for
Recruiting and Financial Aid.
3. Publish and Base Continued Eligibility on Life-time Cohort
Default Rates.
4. Require Real Standards for State Authorization Agencies.
5. Reform Accrediting Agency Role and Requirements.
6. Revise 90/10 Requirement.
7. Change Incentives for Private Lenders and Schools by Ensuring
the Existing FTC Holder Rule Is Enforced Against Lenders.
8. Study and Establish Appropriate Standards for Distance
Education.
9. Require Cancellation Periods and Pro-rata Refunds, and Prohibit
Contractual Obligation or Payment Beyond One Term or 4 Months.
10. Require Ability to Benefit Testing, Either for All Students, or
at Least for All Students Who Did Not Graduate From a Public High
School; Eliminate 6 Unit Alternative Measure for Entrance Until
Sufficient Study at Proprietary Schools Has Occurred.
11. Expand Bases for Loan Discharge and Require Reimbursement from
School or Lender or Allow Students to Seek Remedies Directly from
School and Lender.
12. Consider Establishing Tuition Recovery Fund.
13. Require a Higher Ratio of Current Assets to Liabilities.
14. Direct More Federal Funds to Community Colleges.
1. DEFINE AND ENFORCE THE LONGSTANDING REQUIREMENT THAT PROPRIETARY
PROGRAMS (AND CERTAIN OTHER PROGRAMS) PREPARE STUDENTS FOR GAINFUL
EMPLOYMENT
Congress apparently first noted the widespread exploitation of
students by proprietary schools after enactment of the GI bill after
World War II. The House Select Committee to Investigate Educational,
Training, and Loan Guaranty Programs under GI bill, 2/14/1952
describing the abuses in the GI bill from 1944 to 1950 in connection
with recommending safeguards for veterans of the Korean War noted,
inter alia:
``Exploitation by private schools has been widespread.''
``There was a rapid uncontrolled expansion of private profit
schools. . . .''
``Many schools have offered courses in fields where little or
no employment opportunity existed.''
``Training programs have been approved for unskilled or semi-
skilled occupations where little or no training was required,
resulting in needless expenditure of funds and waste. . . .''
With reason, when Congress later added proprietary schools to the
Higher Education Act, it specified that only schools that prepared
students for gainful employment were eligible. However, the Department
of Education has never defined, much less made much of any attempt to
enforce this requirement. In the negotiated rulemaking on program
integrity the Department initiated in 2009, the Department proposed a
definition that is a modest step toward enforcement of this
requirement. The proposal, which it has yet to officially propose,
would set a flag to identify programs for which the students' median
loan debt would be more than 8 percent of the projected salaries (at
the 25th decile of salaries determined by the Bureau of Labor
Statistics for the occupations for which the training is to prepare
students). Programs that could not meet that standard would still be
eligible if the school could demonstrate that the median debt load is
less than 8 percent of the actual salaries graduates of those programs
earn, or if 90 percent of the graduates of the program did not default
(with ``default'' defined more accurately than under the current cohort
default rate standards).
Given that the 8 percent standard is usually used by lenders to
determine the amount of all non-housing debt a borrower should
reasonably carry, and that many students at proprietary schools are
older and already have other debts such as auto loans and credit card
debts, the 8 percent standard may be too high, especially for those
whose salaries would be less than 150 percent of the poverty level.
Nevertheless, it is a modest, reasonable first step. I believe the debt
load of those who enroll, but do not complete also needs to be
considered, so that there is no temptation for the bad actors to
discourage those with the highest debt loads from completing the
course, in order to lower the median debt load of students in a
program.
The Department's proposal, however, deals only with the ``gainful''
part of the phrase, not with the ``employment'' part. If a school does
a poor job of training students, even if the program met the 8 percent
or related criteria mentioned above, it might still have a minority of
graduates who could actually obtain employment. Consequently, a
proprietary school programs should also have to meet certain levels of
employment. In California, for example, for 19 years, proprietary
schools were required to have at least 70 percent of the graduates from
a program obtain employment within 6 months, in a position that lasted
at least 60 days, for at least 32 hours a week. (Part time employment
could also count if the student had specified in advance of the program
and at the end that the student only wanted part-time employment.) As
was obvious from my testimony, there needs to be some way to verify
that claimed employment levels are true. One suggestion for accuracy in
employment statistics is to require use of State unemployment insurance
data, which some States already do for community colleges.
A current provision under the Higher Education Act, which was
enacted back when most programs were much shorter, applies only to
short courses. The Department has now proposed to apply it more
broadly, so far, as a reporting device only. Based on my experience, to
be used more broadly, the existing provision needs to be strengthened
and improved to prevent manipulation. For example, under the current
provision, while accurate reporting would be helpful, the existing
provision would not be useful. The documentation of employment allowed
would not demonstrate that the employment really meets the standard.
The current provision also relies on an ``attestation engagement'' by
an accountant to verify the reported percentages, but the lack of
specificity as to the sampling needed, and other details I believe,
leaves this provision open to false or inflated reports.
And, as noted above, completion rates also need to be tracked and
verified, and a standard set to insure schools are not manipulating the
data by discouraging completion by students they consider least likely
to be able to get a job. In California, for example, after certain
exceptions--death, military service, those who canceled within the 100
percent full refund cancellation period, etc.--authorized programs had
to show 60 percent of those enrolled completed the program.
I view such standards as critical to separating out the good from
the bad actors. Good schools would continually evaluate their programs,
eliminating or revising those that have high debt levels in comparison
to salaries available or whose graduates are unable to find work in the
field in which they trained. The proprietary schools' lobbying arm,
CCA, has represented that more than 80 percent of the programs it
surveyed would meet the 8 percent flag, and likely additional programs
would meet one of the two alternatives, although CCA did not run the
numbers for the alternatives. It is unclear how many programs would
meet a 70 percent employment requirement, but most national accrediting
agencies already claim to have that high, or a higher standard. In
California, until 2008, that was the standard schools were required to
meet. The requirement did not seem to have slowed the development of
proprietary schools in California (although the State agency charged
with enforcement apparently did little to enforce the law).
Schools should also be required to report on their Web sites, if
they have one, their statistics for each program offered, as well as to
provide a fact sheet to every prospective student showing the
information for the program in which the prospective student has
expressed an interest. Currently, there is no competition among schools
based on such quality factors because those factors are not
transparent. Making them transparent, if they are verified/monitored
for accuracy, would provide some possibility of competition arising
based on these quality criteria. Such real competition would help the
good schools.
While the Department could promulgate these changes, it has yet to
do so. Congressional action might be needed. Of course there might need
to be provisions related to an employment requirement to address
extraordinary circumstances, such as limited employment available in a
particular region after a major disruption, e.g., after hurricane
Katrina, or to address the time lag for getting the results from
licensing exams.
2. STRICTLY PROHIBIT QUOTAS AND INCENTIVE COMPENSATION FOR RECRUITING
AND FINANCIAL AID
The recent Department of Education proposed regulation on incentive
compensation goes a long way to restoring the full intent of the
statute prohibiting incentive compensation. I am concerned, however,
that a few possible loopholes may still exist and will be working with
others to comment on the proposed rule. In addition, I also recommend a
statutory change to make very clear that the use of quotas in
connection with compensation for such staff is prohibited. From the
information I have seen, it appears schools may be trying to get around
the prohibition on incentive compensation by setting quotas and
punishing in some way or firing those who do not reach the quota. While
this may well be covered under the current statute, additional clarity
would be advisable.
The payment of incentive compensation or the use of quotas for
those involved in or supervisors over admissions or financial aid tasks
is particularly pernicious. Prospective students are likely to trust
the ``admissions advisor'' or ``financial aid advisor'' or school
director as a person there to assist them. Prospective students don't
readily realize they are dealing with commissioned sales persons, as
they would when, e.g., buying a car.
Good schools can compete on the basis of quality, and need not
compete on incentives. The natural result of incentives/quotas is to
encourage some of the types of abuse noted at the hearing, including
misrepresentations, enrolling students ill-suited to a particular
training program, or providing training that does not qualify the
graduates for employment.
3. PUBLISH AND BASE CONTINUED ELIGIBILITY ON LIFE-TIME COHORT DEFAULT
RATES
Proprietary schools first came fully into the Higher Education Act
financial aid programs in 1972. By the mid-80s, stories of fraud and
abuse and high default rates were accumulating. One of the provisions
enacted after the 1992 hearings by the Senate Permanent Subcommittee on
Investigations was to eliminate from eligibility schools with high
default rates. Initially, that change had an impact, but the rule has
been watered down over the years, and schools have learned how to
manipulate the data to prevent defaults from showing up within the time
(2, soon to be 3 years) in which defaults are measured. Both the
Inspector General and the GAO have pointed out that the short-time
cohort default rate is a misleading indicator. It is a mere snapshot in
time that does not give a full picture of default trends.\1\
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\1\ See, e.g., U.S. Department of Education, Office of Inspector
General, ``Final Audit Report: Audit to Determine if Cohort Default
Rates Provide Sufficient Information on Defaults in the Title IV Loan
Program'', ED-OIG/A03-C0017 (December 2003); General Accounting Office,
``Student Loans: Default Rates Need to be Computed More
Appropriately'', GAO/HEHS-99-135 (July 1999).
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There are problems not only with the time period, but also with the
cohort rate calculation method. In addition, the default measure does
not include borrowers that are current, but struggling with overly
burdensome debt or borrowers that are delinquent, but not yet in
default (i.e., less than 9 months behind in their payments). These
problems are expected to grow as interest rates rise along with
borrowing levels.
Unless cohort default rates are tracked for life, schools will
continue to be able to manipulate this limitation. Additionally, the
default rate cut-off applied to each interval of time should be a
reasonable measure of defaults in credit markets that are not skewed by
an influx of Federal loans. For example, current default limits over 2
years of 25 percent (soon to be 30 percent over 3 years) are
extraordinarily high compared to normal market-based credit default
rates. Congress needs to act to make these changes.
4. REQUIRE REAL STANDARDS FOR STATE AUTHORIZATION AGENCIES
Traditionally, the Higher Education Act has depended on the triad
of oversight, requiring a school to be accredited by a recognized
accrediting agency, to be ``legally authorized within [the State in
which it operates] to provide a program of education beyond secondary
education,'' and to submit to the provisions of a participation
agreement with the Department of Education. Currently, however,
proprietary schools and their allies, the accrediting agencies, have
successfully lobbied many States to rely on accreditation for most, if
not all of their State oversight responsibilities. The Department of
Education recently proposed a regulation that would require States to
undertake at least some of the responsibilities contemplated by law,
but apparently under pressure from some schools and accrediting
agencies, failed to fully address the statutory requirements for State
oversight. Current law requires the State agency to notify the
Department of Education promptly of any fraud or substantial violation
of the Higher Education Act, but the proposed rule does not require the
State to have any mechanism by which it would be likely to notice such
conduct.
The Department has never had sufficient resources to adequately
police the fraud and abuse in the proprietary sector. In my experience,
local or State agencies are in a much better position to learn about
problems early. As discussed below, accrediting agencies are not
designed to fulfill this role. The Department's proposed regulation
needs to be strengthened or the law needs to be revised to make clear
that schools are not eligible if the State agency in the State in which
the school operates relies on accrediting agencies for its essential
functions. State agencies must themselves approve schools, monitor
their compliance with provisions of the Higher Education Act or with
State provisions that are as strong, or stronger than the Higher
Education Act, and act to revoke authorization of schools that are not
in compliance.
5. REFORM ACCREDITING AGENCY ROLE AND REQUIREMENTS
As was pointed out at the hearing, the advisory commission that
recommends to the Department of Education about accrediting agency
recognition is heavily loaded with representatives or employees of
schools that live or die by accreditation; there is an incestuous
relationship between accrediting agency boards and the schools they
accredit; and schools are using purchase of small, previously
accredited schools to gain accreditation, then expanding the schools
beyond all recognition of the school and programs originally
accredited. As I pointed out, virtually every school I have prosecuted
was accredited, but accreditation did not address the poor outcomes,
nor stop abuse and fraud. Typically, among other limitations,
accrediting agencies have very small staffs, rely on volunteer staff
from members to evaluate other members, do not have trained
investigators or prosecutors involved in designing their oversight
activities, do not set specific enough ``standards'' so that one can
tell if they have been violated, have non-transparent procedures, and
keep information about problems gathered confidential.
Congress needs to address these deficiencies. At a minimum, the
advisory commission needs to be revised so that the majority represents
consumer and student interests, not the interests of schools that
depend on accreditation. To the extent the financial aid programs
continue to rely on accrediting agencies, minimum uniform criteria need
to be established, particularly outcome criteria which all recognized
accrediting agencies will monitor for compliance. Criteria, such as how
much work is required for a unit of credit should not be based on
accrediting agency determinations, but should be required to be set by
the Department, and monitored by accrediting agencies.
6. REVISE 90/10 REQUIREMENT
One of the requirements that came out of the 1992 hearings on
proprietary school fraud and abuse was the requirement that at least 15
percent of a school's revenues should come from other than title IV
funds. This provision was derived from, but did not track the
requirement for Veterans' programs. The rule for Veterans' programs was
that at least 15 percent of the students must not use the GI benefit to
pay for their schooling. This requirement was established because after
the first GI bill, proprietary schools developed to capture the
veterans benefits proliferated, and fraud and abuse were rampant (see
above). Proprietary schools later successfully reduced the percentage
not to be from title IV financial funds to 10 percent. Nevertheless,
proprietary schools continue to operate near the 90 percent title IV
subsidized margin. After lobbying Congress to be able to count all
institutional loans toward their 10 percent in the years in which the
loans are made (rather than when they are repaid), some proprietary
schools began to offer, or increase their offering of school financing.
Some schools admit they expect to collect less than 50 percent of the
amounts owed on their loans for students, suggesting these ``loans''
are driven, in part, by the need to come up with enough non-Federal
funding to meet the watered down 10 percent. Apparenty and perversely,
some proprietary schools are increasing their fees above the amount
available in title IV grants and loans as a strategy for meeting the 10
percent that cannot be from title IV funds.
Even if one looks at just independent students taking 4-year
programs at public, nonprofit, and for-profit schools, the percentage
of borrowers varies dramatically. In the publics and non-profits, 24
percent to 31 percent of students have no Federal loans, but at the
for-profits, only 4 percent do not have Federal loans. The concept of
the Veterans' 85/15 limit is that in the marketplace, a good school
could attract at least 15 percent of its students without reliance on
the Veteran benefit. The 90/10 limit under title IV needs to be
restructured. I would recommend that it be changed to be 85/15 and to
apply not to revenues, but to the numbers of students who receive any
Federal student financial aid, whether grants or loans under title IV,
the VA, or similar programs. Proprietary schools will likely argue that
because they attract a lower income student, such a restriction would
not be possible for them. One has to wonder, however, if they are
providing a good education, why they are not also attracting some
higher income students. Some higher income students do want to become
radiologists, vocational nurses, computer technicians or obtain
Bachelors' or advanced degrees in career-focused fields. This change
would incentivize proprietary schools not to raise tuition, but to
lower it, as they would have to compete for students in the market
generally, rather than just trying to maximize the financial aid the
school can collect by selling dreams of a career to poor people.
This change would have to be accompanied by a strict requirement
that the school must first make known to the student all financial aid
the student can qualify for, before offering information about private,
non-Federal loans so that schools would not just push students into
even higher interest, less favorable private loans. It would also have
to be accompanied by some changes in private loans, as discussed below.
7. CHANGE INCENTIVES FOR PRIVATE LENDERS AND SCHOOLS BY ENSURING THE
EXISTING FTC HOLDER RULE IS ENFORCED AGAINST LENDERS
Under the Federal Trade Commission's rule, commonly referred to as
the ``Holder Rule,'' sellers of consumer goods and services are
required to include a provision in credit contracts they assign to a
lender, or in loans if they refer the consumer to the lender or arrange
the loan, that makes the creditor subject to the same claims and
defenses the purchaser could assert against the seller. This standard
rule prevents a seller from selling a defective product, but having the
payments due to another party who claims the right to collect, even
though the product is defective. Unfortunately, some courts have held
that if the seller (in this case, the school) does not see to it that
the provision is in the credit document, the creditor is not bound by
the rule.
The FTC does not regulate lenders, so it cannot require them to
include the provision, and the agencies that do regulate lenders have
failed to promulgate a parallel rule. This means that lenders need have
little concern about whether the school is good or not. This
inconsistency needs to be addressed so that lenders will have incentive
to provide credit only for students at good schools, or to require
schools to put up a deposit to cover potential future claims or
defenses to payment. Congress should address this by requiring the
notice in contracts for student loans and by specifying that the lender
is liable, whether or not the notice is included, if the notice should
have been included by law.
In connection with the ``holder'' issue, schools should be required
to certify all private student loans and that the student has exhausted
all means of Federal financing, before a private loan may be disbursed.
This would also insure that when schools are determining their
students' loan debt, they are including any private loans the student
may have.
8. STUDY AND ESTABLISH APPROPRIATE STANDARDS FOR DISTANCE EDUCATION
This is probably the fastest growing segment of proprietary schools
and the area most susceptible to abuse. Before 2006, eligible schools
were limited to providing distance education, including correspondence
courses, for no more than 50 percent of their students and no more than
50 percent of their courses. Despite caution from the GAO and IG \2\
that removing this limitation without better controls would lead to
increased fraud and abuse, the limit was lifted as to
telecommunications courses (those offered by electronic means), but not
as to correspondence courses. The only limit on telecommunications
courses is that they must provide regular and substantive interaction
between the student and teacher, but that interaction need not be
synchronous. The only clarification of those terms States that the
interaction must be at regular intervals and not be trivial.
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\2\ General Accounting Office, ``Distance Education: Improved Data
on Program Costs and Guidelines on Quality Assessments Needed to Inform
Federal Policy,'' GAO-04-279 (February 2004); see also 2009 testimony
at http://edlabor.house.gov/documents/111/pdf/testimony/
20091014MaryMitchelsonTestimony.pdf.
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This provision leaves the student financial aid programs wide open
to fraud and abuse. Among other issues, for-profit schools may purchase
a small, reputable school, then turn the school into a massive online
college, with virtually no oversight. A further concern must be that
schools that may have been providing good, needed hands-on programs at
an on-site facility, will be tempted to reduce costs by going to all,
or almost all on-line programs. Although telecommunications programs
are required to be accredited, the GAO has found the same lack of
accrediting agency standards here as noted above.
In her testimony, the Inspector General also noted her concern
about the lack of measures to insure Federal dollars are not being
spent for little or no benefit because of the lack of oversight of
distance education programs. Congress should reinstate the 50 percent
limitation on on-line programs until the means to prevent abuse can be
studied and implemented. There needs to be a study to establish what
requirements and monitoring needs to be implemented to prevent the
massive potential for problems in this burgeoning area.
9. REQUIRE CANCELLATION PERIODS AND PRO-RATA REFUNDS, AND PROHIBIT
CONTRACTUAL OBLIGATION OR PAYMENT BEYOND ONE TERM OR FOUR MONTHS
Each of these suggestions have in common that they offer a measure
of self-help to students who may find themselves in one of the ``bad
actor'' schools, and that they have been used in one or more States, to
curb abuses, but without preventing good schools from flourishing.
In California, the State law for 19 years required proprietary
schools to provide a full refund (except for a modest registration fee)
to any student who canceled the program within the first 5 class days.
That way, there was a chance the student would discover if the
equipment or facilities were lacking, or if teachers were untrained or
had no practical experience before the student had spent thousands of
dollars on a worthless education. Other States prevent the school from
keeping even a registration fee if the student cancels on or before the
first day of class. While bad actor schools become adept at giving a
good first impression, some students may discover the problems in this
initial period.
For 19 years, California required proprietary schools to provide a
full pro-rata refund throughout the program. That requirement reduced
the churn from schools constantly admitting new students and ignoring
students' needs once they passed an arbitrary percentage (which varies
by school) of the course, after which students were no longer entitled
to any refund. Oregon has used a similar concept, prohibiting schools
from collecting from students or obligating students for more than one
term or four months. Again, students under this system might lose some
money on a bad school, but when they realize that things are not as
represented, they are free to leave, without being obligated for many
months more. Without such a policy, students report that the school
responds to their complaints by saying, the student already owes all
the money, so there is no point to quitting out of dissatisfaction with
the program.
10. REQUIRE ABILITY TO BENEFIT TESTING, EITHER FOR ALL STUDENTS, OR AT
LEAST FOR ALL STUDENTS WHO DID NOT GRADUATE FROM A PUBLIC HIGH SCHOOL;
ELIMINATE 6 UNIT ALTERNATIVE MEASURE FOR ENTRANCE UNTIL SUFFICIENT
STUDY AT PROPRIETARY SCHOOLS HAS OCCURRED
To be admitted, students are supposed to have a high school
diploma, or pass a test demonstrating their ability to benefit from the
program being offered. The Inspector General has testified that $12
billion in financial aid was granted in fiscal year 2009 based on
results of Ability-to-Benefit (ATB) tests.\3\ Needless to say, this has
been a well-known area where fraud occurs. The Department has recently
proposed much-needed changes, but I believe those are inadequate to
clean up this problem area.
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\3\ http:/ /studentlendinganalytics.typepad.com/
student_lending_analytics / 2009 /10 /highlights-from-house-hearing-on-
oversight- of- atb-testing-and-diploma-mills-11-of-aid-recipients-ent
.html.
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There has been no definition of ``high school diploma,'' so that
proprietary schools could turn a blind eye to bogus diplomas which
could be obtained for a fee. The Department has proposed to require
schools to have procedures to deal with suspect diplomas, but the
proposed rule still leaves a lot of room for turning a blind eye.
Additionally, a high school diploma may not be adequate to determine if
a prospective student has the basic skills needed for the coursework
for particular careers.
Current rules require an ability-to-benefit (ATB) test to be
administered to non-high school graduates by an independent tester.
This requirement has had limited impact, however, as testers are
generally selected by the school, give the tests at the school, and
rely on the school to maintain the tests and answer sheets. Apparently,
the so-called ``independent'' testers do not run a business in which
they have the facilities to guard the tests themselves. Recently, the
GAO found in undercover operations that tests were not administered
properly, but instead were compromised to ensure the student could be
admitted. It is unclear whether the ATB test is even required for
students who did graduate from high school, but in a country in which
their education was in another language. Sometimes such students are
told courses will be offered in their language, but ultimately they are
put in English-only classes they cannot hope to comprehend.
Under the law, the Department is charged with determining
appropriate test scores to allow eligibility. This is also problematic
because the Department has not interpreted the law to require ability
to benefit from the specific program for which a student is enrolling,
but rather, to be simply the equivalent of having a high school
diploma. Obviously, the beginning skills for, say, security guard, may
be different from those required for a sonographer or radiologist or
cosmetologist.
In addition, recently, on the basis of a study carried out in
community colleges, an alternative measure--the successful completion
of 6 units--is now allowed to determine whether a student may be
eligible for Federal financial aid. This provision has been enacted,
but there are virtually no regulations to prevent abuse. Those schools
that simply want more students can easily manipulate this provision to
claim students have successfully completed some course that is
available to complete some program.
In short, the current ability-to-benefit process needs overhaul.
Tests should be related to the skills that are needed to succeed in the
particular program in which the student is enrolling. Tests should be
administered at a location away from the school, by persons not
recruited by the school, who have sufficient resources to guard tests
and answer sheets from being compromised. If all students are required
to be tested, unless they graduated from a public high school, the
problem with bogus high school diplomas can be reduced, if not
eliminated. Testing of all students, even if they have a public high
school diploma, would help prevent students enrolling in programs for
which they do not have the basic skills necessary. And the 6-unit
alternative should be allowed in proprietary schools only after
adequate study in proprietary schools to show it is comparable to
testing.
11. EXPAND BASES FOR LOAN DISCHARGE AND REQUIRE REIMBURSEMENT FROM
SCHOOL OR LENDER OR ALLOW STUDENTS TO SEEK REMEDIES DIRECTLY FROM
SCHOOL AND LENDER
Students could play a role in program integrity if they had tools
to do so. Currently, however, students may only have their student
loans canceled (discharged) by the Department of Education in very
narrow circumstances, such as the school's false certification of the
student's ability to benefit, the school's failure to properly return
title IV money, or the school's closure. The student's burden to prove
the false certification discharge is very difficult, given that the
Department (in some cases) and the school have the needed records,
which the student does not have. Additionally, the Department has been
very limited in agreeing to cancellation for groups of students, even
if there is a judgment finding the false certification applied to an
entire group of students, or if the Department has similar claims from
students in its files evidencing the alleged false certification by the
same school. Additionally, to be effective in stopping bad actors, the
Department needs to be aggressive in recovering money from schools that
have falsely certified eligibility. Sometimes, of course, the
Department's failure to collect is because the school has closed,
without funds to repay the loan.
The other traditional remedy for fraud and abuse, a civil action,
is not readily available. It is not allowed under current Federal law.
Employees who have witnessed false claims for Federal money by the
school may sue and recover a share of the money paid in the judgment.
Students, however, have no right to sue under the Higher Education Act.
They may be able to assert claims under State law. But even there, they
are often thwarted because the school requires arbitration in which the
students' ability to discover needed facts is limited, rather than
allowing a lawsuit.
In addition to the limits on these means of redress by students,
claims students do pursue successfully are generally not publicly
known. Arbitration proceedings are generally private, not public, like
courts. Schools often require students' confidentiality to settle a
claim and often also prohibit the student from discussing their
grievance with others. Sometimes such confidentiality provisions seem
to prevent the student even from contacting government agencies about
the issue. Typically, evidence of wrongdoing in private arbitrations or
actions that settle is hidden away, not available to the Department,
accrediting agencies or law enforcement agencies.
These limits on redress and on public information about settlements
of disputes both artificially depress Congress' and the public's
awareness of problems, and prevent students from playing a larger role
in program integrity. Congress should examine these limitations to
increase the part students play in program integrity. In particular,
notice of settlements should be provided to the Department and law
enforcement agencies, and evidence developed that points to violations
of the Higher Education Act should be required to be made available to
the Department and law enforcement agencies.
12. CONSIDER ESTABLISHING TUITION RECOVERY FUND
One remedy that has been used in States, including in California,
is the establishment of a tuition recovery fund, funded by fees on
schools, based on numbers of students or amount of tuition. Students
can collect from such a fund if they obtain a judgment against a school
which they cannot collect, if they were enrolled in programs which the
school stopped offering before the student could complete, or if the
school itself closed before the student could complete the program.
13. REQUIRE A HIGHER RATIO OF CURRENT ASSETS TO LIABILITIES
One recurring problem is when a school takes in tuition fees in the
form of Federal aid, then closes before students can complete their
programs. Because the proprietary schools' educational quality often
does not measure up to non-profit or public schools, the credits the
students have already received are not transferable. Indeed, even when
proprietary schools have the opportunity to make their credits
transfer, they frequently choose not to do so, forcing the student to
continue at the proprietary school or have to start over at another
school. Sometimes so-called ``teach-outs'' are offered at another
school, but often they are inadequate or require additional
expenditures to complete the program the student has already paid for.
Currently, only a 1 to 1 ratio of current assets to liabilities is
required under Federal law. A 1 to 1 ratio is, in essence, a penny away
from bankruptcy. The ratio is too low. In other businesses, ratios of 2
to 1 are considered appropriate. In California schools had to have at
least a 1.25 to 1 ratio (excluding such intangible assets as good
will). The requirement, if enforced, could reduce the number of such
closures while still allowing stable schools to flourish.
14. DIRECT MORE FEDERAL FUNDS TO COMMUNITY COLLEGES
Although this may be outside of your question, it may be a
necessary component. I believe there are sound grounds to direct funds
to public community colleges which perform some functions similar to
proprietary schools, but at a much lower cost to students and the
government. State community college systems reach throughout the
country. In many cases, State community college systems have the
flexibility in schedules and in developing new programs that
proprietary schools tout. Students who go to community colleges,
however, borrow much less, wind up with less debt service after they
finish, and, if they want to continue their education, generally can
transfer credits to other public schools in the State. I think we need
to seriously look at whether funds would be allocated more equitably,
and whether we would be better able to serve the population if more
funds were directed to community colleges, rather than continuing the
massive increases in the dollar amount and proportion of Federal funds
spent supporting proprietary schools.
I have tried to list some of the most salient improvements I
believe are needed, based on my experience as a prosecutor. Others with
expertise in different aspects of the student financial aid programs
may suggest other valuable provisions, so I don't contend the list is
necessarily comprehensive. Also, to the extent some changes are made,
others may be less (or more) necessary. As a former prosecutor, I find
it very frustrating that the main way to address the fraud, abuse and
waste currently seems to be by expensive, resource-intensive, time-
consuming litigation, including prosecutions. I recognize that
implementation of these suggestions would require careful drafting. I
am quite willing to cooperate with you and the other members of the
committee in drafting provisions so that the incentives can be turned
around to operate to reduce the waste in the use of Federal financial
aid in the proprietary school sector.
Question 2. We have recently required that cohort default rates be
reported on the College Navigator Web site. Do you think that entrance
counseling for student loan borrowers should include a disclosure about
default rates? Would some students decline to borrow if they knew that
one third or even one half of all students who borrow to attend the
institution were not able to repay the loans?
Answer 2. I am not very hopeful that disclosures/counseling would
make much difference, especially if the disclosures/counseling are
provided by the school, or even by some independent organization that
contracts with the school. I have seen that the enrollment process can
so easily be manipulated to make a school sound like the best thing
since sliced bread, despite required disclosures. Schools can and do
undermine the impact of required counseling or disclosures by the rest
of what they say. I believe preventing schools from operating, or from
offering certain courses if they do not meet minimum standards, such as
low lifetime default rates and high completion and gainful employment
for their graduates, is the better approach. More information could be
somewhat useful if it were readily available on the school's Web site
and, especially for those who do not contact the school via the
Internet, in a uniform disclosure form that had to be provided to
prospective students on their first contact with a school, not buried
in other materials, e.g., by a short video. Information provided later,
just before the student signs enrollment agreements is usually too late
in the process to overcome all the statements the school has already
made that undermine or contradict the disclosures.
QUESTIONS OF SENATOR CASEY
Question 1. The President has set the goal of the United States
leading the world in college graduates by the year 2020. In your
opinion, what is the role of for-profit colleges in trying to achieve
this goal?
Answer 1. I understand the goal to mean college graduates who are
well-trained and able to find skilled work in their profession. We do
not have a way to figure out how many proprietary schools are really
contributing to this goal and how many are simply using students to
milk the system and leave the students with huge debt burdens and
little useable or transferable education. We don't know which schools
really are sufficiently screening applicants for ability to succeed in
the career program they choose, which are preparing their students for
gainful employment and which are not, which are succeeding at having
students graduate, which are adequately counseling students to match
likely debt to likely earnings so they will not be overburdened with
loans, or which are succeeding at having their graduates meet or exceed
licensing or professional certification exam pass rates. So, I am not
certain what role for-profit colleges will be able to play, because we
currently have so little information about which for-profit colleges
are really preparing students. What I do know is that the kinds of
abuses and problems that I have observed are facilitated by the current
regulatory system. Until we address the major problems in the system, I
do not know how we can determine what role for-profit colleges will be
able to play in meeting this goal.
Question 2. What are for-profit schools currently required to
report to the Department of Education around graduation rates and
placement rates? How are placement rates tracked?
Answer 2. My focus was on placement rates, not graduation rates,
and I focused on the requirements of the California law, so there are
probably others better qualified than I to discuss graduation rate
reporting.
Currently, for the vast majority of programs, there is no
requirement for tracking job placement rates, much less reporting them.
A provision under the Higher Education Act, which was enacted back when
most programs were much shorter, applies only to courses of 300 to 599
clock hours. 20 U.S.C. 1088(b)(2)(A). Apparently, virtually no
programs are subject to this requirement, now, because schools have
lengthened their courses to avoid the requirement. The statute requires
these programs to have a 70 percent completion rate and a 70 percent
job placement rate. 34 CFR 668.8(d)(2) and (e). That means (70 percent
x 70 percent = 49 percent) forty-nine percent of those who begin the
program and do not cancel with a full refund would have to be placed in
a job for which they trained or ``a related comparable recognized
occupation.'' The schools are supposed to determine the number of
graduates who are employed within 180 days of graduation and stay
employed for at least 13 weeks. 34 CFR 668.8(g). Schools are allowed to
rely on ``[a] written statement from the student's employer,''
``[s]igned copies of State or Federal income tax forms'' or [w]ritten
evidence of payments of Social Security taxes'' to demonstrate
employment. 34 CFR 668.8(g)(2). Schools are also to submit an
``attestation'' from a certified public accountant as to the placement
and completion statistics. 34 CFR 668.23. In response to your third
question below, see my comments regarding the deficiencies in this
rule.
Question 3. What, if any, statutory or regulatory changes should be
made to strengthen the rules governing for-profit colleges? Are the
penalties strong enough to hold these institutions accountable?
Answer 3. Answering your second question first: As we relied on
penalties under California law, I am not sufficiently familiar with
penalties directly under the Higher Education Act to opine. As I
discuss in more detail below, one failure of the remedies for
violations is that they are not available directly to either students
or law enforcement agencies.
I have compiled a list of suggestions, some of which could be
accomplished by regulations or by legislation, and others of which
would require legislation. In general, most of the suggestions are
remedies that have been used by California or other States or are
revisions to laws that were enacted after the Nunn hearings, but have
been weakened over time. Some remedies have been widely discussed, and
I will only mention them briefly as you are undoubtedly already
familiar with them. First, I list the suggestions. More detail about
each suggestion then follows:
1. Define and Enforce the Longstanding Requirement that Proprietary
Programs (and certain other programs) Prepare Students for Gainful
Employment.
2. Strictly Prohibit Quotas and Incentive Compensation for
Recruiting and Financial Aid.
3. Publish and Base Continued Eligibility on Life-time Cohort
Default Rates.
4. Require Real Standards for State Authorization Agencies.
5. Reform Accrediting Agency Role and Requirements.
6. Revise 90/10 Requirement.
7. Change Incentives for Private Lenders and Schools by Ensuring
the Existing FTC Holder Rule Is Enforced Against Lenders.
8. Study and Establish Appropriate Standards for Distance
Education.
9. Require Cancellation Periods and Pro-rata Refunds, and Prohibit
Contractual Obligation or Payment Beyond One Term or 4 Months.
10. Require Ability to Benefit Testing, Either for All Students, or
at Least for All Students Who Did Not Graduate From a Public High
School; Eliminate 6 Unit Alternative Measure for Entrance Until
Sufficient Study at Proprietary Schools Has Occurred.
11. Expand Bases for Loan Discharge and Require Reimbursement from
School or Lender or Allow Students to Seek Remedies Directly from
School and Lender.
12. Consider Establishing Tuition Recovery Fund.
13. Require a Higher Ratio of Current Assets to Liabilities.
14. Direct More Federal Funds to Community Colleges.
1. DEFINE AND ENFORCE THE LONGSTANDING REQUIREMENT THAT PROPRIETARY
PROGRAMS (AND CERTAIN OTHER PROGRAMS) PREPARE STUDENTS FOR GAINFUL
EMPLOYMENT
Congress apparently first noted the widespread exploitation of
students by proprietary schools after enactment of the GI bill after
World War II. The House Select Committee to Investigate Educational,
Training, and Loan Guaranty Programs under GI bill, 2/14/1952
describing the abuses in the GI bill from 1944 to 1950 in connection
with recommending safeguards for veterans of the Korean War noted,
inter alia:
``Exploitation by private schools has been widespread.''
``There was a rapid uncontrolled expansion of private profit
schools. . . .''
``Many schools have offered courses in fields where little or
no employment opportunity existed.''
``Training programs have been approved for unskilled or semi-
skilled occupations where little or no training was required,
resulting in needless expenditure of funds and waste. . . .
With reason, when Congress later added proprietary schools to the
Higher Education Act, it specified that only schools that prepared
students for gainful employment were eligible. However, the Department
of Education has never defined, much less made much of any attempt to
enforce this requirement. In the negotiated rulemaking on program
integrity the Department initiated in 2009, the Department proposed a
definition that is a modest step toward enforcement of this
requirement. The proposal, which it has yet to officially propose,
would set a flag to identify programs for which the students' median
loan debt would be more than 8 percent of the projected salaries (at
the 25th decile of salaries determined by the Bureau of Labor
Statistics for the occupations for which the training is to prepare
students). Programs that could not meet that standard would still be
eligible if the school could demonstrate that the median debt load is
less than 8 percent of the actual salaries graduates of those programs
earn, or if 90 percent of the graduates of the program did not default
(with ``default'' defined more accurately than under the current cohort
default rate standards).
Given that the 8 percent standard is usually used by lenders to
determine the amount of all non-housing debt a borrower should
reasonably carry, and that many students at proprietary schools are
older and already have other debts such as auto loans and credit card
debts, the 8 percent standard may be too high, especially for those
whose salaries would be less than 150 percent of the poverty level.
Nevertheless, it is a modest, reasonable first step. I believe the debt
load of those who enroll, but do not complete also needs to be
considered, so that there is no temptation for the bad actors to
discourage those with the highest debt loads from completing the
course, in order to lower the median debt load of students in a
program.
The Department's proposal, however, deals only with the ``gainful''
part of the phrase, not with the ``employment'' part. If a school does
a poor job of training students, even if the program met the 8 percent
or related criteria mentioned above, it might still have a minority of
graduates who could actually obtain employment. Consequently,
proprietary school programs should also have to meet a certain level of
employment. In California, for example, for 19 years, proprietary
schools were required to have at least 70 percent of the graduates from
a program obtain employment within 6 months, in a position that lasted
at least 60 days, for at least 32 hours a week. (Part time employment
could also count if the student had specified in advance of the program
and at the end that the student only wanted part-time employment.) As
was obvious from my testimony, there needs to be some way to verify
that claimed employment levels are true. One suggestion for accuracy in
employment statistics is to require use of State unemployment insurance
data, which some States already do for community colleges.
A current provision under the Higher Education Act, which was
enacted back when most programs were much shorter, applies only to
short courses. The Department has now proposed to apply it more
broadly, so far, as a reporting device only. Based on my experience, to
be used more broadly, the existing provision needs to be strengthened
and improved to prevent manipulation. For example, under the current
provision, while accurate reporting would be helpful, the existing
provision would not be useful. The documentation of employment allowed
would not demonstrate that the employment really meets the standard.
The current provision also relies on an ``attestation engagement'' by
an accountant to verify the reported percentages, but the lack of
specificity as to the sampling needed, and other details I believe,
leaves this provision open to false or inflated reports.
And, as noted above, completion rates also need to be tracked and
verified, and a standard set to insure schools are not manipulating the
data by discouraging completion by students they consider least likely
to be able to get a job. In California, for example, after certain
exceptions--death, military service, those who canceled within the 100
percent full refund cancellation period, etc.--authorized programs had
to show 60 percent of those enrolled completed the program.
I view such standards as critical to separating out the good from
the bad actors. Good schools would continually evaluate their programs,
eliminating or revising those that have high debt levels in comparison
to salaries available or whose graduates are unable to find work in the
field in which they trained. The proprietary schools' lobbying arm,
CCA, has represented that more than 80 percent of the programs it
surveyed would meet the 8 percent flag, and likely additional programs
would meet one of the two alternatives, although CCA did not run the
numbers for the alternatives. It is unclear how many programs would
meet a 70 percent employment requirement, but most national accrediting
agencies already claim to have that high, or a higher standard. In
California, until 2008, that was the standard schools were required to
meet. The requirement did not seem to have slowed the development of
proprietary schools in California (although the State agency charged
with enforcement apparently did little to enforce the law).
Schools should also be required to report on their Web sites, if
they have one, their statistics for each program offered, as well as to
provide a fact sheet to every prospective student showing the
information for the program in which the prospective student has
expressed an interest. Currently, there is no competition among schools
based on such quality factors because those factors are not
transparent. Making them transparent, if they are verified/monitored
for accuracy, would provide some possibility of competition arising
based on these quality criteria. Such real competition would help the
good schools.
While the Department could promulgate these changes, it has yet to
do so. Congressional action might be needed. Of course there might need
to be provisions related to an employment requirement to address
extraordinary circumstances, such as limited employment available in a
particular region after a major disruption, e.g., after hurricane
Katrina, or to address the time lag for getting the results from
licensing exams.
2. STRICTLY PROHIBIT QUOTAS AND INCENTIVE COMPENSATION FOR RECRUITING
AND FINANCIAL AID
The recent Department of Education proposed regulation on incentive
compensation goes a long way to restoring the full intent of the
statute prohibiting incentive compensation. I am concerned, however,
that a few possible loopholes may still exist and will be working with
others to comment on the proposed rule. In addition, I also recommend a
statutory change to make very clear that the use of quotas in
connection with compensation for such staff is prohibited. From the
information I have seen, it appears schools may be trying to get around
the prohibition on incentive compensation by setting quotas and
punishing in some way or firing those who do not reach the quota. While
this may well be covered under the current statute, additional clarity
would be advisable.
The payment of incentive compensation or the use of quotas for
those involved in or supervisors over admissions or financial aid tasks
is particularly pernicious. Prospective students are likely to trust
the ``admissions advisor,'' ``financial aid advisor,'' or school
director as a person there to assist them. Prospective students don't
readily realize they are dealing with commissioned sales persons, as
they would when, e.g., buying a car.
Good schools can compete on the basis of quality, and need not
compete on incentives. The natural result of incentives/quotas is to
encourage some of the types of abuse noted at the hearing, including
misrepresentations, enrolling students ill-suited to a particular
training program, or providing training that does not qualify the
graduates for employment.
3. PUBLISH AND BASE CONTINUED ELIGIBILITY ON LIFE-TIME COHORT DEFAULT
RATES
Proprietary schools first came fully into the Higher Education Act
financial aid programs in 1972. By the mid-80s, stories of fraud and
abuse and high default rates were accumulating. One of the provisions
enacted after the 1992 hearings by the Senate Permanent Subcommittee on
Investigations was to eliminate from eligibility, schools with high
default rates. Initially, that change had an impact, but the law has
been watered down over the years, and schools have learned how to
manipulate the data to prevent defaults from showing up within the time
(2, soon to be 3 years) in which defaults are measured. Both the
Inspector General and the GAO have pointed out that the short-time
cohort default rate is a misleading indicator. It is a mere snapshot in
time that does not give a full picture of default trends.\4\
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\4\ See, e.g., U.S. Department of Education, Office of Inspector
General, ``Final Audit Report: Audit to Determine if Cohort Default
Rates Provide Sufficient Information on Defaults in the Title IV Loan
Program'', ED-OIG/A03-C0017 (December 2003); General Accounting Office,
``Student Loans: Default Rates Need to be Computed More
Appropriately'', GAO/HEHS-99-135 (July 1999).
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There are problems not only with the time period, but also with the
cohort rate calculation method. In addition, the default measure does
not include borrowers that are current, but struggling with overly
burdensome debt or borrowers that are delinquent, but not yet in
default (i.e., less than 9 months behind in their payments). These
problems are expected to grow as interest rates rise along with
borrowing levels.
Unless cohort default rates are tracked for the life, schools will
continue to be able to manipulate this limitation. Additionally, the
default rate cut-off applied to each interval of time tracked should be
a reasonable measure of defaults in credit markets that are not skewed
by an influx of Federal loans. For example, current default limits over
2 years of 25 percent (soon to be 30 percent over 3 years) are
extraordinarily high compared to normal market-based credit default
rates. Congress needs to act to make these changes.
4. REQUIRE REAL STANDARDS FOR STATE AUTHORIZATION AGENCIES
Traditionally, the Higher Education Act has depended on the triad
of oversight, requiring a school to be accredited by a recognized
accrediting agency, to be ``legally authorized within [the State in
which it operates] to provide a program of education beyond secondary
education,'' and to submit to the provisions of a participation
agreement with the Department of Education. Currently, however,
proprietary schools and their allies, the accrediting agencies, have
successfully lobbied many States to rely on accreditation for most, if
not all of their State oversight responsibilities. The Department of
Education recently proposed a regulation that would require States to
undertake at least some of the responsibilities contemplated by law,
but apparently under pressure from some schools and accrediting
agencies, failed to fully address the statutory requirements for State
oversight. Current law requires the State agency to notify the
Department of Education promptly of any fraud or substantial violation
of the Higher Education Act, but the proposed rule does not require the
State to have any mechanism by which it would be likely to notice such
conduct.
The Department has never had sufficient resources to adequately
police the fraud and abuse in the proprietary sector. In my experience,
local or State agencies are in a much better position to learn about
problems early. As discussed below, accrediting agencies are not
designed to fulfill this role. The Department's proposed regulation
needs to be strengthened or the law needs to be revised to make clear
that schools are not eligible if the State agency in the State in which
the school operates relies on accrediting agencies for its essential
functions. State agencies must themselves approve schools, monitor
their compliance with provisions of the Higher Education Act or with
State provisions that are as strong, or stronger than the Higher
Education Act, and act to revoke authorization of schools that are not
in compliance.
5. REFORM ACCREDITING AGENCY ROLE AND REQUIREMENTS
As was pointed out at the hearing, the advisory commission that
recommends to the Department of Education about accrediting agency
recognition is heavily loaded with representatives or employees of
schools that live or die by accreditation; there is an incestuous
relationship between accrediting agency boards and the schools they
accredit; and schools are using purchase of small, previously
accredited schools to gain accreditation, then expanding the schools
beyond all recognition from the school and programs originally
accredited. As I pointed out, virtually every school I have prosecuted
was accredited, but accreditation did not address the poor outcomes,
nor stop abuse and fraud. Typically, among other limitations,
accrediting agencies have very small staffs, rely on volunteer staff
from members to evaluate other members, do not have trained
investigators or prosecutors involved in designing their oversight
activities, do not set specific enough ``standards'' so that one can
tell if they have been violated, have non-transparent procedures, and
keep information about problems gathered confidential.
Congress needs to address these deficiencies. At a minimum, the
advisory commission needs to be revised so that the majority represents
consumer and student interests, not the interests of schools that
depend on accreditation. To the extent the financial aid programs
continue to rely on accrediting agencies, minimum uniform criteria need
to be established, particularly outcome criteria which all recognized
accrediting agencies will monitor for compliance. Criteria, such as how
much work is required for a unit of credit should not be based on
accrediting agency determinations, but should be required to be set by
the Department, and monitored by accrediting agencies.
6. REVISE 90/10 REQUIREMENT
One of the requirements that came out of the 1992 hearings on
proprietary school fraud and abuse was the requirement that at least 15
percent of a school's revenues should come from other than title IV
funds. This provision was derived from, but did not track the
requirement for Veterans' programs. The rule for Veterans' programs was
that at least 15 percent of the students must not use the GI benefit to
pay for their schooling. This requirement was established because after
the first GI bill, proprietary schools developed to capture the
veterans benefits proliferated, and fraud and abuse were rampant (see
above). Proprietary schools later successfully reduced the percentage
not to be from title IV financial aid funds to 10 percent.
Nevertheless, proprietary schools continue to operate near the 90
percent title IV subsidized margin. After lobbying Congress to be able
to count all institutional loans toward their 10 percent in the years
in which the loans are made (rather than when they are repaid), some
proprietary schools began to offer, or increase their offering of
school financing. Some schools admit they expect to collect less than
50 percent of the amounts owed on their loans for students, suggesting
these ``loans'' are driven, in part, by the need to come up with enough
non-Federal funding to meet the watered down 10 percent. Apparently and
perversely, some proprietary schools are increasing their fees above
the amount available in title IV grants and loans as a strategy for
meeting the 10 percent that cannot be from title IV funds.
Even if one looks at just independent students taking 4-year
programs at public, non-profit, and for-profit schools, the percentage
of borrowers varies dramatically. In the publics and non-profits, 24
percent to 31 percent of students have no Federal loans, but at the
for-profits, only 4 percent do not have Federal loans. The concept of
the Veterans' 85/15 limit is that in the marketplace, a good school
could attract at least 15 percent of its students without reliance on
the Veteran benefit. The 90/10 limit under title IV needs to be
restructured. I would recommend that it be changed to be 85/15 and to
apply not to revenues, but to the numbers of students who receive any
Federal student financial aid, whether grants or loans under title IV,
the VA, or similar programs. Proprietary schools will likely argue that
because they attract a lower income student, such a restriction would
not be possible for them. One has to wonder, however, if they are
providing a good education, why they are not also attracting some
higher-income students. Some higher income students do want to become
radiologists, vocational nurses, computer technicians or obtain
Bachelors' or advanced degrees in career-focused fields. This change
would incentivize proprietary schools not to raise tuition, but to
lower it, as they would have to compete for students in the market
generally, rather than just trying to maximize the financial aid the
school can collect by selling dreams of a career to poor people.
This change would have to be accompanied by a strict requirement
that the school must first make known to the student all financial aid
the student can qualify for, before offering information about private,
non-Federal loans so that schools would not just push students into
even higher interest, less favorable private loans. It would also have
to be accompanied by some changes in private loans, as discussed below.
7. CHANGE INCENTIVES FOR PRIVATE LENDERS AND SCHOOLS BY ENSURING THE
EXISTING FTC HOLDER RULE IS ENFORCED AGAINST LENDERS
Under the Federal Trade Commission's rule, commonly referred to as
the ``Holder Rule,'' sellers of consumer goods and services are
required to include a provision in credit contracts they assign to a
lender, or in loans if they refer the consumer to the lender or arrange
the loan, that makes the creditor subject to the same claims and
defenses the purchaser could assert against the seller. This standard
rule prevents a seller from selling a defective product, but having the
payments due to another party who claims the right to collect, even
though the product is defective. Unfortunately, some courts have held
that if the seller (in this case, the school) does not see to it that
the provision is in the credit document, the creditor is not bound by
the rule.
The FTC does not regulate lenders, so it cannot require them to
include the provision, and the agencies that do regulate lenders have
failed to promulgate a parallel rule. This means that lenders need have
little concern about whether the school is good or not. This
inconsistency needs to be addressed so that lenders will have
incentives to provide credit only for students at good schools, or to
require schools to put up a deposit to cover potential future claims or
defenses to payment. Congress should address this by requiring the
notice in contracts for student loans and by specifying that the lender
is liable, whether or not the notice is included, if the notice should
have been included by law.
In connection with the ``holder'' issue, schools should be required
to certify all private student loans and that the student has exhausted
all means of Federal financing, before a private loan may be disbursed.
This would also insure that when schools are determining their
students' loan debt, they are including any private loans the student
may have.
8. STUDY AND ESTABLISH APPROPRIATE STANDARDS FOR DISTANCE EDUCATION
This is probably the fastest growing segment of proprietary schools
and the area most susceptible to abuse. Before 2006, eligible schools
were limited to providing distance education, including correspondence
courses, for no more than 50 percent of their students and no more than
50 percent of their courses. Despite caution from the GAO and IG \5\
that removing this limitation without better controls would lead to
increased fraud and abuse, the limit was lifted as to
telecommunications courses (those offered by electronic means), but not
as to correspondence courses. The only limit on telecommunications
courses is that they must provide regular and substantive interaction
between the student and teacher, but that interaction need not be
synchronous. The only clarification of those terms states that the
interaction must be at regular intervals and not be trivial.
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\5\ General Accounting Office, ``Distance Education: Improved Data
on Program Costs and Guidelines on Quality Assessments Needed to Inform
Federal Policy,'' GAO-04-279 (February 2004); see also 2009 testimony
at http://edlabor.house.gov/documents/111/pdf/testimony/
20091014MaryMitchelsonTestimony.pdf.
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This provision leaves the student financial aid programs wide open
to fraud and abuse. Among other issues, for-profit schools may purchase
a small, reputable school, then turn the school into a massive online
college, with virtually no oversight. A further concern must be that
schools that may have been providing good, needed hands-on programs at
an on-site facility, will be tempted to reduce costs by going to all,
or almost all on-line programs. Although telecommunications programs
are required to be accredited, the GAO has found the same lack of
accrediting agency standards here as noted above.
In her testimony, the Inspector General also noted her concern
about the lack of measures to insure Federal dollars are not being
spent for little or no benefit because of the lack of oversight of
distance education programs. Congress should re-instate the 50 percent
limitation on on-line programs until the means to prevent abuse can be
studied and implemented. There needs to be a study to establish what
requirements and monitoring needs to be implemented to prevent the
massive potential for problems in this burgeoning area.
9. REQUIRE CANCELLATION PERIODS AND PRO-RATA REFUNDS, AND PROHIBIT
CONTRACTUAL OBLIGATION OR PAYMENT BEYOND ONE TERM OR FOUR MONTHS
Each of these suggestions have in common that they offer a measure
of self-help to students who may find themselves in one of the ``bad
actor'' schools, and that they have been used in one or more States to
curb abuses, but without preventing good schools from flourishing.
In California, the State law for 19 years required proprietary
schools to provide a full refund (except for a modest registration fee)
to any student who canceled the program within the first 5 class days.
That way, there was a chance the student would discover if the
equipment or facilities were lacking, or if teachers were untrained or
had no practical experience before the student had spent thousands of
dollars on a worthless education. Other States prevent the school from
keeping even a registration fee if the student cancels on or before the
first day of class. While bad actor schools become adept at giving a
good first impression, some students may discover the problems in this
initial period.
For 19 years, California required proprietary schools to provide a
full pro-rata refund throughout the program. That requirement reduced
the churn from schools constantly admitting new students and ignoring
students' needs once they passed an arbitrary percentage (which varies
by school) of the course after which students were no longer entitled
to any refund. Oregon has used a similar concept, prohibiting schools
from collecting from students or obligating students for more than one
term or four months. Again, students under this system might lose some
money on a bad school, but when they realize that things are not as
represented, they are free to leave, without being obligated for many
months more. Without such a policy, students report that the school
responds to their complaints by saying, the student already owes all
the money, so there is no point to quitting out of dissatisfaction with
the program.
10. REQUIRE ABILITY TO BENEFIT TESTING, EITHER FOR ALL STUDENTS, OR AT
LEAST FOR ALL STUDENTS WHO DID NOT GRADUATE FROM A PUBLIC HIGH SCHOOL;
ELIMINATE 6 UNIT ALTERNATIVE MEASURE FOR ENTRANCE UNTIL SUFFICIENT
STUDY AT PROPRIETARY SCHOOLS HAS OCCURRED
To be admitted, students are supposed to have a high school
diploma, or pass a test demonstrating their ability to benefit from the
program being offered. The Inspector General has testified that $12
billion in financial aid was granted in fiscal year 2009 based on
results of Ability-to-Benefit (ATB) tests.\6\ Needless to say, this has
been a well-known area where fraud occurs. The Department has recently
proposed much-needed changes, but I believe those are inadequate to
clean up this problem area.
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\6\ http:/ /studentlendinganalytics.typepad . com /
student_lending_analytics / 2009/10/highlights-from-house-hearing-on-
oversight- of -atb-testing-and-diploma-mills-11-of-aid-recipients-ent
.html.
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There has been no definition of ``high school diploma,'' so that
proprietary schools could turn a blind eye to bogus diplomas which
could be obtained for a fee. The Department has proposed to require
schools to have procedures to deal with suspect diplomas, but the
proposed rule still leaves a lot of room for turning a blind eye.
Additionally, a high school diploma may not be adequate to determine if
a prospective student has the basic skills needed for the coursework
for particular careers.
Current rules require an ability-to-benefit (ATB) test to be
administered to non-high school graduates by an independent tester.
This requirement has had limited impact, however, as testers are
generally selected by the school, give the tests at the school, and
rely on the school to maintain the tests and answer sheets. Apparently,
the so-called ``independent'' testers do not run a business in which
they have the facilities to guard the tests themselves. Recently, the
GAO found in undercover operations that tests were not administered
properly, but instead were compromised to ensure the student could be
admitted. It is unclear whether the ATB test is even required for
students who did graduate from high school, but in a country in which
their education was in another language. Sometimes such students are
told courses will be offered in their language, but ultimately they are
put in English-only classes they cannot hope to comprehend.
Under the law, the Department is charged with determining
appropriate test scores to allow eligibility. This is also problematic
because the Department has not interpreted the law to require ability
to benefit from the specific program for which a student is enrolling,
but rather, to be simply the equivalent of having a high school
diploma. Obviously, the beginning skills for, say, security guard, may
be different from those required for a sonographer or radiologist or
cosmetologist.
In addition, recently, on the basis of a study carried out in
community colleges, an alternative measure--the successful completion
of 6 units--is now allowed to determine whether a student may be
eligible for Federal financial aid. This provision has been enacted,
but there are virtually no regulations to prevent abuse. Those schools
that simply want more students can easily manipulate this provision to
claim students have successfully completed some course that is
available to complete some program.
In short, the current ability-to-benefit process needs overhaul.
Tests should be related to the skills that are needed to succeed in the
particular program in which the student is enrolling. Tests should be
administered at a location away from the school, by persons not
recruited by the school, who have sufficient resources to guard tests
and answer sheets from being compromised. If all students are required
to be tested, unless they graduated from a public high school, the
problem with bogus high school diplomas can be reduced, if not
eliminated. Testing of all students, even if they have a public high
school diploma, would help prevent students enrolling in programs for
which they do not have the basic skills necessary. And the 6-unit
alternative should be allowed in proprietary schools only after
adequate study in proprietary schools to show it is comparable to
testing.
11. EXPAND BASES FOR LOAN DISCHARGE AND REQUIRE REIMBURSEMENT FROM
SCHOOL OR LENDER OR ALLOW STUDENTS TO SEEK REMEDIES DIRECTLY FROM
SCHOOL AND LENDER
Students could play a role in program integrity if they had tools
to do so. Currently, however, students may only have their student
loans canceled (discharged) by the Department of Education in very
narrow circumstances, such as the school's false certification of the
student's ability to benefit, the school's failure to properly return
title IV money, or the school's closure. The student's burden to prove
the false certification discharge is very difficult, given that the
Department (in some cases) and the school have the needed records,
which the student does not have. Additionally, the Department has been
very limited in agreeing to cancellation for groups of students, even
if there is a judgment finding the false certification applied to an
entire group of students, or if the Department has similar claims from
students in its files evidencing the alleged false certification by the
same school. Additionally, to be effective in stopping bad actors, the
Department needs to be aggressive in recovering money from schools that
have falsely certified eligibility. Sometimes, of course, the
Department's failure to collect is because the school has closed,
without funds to repay the loan.
The other traditional remedy for fraud and abuse, a civil action,
is not readily available. It is not allowed under current Federal law.
Employees who have witnessed false claims for Federal money by the
school may sue and recover a share of the money paid in the judgment.
Students, however, have no right to sue under the Higher Education Act.
They may be able to assert claims under State law. But even there, they
are often thwarted because the school requires arbitration in which the
students' ability to discover needed facts is limited, rather than
allowing a lawsuit.
In addition to the limits on these means of redress by students,
claims students do pursue successfully are generally not publicly
known. Arbitration proceedings are generally private, not public, like
courts. Schools often require students' confidentiality to settle a
claim and often also prohibit the student from discussing their
grievance with others. Sometimes such confidentiality provisions seem
to prevent the student even from contacting government agencies about
the issue. Typically, evidence of wrongdoing in private arbitrations or
actions that settle is hidden away, not available to the Department,
accrediting agencies or law enforcement agencies.
These limits on redress and on public information about settlements
of disputes both artificially depress Congress' and the public's
awareness of problems, and prevent students from playing a larger role
in program integrity. Congress should examine these limitations to
increase the part students play in program integrity. In particular,
notice of settlements should be provided to the Department and law
enforcement agencies, and evidence developed that points to violations
of the Higher Education Act should be required to be made available to
the Department and law enforcement agencies.
12. CONSIDER ESTABLISHING TUITION RECOVERY FUND
One remedy that has been used in States, including in California,
is the establishment of a tuition recovery fund, funded by fees on
schools, based on numbers of students or amount of tuition. Students
can collect from such a fund if they obtain a judgment against a school
which they cannot collect, if they were enrolled in programs which the
school stopped offering before the student could complete, or if the
school itself closed before the student could complete the program.
13. REQUIRE A HIGHER RATIO OF CURRENT ASSETS TO LIABILITIES
One recurring problem is when a school takes in tuition fees in the
form of Federal aid, then closes before students can complete their
programs. Because the proprietary schools' educational quality often
does not measure up to non-profit or public schools, the credits the
students have already received are not transferable. Indeed, even when
proprietary schools have the opportunity to make their credits
transfer, they frequently choose not to do so, forcing the student to
continue at the proprietary school or have to start over at another
school. Sometimes so-called ``teach-outs'' are offered at another
school, but often they are inadequate or require additional
expenditures to complete the program the student has already paid for.
Currently, only a 1 to 1 ratio of current assets to liabilities is
required under Federal law. A 1 to 1 ratio is, in essence, a penny away
from bankruptcy. The ratio is too low. In other businesses, ratios of 2
to 1 are considered appropriate. In California, schools had to have at
least a 1.25 to 1 ratio (excluding such intangible assets as good
will). The requirement, if enforced, could reduce the number of such
closures while still allowing stable schools to flourish.
14. DIRECT MORE FEDERAL FUNDS TO COMMUNITY COLLEGES
Although this may be outside of your question, it may be a
necessary component. I believe there are sound grounds to direct funds
to public community colleges which perform some functions similar to
proprietary schools, but at a much lower cost to students and the
government. State community college systems reach throughout the
country. In many cases, State community college systems have the
flexibility in schedules and in developing new programs that
proprietary schools tout. Students who go to community colleges,
however, borrow much less, wind up with less debt service after they
finish, and, if they want to continue their education, generally can
transfer credits to other public schools in the State. I think we need
to seriously look at whether funds would be allocated more equitably,
and whether we would be better able to serve the population if more
funds were directed to community colleges, rather than continuing the
massive increases in the dollar amount and proportion of Federal funds
spent supporting proprietary schools.
I have tried to list some of the most salient improvements I
believe are needed, based on my experience as a prosecutor. Others with
expertise in different aspects of the student financial aid programs
may suggest other valuable provisions, so I don't contend the list is
necessarily comprehensive. Also, to the extent some changes are made,
others may be less (or more) necessary. As a former prosecutor, I find
it very frustrating that the main way to address the fraud, abuse and
waste currently seems to be by expensive, resource-intensive, time-
consuming litigation, including prosecutions. I recognize that
implementation of these suggestions would require careful drafting. I
am quite willing to cooperate with you and the other members of the
committee in drafting provisions so that the incentives can be turned
around to operate to reduce the waste in the use of Federal financial
aid in the proprietary school sector.
QUESTIONS OF SENATOR HAGAN
Question 1. At the end of fiscal year 2010, there are estimated to
be over $700 billion in outstanding, federally backed student loans.
Taxpayers are backing almost all of those loans.
I realize that this question can apply equally to non-profit
institutions as well, but since we're talking about the for-profit
industry today, could any of the witnesses tell me what specific,
quantitative measurements we have across the industry to tell us what
the taxpayers are getting for all that money? What sort of industry-
wide performance measures are available to help us better understand
the performance of institutions that survive on the largess of the
taxpayer?
Answer 1. Currently, virtually, none. The most we have is the very
short period of cohort default rate reporting, which we have seen can
easily be manipulated. A student can be behind in payments for 9 months
before being in default and usually has a grace period right after
graduation. Available deferments or forbearances, e.g., if unemployed,
can stretch this period out even further, so that a diligent school can
keep a student out of default the entire 2-year period, even if the
student never makes a payment. This manipulation is most evident from
the Department's reporting on school default rates in anticipation of
the new requirement to track defaults over 3 years. There were huge
differences between default rates for the current 2-year reporting
period and the 3-year reporting period that will apply in the future.
See http://federalstudentaid.ed.gov/datacenter/cohort.html.
Question 2. Some say that the for-profit sector is highly regulated
with oversight from the U.S. Department of Education, State licensure
agencies and accrediting bodies. Others may disagree, citing that much
more needs to be done.
That said, what are your thoughts on how can we better align the
goals of each of these agencies so that everyone is demanding the
highest quality outcomes for every institution?
Answer 2. I believe that substantial changes are needed with
respect to accrediting agencies and State agencies.
the role and requirements for accrediting agencies need to be reformed
As was pointed out at the hearing, the National Advisory Committee
on Institutional Quality and Integrity, the body that recommends to the
Department of Education about accrediting agency recognition is heavily
loaded with representatives or employees of schools that live or die by
accreditation; there is an incestuous relationship between accrediting
agency boards and the schools they accredit; and schools are using
purchase of small, previously accredited schools to gain accreditation,
then expanding the schools beyond all recognition of the school and
programs originally accredited. As I pointed out, virtually every
school I have prosecuted was accredited, but accreditation did not
address the poor outcomes, nor stop abuse and fraud. Typically, among
other limitations, accrediting agencies have very small staffs, rely on
staff from members to evaluate other members, do not have trained
investigators or prosecutors involved in designing their oversight
activities, do not set specific enough ``standards'' so that one can
tell if they have been violated, have non-transparent procedures, and
keep information about problems gathered confidential.
At a minimum, the advisory commission needs to be revised so that
the majority represents consumer and student interests, not the
interests of schools that depend on accreditation. To the extent the
financial aid programs continue to rely on accrediting agencies, the
Department needs to specify minimum uniform criteria, particularly
outcome criteria in which all recognized accrediting agencies will
monitor for compliance. Criteria, such as how much work is required for
a unit of credit should not be based on accrediting agency
determinations, but should be set by the Department, and monitored by
accrediting agencies.
REQUIRE REAL STANDARDS FOR STATE AUTHORIZATION AGENCIES
Traditionally, the Higher Education Act has depended on the triad
of oversight, requiring a school to be accredited by a recognized
accrediting agency, to be ``legally authorized within [the State in
which it operates] to provide a program of education beyond secondary
education,'' and to submit to the provisions of a participation
agreement with the Department of Education. Currently, however,
proprietary schools and their allies, the accrediting agencies, have
successfully lobbied many States to rely on accreditation for most, if
not all of their State oversight responsibilities. The Department of
Education recently proposed a regulation that would require States to
undertake at least some of the responsibilities contemplated by law,
but apparently under pressure from some schools and accrediting
agencies, failed to fully address the statutory requirements for State
oversight. Current law requires the State agency to notify the
Department of Education promptly of any fraud or substantial violation
of the Higher Education Act, but the proposed rule does not require the
State to have any mechanism by which it would be likely to notice such
conduct.
The Department has never had sufficient resources to adequately
police the fraud and abuse in the proprietary sector. In my experience,
local or State agencies are in a much better position to learn about
problems early. As discussed above, accrediting agencies are not
designed to fulfill this role. The Department's proposed regulation
needs to be strengthened or the law needs to be revised to make clear
that schools are not eligible if the State agency in the State in which
the school operates relies on accrediting agencies for its essential
functions. State agencies must themselves approve schools, monitor
their compliance with provisions of the Higher Education Act or with
State provisions that are as strong, or stronger than the Higher
Education Act, and act to revoke authorization of schools that are not
in compliance.
Question 3. Many of you in your testimony mention the ``90/10
rule'', the provision that requires proprietary institutions of higher
education to have at least 10 percent of the institution's revenues
from sources that are not derived from funds provided through Federal
financial aid.
Is there a way to more accurately track the percentage of title IV
dollars that schools receive?
Answer 3. I don't have sufficient information to answer.
Question 4. As you know, the purpose of this hearing is for all of
us to get a better sense of how well the for-profit education industry
is serving students. We know that there are good actors as well as bad
actors in the for-profit education industry.
For those of us who want to ensure that anyone who has the drive
and desire to get a high-quality education is able to do so, how do you
suggest we work together to better identify those schools that are
getting the job done and those that aren't?
Answer 4. In addition to my comments above about accrediting
agencies and State agencies, I offer the following suggestions to help
us better identify those schools that are getting the job done and
those that aren't. In making these suggestions, I am aware of the long
reported history of fraud, abuse, and failure to adequately train
students in the proprietary school sector. Past efforts at the Federal
level and in some States to sort the good from the bad have at times
made progress, but have often been insufficient. In general, most of
the suggestions are remedies that have been used by California or other
States or are revisions to laws that were enacted after the Nunn
hearings, but have been weakened over time. The suggestions aim to
change the incentives, so that schools will need to do a good job to
succeed. That is in contrast to the current state of affairs, in which
incentives encourage a rush to the bottom. Some remedies have been
widely discussed, and I will only mention them briefly as you are
undoubtedly already familiar with them. First, I list the suggestions.
More detail about each suggestion then follows:
1. Define and Enforce the Longstanding Requirement that Proprietary
Programs (and certain other programs) Prepare Students for Gainful
Employment.
2. Strictly Prohibit Quotas and Incentive Compensation for
Recruiting and Financial Aid.
3. Publish and Base Continued Eligibility on Life-time Cohort
Default Rates.
4. Revise 90/10 Requirement.
5. Change Incentives for Private Lenders and Schools by Ensuring
the Existing FTC Holder Rule Is Enforced Against Lenders.
6. Study and Establish Appropriate Standards for Distance
Education.
7. Require Cancellation Periods and Pro-rata Refunds, and Prohibit
Contractual Obligation or Payment Beyond One Term or 4 Months.
8. Require Ability to Benefit Testing, Either for All Students, or
at Least for All Students Who Did Not Graduate From a Public High
School; Eliminate 6 Unit Alternative Measure for Entrance Until
Sufficient Study at Proprietary Schools Has Occurred.
9. Expand Bases for Loan Discharge and Require Reimbursement from
School or Lender or Allow Students to Seek Remedies Directly from
School and Lender.
10. Require a Higher Ratio of Current Assets to Liabilities.
1. DEFINE AND ENFORCE THE LONGSTANDING REQUIREMENT THAT PROPRIETARY
PROGRAMS (AND CERTAIN OTHER PROGRAMS) PREPARE STUDENTS FOR GAINFUL
EMPLOYMENT.
Congress apparently first noted the widespread exploitation of
students by proprietary schools after enactment of the GI bill after
World War II. The House Select Committee to Investigate Educational,
Training, and Loan Guaranty Programs under GI bill, 2/14/1952
describing the abuses in the GI bill from 1944 to 1950 in connection
with recommending safeguards for veterans of the Korean War noted,
inter alia:
``Exploitation by private schools has been widespread.''
``There was a rapid uncontrolled expansion of private profit
schools. . . .''
``Many schools have offered courses in fields where little or
no employment opportunity existed.''
``Training programs have been approved for unskilled or semi-
skilled occupations where little or no training was required,
resulting in needless expenditure of funds and waste. . . .''
With reason, when Congress later added proprietary schools to the
Higher Education Act, it specified that only schools that prepared
students for gainful employment were eligible. However, the Department
of Education has never defined, much less made much of any attempt to
enforce this requirement. In the negotiated rulemaking on program
integrity the Department initiated in 2009, the Department proposed a
definition that is a modest step toward enforcement of this
requirement. The proposal, which it has yet to officially propose,
would set a flag to identify programs for which the students' median
loan debt would be more than 8 percent of the projected salaries (at
the 25th decile of salaries determined by the Bureau of Labor
Statistics for the occupations for which the training is to prepare
students). Programs that could not meet that standard would still be
eligible if the school could demonstrate that the median debt load is
less than 8 percent of the actual salaries graduates of those programs
earn, or if 90 percent of the graduates of the program did not default
(with ``default'' defined more accurately than under the current cohort
default rate standards).
Given that the 8 percent standard is usually used by lenders to
determine the amount of all non-housing debt a borrower should
reasonably carry, and that many students at proprietary schools are
older and already have other debts such as auto loans and credit card
debts, the 8 percent standard may be too high, especially for those
whose salaries would be less than 150 percent of the poverty level.
Nevertheless, it is a modest, reasonable first step. I believe the debt
load of those who enroll, but do not complete also needs to be
considered, so that there is no temptation for the bad actors to
discourage those with the highest debt loads from completing the
course, in order to lower the median debt load of students in a
program.
The Department's proposal, however, deals only with the ``gainful''
part of the phrase, not with the ``employment'' part. If a school does
a poor job of training students, even if the program met the 8 percent
or related criteria mentioned above, it might still have a minority of
graduates who could actually obtain employment. Consequently,
proprietary school programs should also have to meet a certain level of
employment. In California, for example, for 19 years, proprietary
schools were required to have at least 70 percent of the graduates from
a program obtain employment within 6 months, in a position that lasted
at least 60 days, for at least 32 hours a week. (Part time employment
could also count if the student had specified in advance of the program
and at the end that the student only wanted part-time employment.) As
was obvious from my testimony, there needs to be some way to verify
that claimed employment levels are true. One suggestion for accuracy in
employment statistics is to require use of State unemployment insurance
data, which some States already do for community colleges.
A current provision under the Higher Education Act, which was
enacted back when most programs were much shorter, applies only to
short courses. The Department has now proposed to apply it more
broadly, so far, as a reporting device only. Based on my experience, to
be used more broadly, the existing provision needs to be strengthened
and improved to prevent manipulation. For example, under the current
provision, while accurate reporting would be helpful, the existing
provision would not be useful. The documentation of employment allowed
would not demonstrate that the employment really meets the standard.
The current provision also relies on an ``attestation engagement'' by
an accountant to verify the reported percentages, but the lack of
specificity as to the sampling needed, and other details I believe,
leaves this provision open to false or inflated reports.
And, as noted above, completion rates also need to be tracked and
verified, and a standard set to insure schools are not manipulating the
data by discouraging completion by students they consider least likely
to be able to get a job. In California, for example, after certain
exceptions--death, military service, those who canceled within the 100
percent full refund cancellation period, etc.--authorized programs had
to show 60 percent of those enrolled completed the program.
I view such standards as critical to separating out those which are
getting the job done from those that are not. Good schools would
continually evaluate their programs, eliminating or revising those that
have high debt levels in comparison to salaries available or whose
graduates are unable to find work in the field in which they trained.
The proprietary schools' lobbying arm, CCA, has represented that more
than 80 percent of the programs it surveyed would meet the 8 percent
flag, and likely additional programs would meet one of the two
alternatives, although CCA did not run the numbers for the
alternatives. It is unclear how many programs would meet a 70 percent
employment requirement, but most national accrediting agencies already
claim to have that high, or a higher standard. In California, until
2008, that was the standard schools were required to meet. The
requirement did not seem to have slowed the development of proprietary
schools in California (although the State agency charged with
enforcement apparently did little to enforce the law).
Schools should also be required to report on their Web sites, if
they have one, their statistics for each program offered, as well as to
provide a fact sheet to every prospective student showing the
information for the program in which the prospective student has
expressed an interest. Currently, there is no competition among schools
based on such quality factors because those factors are not
transparent. Making them transparent, if they are verified/monitored
for accuracy, would provide some possibility of competition arising
based on these quality criteria. Such real competition would help the
good schools.
Of course there might need to be provisions related to an
employment requirement to address extraordinary circumstances, such as
limited employment available in a particular region after a major
disruption, e.g., after hurricane Katrina, or to address the time lag
for getting the results from licensing exams.
2. STRICTLY PROHIBIT QUOTAS AND INCENTIVE COMPENSATION FOR RECRUITING
AND FINANCIAL AID
The recent Department of Education proposed regulation on incentive
compensation goes a long way to restoring the full intent of the
statute prohibiting incentive compensation. I am concerned however,
that a few possible loopholes may still exist and will be working with
others to comment on the proposed rule. In addition, I also recommend a
statutory change to make very clear that the use of quotas in
connection with compensation for such staff is prohibited. From the
information I have seen, it appears schools may be trying to get around
the prohibition on incentive compensation by setting quotas and
punishing in some way or firing those who do not reach the quota. While
this may well be covered under the current statute, additional clarity
would be advisable.
The payment of incentive compensation or the use of quotas for
those involved in or supervisors over admissions or financial aid tasks
is particularly pernicious. Prospective students are likely to trust
the ``admissions advisor,'' ``financial aid advisor,'' or school
director as a person there to assist them. Prospective students don't
readily realize they are dealing with commissioned sales persons, as
they would when, e.g., buying a car.
Good schools can compete on the basis of quality, and need not
compete on incentives. The natural result of incentives/quotas is to
encourage some of the types of abuse noted at the hearing, including
misrepresentations, enrolling students ill-suited to a particular
training program, or providing training that does not qualify the
graduates for employment.
3. PUBLISH AND BASE CONTINUED ELIGIBILITY ON LIFE-TIME COHORT DEFAULT
RATES
Proprietary schools first came fully into the Higher Education Act
financial aid programs in 1972. By the mid-80s, stories of fraud and
abuse and high default rates were accumulating. One of the provisions
enacted after the 1992 hearings by the Senate Permanent Subcommittee on
Investigations was to eliminate from eligibility schools with high
default rates. Initially, that change had an impact, but the law has
been watered down over the years, and schools have learned how to
manipulate the data to prevent defaults from showing up within the time
(2, soon to be 3 years) in which defaults are measured. Both the
Inspector General and the GAO have pointed out that the short-time
cohort default rate is a misleading indicator. It is a mere snapshot in
time that does not give a full picture of default trends.\7\
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\7\ See, e.g., U.S. Department of Education, Office of Inspector
General, ``Final Audit Report: Audit to Determine if Cohort Default
Rates Provide Sufficient Information on Defaults in the title IV Loan
Program'', ED-OIG/A03-C0017 (December 2003); General Accounting Office,
``Student Loans: Default Rates Need to be Computed More
Appropriately'', GAO/HEHS-99-135 (July 1999).
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There are problems not only with the time period, but also with the
cohort rate calculation method. In addition, the default measure does
not include borrowers that are current, but struggling with overly
burdensome debt or borrowers that are delinquent, but not yet in
default (i.e., less than 9 months behind in their payments). These
problems are expected to grow as interest rates rise along with
borrowing levels.
Unless cohort default rates are tracked for the life, schools will
continue to be able to manipulate this limitation. Additionally, the
default rate cut-off applied to each interval of time tracked should be
a reasonable measure of defaults in credit markets that are not skewed
by an influx of Federal loans. For example, current default limits over
2 years of 25 percent (soon to be 30 percent over 3 years) are
extraordinarily high compared to normal market-based credit default
rates. Congress needs to act to make these changes.
4. REVISE 90/10 REQUIREMENT
One of the requirements that came out of the 1992 hearings on
proprietary school fraud and abuse was the requirement that at least 15
percent of a school's revenue should come from other than title IV
funds. This provision was derived from, but did not track the
requirement for Veterans' programs. The rule for Veterans' programs was
that at least 15 percent of the students must not use the GI benefit to
pay for their schooling. This requirement was established because after
the first GI bill, proprietary schools developed to capture the
veterans benefits proliferated, and fraud and abuse were rampant (see
above). Proprietary schools later successfully reduced the percentage
not to be from title IV financial aid funds to 10 percent.
Nevertheless, proprietary schools continue to operate near the 90
percent title IV subsidized margin. After lobbying Congress to be able
to count all institutional loans toward their 10 percent in the years
in which the loans are made (rather than when they are repaid), some
proprietary schools began to offer, or increase their offering of
school financing. Some schools admit they expect to collect less than
50 percent of the amounts owed on their loans for students, suggesting
these ``loans'' are driven, in part, by the need to come up with enough
non-Federal funding to meet the watered down 10 percent. Apparently and
perversely, some proprietary schools are increasing their fees above
the amount available in title IV grants and loans as a strategy for
meeting the 10 percent that cannot be from title IV funds.
Even if one looks at just independent students taking 4-year
programs at public, non-profit, and for-profit schools, the percentage
of borrowers varies dramatically. In the publics and non-profits, 24
percent to 31 percent of students have no Federal loans, but at the
for-profits, only 4 percent do not have Federal loans. The concept of
the Veterans' 85/15 limit is that in the marketplace, a good school
could attract at least 15 percent of its students without reliance on
the Veteran benefit. The 90/10 limit under title IV needs to be
restructured. I would recommend that it be changed to be 85/15 and to
apply not to revenues, but to the numbers of students who receive any
Federal student financial aid, whether grants or loans under title IV,
the VA, or similar programs. Proprietary schools will likely argue that
because they attract a lower income student, such a restriction would
not be possible for them. One has to wonder, however, if they are
providing a good education, why they are not also attracting some
higher-income students. Some higher income students do want to become
radiologists, vocational nurses, computer technicians or obtain
Bachelors' or advanced degrees in career-focused fields. This change
would incentivize proprietary schools not to raise tuition, but to
lower it, as they would have to compete for students in the market
generally, rather than just trying to maximize the financial aid the
school can collect by selling dreams of a career to poor people.
This change would have to be accompanied by a strict requirement
that the school must first make known to the student all financial aid
the student can qualify for, before offering information about private,
non-Federal loans so that schools would not just push students into
even higher interest, less favorable private loans. It would also have
to be accompanied by some changes in private loans, as discussed below.
5. CHANGE INCENTIVES FOR PRIVATE LENDERS AND SCHOOLS BY ENSURING THE
EXISTING FTC HOLDER RULE IS ENFORCED AGAINST LENDERS
Under the Federal Trade Commission's rule, commonly referred to as
the ``Holder Rule,'' sellers of consumer goods and services are
required to include a provision in credit contracts they assign to a
lender, or in loans if they refer the consumer to the lender or arrange
the loan, that makes the creditor subject to the same claims and
defenses the purchaser could assert against the seller. This standard
rule prevents a seller from selling a defective product, but having the
payments due to another party who claims the right to collect, even
though the product is defective. Unfortunately, some courts have held
that if the seller (in this case, the school) does not see to it that
the provision is in the credit document, the creditor is not bound by
the rule.
The FTC does not regulate lenders, so it cannot require them to
include the provision, and the agencies that do regulate lenders have
failed to promulgate a parallel rule. This means that lenders need have
little concern about whether the school is good or not. This
inconsistency needs to be addressed so that lenders will have
incentives to provide credit only for students at good schools, or to
require schools to put up a deposit to cover potential future claims or
defenses to payment. Congress should address this by requiring the
notice in contracts for student loans and by specifying that the lender
is liable, whether or not the notice is included, if the notice should
have been included by law.
In connection with the ``holder'' issue, schools should be required
to certify all private student loans and that the student has exhausted
all means of Federal financing, before a private loan may be disbursed.
This would also insure that when schools are determining their
students' loan debt, they are including any private loans the student
may have.
6. STUDY AND ESTABLISH APPROPRIATE STANDARDS FOR DISTANCE EDUCATION
This is probably the fastest growing segment of proprietary schools
and the area most susceptible to abuse. Before 2006, eligible schools
were limited to providing distance education, including correspondence
courses, for no more than 50 percent of their students and no more than
50 percent of their courses. Despite caution from the GAO and IG \8\
that removing this limitation without better controls would lead to
increased fraud and abuse, the limit was lifted as to
telecommunications courses (those offered by electronic means), but not
as to correspondence courses. The only limit on telecommunications
courses is that they must provide regular and substantive interaction
between the student and teacher, but that interaction need not be
synchronous. The only clarification of those terms states that the
interaction must be at regular intervals and not be trivial.
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\8\ General Accounting Office, ``Distance Education: Improved Data
on Program Costs and Guidelines on Quality Assessments Needed to Inform
Federal Policy,'' GAO-04-279 (February 2004); see also 2009 testimony
at http://edlabor.house.gov/documents/111/pdf/testimony/
20091014MaryMitchelsonTestimony.pdf.
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This provision leaves the student financial aid programs wide open
to fraud and abuse. Among other issues, for-profit schools may purchase
a small, reputable school, then turn the school into a massive online
college, with virtually no oversight. A further concern must be that
schools that may have been providing good, needed hands-on programs at
an on-site facility, will be tempted to reduce costs by going to all,
or almost all on-line programs. Although telecommunications programs
are required to be accredited, the GAO has found the same lack of
accrediting agency standards here as noted above.
In her testimony, the Inspector General also noted her concern
about the lack of measures to insure Federal dollars are not being
spent for little or no benefit because of the lack of oversight of
distance education programs. Congress should re-instate the 50 percent
limitation on on-line programs until the means to prevent abuse can be
studied and implemented. There needs to be a study to establish what
requirements and monitoring needs to be implemented to prevent the
massive potential for problems in this burgeoning area.
7. REQUIRE CANCELLATION PERIODS AND PRO-RATA REFUNDS, AND PROHIBIT
CONTRACTUAL OBLIGATION OR PAYMENT BEYOND ONE TERM OR FOUR MONTHS
Each of these suggestions have in common that they offer a measure
of self-help to students who may find themselves in one of the ``bad
actor'' schools, and that they have been used in one or more States to
curb abuses.
In California, the State law for 19 years required proprietary
schools to provide a full refund (except for a modest registration fee)
to any student who canceled the program within the first 5 class days.
That way, there was a chance the student would discover if the
equipment or facilities were lacking, or if teachers were untrained or
had no practical experience before the student had spent thousands of
dollars on a worthless education. Other States prevent the school from
keeping even a registration fee if the student cancels on or before the
first day of class. While bad actor schools become adept at giving a
good first impression, some students may discover the problems in this
initial period.
For 19 years, California required proprietary schools to provide a
full pro-rata refund throughout the program. That requirement reduced
the churn from schools constantly admitting new students and ignoring
students' needs once they passed an arbitrary percentage (which varies
by school) of the course after which students were no longer entitled
to any refund. Oregon has used a similar concept, prohibiting schools
from collecting from students or obligating students for more than one
term or four months. Again, students under this system might lose some
money on a bad school, but when they realize that things are not as
represented, they are free to leave, without being obligated for many
months more. Without such a policy, students report that the school
responds to their complaints by saying, the student already owes all
the money, so there is no point to quitting out of dissatisfaction with
the program.
8. REQUIRE ABILITY TO BENEFIT TESTING, EITHER FOR ALL STUDENTS, OR AT
LEAST FOR ALL STUDENTS WHO DID NOT GRADUATE FROM A PUBLIC HIGH SCHOOL;
ELIMINATE 6 UNIT ALTERNATIVE MEASURE FOR ENTRANCE UNTIL SUFFICIENT
STUDY AT PROPRIETARY SCHOOLS HAS OCCURRED
To be admitted, students are supposed to have a high school
diploma, or pass a test demonstrating their ability to benefit from the
program being offered. The Inspector General has testified that $12
billion in financial aid was granted in fiscal year 2009 based on
results of Ability-to-Benefit (ATB) tests.\9\ Needless to say, this has
been a well-known area where fraud occurs. The Department has recently
proposed much-needed changes, but I believe those are inadequate to
clean up this problem area.
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student_lending_analytics / 2009 /10 / highlights-from-house-hearing-
on-oversight- of -atb-testing-and-diploma-mills-11-of-aid-recipients-
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There has been no definition of ``high school diploma,'' so that
proprietary schools could turn a blind eye to bogus diplomas which
could be obtained for a fee. The Department has proposed to require
schools to have procedures to deal with suspect diplomas, but the
proposed rule still leaves a lot of room for turning a blind eye.
Additionally, a high school diploma may not be adequate to determine if
a prospective student has the basic skills needed for the coursework
for particular careers.
Current rules require an ability-to-benefit (ATB) test to be
administered to non-high school graduates by an independent tester.
This requirement has had limited impact, however, as testers are
generally selected by the school, give the tests at the school, and
rely on the school to maintain the tests and answer sheets. Apparently,
the so-called ``independent'' testers do not run a business in which
they have the facilities to guard the tests themselves. Recently, the
GAO found in undercover operations that tests were not administered
properly, but instead were compromised to ensure the student could be
admitted. It is unclear whether the ATB test is even required for
students who did graduate from high school, but in a country in which
their education was in another language. Sometimes such students are
told courses will be offered in their language, but ultimately they are
put in English-only classes they cannot hope to comprehend.
Under the law, the Department is charged with determining
appropriate test scores to allow eligibility. This is also problematic
because the Department has not interpreted the law to require ability
to benefit from the specific program for which a student is enrolling,
but rather, to be simply the equivalent of having a high school
diploma. Obviously, the beginning skills for, say, security guard, may
be different from those required for a sonographer or radiologist or
cosmetologist.
In addition, recently, on the basis of a study carried out in
community colleges, an alternative measure--the successful completion
of 6 units--is now allowed to determine whether a student may be
eligible for Federal financial aid. This provision has been enacted,
but there are virtually no regulations to prevent abuse. Those schools
that simply want more students can easily manipulate this provision to
claim students have successfully completed some course that is
available to complete some program.
In short, the current ability-to-benefit process needs overhaul.
Tests should be related to the skills that are needed to succeed in the
particular program in which the student is enrolling. Tests should be
administered at a location away from the school, by persons not
recruited by the school, who have sufficient resources to guard tests
and answer sheets from being compromised. If all students are required
to be tested, unless they graduated from a public high school, the
problem with bogus high school diplomas can be reduced, if not
eliminated. Testing of all students, even if they have a public high
school diploma, would help prevent students enrolling in programs for
which they do not have the basic skills necessary. And the 6-unit
alternative should be allowed in proprietary schools only after
adequate study in proprietary schools to show it is comparable to
testing.
9. EXPAND BASES FOR LOAN DISCHARGE AND REQUIRE REIMBURSEMENT FROM
SCHOOL OR LENDER OR ALLOW STUDENTS TO SEEK REMEDIES DIRECTLY FROM
SCHOOL AND LENDER
Students could play a role in program integrity if they had tools
to do so. Currently, however, students may only have their student
loans canceled (discharged) by the Department of Education in very
narrow circumstances, such as the school's false certification of the
student's ability to benefit, the school's failure to properly return
title IV money, or the school's closure. The student's burden to prove
the false certification discharge is very difficult, given that the
Department (in some cases) and the school have the needed records,
which the student does not have. Additionally, the Department has been
very limited in agreeing to cancellation for groups of students, even
if there is a judgment finding the false certification applied to an
entire group of students, or if the Department has similar claims from
students in its files evidencing the alleged false certification by the
same school. Additionally, to be effective in stopping bad actors, the
Department needs to be aggressive in recovering money from schools that
have falsely certified eligibility. Sometimes, of course, the
Department's failure to collect is because the school has closed,
without funds to repay the loan.
The other traditional remedy for fraud and abuse, a civil action,
is not readily available. It is not allowed under current Federal law.
Employees who have witnessed false claims for Federal money by the
school may sue and recover a share of the money paid in the judgment.
Students, however, have no right to sue under the Higher Education Act.
They may be able to assert claims under State law. But even there, they
are often thwarted because the school requires arbitration in which the
students' ability to discover needed facts is limited, rather than
allowing a lawsuit.
In addition to the limits on these means of redress by students,
claims students do pursue successfully are generally not publicly
known. Arbitration proceedings are generally private, not public, like
courts. Schools often require students' confidentiality to settle a
claim and often also prohibit the student from discussing their
grievance with others. Sometimes such confidentiality provisions seem
to prevent the student even from contacting government agencies about
the issue. Typically, evidence of wrongdoing in private arbitrations or
actions that settle is hidden away, not available to the Department,
accrediting agencies or law enforcement agencies.
These limits on redress and on public information about settlements
of disputes both artificially depress Congress' and the public's
awareness of problems, and prevent students from playing a larger role
in program integrity. Congress should examine these limitations to
increase the part students play in program integrity. In particular,
notice of settlements should be provided to the Department and law
enforcement agencies, and evidence developed that points to violations
of the Higher Education Act should be required to be made available to
the Department and law enforcement agencies.
10. REQUIRE A HIGHER RATIO OF CURRENT ASSETS TO LIABILITIES
One recurring problem is when a school takes in tuition fees in the
form of Federal aid, then closes before students can complete their
programs. Because the proprietary schools' educational quality often
does not measure up to non-profit or public schools, the credits the
students have already received are not transferable. Indeed, even when
proprietary schools have the opportunity to make their credits
transfer, they frequently choose not to do so, forcing the student to
continue at the proprietary school or have to start over at another
school. Sometimes so-called ``teach-outs'' are offered at another
school, but often they are inadequate or require additional
expenditures to complete the program the student has already paid for.
Currently, only a 1 to 1 ratio of current assets to liabilities is
required under Federal law. A 1 to 1 ratio is, in essence, a penny away
from bankruptcy. The ratio is too low. In other businesses, ratios of 2
to 1 are considered appropriate. In California, schools had to have at
least a 1.25 to 1 ratio (excluding such intangible assets as good
will). The requirement, if enforced, could reduce the number of such
closures while still allowing stable schools to flourish.
I have tried to list some of the most salient improvements I
believe are needed, based on my experience as a prosecutor. Others with
expertise in different aspects of the student financial aid programs
may suggest other valuable provisions, so I don't contend the list is
necessarily comprehensive. Also, to the extent some changes are made,
others may be less (or more) necessary. As a former prosecutor, I find
it very frustrating that the main way to address the fraud, abuse and
waste currently seems to be by expensive, resource-intensive, time-
consuming litigation, including prosecutions. I recognize that
implementation of these suggestions would require careful drafting. I
am quite willing to cooperate with you and the other members of the
committee in drafting provisions so that the incentives can be turned
around to operate to reduce the waste in the use of Federal financial
aid in the proprietary school sector.
QUESTIONS OF SENATOR COBURN
Question 1. What role do States play--above and beyond the role
currently played by the Federal Government--in ensuring the quality and
integrity of post-secondary degree programs? Are States best positioned
to make qualitative judgments about post-secondary institutions and to
police improper behavior?
Answer 1. While States could and should play a larger role, the
trend has been in the opposite direction. It appears that more and more
States have abdicated their oversight role to accrediting agencies.
Traditionally, the Higher Education Act has depended on the triad
of oversight, requiring a school to be accredited by a recognized
accrediting agency, to be ``legally authorized within [the State in
which it operates] to provide a program of education beyond secondary
education,'' and to submit to the provisions of a participation
agreement with the Department of Education. Currently, however,
proprietary schools and their allies, the accrediting agencies, have
successfully lobbied many States to rely on accreditation for most, if
not all of their State oversight responsibilities. According to a
report from the Western Association of Schools and Colleges provided to
negotiated rulemaking participants, three States have no State agency
or oversight over schools participating in the Federal student
assistance programs (Alaska, Arizona and Montana). Another
approximately 26 States turn over some, or all of their State functions
to accrediting agencies. Some of these States exempt particular classes
of accredited schools (such as schools operating before a certain date,
e.g., 2006 or for 10 years. Other States exempt from State oversight
schools accredited by particular accreditors or classes of accreditors.
Others have minimum oversight over accredited schools. Still others
even rely on accreditors to insure compliance with consumer protection
laws. Oklahoma, for example, exempts all accredited degree-granting
schools from State oversight. Memorandum by Kessenick, Gamma & Free,
dated January 20, 2010.
The Department of Education recently proposed a regulation that
would require States to undertake at least some of the responsibilities
contemplated by law, but apparently under pressure from some schools
and accrediting agencies, failed to fully address the statutory
requirements for State oversight. Current law requires the State agency
to notify the Department of Education promptly of any fraud or
substantial violation of the Higher Education Act, but the proposed
rule does not require the State to have any mechanism by which it would
be likely to notice such conduct.
The Department has never had sufficient resources to adequately
police the fraud and abuse in the proprietary sector. In my experience,
local or State agencies are in a much better position to learn about
problems early. As discussed above, accrediting agencies are not
designed to fulfill this role. The Department's proposed regulation
needs to be strengthened or the law needs to be revised to make clear
that schools are not eligible if the State agency in the State in which
the school operates relies on accrediting agencies for its essential
functions. State agencies must themselves approve schools, monitor
their compliance with provisions of the Higher Education Act or with
State provisions that are as strong, or stronger than the Higher
Education Act, and act to revoke authorization of schools that are not
in compliance.
Question 2. Do non-profit and public colleges and universities use
the Federal student aid programs to suit their business models? Are
for-profit colleges the only sector of higher education that capitalize
on the Federal student aid programs?
Answer 2. How different types of schools address the Federal
student aid programs in their business models is not something on which
I have expertise, so it is a topic best addressed to others. What we do
know is that for-profit schools, although ostensibly actors in a market
economy, as a sector, are much more highly dependent on the subsidies
of Federal student financial aid than other sectors. For example, even
if one looks at just independent students taking 4-year programs at
public, non-profit, and for-profit schools, the percentage of borrowers
varies dramatically. In the publics and non-profits, 24 percent to 31
percent of students have no Federal loans, but at the for-profits, only
4 percent do not have Federal loans.
Question 3. Does it concern you that, as a country, we have created
a student aid system that has helped fuel tuition costs? According to
the National Center for Public Policy and Higher Education, from 1982
to 2007, tuition and fees increased 439 percent while median family
income rose 147 percent. Does the overall framework work in your mind,
or has the government created a system that helps drive up tuition and
that invites waste, fraud and abuse into all sectors of higher
education?
Answer 3. I do not have sufficient information to respond. I do not
know if Federal financial aid has kept pace with, lagged behind, or
exceeded increased tuition costs, so I don't know if it could be said
to be fueling the increases in tuition, or if it is a factor, how
significant that factor may be. I do not know how much of the increase
in tuition may be due for example, to large increases in fees in one
sector, rather than across the board. I do not know what portion of
that increase is due to increased costs, such as the need for more
expensive technology, e.g., in allied health programs. And I do not
know if the difference between the cost of tuition and family income is
due to policies that caused tuition to rise excessively, or to policies
that caused median income to be depressed excessively.
It is a worthy topic, given the importance of widespread education
in a democracy and in the competitive world economy, and one I am very
interested in learning more about, but others may be more able to
respond than I.
Question 4. What responsibility do post-secondary students, as
adult consumers, have in taking their futures into their own hands and
researching their post-secondary education and training options?
Answer 4. How much responsibility post-secondary students can have
in researching their training options depends on a number of factors,
several of which I identify here.
First, about half of the population functions at the below basic or
basic literacy level. According to the National Adult Literacy Surveys,
about a quarter of the population (depending on the type of task) tests
below basic, meaning, for example, they cannot carry out such low level
functions as entering background information on an application for
social security, identifying the gross pay for the year on a pay stub,
or calculating the weekly salary based on the hourly wage. Another
approximately 25 percent (depending on the type of task) of the
population tests basic, which means, for example, they cannot tell from
a bus schedule how long one will have to wait to catch a bus, write a
short letter to explain an error in a credit card bill, or summarize
the work experience needed for an advertised job.\10\ A full 87 percent
of those surveyed, even those with intermediate level literacy skills,
could not contrast financial information presented in a table about
differences among credit cards. If those who are attracted to for-
profit schools are similar to the population at large, about half of
them may not be capable of undertaking meaningful research on their
education options.
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\10\ National Assessment of Adult Literacy performed by National
Center for Education Statistics for the U.S. Department of Education in
1992 and 2003.
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Second, even for a sophisticated person, finding out the quality of
a for-profit school can be difficult, if not impossible. As I explained
in my testimony, there are no standard, reliable, transparent
statistics on such important matters as the record of the school's
graduates in obtaining employment in the field, the salaries obtained,
or the success of graduates on licensing exams. Most of the pertinent
information, such as employment rates, lifetime default rates, or
salary potential are either not available at all, not readily
available, or not reliable. In the case about which I testified, for
example, the documents the school was required by law to prepare and
provide students consistently contained inflated statements of
employment and salaries after graduation.
Similarly, at the hearing, even Senators expressed their confusion
about the kind of accreditation needed. A school may be nationally
accredited (meaning its students can get Federal financial aid), but
the school may not have programmatic accreditation for a particular
specialty it offers. The programmatic accreditation may not be
something required by the State, but may be what most employers would
require. Or a school may represent that it has programmatic
accreditation, but the organization giving that accreditation is not
the one recognized by most professionals in the field. It is not
necessarily that easy for a person with little prior knowledge of the
field to figure out that the program a school offers in a particular
field will not actually prepare one to work in that field.
Third, schools are not like used car dealers. People may be on
guard for sales tricks when looking for a used car. People generally
are unlikely to suspect that an ``admission advisor'' or ``financial
aid advisor'' is really a salesperson, not someone looking after the
student's best interest.
These examples illustrate why placing the burden of program
integrity on the students' ability to research their training options
is unlikely to safeguard the Federal aid dollars. Nevertheless, there
are some things that can be done to enlist students in efforts to
prevent fraud, abuse and waste.
require cancellation periods and pro-rata refunds, and prohibit
contractual obligation or payment beyond one term or four months
Each of these suggestions has in common that it offers a measure of
self-help to students who may find themselves in one of the ``bad
actor'' schools, and that it has been used in one or more States to
curb abuses, but without preventing good schools from flourishing.
In California, the State law for 19 years required proprietary
schools to provide a full refund (except for a modest registration fee)
to any student who canceled the program within the first 5 class days.
That way, there was a chance the student would discover if the
equipment or facilities were lacking, or if teachers were untrained or
had no practical experience before the student had spent thousands of
dollars on a worthless education. Other States prevent the school from
keeping even a registration fee if the student cancels on or before the
first day of class. While bad actor schools become adept at giving a
good first impression, some students may discover the problems in this
initial period.
For 19 years, California required proprietary schools to provide a
full pro-rata refund throughout the program. That requirement reduced
the churn from schools constantly admitting new students and ignoring
students' needs once they passed an arbitrary percentage (which varies
by school) of the course, after which students were no longer entitled
to any refund. Oregon has used a similar concept, prohibiting schools
from collecting from students or obligating students for more than one
term or four months. Again, students under this system might lose some
money on a bad school, but when they realize that things are not as
represented, they are free to leave, without being obligated for many
months more. Without such a policy, students report that the school
responds to their complaints by saying, the student already owes all
the money, so there is no point to quitting out of dissatisfaction with
the program.
I appreciate this opportunity to address your questions. I am quite
willing to cooperate with you and the other members of the committee in
drafting provisions so that the incentives can be turned around to
operate to reduce the waste in the use of Federal financial aid in the
proprietary school sector.
______
DeVry Inc.,
Downers Grove, IL 60515-5799,
July 15, 2010.
Hon. Tom Harkin, Chairman,
Committee on Health, Education, Labor, and Pensions,
428 Dirksen Senate Office Building,
Washington, DC 20510.
Hon. Michael B. Enzi, Ranking Member,
Committee on Health, Education, Labor, and Pensions,
835 Hart Senate Office Building,
Washington, DC 20510.
Dear Chairman Harkin and Ranking Member Enzi: Thank you once again
for the opportunity to testify before the Senate Committee on Health,
Education, Labor, and Pensions hearing on ``Emerging Risk?: An Overview
of the Federal Investment in For-Profit Education.'' DeVry has a long
history serving our Nation's educational needs and it was an honor to
share my experience in the sector with you and the other honorable
members of the committee.
Please find enclosed the written responses to questions that you
and other members of the committee had regarding my testimony. This
material will also be e-mailed, per your instructions, to the
appropriate committee staff. With your consent, we request 1 additional
week to complete our response to Chairman Harkin's question 4(d)
concerning Apollo College and Western Career College, so that we can
obtain the relevant data. Additionally, relative to Chairman Harkin's
question 6(b), should the committee require more information, we are
happy to discuss how to provide such detail with you or your staff.
Please contact me directly at (630) 515-3146 or at [email protected].
President Obama has set some ambitious goals before the higher
education community and the work that you and the committee are doing
will be critical to the future of our Nation.
Sincerely,
Sharon Thomas Parrott,
Senior Vice President,
Government and Regulatory Affairs,
Chief Compliance Officer.
______
Response to Questions of Senator Harkin, Senator Enzi, Senator Dodd,
Senator Casey, Senator Hagan, Senator Alexander, and Senator Coburn by
Sharon Thomas Parrott
QUESTIONS OF SENATOR HARKIN
During the course of your testimony you volunteered that the
Department of Education tracks student retention from one September to
the next, i.e. that schools must report the number of the students
enrolled in one September, and the following September must report how
many of those remain enrolled, have graduated or completed a program,
and how many have dropped out. You suggested that this data set
accurately captures the number of students who withdraw from for-profit
colleges like DeVry and would be able to explain what is happening to
the students indicated in green on the chart below:
Question 1. Isn't it correct that, contrary to your testimony, all
students who have attended another post-secondary institution are
excluded from this data set?
Answer 1. The Integrated Post-Secondary Education Data System
(IPEDS) retention rate is the percentage of first-time, bachelor-
seeking students in the previous fall semester who are enrolled in the
current fall semester.
The IPEDS retention rate does indeed exclude those who have
attended another post-secondary institution as well as those seeking a
degree other than a bachelor's.
For further discussion of IPEDS retention rates, please see my
response to Question 5.
My testimony was in reference to the undergraduate withdrawal rate
furnished to compliance auditors as part of the annual title IV audit
required by the Department of Education for DeVry University and
Chamberlain College of Nursing. The rate is calculated as the
percentage of students enrolled at the start of the fall semester that
had not graduated and were not enrolled the end of the following spring
semester. It encompasses all undergraduate students, not just those who
were first-time-to-college.
For Apollo College and Western Career College, the rate is
calculated as the percentage of those enrolled between July 1 and June
30 who withdrew for the remainder of the year.
The withdrawal rates provided as part of the fiscal year 2009 title
IV audit are as follows:
Apollo College: 12-17 percent (across locations).
Chamberlain College of Nursing: 14 percent.
DeVry University: 21 percent.
Western Career College: 19.9 percent.
Although it is not reported as such, the inverse of the withdrawal
rate can be thought of as a retention measure. That is, fall through
spring retention rates for DeVry University and Chamberlain College of
Nursing were 79 percent and 86 percent, respectively. For Apollo
College and Western Career College the retention rates were 83-88
percent (across locations) and 79 percent, respectively.
Question 2. Isn't it also true that any student who enrolls in a
school outside the September window is not captured by this data set
unless they remain at the school until the following September?
Answer 2. No. Please see my response to Question 1. I referenced
the title IV audit withdrawal rate, which is a fall through spring
measure. You may have been referring to the IPEDS retention rate, which
is a fall-to-fall measure and is discussed in my response to Question
5.
Question 3. Is it correct to say that large numbers of students
attending schools owned and operated by DeVry enroll throughout the
year, not just in the Fall?
Answer 3. Yes. Unlike typical traditional institutions that admit
students once a year in the fall, DeVry University and Chamberlain
College of Nursing accept new students in summer, fall and spring
semesters throughout the year. Apollo College and Western Career
College accept students on a rolling calendar throughout the year as
well.
An increasing number of all college students are ``non-
traditional,'' including older, working adult students. Multiple start
dates, along with evening/weekend programs and online courses are some
of the ways we try to serve this growing need.
Question 4a. For the year beginning September 1, 2008 and ending
September 1, 2009 could you please provide the following information:
Although the September to September academic year in your question
is a typical period for traditional institutions, it is not reflective
of our academic calendar. DeVry's institutions operate on an academic
calendar beginning July 1 and ending June 30.
Answer 4a. The total number of students enrolled in the six schools
operated by DeVry on September 1, 2008.
Four of DeVry's schools have undergraduate enrollment and provide
the proper context for the retention rates in the 2008-2009 IPEDs Fall
Enrollment Survey.
Ross University and DeVry University's Keller Graduate School of
Management are not included because neither admits students at the
undergraduate level.
Below are the fall 2008 undergraduate enrollments as reported in
the 2008-2009 IPEDS Fall Enrollment Survey.
Apollo College: 6,884.
Chamberlain College of Nursing: 3,203.
DeVry University (U.S.): 48,166.
Western Career College: 6,001.
For Chamberlain College of Nursing and DeVry University, the fall
2008 semester began on October 27, 2008. The official census date was
November 24, 2008. For Apollo College and Western Career College, the
official fall reporting period began August 1, 2008 and ended October
31, 2008.
Question 4b. The number of those enrolled who were not first-time
students?
Answer 4b. Although the September to September academic year in
your question is a typical period for traditional institutions, it is
not reflective of our academic calendar. DeVry's institutions operate
on an academic calendar beginning July 1 and ending June 30.
Of those undergraduate students counted in 4(a), the number who
were not first-time degree/certificate-seeking is provided below, as
reported in the 2008-2009 IPEDS Fall Enrollment Survey.
Apollo College: 5,038.
Chamberlain College of Nursing: 3,158.
DeVry University (U.S.): 39,560.
Western Career College: 4,485.
Question 4c. The number of students who enrolled between October 1,
2008 and August 1, 2009?
Answer 4c. Although the September to September academic year in
your question is a typical period for traditional institutions, it is
not reflective of our academic calendar. DeVry's institutions operate
on an academic calendar beginning July 1 and ending June 30.
Below are the 2008-2009 undergraduate head counts for each
institution, as reported in the 2009-2010 IPEDS 12-month Enrollment
Survey.
Apollo College: 12,818.
Chamberlain College of Nursing: 5,701.
DeVry University: 85,931.
Western Career College: 9,601.
Question 4d. The number of students who enrolled between October 1,
2008 and August 1, 2009 but were no longer enrolled in September 2009?
Answer 4d. Of those undergraduate students counted in 4(c), the
number who had not graduated and were not enrolled in summer 2009 is
provided below for DeVry University and Chamberlain College of Nursing.
Because the requested data is not publicly available and has not been
compiled in this manner before, our team is still conducting the
analysis for Apollo College and Western Career College. We would like
to provide the most accurate information possible, so with your
permission we will follow up with the data for these two schools with
our submission next week.
Apollo College: data forthcoming.
Chamberlain College of Nursing: 1,436.
DeVry University (U.S.): 33,745.
Western Career College: data forthcoming.
Question 5. With regard to the DeVry College of New York, the
school reported that for the September 2007 to September 2008 period
the retention rate for that particular campus was 30 percent for full-
time students and 14 percent for part-time students. Do you believe
that these numbers are consistent with the retention rates of schools
described in the chart above? Why or why not? Do you believe the
numbers for DeVry New York accurately reflect the retention rate of
DeVry overall, and if not why not?
Answer 5. In New York, DeVry University operates as DeVry College
of New York. The full-time retention rate for this location was 30
percent for full-time students and 14 percent for part-time students,
as reported in the 2008-2009 IPEDS Fall Enrollment Survey. In other
words, 30 percent of first-time, bachelor-seeking students attending
full-time at DeVry College of New York in fall 2007 were enrolled in
fall 2008 (14 percent for those attending first-time, part-time in fall
2007).
To provide context, the first-time bachelor-seeking cohort for the
IPEDS retention rate covered only 54 percent of all new undergraduate
students enrolled at DeVry College of New York in fall 2007.
But setting aside the limitations of the IPEDS measure, the
retention rate for DeVry College of New York is not representative of
DeVry University as a whole. Nationwide the first-time, full-time,
bachelor-seeking student retention rate was 44 percent and the first-
time, part-time bachelor-seeking student retention rate was 31 percent.
Other examples include DeVry University-Ohio with a 50 percent first-
time full-time bachelor-seeking student retention rate and a 31 percent
first-time, part-time, bachelor-seeking student retention rate and
DeVry University-California with a 53 percent first-time, full-time
bachelor-seeking student retention rate and a 30 percent first-time,
part-time bachelor-seeking student retention rate.
The first-time bachelor-seeking context applicable to DeVry College
of New York is also applicable to DeVry University-California and DeVry
University-Ohio. The first-time bachelor-seeking retention rate cohort
covered only 47 percent of new undergraduates in fall 2007 at DeVry
University-California and only 41 percent at DeVry University-Ohio. For
DeVry University nationwide the first-time bachelor-seeking retention
rate cohort accounted for only 38 percent of new undergraduates in fall
2007.
Additionally, I believe that in measuring colleges and
universities, it is important to compare like-institutions based on
student profile and risk factors.
I am unable to speak to the retention rates in the provided chart
because the institutions are not identified and do not appear to
include any DeVry schools. Additionally, it is difficult for me to
decipher a retention rate from the chart without knowing factors such
as the length of the programs at the schools. If, for example, those
schools have programs of less than 1 year, then the ``departed
students'' may be graduates, rather than drop-outs. In any case, I
would be very happy to meet with you or your staff to provide more
information and analysis--it may be easier to clarify these questions
in a meeting.
Question 6. In your testimony you stated that DeVry spends 14
percent of revenues on advertising. Could you please also state, in
similar percentage terms, how much DeVry spends on the following: (a)
Direct recruiting (salary and costs of admissions representatives and
managers); (b) Marketing and Outreach Total including breakdown of:
i. Advertising (television, radio, print, billboard and
Internet)
ii. Telemarketing
iii. Direct mail
iv. Other promotional efforts
As stated in our Form 10-K filing (Attachment 1), DeVry Inc.
advertising expense for the fiscal year ended June 30, 2009 was $179.4
million as compared to $669.7 million spent on educational services.
Advertising expense represented 12.3 percent of total revenues of
$1,461.5 million versus 45.8 percent for educational services.
Advertising expense represents about 14.6 percent and educational
services represent about 54.6 percent of total operating costs and
expenses of $1,226.6 million.
[Editor's Note: Attachment 1 referred to may be found at: http://
www.ann
ualreports.com/HostedData/AnnualReports/PDFarchive/dv2009.pdf.]
DeVry spent about $670 million on educational services,
approximately 370 percent of the amount spent on advertising.
As a publicly held organization DeVry discloses the financial
information noted above in regular filing with the Securities and
Exchange Commission (SEC). DeVry does not publicly disclose more
specific details concerning operating costs for competitive reasons. If
the committee requires additional details, we would be happy to discuss
how to provide them to you and your staff.
Question 7. In your testimony you stated that the 54 percent of
revenues that DeVry spends on education services is slightly higher
than the amount spent by not-for-profit or public schools. Please
explain your methodology for this assertion and provide concrete
examples to support it?
Answer 7. DeVry's educational services are 54.6 percent of total
costs. Please allow me to clarify one point of potential confusion. At
the hearing you mentioned that DeVry's educational services accounted
for 54 percent of costs rather than revenues, while in this question
you mentioned it as a percent of revenues. The available comparisons
are in terms of percent of costs, and I will proceed on that basis.
The benchmark for the comparison was from table 362 from the
Department of Education's 2009 Digest of Education Statistics
(Attachment 2). The report on expenditures of public institutions shows
the following percentage distribution on instructional costs:
Table 1.--Calculation of Total Instructional Costs (as a percent of Total Costs); Selected data from table 362
----------------------------------------------------------------------------------------------------------------
Total
Instructional Academic Student Institutional Total [In
Cost [In Support [In Services [In Support [In percent]
percent] percent] percent] percent]
----------------------------------------------------------------------------------------------------------------
2003-2004....................... 27.68 6.64 4.60 8.22 47.13
2004-2005....................... 27.65 6.61 4.65 8.09 47.00
2005-2006....................... 27.80 6.75 4.69 8.18 47.43
2006-2007....................... 28.13 6.83 4.76 8.36 48.08
----------------------------------------------------------------------------------------------------------------
Table 364 and 366 (Attachments 3 and 4) of the same digest provides
information for private not-for-profit/independent colleges and private
for-profit/private sectors schools respectively. Weighting for
enrollment, the expenditure allocation for education services for all
publics and not-for-profits averages less than 52 percent.
Question 8. Information reported to the U.S. Department of
Education is that the University of Northern Iowa, with 2008 enrollment
of 12,098, spent 37.5 percent of its core expenses on instruction and
11.4 percent on academic support. DeVry University-Illinois with
enrollment of 19,417 reported 18.3 percent spending on instruction and
82.7 percent on academic support. Do you believe that DeVry typically
spends more on instruction than public universities such as the
University of Northern Iowa or comparable schools?
Answer 8. DeVry University's instructional expenditures are
typically similar to comparable 4-year public institutions. DeVry
University-Illinois is not representative of DeVry University overall.
The other 25 DeVry University locations had higher percentages more in
line with like-type public institutions in the States in which we
operate. The average was 30 percent. One reason DeVry University-
Illinois appears to be lower is that online students and online
expenses nationwide are reported at that IPEDS location.
DeVry University's instructional expenditures as a percentage of
core expenditures are similar to comparable 4-year public institutions.
Table Two provides examples for seven of DeVry University's IPEDS
locations.
Table 2
------------------------------------------------------------------------
Instruction
as a
percentage
Institution of core
expenses,
2007-2008
[In percent]
------------------------------------------------------------------------
DeVry College of New York................................. 29
Stony Brook University.................................... 34
DeVry University-California............................... 30
California State University-Fresno........................ 35
DeVry University-Florida.................................. 28
Florida Agricultural and Mechanical University............ 30
DeVry University-Georgia.................................. 29
Georgia Institute of Technology-Main Campus............... 23
DeVry University-Illinois................................. 18
Northeastern Illinois University.......................... 31
DeVry University-Pennsylvania............................. 32
Cheyney University of Pennsylvania........................ 27
DeVry University-Texas.................................... 32
University of Houston..................................... 28
------------------------------------------------------------------------
Question 9a. You stated in your testimony that from the 1970s to
date DeVry has averaged 90 percent employment of graduates who actively
participated in a job search with DeVry in educationally related jobs.
You agreed as well to produce that data as well as the methodology used
in calculating those percentages. In addition to the underlying data
and methodology, please answer the following to aid in our
understanding of the data:
Answer 9a. The graduate employment data provided during my
testimony was for the years 1975 through 2008, the last calendar year
for which the statistics were audited. The following terms are used in
calculating and disclosing graduate employment statistics for DeVry
University:
Graduates eligible for career assistance: All graduates other than
those continuing their education, foreign graduates legally ineligible
to work in the United States or Canada, our own employees, national
servicemen and women, foreign residents, graduates we are unable to
locate and those ineligible for career assistance because of extreme
circumstances. Extreme circumstances include death, suffering from a
serious illness or medical condition, maternity/paternity leave,
participation in religious mission work, incarceration or community
service that prevent a graduate from obtaining employment during this
time period.
We offer lifetime employment assistance and thus those graduates
who are not included in this count due to current circumstances can
take full advantage when/if they are able to resume their employment
search.
Graduates who actively pursued employment: Net number of graduates
eligible for career assistance who meet the requirements in (c) below.
Education-related employment: Requires the graduate to be using
degree-related skills and knowledge they attained while attending DeVry
University.
Employment rate: Percent of graduates who actively pursued and
obtained employment and those who were already employed in education-
related careers within 180 days or 26 weeks of graduation.
employment rate calculation from 1975 through 2008
Total Graduates: 237,957.
Graduates eligible for career assistance: 210,569.
Graduates who actively pursued employment: 186,788.
Graduates employed in education-related positions: 168,596.
Employment Rate: 90.3 percent.
Question 9b. What does it mean that a graduate ``actively
participated in a job search?''
Answer 9b. Graduates who are actively engaged in a job search prior
to graduation through 26 weeks following graduation, as well as those
graduates who are already employed in an education-related field at the
time of graduation. Active participation includes resume preparation;
willingness to interview; contacting and following up on employment
opportunities and bi-weekly contact with their assigned Career Services
Advisor.
Question 9c. How many graduates each year participated in such a
search?
Answer 9c. The average percent of eligible graduates who pursued
employment for the period from 1975 through 2008 was 88.7 percent
(186,788/210,569).
Question 9d. What are the categories of programs from which they
graduated?
Answer 9d. DeVry University offers undergraduate programs in
business, technology and health care administration. For 2009 graduates
earned degrees in the following programs:
Associate Degree Programs
Accounting
Electroneurodiagnostic Technology
Electronics and Computer Technology
Health Information Technology
Network Systems Administration
Web Graphic Design
Bachelor Degree Programs
Biomedical Engineering Technology
Business Administration
Computer Engineering Technology
Computer Information Systems
Electronics Engineering Technology
Game and Simulation Programming
Technical Management
Network and Communications Mgt
Question 9e. For each category please describe all jobs that are
considered ``educationally related'' for purposes of calculating the
employment rates?
Answer 9e. Please see the term definitions above. ``Educationally
related'' is determined from position responsibilities as reported by
the graduate. Career Services staff determines whether the position
responsibilities are related to the graduate degree program based on
their knowledge of the educational outcomes of each program.
QUESTIONS OF SENATOR ENZI
Question 1. How does DeVry help students manage their financial aid
needs, and ensure that they understand their loans?
Answer 1. I believe that DeVry schools provide high levels of
customer service to our students in order to help them achieve their
educational and career goals.
Prospective students are assigned a student finance advisor
immediately after completing their enrollment agreements. Student
finance advisors explain financing options; provide technical
assistance with completing financial aid and scholarship applications;
and provide information about the various loan programs, their terms
and repayment responsibilities. The student finance advisor-student
relationship is maintained for the duration of the student's studies.
The advisor is responsible for helping the student with their financial
planning including providing debt counseling to minimize overall debt
levels. Advisors also administer our $16-million institutional
scholarship programs, helping to target these programs to students with
financial need.
At the hearing we were asked for best-practices that could be
employed to help meet U.S. educational goals. We believe that among the
best practices being developed and implemented with our student finance
advisors is the financial review that is conducted with students before
they begin their studies. During this review process, the advisor
determines each student's financial aid eligibility and projects out
the expected costs and method of financing with the student. The
student is able to look at the cost of attending part-time versus full-
time as well as determine the long-term ramifications of that decision.
They are able to estimate the amount of debt they may have to take on
to complete their studies and make decisions of how much to pay now
versus how much they want to pay later (in repayment of student loans).
This process not only gives the prospective student a long-range look
toward graduation, it advances their financial literacy level which is
helpful in other areas of their life.
Question 2. What does DeVry do to hold itself accountable?
Answer 2. DeVry is guided by its values, which include maintaining
a high standard of performance and integrity in all areas of operation.
These values are articulated in DeVry's Code of Business Conduct and
Ethics and detail key policies and procedures that help our employees
to legally and ethically perform the tasks associated with their
employment.
Like other higher education institutions--whether public or
private--DeVry is governed by a wide variety of Federal and State
regulations. Our colleges and universities are accredited by U.S.
Department of Education approved accrediting bodies.
In the United States, DeVry's institutions are regulated by the
U.S. Department of Education and State regulatory bodies.
As a publicly held organization, DeVry discloses financial and a
host of qualitative information in regular filings with the Security
and Exchange Commission (SEC). This creates a level of public
disclosure and transparency not generally found among traditional
higher education institutions.
DeVry holds itself accountable through clear internal operating
procedures, internal quality controls, regular and standardized
professional staff development, independent outside auditors and
internal quality assurances. These compliance measures include
dedicated regulatory and compliance personnel, standardized policies
and procedures updated at least annually, extensive training and
mentoring that is ongoing, peer review and internal and external
audits.
We hold ourselves accountable to the academic outcomes that our
students achieve. An example of this is exam results on the nursing
licensure examination the NCLEX-RN. Recent graduates of Chamberlain
College of Nursing have a first-time NCLEX-RN pass rate between 90-98
percent depending on the campus location.
Perhaps the ultimate measure of accountability is success in the
career marketplace. As I detail in Chairman Harkin's question No. 9,
90.3 percent of eligible graduates active in the job market were
employed during the period from 1975 through 2008.
We appreciate this question as we believe that all schools,
regardless of sector, must be held accountable for the quality of their
academic outcomes.
Question 3. What does DeVry do to help its students find
employment?
Answer 3. Local and national advisory boards and faculty with
experience and expertise in their profession help DeVry University to
develop an academic curriculum that is relevant to workforce
requirements. We regularly review entire programs of study to ensure
that course materials and objectives continue to be rigorous and
relevant. We provide capstone courses in each program to prepare
students to enter the workforce through a team-based experience working
in a real-world environment on assignments requiring students to apply
their knowledge and skills. The final semesters of study include career
development courses that reinforce presentation skills, self-
assessment, goal-setting and career planning.
Our 150 career service professionals develop and maintain
relationships with employers (some of these relationships have
persisted for decades) to keep abreast of employment needs and
opportunities and share this information with staff. Career fairs are
held on campuses throughout the year. Our career services professionals
coordinate on-site interviews for employers. DeVry also maintains an
interactive employer database that contains information on thousands of
North American companies. This database is available to students and
alumni and provides real-time access to current job leads, details on
career events and other career-related information.
QUESTIONS OF SENATOR DODD
Question 1. Do you see any potential problem that schools sit on
the same accreditation boards that provide the official legitimacy for
their schools to operate? Do you see this as a potential conflict of
interest? How can we ensure that this does not become a conflict of
interest?
Answer 1. As explained by the Council for Higher Education
Accreditation (CHEA) in its booklet, The Value of Accreditation
(Attachment 5), ``Accreditation in the United States is a means to
assure and improve higher education quality, assisting institutions and
programs using a set of standards developed by peers . . .
Accreditation assures that a neutral, external party (the accrediting
organization) has reviewed the quality of education provided and has
found it to be satisfactory, based upon appropriate peer expertise.''
The participation of affiliated school representatives on accreditation
boards is an integral part of the peer review method.
In the United States, accreditation operates as a democratic
process. Members of the community volunteer to represent and lead.
Because there is potential for a conflict of interest in any form of
democracy, there are safeguards in place to ensure a process of
integrity. It is standard practice among accrediting agencies that
persons with potential conflicts of interest recuse themselves from
voting on institution-specific decisions related to their own colleges
or universities. At the Accrediting Council for Independent Colleges
and Schools, for example, members of the Board of Directors who have a
conflict of interest, or even the appearance of a conflict of interest,
recuse themselves from voting and physically leave the room during the
voting process for such institutions.
The U.S. Department of Education operates with appropriate
oversight to prevent conflicts of interest in the accreditation
community. According to The Criteria for Recognition of an Accrediting
Agency for post-secondary students (Attachment 6), the basic
eligibility requirements mandate: ``At least one member of the agency's
decisionmaking body is a representative of the public, and at least
one-seventh of that body consists of representatives of the public''
(602.14 b-2); and, ``The agency has established and implemented
guidelines for each member of the decisionmaking body to avoid
conflicts of interest in making decisions'' (602.14 b-3). The Criteria
also require, ``Clear and effective controls against conflicts of
interest, or the appearance of conflicts of interest, by the agency's
(i) Board members; (ii) Commissioners; (iii) Evaluation team members;
(iv) Consultants; (v) Administrative staff; and (vi) Other agency
representatives'' (602.15 a-6). Additionally, it is required that any
appeals panel, ``is subject to the conflict of interest policy''
(602.25 f-1-ii). These regulations demonstrate a thorough and effective
policy throughout the accreditation community.
[Editor's Note: Attachment 6 referred to may be found at: http://
www2.ed.
gov/print/admins/finaid/accred/accreditation.html.]
To incorporate another safeguard for the integrity of the peer
review process, the Council of Regional Accrediting Commissions, with
assistance from CHEA, instituted a policy on interregional
accreditation. As explained in the policy manual of the Higher Learning
Commission (Attachment 7), ``To preserve the values and practices of
peer review and regional accreditation, the Commission's evaluation of
affiliated institutions that deliver education at a physical site(s) in
another region(s) within the United States or its territories will be
undertaken with the participation of the host regional accrediting
commission(s). This will include the joint (home/host) evaluation of
the off-campus sites in a host region against the accreditation
standards of that region.'' This policy is evaluated every 3 years, and
ensures procedural respect among the regional, institutional
accreditors.
[Editor's Note: Attachment 7 referred to may be found at: http://
ncahlc.org/policy/commission-policies.html. Click on policy book in
first paragraph for updated pdf.]
When the Higher Learning Commission of the North Central
Association of Colleges and Schools (HLC) conducted its comprehensive
review of DeVry University in 2002, the process required an assessment
of five campuses outside of its own region. The following accrediting
agencies were invited to participate in the review process: the Middle
States Commission on Higher Education, the Northwest Commission on
Colleges and Universities, the Southern Association of Colleges and
Schools Commission on Colleges, and the Western Association of Schools
and Colleges Accrediting Commission for Senior Colleges and
Universities. All four agencies participated in the process with HLC at
their affiliate campus locations and submitted their reviews of the
campuses with the HLC reviewer team report.
Question 2. We agree that with the increased need for and
importance of distance learning, coupled with President Obama's goal of
8.2 million additional graduates in 2020, for-profit schools serve a
definite need in our education sector. As someone in the industry, what
steps do you suggest we take in order to ensure that Federal funding is
not being used to raise stocks for bad actors, and instead that these
important funds are directed to the good actors in the business?
Answer 2. We appreciate this question as we believe that all
schools, regardless of sector, must be held accountable for the quality
of their academic outcomes. The stewardship of student aid funds is
applicable to all sectors of higher education. Government oversight and
control is critically important to ensuring the integrity of the
government financial aid system. Because private-sector schools serve a
definite need in our education system, it is critical that we do not
``throw the baby out with the bath water.''
We offer the following steps to ensure program integrity.
Recognizing that over time, and with the best of
intentions, we have built a complex and often conflicting set of rules
and regulations--and that it is time for a regulatory reform package.
We agree with the need for higher education regulation.
Key regulatory reform package elements should be:
Measure of program completion rate.
Measure of graduate employment.
Measure of cohort default rate, adjusted for socio-
demographic factors. Thus schools that serve students of lesser
means should not be unfairly punished for doing so.
Measure of pass rate on standard exams, where they
exist (e.g. nursing).
Robust disclosure regimen (Attachment 8).
We must also be careful to be specific when referring to ``bad
actors.'' To paraphrase Secretary Duncan, we need to hold bad actors
accountable, regardless of sector. Further, we must have data and not
only media anecdotes. Just last week we learned that one widely
reported issue raised to the Secretary of Education was reported by
someone paid by Wall Street short-sellers.
I would also like to note that student aid funds are not directed
to schools but rather to students themselves. As you noted at the
hearing, just like the GI Bill, the financial aid goes to the student
and the student then votes with their feet--they can use their aid at
any accredited school. This model of education funding has contributed
to the strength of America's system of higher education, by promoting
competition and accountability.
QUESTIONS OF SENATOR CASEY
Question 1. The President has set the goal of the United States
leading the world in college graduates by the year 2020. In your
opinion, what is the role of for-profit colleges in trying to achieve
this goal?
Private-sector colleges and universities play a critical role in
reaching President Obama's 2020 education goals. An analysis by the
National Center on Higher Education Management Systems (Attachment 9)
estimates that the United States will need to produce an additional 8.2
million post-secondary degrees to meet these goals. With cuts in State
higher education budgets forcing caps in enrollment and program cuts,
it is impossible to imagine meeting the President's goals without the
capacity being built by private-sector schools.
Public and independent schools have been shrinking enrollment for
quite some time, even before the current budget issues forced State
governments to cut higher education funding. Public-sector and
independent colleges, for the last 10 years for which the data are
available (1997-2007), have actually shrunk enrollments of bachelor's
degree seeking students age 25+ by 50,000 students while the private
sector has grown by 400,000 students (Attachment 10). And with public
schools like the California State University System projecting
enrollment cuts of 40,000 students, the Nation is clearly facing even
greater capacity challenges (Attachment 11).
From a capacity building perspective, the private sector is key in
reaching the President's 2020 goals. The private sector is also
critical as the growth we need in college attainment will come largely
from ``non-traditional'' students. This includes working moms, first-
in-family college-goers, recent immigrants and career changers. They
represent 73 percent of current college and university attendees and
are the new majority in higher education (Attachment 12).
[Editor's Note: Attachment 12 referred to may be found at: http://
nces.ed.
gov/pubs2002/2002012.pdf.]
Private-sector schools have proven to be especially nimble and
innovative in meeting the needs of non-traditional students. Online
learning was first developed and implemented by private-sector schools
and is key to reaching this critical demographic. Public-sector and
independent schools have gradually taken it up as well. Other
innovative approaches have also been critical: flexible schedules,
increased academic and career services support, year-round classes so
that students can earn their Bachelor's degree in 3 years or their
Associate's degree in 18 months, and closely following employment
trends to develop courses that are quickly adaptable to the workforce.
Innovations such as these, often led by private-sector colleges, are
necessary to serve these ``non-traditional'' students.
But the private sector cannot make up all the additional degrees
required to regain our leadership in college attainment. All sectors of
higher education are needed and must work together. We need to share
and embrace new technological approaches, adopt simple, long-overdue
administrative changes like making transfers of credit hours between
institutions easier, and relentlessly focus on the student and their
desired career and learning outcomes. The United States has a system of
higher education that is the envy of the world, due to its diversity of
student choice among public-sector, private-sector, and independent
colleges and universities.
Question 2. What are for-profit schools currently required to
report to the Department of Education around graduation rates and
placement rates? How are placement rates tracked?
Answer 2. Graduation rates are reported to the Department of
Education only for first-time, full-time students. These are done
annually through the Integrated Post-Secondary Education Data System
(IPEDS). ``Placement'' or graduate employment rates are not reported to
the Department. There is no placement rate calculation methodology
defined for regionally accredited colleges and universities. The
Accrediting Council for Independent Colleges and Schools (ACICS), a
national accreditor, which accredits Apollo College (as of June 30,
2010 renamed Carrington College) define a methodology for calculating
placements and requires all schools to annually report placement data.
Placement data reported to ACICS includes:
Number of graduates.
Number placed in field of study.
Number placed in related field of study.
Number placed out of field of study.
Number of graduates not available for placement due to
pregnancy, death, other health-related situations, continuing
education, military service or because they are not eligible for
placement in the United States.
Number of graduates not working.
Many private-sector colleges and universities publicly report
graduate employment data. To provide the information students need to
be fully informed consumers, we should hold all institutions,
regardless of sector, to the same standards of accountability.
Question 3. What, if any, statutory or regulatory changes should be
made to strengthen the rules governing for-profit colleges? Are the
penalties strong enough to hold these institutions accountable?
Answer 3. We appreciate this question as we believe that all
schools, regardless of sector, must be held accountable for the quality
of their academic outcomes. The stewardship of student aid funds is
also applicable to all sectors of higher education. Government
oversight and control is critically important to ensuring the integrity
of the government financial aid system. Because private-sector schools
serve a definite need in our education system, it is critical that we
do not ``throw the baby out with the bath water'' or potentially
proliferate the problem by limiting oversight to one sector over
another.
We offer the following steps to ensure program integrity.
Recognizing that over time, and with the best of
intentions, we have built a complex and often conflicting set of rules
and regulations--and that it is time for a regulatory reform package.
We agree with the need for regulation of higher education.
Key regulatory reform package elements should be:
Measure of program completion rate.
Measure of graduate employment.
Measure of cohort default rate, adjusted for socio-
demographic factors. Thus schools that serve students of lesser
means should not be unfairly punished for doing so.
Measure of pass rate on standard exams, where they
exist (e.g., nursing).
Robust disclosure regimen (Attachment 8).
We must also be careful to be specific when referring to ``bad
actors.'' To paraphrase Secretary Duncan, we need to hold bad actors
accountable, regardless of sector. Further, we must have data and not
only media anecdotes. Just last week we learned that one widely
reported issue raised to the Secretary of Education was reported by
someone paid by Wall Street short-sellers.
I would also like to note that student aid funds are not directed
to schools but rather to students themselves. As you noted at the
hearing, just like the GI Bill, the financial aid goes to the student
and the student then votes with their feet--they can use their aid at
any accredited school. This model of education funding has contributed
to the strength of America's system of higher education, by promoting
competition and accountability.
With the proper training, evaluation and enforcement, the
Department of Education has very strong powers to hold institutions
accountable. Please see Attachment 8 for further information. DeVry has
been actively engaged throughout this year with both the Secretary of
Education's Office and the Congress in an attempt to define problems
and develop solutions targeted to these problems. We look forward to
continuing to help analyze and test potential solutions to identified
problems.
Currently, there is a broad array of penalties available to the
Secretary for assessing in the event of noncompliance with Federal
regulations. These include limitation, suspension or termination of an
institution's title IV eligibility. Limitations can also include
requiring the posting of letters of credit or payment of fines.
QUESTIONS OF SENATOR HAGAN
Question 1. Over the last several years Congress has had to make
some very difficult choices regarding the spending of Federal dollars,
one of which was to devote a greater amount of Federal resources to the
Pell Grant program over other priorities with just as much need.
As you well know, Federal title IV loan and grant dollars now
comprise close to 90 percent of total revenues at many for-profit
institutions. In fact, Mr. Eisman's research states that the amount of
Federal dollars flowing to the for-profit industry is over $21 billion.
In a time in which budgets are very tight I strongly believe that
it is critical for Congress to take a look at each and every dollar
that we spend.
The bulk of your revenue comes from Federal loans and grants but
there is no assurance that you are providing the type of high quality
education leading to a lucrative job that these students deserve and
are paying for. This must change. Does DeVry, or the industry in
general, have any accountability mechanisms in place that can
demonstrate to us that you are making the most effective use of the
Federal dollars from student financial aid that you currently receive?
If not, what steps are you willing to take to make that change?
Answer 1. DeVry is guided by its values, which include maintaining
a high standard of performance and integrity in all areas of operation.
These values are articulated in DeVry's Code of Business Conduct and
Ethics and detail key policies and procedures that help our employees
to legally and ethically perform the tasks associated with their
employment.
Like other higher education institutions--whether public or
private--DeVry is governed by a wide variety of Federal and State
regulations. Our colleges and universities are accredited by U.S.
Department of Education approved accrediting bodies.
In the United States, DeVry's institutions are regulated by the
U.S. Department of Education and State regulatory bodies.
As a publicly held organization, DeVry discloses financial and a
host of qualitative information for regular filings with the Securities
and Exchange Commission (SEC). This creates a level of public
disclosure and transparency not generally found among traditional
higher education institutions.
DeVry holds itself accountable through clear internal operating
procedures, internal quality controls, regular and standardized
professional staff development, independent outside auditors and
internal quality assurances. These compliance measures include
dedicated regulatory and compliance personnel, standardized policies
and procedures updated at least annually, extensive training and
mentoring that is ongoing, peer review and internal and external
audits.
We hold ourselves accountable to the academic outcomes our students
achieve. An example of this is exam results on the nursing licensure
examination, the NCLEX-RN. Recent graduates of Chamberlain College of
Nursing have a first-time NCLEX-RN pass rate between 90-98 percent
depending on the campus location.
The ultimate accountability measurement for career-oriented
education is whether our graduates, either entering or re-entering the
workforce or maintaining their job continue to be employed and whether
that employer continues to hire our graduates for future positions. We
have been measuring this for more than 35 years. Aside from employment
rate, DeVry is measured much like every other institution. We report
graduation, retention and withdrawal rates to the Department of
Education, as well as cost and demographic information. The Department
calculates cohort default and financial aid participation rates and
makes all this information available to consumers on its College
Navigator Web site as well as to financial aid applicants at the time
of application. While this may be useful information, its
disaggregation from the enrollment process limits its effectiveness.
Subsequent to the conclusion of the recent negotiated rulemaking,
we proposed (with two other schools) a robust disclosure process as an
alternative to the Gainful Employment proposal discussed in the
rulemaking sessions. This disclosure would provide specific program-
level cost, indebtedness and repayment information that we think should
be readily available for every student. This disclosure would help
assure students are making informed decisions and using taxpayer
assistance to best meet their educational objectives.
Since Mr. Eisman's testimony is cited, I would also like to note
that Mr. Eisman is a Wall Street short-seller who has bet millions on
seeing shares of publicly held colleges decline. He is not merely
predicting what will happen, he and other short-sellers have conducted
a carefully orchestrated campaign to make it happen. Just last week we
learned that one widely reported issue that was raised with the
Secretary of Education was reported to him by someone paid by Wall
Street short-sellers.
Question 2. I read and I hear stories of students like Yasmine
Issa--our witness here today--a motivated and hard working student
simply ready and willing to work hard to accomplish her goals. But for
many students, their goals have slowly diminished as the clock ticks
and they are unable to find a job.
I also understand that there are many stories of students who have
attended a for-profit institution and have gone on to successful
careers and are able to manage their student loan debt.
When you hear stories like Ms. Issa's, how do you defend the
institution you work on behalf of and its counterparts?
Answer 2. As you know, Ms. Issa did not attend one of our schools.
Our students attend DeVry's schools to earn a degree or certificate
that allows them to begin or advance in their careers and we work every
day to ensure they leave our programs with the tools they need to
succeed.
We hold ourselves accountable to the academic outcomes our students
achieve. An example of this is exam results on the nursing licensure
examination, the NCLEX-RN. Recent graduates of Chamberlain College of
Nursing have a first-time NCLEX-RN pass rate of between 90-98 percent
depending on the campus location.
As I detail in Chairman Harkin's question No. 9, 90.3 percent of
eligible graduates active in the job market were employed during the
period from 1975 through 2008.
The ultimate accountability measurement for career-oriented
education is whether our graduates, either entering or re-entering the
workforce or maintaining their job continue to be employed and whether
that employer continues to hire our graduates for future positions. We
have been measuring this for more than 35 years. Aside from employment
rate, DeVry is measured much like every other institution. We report
graduation, retention and withdrawal rates to the Department of
Education, as well as cost and demographic information. The Department
calculates cohort default and financial aid participation rates and
makes all this information available to consumers on its College
Navigator Web site as well as to financial aid applicants at the time
of application. While this may be useful information, its
disaggregation from the enrollment process limits its effectiveness.
Subsequent to the conclusion of the recent negotiated rulemaking,
we proposed (with two other schools) a robust disclosure process as an
alternative to the Gainful Employment proposal discussed in the
rulemaking sessions. This disclosure would provide specific program-
level cost, indebtedness and repayment information that we think should
be readily available for every student. This disclosure would help
assure students are making informed decisions and using taxpayer
assistance to best meet their educational objectives.
As you point out, there are many successful graduates. The Arizona
Republic ran a story last year on Bonnie Brown, a local DeVry student.
She is a stay-at-home mother of three who wanted to get a degree in
biomedical engineering technology and get back into the workforce. She
graduated in 2009 in only 3 years, taking classes year round and now
has a job at Phoenix Children's Hospital.
Ms. Brown received a quality education, in a field with growing
capacity needs, on a schedule that fit her busy life. In the not so
distant past, students like Ms. Brown might not have had the chance to
go back and get a degree. But today, because of changes in technology,
in how we offer classes to students, and our flexible, competitive
higher education system, she can.
Question 3. At the end of fiscal year 2010, there are estimated to
be over $700 billion in outstanding, federally backed student loans.
Taxpayers are backing almost all of those loans.
I realize that this question can apply equally to non-profit
institutions as well, but since we're talking about the for-profit
industry today, could any of the witnesses tell me what specific,
quantitative measurements we have across the industry to tell us what
the taxpayers are getting for all that money? What sort of industry-
wide performance measures are available to help us better understand
the performance of institutions that survive on the largess of the
taxpayer?
Answer 3. The National Center for Education Statistics (NCES)
collects a wide variety of student performance and cost information
from schools each year. They provide 1-year snapshots of performance as
well as longitudinal studies. For instance, from the 1996 Beginning
Post-Secondary Students Longitudinal Study (Attachment 13), 55.6
percent of all students starting at a for-profit, 2-year school
received a degree or certificate by 2001 (the last year data was
collected for this study) versus 36.7 percent for students starting at
public, 2-year schools. Additionally, 52.8 percent of students starting
at for-profit, 4-year schools had received a degree by 2001 versus 60.5
percent at public schools.
We recognize that taxpayers make a significant investment in higher
education. According to the National Center for Education Statistics
(NCES) 2008-2009 data (Table 3), Federal, State, county and/or
municipal governments contributed the following average tax subsidy to
public-sector institutions per full-time student equivalent:
Public institutions: $13,920.
Independent institutions: $7,546.
Private sector institutions: $1,001.
For-profit or private-sector institutions provide higher education
that is worthwhile and far more cost efficient investment of taxpayer
subsidies. Institutions like ours also help offset taxpayer subsidies
to public institutions by returning to the government a significant
portion of our earnings as Federal, State, county and/or municipal
taxes. As an example, DeVry will pay over $100M in tax this year. In
the latest tax year.
National Center for Educational Statistics
Table A-49-1.--Total and Per Student Revenue of Public, Private Not-For-Profit, and Private for-Profit Degree-Granting Post-Secondary Institutions, by
Source of Funds: Selected Academic Years, 1999-2000 Through 2007-2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total 2007- Percentage distribution of total revenue Revenue per FTE student\1\ [In constant 2008-
2008 -------------------------------------------- 2009 dollars]
Control of institution and source of funds revenue [In -----------------------------------------------
millions] 1999-2000 2003-2004 2006-2007 2007-2008 1999-2000 2003-2004 2006-2007 2007-2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
Public institutions
Total...................................... $273,109 -- 100.0 100.0 100.0 -- $27,702 $29,715 $28,432
Operating revenues............................. 151,079 -- 58.0 55.4 55.3 -- 16,063 16,461 15,728
Tuition and fees\2\............................ 48,070 -- 15.8 16.7 17.6 -- 4,388 4,954 5,004
Grants and contracts........................... 42,054 -- 19.2 17.3 15.4 -- 5,312 5,153 4,378
Federal (excludes FDSL\3\)..................... 25,523 -- 13.0 11.5 9.3 -- 3,605 3,406 2,657
State.......................................... 7,832 -- 3.0 2.8 2.9 -- 822 842 815
Local.......................................... 8,699 -- 3.2 3.0 3.2 -- 885 905 906
Auxiliary enterprises.......................... 20,488 -- 7.7 7.6 7.5 -- 2,121 2,257 2,133
Hospitals...................................... 25,183 -- 8.8 8.4 9.2 -- 2,445 2,498 2,622
Other operating revenues....................... 15,284 -- 6.5 5.4 5.6 -- 1,797 1,599 1,591
Nonoperating revenues.......................... 105,254 -- 36.6 38.5 38.5 -- 10,137 11,434 10,958
Federal appropriations......................... 1,850 -- 0.7 0.7 0.7 -- 200 211 193
State appropriations........................... 68,375 -- 24.3 23.5 25.0 -- 6,727 6,993 7,118
Local appropriations........................... 9,319 -- 3.5 3.3 3.4 -- 962 976 970
Government grants.............................. 12,109 -- 1.6 1.6 4.4 -- 450 474 1,261
Gifts.......................................... 6,070 -- 1.9 2.1 2.2 -- 523 618 632
Investment income.............................. 5,279 -- 3.2 5.8 1.9 -- 894 1,725 550
Other nonoperating revenues.................... 2,251 -- 1.4 1.5 0.8 -- 381 437 234
Other revenues................................. 16,776 -- 5.4 6.1 6.1 -- 1,502 1,819 1,746
Private not-for-profit institutions
Total...................................... 139,251 100.0 100.0 100.0 100.0 60,242 55,273 64,760 46,511
Tuition and fees............................... 50,736 24.6 28.7 26.0 36.4 14,809 15,856 16,860 16,946
Federal Government\4\.......................... 20,205 10.1 13.7 11.1 14.5 6,089 7,550 7,170 6,749
State governments.............................. 1,857 0.9 1.1 0.9 1.3 558 599 578 620
Local governments.............................. 528 0.5 0.4 0.3 0.4 290 200 191 177
Private gifts, grants, and contracts\5\........ 20,992 13.7 11.8 11.1 15.1 8,235 6,526 7,170 7,012
Investment return.............................. 6,447 31.3 23.0 30.7 4.6 18,860 12,723 19,852 2,153
Educational activities......................... 4,850 2.4 2.5 2.3 3.5 1,431 1,355 1,458 1,620
Auxiliary enterprises.......................... 12,929 6.9 7.7 6.7 9.3 4,154 4,252 4,365 4,318
Hospitals...................................... 13,300 6.0 7.2 6.9 9.6 3,600 3,977 4,487 4,442
Other.......................................... 7,407 3.7 4.0 4.1 5.3 2,217 2,236 2,630 2,474
Private for-profit institutions
Total...................................... 16,084 100.0 100.0 100.0 100.0 14,248 16,027 15,579 15,825
Tuition and fees............................... 14,030 86.1 89.5 88.2 87.2 12,267 14,350 13,742 13,804
Federal Government............................. 960 4.6 4.4 5.2 6.0 656 709 809 944
State and local governments.................... 68 1.7 0.7 0.5 0.4 237 105 78 67
Private gifts, grants, and contracts........... 5 # 0.1 # # 7 13 4 5
Investment return.............................. 65 0.4 0.2 0.3 0.4 61 30 54 64
Educational activities......................... 290 1.6 1.5 1.8 1.8 233 248 274 285
Auxiliary enterprises.......................... 352 3.6 2.7 2.2 2.2 516 426 348 346
Other.......................................... 315 1.9 0.9 1.7 2.0 271 146 270 310
--------------------------------------------------------------------------------------------------------------------------------------------------------
-- = Not available.
# = Rounds to zero.
\1\ Full-time-equivalent (FTE) enrollment includes full-time students plus the full-time equivalent of the part-time students.
\2\ Net of allowances and discounts.
\3\ Federal Direct Student Loans.
\4\ Includes independent operations.
\5\ Includes contracts and contributions from affiliated entities.
Note: For more information on the Integrated Post-Secondary Education Data System (IPEDS), see supplemental note 3.
Source: U.S. Department of Education, National Center for Education Statistics, 1999-2000 through 2007-2008 Integrated Post-Secondary Education Data
System, ``Fall Enrollment Survey'' (IPEDS-EF: 99) and Spring 2001 through Spring 2009.
Question 4. Some say that the for-profit sector is highly regulated
with oversight from the U.S. Department of Education, State licensure
agencies and accrediting bodies. Others may disagree, citing that much
more needs to be done.
That said, what are your thoughts on how can we better align the
goals of each of these agencies so that everyone is demanding the
highest quality outcomes for every institution?
Answer 4. Without question, the for-profit or private-sector is
highly regulated. In addition to the named entities, the sector is
regulated by other Federal and State agencies, including for some, the
SEC. The question is whether the regulation adequately ensures that
institutions are effectively delivering a quality product and service
that meets the student and taxpayer's expectations. This is not a
question just for the private sector, but for all of higher education.
In calling for an increase of 8.2 million college graduates, the
President is not just telling us to throw open our doors and add more
seats. He is telling us we need to first offer programs and services
that meet the needs of the un-enrolled, and second, do a better job at
seeing them through to graduation.
The Triad, consisting of the Department of Education, State
licensing entities and accrediting bodies, needs to work effectively
and cohesively to enable this expansion while at the same time being
able to better measure individual institutional performance towards
those goals. While none of these entities operates in a silo, they each
bring different strengths and responsibilities to the table. They each
must be accountable to increasing the level of execution of their own
responsibilities. For example, if it is the State's role to ensure that
institutions are responsive to student consumers, then they need to
have a rapid response process that assures complaints are not only
resolved for an individual student, but that the institution ``learns''
from the resolution and will advance its product and services as a
result. The Department currently has the authority to spearhead this
effort within its existing enforcement authority. It also has the
authority and resources to gather and report on meaningful qualitative
results.
Similarly, the Federal Negotiated Rulemaking process provides a
meaningful opportunity for community input and serves as an integral
part of engaging not only the Triad but the higher education community
at-large. As members of this community, DeVry staff has served as
Federal trainers, chairmen of Department of Education (USED) task
forces, on the National Academy Foundation student aid research
projects, on USED focus groups to simplify student aid and the steering
committee of NCES's National Post-Secondary Education Cooperative which
promotes better data for better decisionmaking. We have also
participated as members of associations including the American Council
of Education, The College Board, and the National Association of
Student Financial Aid Administrators. Most recently DeVry staff served
as negotiators in negotiated rulemaking and has provided recommended
regulatory language to USED aimed at strengthening student disclosures.
DeVry has and will continue to engage with Members of Congress on ways
to improve educational opportunity and success for all students.
Question 5. Many of you in your testimony mention the ``90/10
rule'', the provision that requires proprietary institutions of higher
education to have at least 10 percent of the institution's revenues
from sources that are not derived from funds provided through Federal
financial aid.
Is there a way to more accurately track the percentage of title IV
dollars that schools receive?
Answer 5. Both the U.S. Department of Education and schools can
accurately track the receipt of total title IV dollars. However, the
allocation of those dollars towards an institution's 90/10 calculation
is problematic. Currently, the Department requires that all title IV
funds be counted first towards revenue. Many tuition-
restricted scholarships, State grants and other 3d party assistance are
excluded from the 90/10 calculation. Title IV loans are often used to
pay for non-institutional charges. These loans, which most schools
discourage use of, must be counted towards the 90 percent limit even
though they were never used to pay institutional charges. We have three
recommendations related to this concern:
1. Tuition-restricted funding should always count first (prior to
title IV assistance) towards the calculation of the 90/10 rate, and;
2. Schools should have the flexibility in their awarding policies
to restrict borrowing for non-institutional costs.
3. To provide incentives to institutions to help reduce student
debt by providing need-based institutional grants and scholarships.
These should be allowed to count toward the 10 percent requirement.
Question 4. As you know, the purpose of this hearing is for all of
us to get a better sense of how well the for-profit education industry
is serving students. We know that there are good actors as well as bad
actors in the for-profit education industry.
For those of us who want to ensure that anyone who has the drive
and desire to get a high-quality education is able to do so, how do you
suggest we work together to better identify those schools that are
getting the job done and those that aren't?
Answer 4. As I stated in my written testimony:
``Please make no mistake, when an institution does something
wrong and in conflict with the best interests of students, they
must be held accountable. However, I submit that rather than
limiting oversight to one sector over another or one `actor'
over the `other', policymakers consider that there are `good
acts' and `bad acts' of which no sector is immune.''
I have a few suggestions for working together to identify schools
in all sectors that are getting the job done and those that are not.
Given the enormity of the task facing our country, educating 8.2
million additional post-secondary graduates by 2020, we must count on
every single part of our higher education system to deliver high-
quality opportunities to an exponentially diverse and growing student
population.
Historically, American colleges and universities have not done the
best job educating and graduating at-risk students. However, given the
challenges we face, this has to change.
In measuring how colleges and universities heed this challenge, it
is important to compare like institutions based on student profile and
risk factors. There are a myriad of ways to measure like institutions
but still hold the whole of higher education accountable for student
outcomes. In fact DeVry is currently working with a few schools at the
request of a Member of Congress to come up with objective, risk-
adjusted performance standards that can be used to measure
institutional effectiveness.
I am also familiar with other examples; a notable one is found in
the State of Texas. The Texas Higher Education Coordinating Board
(THECB), the State authorizing body for degree-granting institutions,
has a robust higher education accountability system that seeks to group
like institutions based on a series of qualitative and quantitative
measures (Attachment 14).
[Editor's Note: Attachment 14 referred to may be found at: http://
www.tx
highereddata.org/Interactive/Accountability/History.cfm.]
We are engaged with the Gates Foundation, Lumina Foundation and the
Pell institute, along with other institutions of higher education, to
determine ways of measuring success based on risk-based factors. We
encourage the Congress to work with the broader community and the
Department of Education to address this challenge.
QUESTIONS OF SENATOR ALEXANDER
Question 1. What types of programs or assistance do you provide to
your part-time or transfer students to help ensure that they actually
graduate or complete their program? Are there better ways we could
track that information so that we can have a better understanding of
college completion across all sectors.
Answer 1. DeVry provides high levels of support and service to all
our students, whether part-time, transfer or first-time full-time
students. Each of our incoming students is assigned a student success
coach who is responsible for facilitating their successful transition
into and through the first year of college. The coach works with his/
her students to establish their degree completion plan and assists with
course selection. Throughout the students tenure coaches stay in
contact with their students providing proactive advisement and support.
Student attendance is monitored and the coaches act as liaisons with
other University departments on their students' behalf.
In student finance, as discussed in an earlier question, each
student is assigned an advisor who works with him/her setting up a
personalized financing plan, including debt counseling and scholarship
search options.
Finally, all graduating students are assigned a career services
advisor to assist students with career planning and their job search.
Even after a student graduates and begins their job, career services
assistance is available as a life-long service to DeVry alumni.
With respect to tracking college completion, currently the
Department relies on schools to track transfer rates and does not
require tracking of part-time and transfer-in students for reporting
graduation rates. This omits a huge and increasing number of students
from performance monitoring. We believe that the Department has the
ability to monitor transferring students as well as continue
longitudinal studies on part-time enrollments. They should be
encouraged to do so. All full-time students should be included in a
school's calculation.
Question 2. What reporting requirements do you think we should ask
of institutions of higher education to report on to the Department of
Education and the public to ensure the quality of the school? What
should we be measuring instead of the boxes and boxes we currently
gather?
Answer 2. I believe that all schools, regardless of sector, must be
held accountable for the quality of their academic outcomes.
A robust regulatory reform package should include:
Measure of program completion rate.
Measure of graduate employment.
Measure of cohort default rate, adjusted for socio-
demographic factors. Thus schools that serve students of lesser means
should not be unfairly punished for doing so.
Measure of pass rate on standard exams, where they exist
(e.g. nursing).
Robust disclosure regimen (Attachment 8)
Question 3. Could you tell us a little more about how the DeVry
University Advantage Academy was created? Does DeVry intend to expand
the Advantage Academy beyond Chicago and Columbus, OH?
Answer 3. The DeVry University Advantage Academy (DUAA) was created
at the urging of Mayor Richard Daley, who asked his then-CEO of the
Chicago Public Schools (CPS), Arne Duncan, to work with DeVry to
develop an innovative approach to help increase high school graduation
rates and college attainment among CPS high school students. Together,
DeVry and CPS developed a dual enrollment program that allowed high
school students, beginning in their junior year, to take college
courses in addition to their regular classes so that they could
graduate with both their high school diploma and an Associate's degree.
Launched in 2004, it has graduated four classes, and the 6th class
matriculated in 2009.
DUAA is geared not toward the super high achieving student, or the
students with serious study and attendance issues. Students at either
extreme of the educational spectrum typically get extra resources and
attention. DUAA was created to help the ``regular kids'', students who
come to school every day and want to learn and be challenged. And it
has been very successful: The Chicago campus has a 92 percent
graduation rate and the Columbus, OH, campus, launched in 2006 in
partnership with Columbus City Schools, has a 100 percent graduation
rate.
Building off these successes, DeVry will partner with America's
Promise Alliance, the foundation created by General Colin Powell, to
expand the DUAA program to another 10 cities over the next 3 years.
America's Promise is on a 10-year campaign called ``Grad Nation'' to
mobilize our country as never before to reverse the dropout crisis and
enable our children to be prepared for success in college, work and
life. DeVry and America's Promise will work together to identify cities
where a DeVry Advantage Academy can help improve high school graduation
rates and work with the local school district in each city to develop a
program that meets the needs of local students.
DUAA is an innovative and successful approach that clearly works.
DeVry would be honored to meet with members of the committee to talk
more about the program and discuss how the DUAA approach could be
applied in their home State school districts.
QUESTIONS OF SENATOR COBURN
Question 1. Can you please discuss the potential economic impact of
the Gainful Employment regulations on the country?
Answer 1. This past spring, Professor Jon Guryan, an economist at
the University of Chicago, conducted a comprehensive analysis of the
potential impact of the Gainful Employment regulations as they were
proposed during negotiated rulemaking (Attachment 15). His analysis
came from data collected from 17 institutions on more than 640,000
students enrolled in more than 10,000 separate programs of study. He
concluded that more than 18 percent of all programs of study at for-
profit institutions would fail to meet the proposed Gainful Employment
requirements. Furthermore, he concluded that more than 33 percent of
all students enrolled in for-profit institutions were enrolled in
programs that would be disqualified. The total estimated impact would
be to displace more than 900,000 current students and 360,000 new
students each year. The economic impact on the country would be
tremendous. There is no capacity within public schools, and building
this capacity would be time-consuming and beyond the ability of
strained State budgets. If you conservatively assumed that 40 percent
of the 900,000 currently affected students would have graduated and 70
percent of these would have entered the workforce with $30,000 a year
jobs, the aggregate lost earnings would be $7.6 billion--in the first
year alone.
[Editor's Note: Attachment 15 referred to may be found at: http://
nwcareer
colleges.org/documents/CRA-GainfulEmployment-full.pdf.]
Question 2. What actions does your company take when it encounters
so-called ``bad'' actors that ultimately stigmatize this industry?
Answer 2. DeVry is a values-driven organization whose purpose is to
empower our students to achieve their educational and career goals. We
have a long history within higher education of working with industry
partners to increase our accountability to students and taxpayers. We
are helping to lead an initiative today to develop a Statement of
Ethical Principles for our industry. When we hear about ``bad acts''--
whether intentional or the result of error or misunderstanding--we use
them as teaching opportunities, to maintain our values and controls and
to mitigate against these acts within our organization.
Question 3. The testimony provided by Mr. Steven Eisman, Portfolio
Manager of FrontPoint Financial Services Fund, discusses the amount
that some for-profit colleges provision for losses on their respective
institutional loans, sometimes in excess of 50 percent. In fiscal year
2008 and fiscal year 2009, how much (and what percentage of loans) did
DeVry maintain for losses against its institutional loans? Please
provide your perspective on why companies maintain considerable
reserves for losses anticipated on their own loans?
Answer 3. Students incur debt to DeVry Inc. through either a
tuition payment plan, which is to be repaid through the course of the
term of studies and is similar to those offered by most institutions of
higher education, or an institutional loan program which has a
repayment period schedule of 5 years or longer depending on the
program, beyond completion of their studies. The institutional loan
program is designed to partially offset the impact of the credit crisis
and loss of private loan availability. The amount of total indebtedness
assumed by students through the institutional loan program comprises
less than 2 percent of total DeVry Inc. revenue. The loss reserve
established for the institutional loan program is based on the default
experience on remaining tuition payment balances at the time a student
withdraws or graduates. The total reserve for bad debt on institutional
loans at the end of fiscal year 2009 was $6.3 million, representing
35.6 percent of the total balance owed to DeVry Inc. Since we had no
institutional loan programs in fiscal year 2008, we had no reserve for
bad debt. DeVry's perspective on why we maintain this level of reserve
is that we tend to be conservative in our accounting. Nobody likes
surprises, including us, and our reserve reflects that. It could be
that the actual losses we experience are less than this reserve amount.
Since Mr. Eisman's testimony is cited, I would also like to note
that Mr. Eisman is a Wall Street short-seller who has bet billions on
seeing shares of publicly held colleges decline. He is not merely
predicting that will happen, he and other short-sellers have conducted
a carefully orchestrated campaign to make it happen. Just last week we
learned that one widely reported issue that was raised with the
Secretary of Education was reported to him by someone paid by Wall
Street short-sellers.
Question 4. In your testimony, you state that DeVry's net income
margin for fiscal year 2009 was 11 percent, and that substantially all
of these revenues were retained to re-invest in the future. You call
this your students' endowment and note that during the last fiscal year
DeVry has invested more than $100 million in equipment and facilities,
upgraded classrooms, the re-development of curricula, expanded academic
offerings and additional staff. Can you expand on the importance of re-
investing in your students? How does the amount that DeVry re-invests
in students compare to the amount of endowment earnings that
traditional schools re-invest in their student populations?
Answer 4. Last year's earnings become the resource for this year's
capital investments. Our capital investments for fiscal year 2010 will
be about $140 million. This represents 85 percent of our net earnings
of $165 million from fiscal year 2009. These investments include
increasing our enrollment capacity to meet increased student interest
in our programs, such as building two new nursing campuses, one in
Chicago and another across the river in Arlington. It also includes
adding new computers across our network of more than 120 campuses to
support business and technology programs, purchasing patient simulators
that can cost $100,000 each for our nursing and medical programs and
implementing new technology systems designed to improve classroom
learning and student services. In addition to funding capital
expenditures, we funded more than $16 million in scholarships this past
year. This re-investing in our students is an integral part of our
strategic plan. Investing in academic quality leads to better student
outcomes. When students achieve better outcomes, it creates more
interest in our programs. And this enables us to support further
investment into the quality of our academic programs.
Although many universities rely on their endowment (instead of
retained earnings) to fund capital investments, the difference in
allocating funding is great. A traditional university's endowment
consists of two components; the original endowment (or gift) received
from individual donors and a component that is represented by the
investment growth of that original endowment. CommonFund and National
Association of College and University Business Officers (NACUBO)
studies (Attachment 16) show that most schools target a spend rate for
their endowments of 4.5-5.0 percent, which is typically less than the
growth rate of the original endowment. This difference ensures a
stabilization of the endowment to be used for generations in the
future. Unlike an endowment, DeVry does not ``lock up'' its retained
earnings and only use the income from those earnings to generate
resources for capital investing and scholarships. We consistently use a
substantial portion of prior year earnings to fund the current year's
initiatives. But, similar to the stability that an endowment helps
ensure for public and non-profit independent colleges, DeVry's long-
term stability is secured with its direct reinvestment into initiatives
that support student access and success.
Question 5. In your testimony you discuss the amount of counseling
and financial literacy training that your students must go through
before being allowed to receive loan disbursements. Would you say your
students, consequently, are fully informed of the debt obligations and
the contract to which they are entering?
Answer 5. Students are fully informed of the estimated total cost
of their program, how tuition charges are calculated each term and the
cost of attendance used for financial aid calculations. Students are
also fully informed of the terms and conditions for any loan program
from which they may choose to borrow. Subsequent to the conclusion of
the recent negotiated rulemaking, we, in addition to two other schools,
proposed a robust disclosure process as an alternative to the Gainful
Employment proposal discussed in the rulemaking sessions. This
disclosure would provide specific program-level cost, indebtedness and
repayment information that we think should be readily available for
every student. Notwithstanding any rulemaking outcome, we will
implement this process during the coming academic year at all of our
schools.
Question 6. Do community colleges, public and nonprofit colleges
and universities face capacity issues that limit their growth, and by
consequence, limit opportunity for students--especially the most
disadvantaged?
Answer 6. There are capacity issues facing community colleges,
public and non-profit (independent) colleges that can limit their
growth and, by extension, limit opportunities for disadvantaged
students. Considering that 80 percent of all college attendees are
enrolled in public-sector schools (both community colleges and 4-year
schools), capacity issues have a significant impact on educational
opportunity. This capacity issue translates into many of these schools
becoming more selective in determining who is enrolled. As a result,
the most impacted are those who have traditionally been left out of
higher education and are the ones most in need of college access.
Publicly funded schools continue to face severe budget cuts that
result in capping, and sometimes cutting, enrollment; eliminating
courses; increasing class sizes; and laying off faculty and
administrative staff. It is well known that the University of
California System has proposed cutting 40,000 enrollments (Attachment
11). Arizona State University recently considered eliminating their
Clinical Lab Science bachelor's degree program (``Closure of clinical
lab sciences programs threatens healthcare industry.'' Healthcare
Finance News. May 13, 2009, http://www.
healthcarefinancenews.com/news/closure-clinical-lab-sciences-programs-
threatens-healthcare-industry). DeVry University Phoenix just opened
one.
An example of one capacity issue facing community colleges, public
and nonprofit colleges and universities is our Nation's projected
nursing shortage. It is estimated that more than 1 million new and
replacement nurses will be needed by 2020. Yet nearly 99,000 qualified
students are turned away each year from U.S. nursing schools due to a
lack of capacity. Thousands of people want to be nurses but can't
because there are not enough seats in nursing schools.
Reductions in administrative staff and resources do affect those
that get in the door at traditional schools. Disadvantaged and non-
traditional students often have less experience with higher education.
They may be the first in their family to go to college, or are older
students already in the workforce, with children or other dependents.
These non-traditional students typically need much more in the way of
support services, such as financial aid counselors, career counselors,
admissions advisors, and academic support. Reductions in these
administrative resources further limit opportunities for success for
disadvantaged students.
Many publicly funded schools have also been slow to adopt some of
the innovations that the private sector has developed or embraced.
Online courses were pioneered by the private sector, but many
traditional schools have been slow to embrace this technology. Non-
traditional students, many of whom work full time, often find online
courses to be the only option flexible enough to allow them to pursue a
degree. Offering classes year-round is also critical to meeting the
needs of non-traditional students. They want to graduate quickly and
need a full offering of courses over the summer.
Northern Virginia Community College President Robert Templin sums
up the public education response to the current economic challenge in
saying, ``A significant portion of higher education is hunkered down,
trying to wait out the storm. We've taken the approach that while
things will get better, they will never get back to the way they were.
We're going to have to find new ways to do our work.'' (Attachment 17).
______
Attachment 2
Attachment 3
Attachment 4
Attachment 5.--Council for Higher Education Accreditation (CHEA)
THE VALUE OF ACCREDITATION
Accreditation in the United States is a means to assure and improve
higher education quality, assisting institutions and programs using a
set of standards developed by peers. An institution or program that has
successfully completed an accreditation review has in place the needed
instructional, student support and other services to assist students to
achieve their educational goals. Accreditation has helped to provide
the conditions necessary for the United States to develop diverse,
flexible, robust and often admired higher education.
ACCREDITATION: A PROCESS AND A STATUS
Accreditation is both a process and a status. It is the process of
reviewing colleges, universities, institutions and programs to judge
their educational quality--how well they serve students and society.
The result of the process, if successful, is the award of ``accredited
status.''
Accreditation is carried out through nongovernmental organizations
created in whole or in part by the higher education community. Some
accrediting organizations review colleges and universities. Others
review specific programs, e.g., law, medicine, engineering. In a number
of fields, especially the health professions, graduation from an
accredited program is a requirement for receiving a license to
practice. At present, 80 recognized organizations accredit more than
7,000 institutions and 19,000 programs serving more than 24 million
students.*
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* Council for Higher Education Accreditation, 2008. The Council for
Higher Education Accreditation (CHEA) is a private, nonprofit national
organization that coordinates accreditation activity in the United
States. represents more than 3,000 colleges and universities and 60
national, regional and specialized accreditors.
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All accrediting organizations create and use specific standards
both to assure that institutions and programs meet threshold
expectations of quality and to assure that they improve over time.
These standards address key areas such as faculty, student support
services, finance and facilities, curricula and student learning
outcomes.
All accrediting organizations use common practices, including a
self review by the institution or program against the standards, an on-
site visit by an evaluation team of peer experts and a subsequent
review and decision by the accrediting body about accredited status.
This review is repeated every 3 to 10 years if the institution or
program is to sustain its accreditation.
Established accrediting organizations themselves are usually
subject to external review, a process called ``recognition.'' This
involves periodic examination of the organizations based on a set of
standards. The external examination is carried out by the U.S.
Department of Education or, in the private sector, the Council for
Higher Education Accreditation.
ACCREDITATION BENEFITS STUDENTS AND THE PUBLIC
``Accredited status'' means that students and the public can expect
that a school or program lives up to its promises. It means that a
student can have confidence that a degree or credential has value.
Accreditation signals that the public can have confidence in the worth
of an institution or program.
For students, accreditation provides value related to not only
judging quality, but also obtaining employment, receiving student aid
and transferring credits. Accreditation:
Encourages confidence that the educational activities of
an accredited institution or program have been found to be
satisfactory.
Assists with student mobility: Accredited status indicates
to institutions judging requests for transfer or applications for
graduate school that the sending institution or program has met
threshold expectations of quality.
Signals to prospective employers that a student's
educational program has met widely accepted standards, with graduation
from an accredited program, in some cases, a prerequisite for entering
a profession.
Provides access to Federal and sometimes State financial
aid, available to qualified students who attend institutions accredited
by recognized accrediting organizations.
To the public, the accreditation process provides value not only
through judging quality, but also assuring reliable information about
institutions and programs, promoting accountability and identifying
successful improvement efforts. Accreditation:
Confirms that the public presentation of an educational
program, student services and graduate accomplishments is fair and
accurate.
Promotes accountability through ongoing external
evaluation of the institution or program, with a finding that there is
compliance with general expectations in higher education or a
professional field as reflected in the accreditation standards.
Identifies institutions and programs that have voluntarily
undertaken explicit activities directed at improving the quality of the
institution and its professional programs and are carrying them out
successfully.
Frequently Asked Questions
What is the Value of Accreditation?
Accreditation:
Encourages confidence that an institution's or program's
presentation of the education it provides is fair and accurate,
including the description of services available to students and the
accomplishments of its graduates.
Assures that a neutral, external party (the accrediting
organization) has reviewed the quality of education provided and has
found it to be satisfactory, based upon appropriate peer expertise.
Confirms that institutions and programs have processes in
place to meet changes in thinking within the academy and in the
public's expectations;
Provides for eligible students to have access to Federal
financial aid if they attend institutions accredited by accreditors
that are ``recognized'' or scrutinized for quality by the U.S.
Department of Education (USDE).
Assists with transfer of credits among institutions or
admission to graduate school, with student mobility more likely to be
successful among accredited institutions as compared to unaccredited
institutions.
Aids with entrance to a profession, when a particular
field may require graduation from an accredited program or institution.
Signals prospective employers that an educational program
has met widely accepted educational standards.
Why is the Accredited Status of an Institution or Program Important
to Students?
Accredited status is a reliable indication of the value and quality
of educational institutions and programs to students and the public.
Without accredited status, it is hard to be sure about the quality of
the education or to be confident that an institution or program can
deliver on its promises. Similarly, employers or graduate programs
cannot be confident that graduates of an unaccredited institution or
program will be appropriately prepared. Remember that accreditation of
an institution may not mean that a specific program is accredited,
particularly a professional program leading to licensure.
What Does the Fact That the Institution or Program is Accredited
Mean to Students?
It means that students can have confidence in an institution or
program because those who went before had access to a quality
education. Through accreditation, peer experts have reviewed the
quality of the education provided, the processes by which students are
educated and the processes that the institution or program uses to
maintain an acceptable level of quality over time.
How Do Students Know That an Accredited Institution or Program Will
Keep Its Word in Providing the Education Described in Its Public
Materials?
As part of the accreditation process, institutions and programs
must demonstrate that they meet the accreditation standards requiring
that they provide quality education. And, they have to demonstrate
truth in advertising--that the information presented about the
education they offer is accurate.
Can Every Accreditor be Trusted?
Not all accreditors are the same. Recognition of an accreditor by
USDE or the Council for Higher Education Accreditation (CHEA) means
that the accreditor has been reviewed by an outside organization to
determine that the accreditor is trustworthy. Both of these
organizations provide periodic external reviews of accrediting
organizations and have high standards, checking, e.g., every 5 to 10
years to see if the accreditors they have recognized continue to meet
these standards. Some established accrediting organizations are not
eligible to address either USDE or CHEA recognition standards. Others
may deserve special scrutiny because they may be rogue providers of
accreditation or ``accreditation mills.''
What is a ``Recognized'' Accrediting Organization?
Just as institutions and programs are accredited, accrediting
organizations are reviewed to make sure that they have processes and
outcomes in place to protect students and the public. An accrediting
organization that has been reviewed and determined to meet the
standards of an external body, such as USDE or CHEA, is
``recognized.''
How Does the Accrediting Organization Review Educational Outcomes?
Accrediting organizations require institutions and programs to set
standards for student learning outcomes and provide evidence that the
learning outcomes are achieved. The expected outcomes and the evidence
vary, depending on the level of education provided and the different
skills or competencies required of graduates in different fields.
What Are Some of the Differences Between Accredited and
Unaccredited Institutions and Programs?
All accredited institutions and programs must provide resources to
assist students toward successful completion of their courses of study.
Although similar resources may be available in institutions or programs
that are not accredited, accreditation provides external assurance that
those resources are in place.
Where is Information About Accredited Institutions and Programs
Available?
All accrediting organizations provide information to the public
about the institutions and programs they accredit, when they are
reviewed and the general results of the most recent accreditation
review. This is readily available on the accreditor's Web site.
For a complete list of accrediting organizations and access to
their accredited institutions or programs, go to: CHEA: http://
www.chea.org/pdf/2009_2010_
Directory_of_CHEA_Recognized_Organizations.pdf; USDE: http://
ope.ed.gov/accreditation/.
Attachment 8
April 19, 2010.
Hon. Anthony Wilder Miller,
Deputy Secretary,
U.S. Department of Education,
Washington, DC 20202.
Dear Secretary Miller: Thank you for meeting with us this past
Thursday to discuss the Department of Education's (ED) proposed Gainful
Employment (GE) regulation. We appreciate the candid discussion, and
want to follow up on several items that arose in our meeting.
We appreciated your reinforcement of the ED's public statements
that it views private sector presence in the higher education
marketplace as positive. We also believe that it is not the ED's
intention to eliminate private sector institutions or eliminate private
capital from higher education. We view these as important points
because the GE proposal made during Negotiated Rulemaking--which would
substantially eliminate proprietary institutions' ability to offer
degrees--is not consistent with the ED's goals.
Our comments come from a sincere concern for the students we serve,
an understanding of the limited educational opportunities afforded to
these students, and the success stories of their fellow students who
graduated before them. We educate hundreds of thousands of students
each year, enabling them to obtain jobs and begin careers that are
transformational not only for those students, but for generations to
follow. We each offer non-degree, associate, baccalaureate and graduate
degree programs. Across our three organizations, we enroll more than
300,000 students and employ more than 50,000 faculty and staff each
year.
As we discussed, while the ED's GE proposal will exclude fully one-
third of our students from the programs they currently attend, its
effect on degree programs is the most severe. The ED's GE proposal is
unworkable for the vast majority of degree programs in our sector and
will result in as many as half of the 2 million-plus degree students at
our colleges being denied title IV funds. This includes, among
countless examples, Bachelor's of Science in Nursing students, at a
time when our country faces a growing nursing shortage. Private sector
colleges are a vital source of new capacity in nursing education as
well as in allied health fields, where they educate 54 percent of all
such professionals. We do not believe this could possibly be the intent
of the ED, which is why we are asking you to revise your proposal to
avoid these unintended consequences.
Likewise, we reiterate that the 50 percent graduation rate
exception described recently does little to ameliorate the impact of
the ED's last GE proposal. With the Nation's median aggregate college
graduation rate at less than 50 percent for all types of colleges
(private, public and non-profit alike--including elite colleges with 90
percent+ graduation rates), even this exception would exclude the
students at more than half of all colleges from participation in the
title IV program. Many of those excluded students would be the very
ones Congress was attempting to help through the Stafford and Pell
programs, and those for whom there are few other educational
opportunities today.
We understand the objectives of the proposed GE regulations are
focused on two concerns:
1. The ED's concern that a material segment of students take on
disproportionate debt for value received. More specifically, a concern
that the risk tolerance of these students essentially means that no
amount of warning would deter them from making a poor enrollment
decision and ``over-borrowing''--i.e., borrowing more than their
ultimate job prospects would enable them to repay.
2. The ED's concern about the risk that certain investors could
purchase schools with the intention of growing revenue by dramatically
increasing enrollment without regard to educational quality, and then
turning a quick profit by re-selling the institution to another buyer
or to the investing public through a securities offering. The concern
here is that such investors would take advantage of the difference
between their short timetable and the inherently longer term during
which regulatory problems mature--all while drawing Federal financial
aid and increasing the overall student debt burden.
As we discussed in our meeting, we share your concern about student
over-borrowing and believe our proposal can solve that problem without
harming quality schools. Section 1 of this letter expounds further on
our student debt proposal and offers additional alternatives.
We also understand your concerns about the incentives certain
investors might have and believe that the ED has the tools to constrain
them without harming students across the sector. The ED's ability to
constrain such investors is discussed in section 2 of this letter.
OUR PROPOSAL AND SIMPLE MODIFICATIONS TO THE DEBT-SERVICE-TO-INCOME
RATIO CAN SOLVE THE PROBLEM OF STUDENT OVER-BORROWING WITHOUT HARMING
STUDENTS OF QUALITY SCHOOLS
We continue to believe that student debt concerns can be addressed
quickly and meaningfully by: (a) mandating that institutions disclose
to students the information students need to make informed decisions
prior to taking on debt, and (b) implementing a student consumer
``lemon law'' that warns students prior to enrollment about programs
that fail to meet a minimum debt-service-to-income ratio (Appendix A).
This approach has at least four advantages over the ED's GE proposal:
(1) it addresses the concern that defining ``gainful employment'' by
student debt levels is beyond congressional intent; (2) it is a less
draconian approach from an enforcement perspective; (3) it avoids the
risk of inadvertently eliminating quality programs if the ratio
parameters are not set appropriately; and (4) it will immediately
address the ED's concerns while still allowing the ED and schools to
complete the data collection and analysis necessary to develop a more
studied approach, if necessary. This approach would indeed give the ED
new tools to address the risk for programs that do not provide value
commensurate with their cost.
Under our proposal, in addition to disclosure, a school would be
required to warn students if that school had failed certain debt-
service-to-income metrics. The proposed metrics would roughly follow
those in the ED's latest GE proposal, but with the following
modifications:
a. Any Debt-Service-To-Income Ratio Should Apply Only To Non-Degree
Programs
As you are aware, the GE requirement contained in the Higher
Education Act (HEA) applies to all program offerings at proprietary
institutions including Associate's, Bachelor's and Master's and
doctoral-level and professional degrees (other than a de minimis number
of ``liberal arts'' programs) and only non-degree programs at public
and private nonprofit institutions. While we believe that a debt-
service-to-income formula is inappropriate, we are especially concerned
with a formula that is inherently biased against degree programs (and
with corresponding alternative measures that are biased as well).
There are a number of reasons why debt-service-to-income ratios
such as those contained in the ED's GE proposal should not apply to
degree programs. First, it is very unlikely that Congress intended the
GE requirement to apply to degree programs. When the GE requirement was
first introduced by Congress in the 1965 HEA, very few proprietary
schools were degree granting. Second, the at-risk students the ED is
seeking to protect are much more likely to enroll in non-degree
programs than in degree programs. Third, the lifetime benefits
conferred by degree programs, such as higher lifetime earnings, higher
income growth rates, greater employability, better career advancement
and job stability, don't readily lend themselves to a formulaic
approach to measuring value using job codes and BLS statistics. For
these reasons, debt-service-to-income ratios should not apply to degree
programs.
To accomplish the above and to overcome our concerns with the ED's
debt-service-to-income proposal, we recommend the ED use the following
language, which tracks the last language proposed at the Negotiated
Rulemaking session (bolded to show changes/additions):
(a) General. (1) An institution . . . offering an eligible non-
degree program . . . shall be required to warn students that they are
likely to have difficulty meeting their repayment obligations in such
program where . . . at the end of each 3-year period . . . the debt to
earnings ratio associated with the program is 12 percent or less . . .
(b) Debt to earnings ratio. [A]n institution calculates the ratio
for the 3-year period by----
(1) Determining the median loan debt of students who completed or
graduated from the non-degree program (loan debt includes title IV, HEA
programs (except Parent PLUS), institutional loans and private
educational loans) during the 3-year period and using the mean loan
debt to calculate an annual loan payment based on a 15-year repayment
schedule and the current annual interest rate on Unsubsidized Federal
Stafford Loans or Direct Unsubsidized Loans;
(2) Using the most current Bureau of Labor Statistics (BLS) data .
. . to determine the annual earnings, at the 25th percentile, made by
persons employed in occupations related to the training provided by the
non-degree program; . . .
b. Alternatively, There Should Be a Tiered Approach To the Debt-
Service-To-Income Formula
Should the ED be inclined to include degree programs, we recommend
different formulae for non-degree programs, Associate's degree
programs, and Bachelor's degree programs. Post-baccalaureate programs
would not be included as those students, having successfully completed
at least a Bachelor's level of education, are more sophisticated
consumers and better equipped to make informed borrowing decisions.
We recommend the following graduated degree metrics:
------------------------------------------------------------------------
Debt-
service-
to-income BLS Years in
Program Level threshold Percentile Repayment
[In
percent]
------------------------------------------------------------------------
Non-Degree............................ 12 25th 15
Associate's Degree.................... 15 50th 15
Bachelor's Degree..................... 15 50th 20
------------------------------------------------------------------------
These numbers are consistent with the studies by Kantrowitz and
Baum referenced in our April 12, 2010 letter.
c. Any Formula Should Contain an Exclusion for Prior School Debt
As we also discussed, prior school debt should be excluded from any
debt-service-to-income ratio test. By excluding prior debt, the ED can
ensure that students who may have failed in the past will continue to
have an opportunity to succeed in the future, without penalizing
schools for giving the students that opportunity.
d. There Are Other Alternatives Worth Exploring
In the event the ED chooses to pursue a debt-service-to-income
ratio test, we reiterate our recommendation that the ED consider
alternative routes to compliance as part of that test. These
alternatives include maintaining target graduate cohort default rates
(GCDRs) at 12.5 percent over 2 years and 15 percent over 3 years. They
also include a threshold for post-graduate employment rates. We
recommend setting a minimum employment rate of 70 percent within 6
months following graduation. As we discussed, the employment rate would
be measured using methodologies similar to those of the larger national
accrediting agencies, but with additional flexibility, particularly for
degree programs, as degree-seeking students are likely to use their
degree for general employment advancement.
2. THE ED HAS AN ARRAY OF POWERFUL TOOLS TO CONSTRAIN CERTAIN NEW
INVESTORS
As we discussed, most private sector higher education companies are
invested in students for the long haul. Certainly, Kaplan, DeVry, and
EDMC--as well as other higher education organizations--are focused on
building enduring institutions that create value for our students, our
employees, and our communities. Our institutions will only succeed to
the extent our students succeed. We are passionate about our students'
achieving their learning outcomes, securing good jobs, and becoming
contributing members of society. Our reputation is essential to
attracting students, faculty, and employees. Indeed, most of our alumni
quietly but successfully enter into essential roles in the American
economy--working hard, paying taxes, and raising their families. Their
enthusiasm is what encourages other students to join our institutions--
and any unhappiness or frustration with their learning experiences
would quickly hamper our institutions' ability to attract new students.
We understand your concern that some firms may invest in higher
education with different motives and according to a vastly different
timetable. They may see an opportunity to purchase a struggling
institution, grow it rapidly, and exit the business before difficulties
like poor completion, employment rates, cohort default rates or other
problems mature--all at the students' and the taxpayers' expense.
We respectfully submit that the HEA currently provides the ED with
ample measures to prevent such a scenario from occurring. A number of
such measures are enumerated below. A chart providing additional detail
regarding these measures is attached as Appendix B to this letter.
1. The ED has the authority to condition or withhold title IV
approval from new owners who do not have a demonstrated track record.
2. The ED may condition or disallow the resumption of title IV
participation following a change in ownership.
3. Following a change in ownership, the ED may terminate an
institution's eligibility to participate in the title IV programs
without the institution having the usual due process rights to contest
the termination.
4. The ED has the ability to ensure that no students receive title
IV funds until the ED is satisfied that the students are eligible for
the funds and the school is worthy.
We appreciate your meeting with us and we sincerely hope that you
have found these observations and ideas useful. We look forward to
discussing these matters further. Should you so desire, we would be
happy to provide you with further clarifications and are available to
meet at your convenience.
Yours Truly,
Andrew S. Rosen,
Chairman and CEO, Kaplan, Inc.
Daniel Hamburger,
President and CEO, DeVry Inc.
Todd S. Nelson,
CEO, Education Management Corporation.
Attachment 9.--Executive Summary
Help Wanted: Projections of Jobs and Education Requirements
Through 2018
(By Anthony P. Carnevale, Nicole Smith, and Jeff Strohl)
America is slowly coming out of the Recession of 2007--only to find
itself on a collision course with the future: not enough Americans are
completing college.\1\ The Georgetown University Center on Education
and the Workforce shows that by 2018, we will need 22 million new
college degrees--but will fall short of that number by at least 3
million post-secondary degrees, Associate's or better. In addition, we
will need at least 4.7 million new workers with post-secondary
certificates. At a time when every job is precious, this shortfall will
mean lost economic opportunity for millions of American workers.
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\1\ We conducted this research as an alternative to official
government data, which consistently underestimate the demand for post-
secondary education. Actual counts of post-secondary workers in 2008
showed that the official government estimate of post-secondary degrees
was off by 47 percent. Our methodology, for that same period, over-
predicted post-secondary education demand by just 4 percent.
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This shortage is the latest indication of how crucial post-
secondary education and training has become to the American economy.
The shortfall--which amounts to a deficit of 300,000 college graduates
every year between 2008 and 2018--results from burgeoning demand by
employers for workers with high levels of education and training. Our
calculations show that America's colleges and universities would need
to increase the number of degrees they confer by 10 percent annually, a
tall order.
Meeting this demand is not a challenge we can afford to ignore. Our
grandparents' economy, which promised well-paying jobs for anyone who
graduated from high school, is fading and will soon be altogether gone.
Over the past three decades, higher education has become a virtual must
for American workers. Between 1973 and 2008, the share of jobs in the
U.S. economy which required post-secondary education increased from 28
percent to 59 percent. According to our projections, the future
promises more of the same. The share of post-secondary jobs will
increase from 59 to 63 percent over the next decade. High school
graduates and dropouts will find themselves largely left behind in the
coming decade as employer demand for workers with post-secondary
degrees continues to surge.
In our analysis of occupations, we find that 9 out 10 workers with
a high school education or less are limited to three occupational
clusters that either pay low wages or are in decline (Figure 1). As the
economy gets back on track over the next 5 years, 60 million Americans
are at risk of being locked out of the middle class, toiling in
predominantly low-wage jobs that require high school diplomas or less.
the shift to a college economy will continue over the next decade
The core mechanism at work in increasing demand for post-secondary
education and training is the computer, which automates repetitive
tasks and increases the value of non-repetitive functions in all jobs.
Occupations with high levels of non-
repetitive tasks, such as professional and managerial jobs, tend to
require post-secondary education and training. These types of jobs are
growing, while positions dominated by repetitive tasks that tend to
require high school or less, like production jobs, are declining.\2\
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\2\ Many low-wage, low-skill jobs--such as fast food positions--are
also difficult to automate. This produces an occupational and wage
structure in which low-wage/low-skill jobs continue to grow along with
high-skill/high-wage jobs--although much more slowly. Our projections
show that technology change preserves many low-wage/low-skill jobs that
require high school or less; has mixed effects on mid-skill jobs that
require certificates and AA's; and grows high-skill/high-wage jobs that
require BA's or better (Autor, Katz and Kearney, 2008).
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The iPod is an example of a typical post-industrial product. Less
than 20 percent of the value-added in the manufacture of video and
audio equipment from the United States comes from the blue collar
production workers who manufacture it. By contrast, about 80 percent of
the value-added comes from the white collar office workers who design,
market, finance, and manage the global production and dissemination of
these products.\3\ \4\
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\3\ Anthony Carnevale and Steven Rose. Input Output Analysis of the
U.S. Economy. Center on Education and the Workforce. Work in Progress,
2010.
\4\ On average, 18 percent of the product components are imported.
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Consider that, in 1973, there were 25 million jobs available to
people with at least some college or better (Figure 2). By 2007 that
number ballooned to 91 million jobs. In 34 years, the American job
machine nearly quadrupled the number of jobs available to people with
at least some formal education beyond high school.
POSTSECONDARY EDUCATION HAS BECOME THE GATEKEEPER TO THE MIDDLE CLASS
AND THE UPPER CLASS
As the economy evolved, post-secondary education gradually became
the threshold requirement for access to middle class status and
earnings. In the 37-year timeframe shown in Figure 3, the share of
people in the middle class with some college education and no degree or
less, declined dramatically.\5\
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\5\ Dropouts, high school graduates and people with some college
but no degree increasingly are on the economic down-escalator, falling
out of the middle class and into the lower three deciles of family
income. In 1970, almost half (46 percent) of high school dropouts were
in the middle class. By 2007, the share of dropouts in the middle class
had fallen to 33 percent. In 1970, almost 60 percent of high school
graduates were in the middle class. By 2007, the share had fallen to 45
percent. In 1970 almost 53 percent of workers with some college, no
degree were in the middle class. By 2007, the share had fallen to 45
percent.
---------------------------------------------------------------------------
Over that same period, the share of people with college degrees
have either stayed in the middle class or boarded the up-escalator to
upper class incomes--the three highest family income deciles. After the
dust has settled, the educational composition of the middle class
favors workers with some college or better (Figure 4). In 1970, 26
percent of the middle class had post-secondary education and training.
By 2007, 61 percent of middle class workers had post-secondary
education and training.
Workers with post-secondary education and training are moving into
the upper class.\6\ That is, the educational composition of the upper
class also favors workers with some college or better (Figure 5). In
1970, 44 percent of the upper class had post-secondary education and
training. By 2007, 81 percent of upper class workers had post-secondary
education and training.
---------------------------------------------------------------------------
\6\ The share of people with Bachelor's degrees in the middle class
declined from 47 percent to 38 percent. But the share of people with a
Bachelor's in the top three income deciles jumped from 37 percent to 48
percent. Meanwhile, the share of people with Graduate Degrees in the
middle class declined from 46 to 30 percent. Clearly, though, they were
leaving for higher standards of living, as the share of people with
Graduate Degrees in the top three income deciles increased from 41 to
61 percent.
Given the transformation of workers by economic class, post-
secondary education and training is no longer just the preferred
pathway to middle and upper income classes--it is, increasingly, the
only pathway.
TODAY'S CAREER PATHWAYS ARE IN OCCUPATIONS NOT WITHIN INDUSTRIES
Federal, State, and local governments face a dilemma as they
formulate economic development strategy because the traditional
approach to understanding career pathways starts with an industry-based
perspective while careers, and career mobility, are based on
occupation. The emphasis on post-secondary preparation for new hires
means that workers will tend to be attached more to the occupations
they will be filling than to the specialized industries in which they
work. The day when people left high school to go to work in the local
industry and then worked their way up is disappearing. Starting out,
straight from high school, on the loading dock or in the mail room and
climbing to the CEO's corner office is no longer an option. People do
not go to work in industries any more. They get educated or trained, go
to work in occupations, and progress in an occupational hierarchy. Some
occupations are tied tightly to particular industries--healthcare
occupations for example--but more and more occupations are dispersed
broadly across industries. And industries vary widely in how many jobs
they create: old-line manufacturing, clearly, is in decline. But even
some new industries, such as information services, have only limited
hiring potential because they are tech-heavy and can achieve high
levels of productivity with relatively few workers. This means
governments will need to be selective about how they approach
industries and where they deploy scarce development resources.
CONCLUSION: HIGHER EDUCATION IS CRITICAL TO SUCCESS IN THE COMING
ECONOMY
As a result of a broad concern about the United States
underperforming in post-secondary education, President Barack Obama in
February 2009 told a joint session of Congress: ``By 2020, America will
once again have the highest proportion of college graduates in the
world.'' \7\ Subsequent analysis at the National Center on Higher
Education Management Systems (NCHEMS) estimated that achieving the
President's goal would require an additional 8.2 million post-secondary
graduates by 2020.\8\
---------------------------------------------------------------------------
\7\ In July 2009, the President committed to a down payment on
reasserting America's global leadership in post-secondary education
with a commitment to an increase of 5 million community college
graduates.
\8\ We produced this in collaboration with Dennis Jones and Patrick
Kelly.
---------------------------------------------------------------------------
At current cost the goal of producing 8.2 million new college
graduates would require an increase of $158 billion by 2020 in nominal
spending at the State and Federal level. The costs are daunting, nearly
$16 billion per year.
The Obama administration has come up with an additional $36 billion
for spending on Pell grants in its reform of the post-secondary
financing system (SAFRA). This leaves $122 billion outstanding which
would have to come from State and local budgets.
We recognize, in the current budget climate, that it will be
difficult for States to come up with their share. Ultimately, Federal
and State Governments will need to engage post-secondary institutions
as partners in finding ways to pay for achieving this goal. Together
they must develop reforms that result in both cost-efficient and
quality post-secondary education and training programs.
The impending shortage of at least 3 million Associate's degrees or
better lends urgency to the questions about the financing of America's
college and university system.
Failure to achieve the mix of funding and reform required for the
President's goal will not only leave more and more Americans behind--it
will damage the Nation's economic future.
And that, quite simply, is something we cannot afford.
Appendix
Educational Distribution of Total Jobs (by occupation) in 2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
Some Master's
Occupations High school High school college, no Associate's Bachelor's degree or Total
dropouts graduates degree degree degree better
--------------------------------------------------------------------------------------------------------------------------------------------------------
Healthcare Support........................................... 316,220 1,650,170 1,316,377 1,015,012 433,370 95,088 4,826,237
Community Services and Arts.................................. 41,044 411,231 583,516 526,375 2,520,524 1,126,326 5,209,016
STEM......................................................... 27,717 729,443 865,555 1,054,172 3,614,642 2,261,768 8,553,297
Healthcare Professional and Technical........................ -- 450,038 610,671 2,161,139 2,924,180 2,667,125 8,813,153
Education.................................................... 60,302 654,477 825,721 674,515 3,906,200 4,112,993 10,234,208
Managerial and Professional Office........................... 253,580 2,033,003 2,340,385 1,766,664 7,518,784 3,771,595 17,684,011
Food and Personal Services................................... 5,311,606 10,375,799 5,176,370 2,953,944 3,705,516 472,328 27,995,563
Blue Collar.................................................. 7,122,598 15,322,808 5,805,475 3,664,944 2,387,683 337,899 34,641,407
Sales and Office Support..................................... 2,326,477 12,838,226 10,908,550 5,901,593 10,069,661 1,498,611 43,543,118
------------------------------------------------------------------------------------------
Total*................................................... 15,459,544 44,465,195 28,432,620 19,718,358 37,080,560 16,343,733 161,500,010
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Center on Education and the Workforce forecast of educational demand through 2018.
Educational Distribution of Total Jobs (by industry) in 2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
Some Master's
Industries High school High school college, no Associate's Bachelor's degree or Total
dropouts graduates degree degree degree better
--------------------------------------------------------------------------------------------------------------------------------------------------------
Wholesale and Retail Trade Services.......................... 2,054,180 7,747,315 5,240,566 2,628,735 5,384,497 1,089,876 24,145,169
Professional and Business Services........................... 1,172,360 3,181,083 2,995,082 2,264,671 8,649,452 4,795,087 23,057,735
Government and Public Education Services..................... 347,226 3,465,799 4,127,209 3,909,128 7,246,199 2,764,115 21,859,676
Healthcare Services.......................................... 991,378 4,124,082 3,519,395 3,936,313 5,116,397 2,866,496 20,554,061
Leisure and Hospitality Services............................. 4,029,596 4,635,877 2,937,440 1,351,427 2,690,571 509,823 16,154,733
Manufacturing................................................ 1,262,440 4,646,339 1,984,204 1,458,667 2,612,356 1,116,125 13,080,131
Financial Services........................................... 217,869 1,780,750 2,220,391 1,177,103 4,506,022 1,441,828 11,343,964
Construction................................................. 1,809,463 3,554,175 1,387,382 878,205 837,183 162,861 8,629,269
Transportation and Utilities Services........................ 553,317 2,871,578 1,262,668 768,033 1,049,958 181,151 6,686,704
Personal Services............................................ 970,426 2,065,142 1,064,372 914,406 750,046 447,987 6,212,379
Private Education Services................................... 40,041 432,463 366,395 263,122 1,141,766 1,237,942 3,481,728
Information Services......................................... -- 291,555 736,215 381,689 1,547,880 503,713 3,461,051
Natural Resources............................................ 817,562 1,158,793 281,276 257,506 275,567 92,117 2,882,822
------------------------------------------------------------------------------------------
Total*................................................... 14,265,858 39,954,951 28,122,595 20,189,005 41,807,893 17,209,121 161,549,423
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The education totals for education categories do not match totally between occupation and industry due to methodological differences. A discussion of
the methodology used to generate all forecasts in this document is available at the Center's Web site at cew.georgetown.edu.
Source: Center on Education and the Workforce forecast of educational demand through 2018.
Attachment 10
Attachment 11.--Public Affairs--California State University Officials
Outline Enrollment Cuts and Preview 2010-2011 Budget
CSU OUTLINES ENROLLMENT CUTS AND PREVIEW 2010-2011 BUDGET
(Nov. 10, 2009)--Facing a $564 million budget cut for this fiscal
year, California State University Chancellor Charles B. Reed provided
an update on the drastic measures that the CSU is undertaking to
address the deficit including slashing enrollment by more than 40,000
students, as demand to attend the CSU continues to rise.
CSU estimates that it cut 4,000 students in fall 2009, and will see
a much larger drop in spring as a result of curtailing enrollment
including the elimination of spring admissions. In all, CSU needs to
reduce its student numbers by more than 40,000 students in order to
match student enrollment with funding received from the State.
``Last year, we declared systemwide impaction and said we were
going to reduce enrollment by 10,000 students that we did not receive
any funding for by the State,'' said Reed. ``By spring, we will reach
that total, and project an even larger enrollment decrease for fall
2010. This reduction in access is the direct result of the almost $600
million that has been cut from our budget. You cannot see a 20 percent
drop in revenue and serve the same number of students.''
Campuses are currently in the process of receiving applications for
admissions in fall 2010, and to date, the CSU has received more than
266,000 applications, a 53 percent increase over the same time last
year. Specifically, there has been a 127 percent increase in the number
of applications from community college transfers, partially due to the
closing of spring admissions that heavily impacts transfer students
from community colleges. Freshmen applications are up by about 32
percent over the same time period last year.
``Denying students access to higher education is just about one of
the worst things you can do in a recession,'' said Reed. ``The State
needs our graduates to enter the workforce and help the State's
economic recovery. But, when your budget is cut so drastically, we are
left with little choice but to restrict our enrollment.''
CSU officials did stress the importance of students applying by
November 30, when about half of its campuses will stop accepting
applications for all freshmen, and most community college transfer
students. Students are also encouraged to apply to the campus in their
local service area.
Chancellor Reed also provided a preview of the proposed 2010-2011
budget that the CSU will present to its board of trustees next week.
Calling it a ``recover and reinvest'' budget, CSU is asking the State
to restore funding for one-time cuts imposed in 2009-2010 totaling $305
million, as well as an additional $579 million for mandatory cost
increases, enrollment growth, compensation increases, and a restoration
of the revenues that would have been part of the Compact funding for
higher education. The total $884 million increase includes a request
for revenue needed for the legislature to ``buy out'' a 10 percent
student fee increase. The board is expected to vote on the budget at
its meeting November 17 and forward the request to the Governor and the
legislature.
``This is a very ambitious budget in these very challenging
times,'' said Reed, ``but it is critical that the State legislature and
administration realize the true fiscal needs to run the CSU.''
ABOUT THE CALIFORNIA STATE UNIVERSITY
The California State University is the largest system of senior
higher education in the country, with 23 campuses, approximately
450,000 students and 48,000 faculty and staff. Since the system was
created in 1961, it has awarded nearly 2.5 million degrees, about
90,000 annually. Its mission is to provide high-quality, affordable
education to meet the ever-changing needs of the people of California.
With its commitment to excellence, diversity and innovation, the CSU is
the university system that is working for California.
Attachment 13
Table 318. Percentage Distribution of Enrollment and Completion Status of First-Time Post-Secondary Students Starting During the 1995-1996 Academic Year, by Type of Institution and Other
Student Characteristics: 2001
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Students starting in 2-year institutions Students starting in 4-year institutions
------------------------------------------------------------------------------------------------------------------------------------------------------
Highest degree attained Highest degree attained
Student and institution characteristic ----------------------------------------------------- No degree, No degree, -------------------------------------------------- No degree, No degree,
Total, any still not Total, any Bachelor's still not
degree\1\ Certificate Associate's Bachelor's\2\ enrolled enrolled degree\1\ Certificate Associate's \2\ enrolled enrolled
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1 2 3 4 5 6 7 8 9 10 11 12 13
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total................................ 38.4 (1.7) 11.5 (1.2) 17.3 (1.3) 9.7 (1.1) 16.4 (1.4) 45.2 (1.6) 65.1 (1.0) 2.7 (0.3) 4.0 (0.4) 58.4 (1.2) 14.4 (0.6) 20.5 (0.8)
------------------------------------------------------------------------------------------------------------------------------------------------------
Male..................................... 39.2 (2.4) 10.8 (1.6) 18.7 (1.9) 9.7 (1.5) 18.0 (2.2) 42.8 (2.4) 60.6 (1.4) 2.5 (0.4) 3.6 (0.6) 54.6 (1.5) 16.2 (0.9) 23.2 (1.1)
Female................................... 37.7 (2.2) 12.0 (1.6) 15.9 (1.7) 9.8 (1.4) 14.9 (1.7) 47.4 (2.2) 68.7 (1.3) 2.9 (0.3) 4.3 (0.5) 61.6 (1.4) 12.9 (0.8) 18.4 (1.0)
Age when first enrolled:
18 years or younger.................... 43.8 (2.3) 7.3 (1.2) 19.4 (2.0) 17.0 (1.9) 17.8 (2.1) 38.4 (2.1) 70.0 (1.0) 1.8 (0.2) 3.4 (0.4) 64.7 (1.1) 13.4 (0.6) 16.6 (0.7)
19 years............................... 38.2 (4.1) 8.2 (2.0) 24.3 (4.0) 5.7 (2.2) 20.9 (3.6) 40.9 (4.0) 57.1 (2.8) 3.3 (0.9) 6.0 (1.3) 47.9 (2.9) 16.4 (2.0) 26.6 (2.3)
20 to 23 years......................... 29.9 (4.2) 13.1 (3.0) 13.0 (3.4) 3.7 (1.6) 20.1 (4.2) 50.0 (4.8) 37.7 (3.8) 8.7 (2.1) 6.7 (2.1) 22.3 (3.0) 20.9 (3.0) 41.4 (3.6)
24 to 29 years......................... 36.5 (4.8) 25.6 (4.6) 8.4 (2.2) 2.5 (1.5) 11.0 (3.5) 52.6 (5.1) 34.4 (5.5) 4.3 (1.8) 7.2 (3.5) 23.0 (4.7) 22.7 (5.8) 42.9 (6.3)
30 years or over....................... 30.6 (5.5) 14.1 (3.8) 14.5 (3.3) 2.0 (1.5) 8.7 (2.4) 60.7 (5.8) 26.1 (4.3) 11.5 (3.5) 4.3 (1.6) 10.3 (2.8) 17.0 (4.2) 56.9 (5.1)
Race/ethnicity:
White.................................. 40.5 (2.0) 10.9 (1.3) 18.2 (1.5) 11.4 (1.6) 16.5 (1.7) 43.0 (2.0) 68.1 (1.1) 2.4 (0.3) 3.8 (0.4) 61.9 (1.3) 12.5 (0.7) 19.4 (0.9)
Black.................................. 28.4 (4.2) 16.7 (4.0) 8.5 (2.3) 3.2 (1.3) 13.3 (2.9) 58.3 (4.3) 51.3 (2.6) 4.6 (1.0) 3.2 (0.8) 43.4 (2.8) 20.6 (2.3) 28.2 (2.2)
Hispanic............................... 34.3 (4.8) 11.1 (3.2) 17.8 (3.2) 5.5 (2.3) 18.1 (3.3) 47.6 (4.8) 53.9 (2.3) 3.1 (0.7) 6.8 (1.7) 44.0 (2.4) 20.4 (1.8) 25.7 (2.1)
Asian/Pacific Islander................. 41.9 (9.2) 11.6 (6.4) 23.0 (8.2) 7.4 (3.7) 21.2 (7.7) 36.9 (8.7) 71.3 (3.1) 0.2 (0.2) 2.0 (0.8) 69.1 (3.1) 13.9 (2.3) 14.8 (2.4)
American Indian/Alaska Native.......... ( ) ( ) ( ) ( ) ( ) ( ) 55.4 ( ) 3.7 (3.7) 51.7 26.1 (8.4) 18.5 (6.8)
(10.6) (10.7)
Highest education level of parents:
High school diploma or less............ 36.5 (2.3) 13.5 (1.8) 17.0 (1.9) 6.0 (1.2) 12.4 (1.6) 51.1 (2.4) 52.0 (1.6) 4.1 (0.6) 4.8 (0.6) 43.1 (1.6) 16.5 (1.3) 31.5 (1.5)
Some post-secondary.................... 32.8 (3.3) 10.1 (2.1) 14.3 (2.6) 8.4 (2.0) 19.0 (2.8) 48.2 (2.9) 59.5 (1.9) 3.1 (0.7) 5.4 (1.1) 50.9 (2.1) 16.4 (1.4) 24.2 (1.6)
Bachelor's degree...................... 47.7 (4.2) 9.1 (2.3) 22.4 (3.7) 16.2 (3.2) 18.8 (3.5) 33.5 (3.9) 72.1 (1.5) 1.8 (0.4) 4.0 (0.6) 66.3 (1.5) 13.4 (1.1) 14.5 (1.1)
Advanced degree........................ 45.4 (6.0) 3.1 (2.0) 17.2 (4.4) 25.2 (5.5) 25.2 (5.4) 29.4 (6.0) 76.5 (1.7) 1.2 (0.3) 1.4 (0.3) 73.9 (1.7) 11.7 (1.2) 11.8 (1.2)
Dependency status when first enrolled:
Dependent.............................. 42.1 (2.2) 8.2 (1.2) 20.1 (1.8) 13.8 (1.7) 18.3 (1.9) 39.6 (2.1) 68.0 (1.0) 2.1 (0.2) 3.6 (0.4) 62.1 (1.2) 14.0 (0.6) 18.1 (0.7)
Independent............................ 32.9 (3.1) 17.6 (2.4) 12.3 (1.9) 3.0 (0.9) 13.8 (2.4) 53.4 (3.5) 35.9 (2.9) 8.8 (1.7) 6.4 (1.6) 20.6 (2.3) 19.1 (2.5) 45.0 (3.2)
Dependent student family income in 1994:
Less than $25,000...................... 43.0 (3.8) 10.9 (2.6) 24.5 (3.4) 7.6 (2.1) 14.3 (2.6) 42.7 (3.5) 58.8 (1.8) 3.4 (0.7) 5.1 (1.0) 50.3 (2.1) 18.6 (1.5) 22.6 (1.5)
$25,000 to $44,999..................... 41.2 (4.5) 10.5 (2.3) 16.4 (2.9) 14.3 (2.7) 19.1 (3.0) 39.6 (3.6) 61.7 (1.7) 2.3 (0.4) 4.4 (0.8) 55.0 (1.7) 15.1 (1.3) 23.1 (1.4)
$45,000 to $69,999..................... 40.2 (3.8) 5.3 (1.8) 22.1 (3.2) 12.8 (2.5) 19.3 (3.5) 40.5 (4.0) 69.1 (1.6) 1.7 (0.4) 3.7 (0.7) 63.6 (1.7) 13.2 (1.0) 17.7
(1.3)
$70,000 or more........................ 44.7 (5.5) 4.5 (1.8) 15.8 (3.6) 24.4 (4.5) 22.1 (4.2) 33.2 (4.8) 77.4 (1.3) 1.6 (0.4) 2.0 (0.4) 73.8 (1.5) 10.7 (1.0) 11.9 (0.9)
Timing of post-secondary enrollment:
Did not delay\3\....................... 43.9 (2.3) 7.0 (1.1) 20.9 (2.0) 15.9 (1.8) 18.4 (2.0) 37.7 (2.1) 69.2 (1.0) 1.9 (0.2) 3.3 (0.4) 64.0 (1.1) 13.7 (0.6) 17.1 (0.7)
Delayed entry.......................... 32.8 15.6 (2.0) 13.7 (1.8) 3.5 (1.0) 14.9 (2.0) 52.3 (2.8) 45.0 (2.2) 6.6 (1.0) 7.0 (1.3) 31.4 (2.1) 18.0 (1.6) 37.0 (2.2)
(2.7)
Attendance status when first enrolled:
Full-time.............................. 47.3 (2.4) 10.2 (1.4) 21.3 (1.9) 15.8 (2.1) 15.9 (2.0) 36.8 (2.3) 69.3 (1.0) 1.9 (0.2) 4.0 (0.4) 63.3 (1.2) 12.7 (0.6) 18.0 (0.8)
Part-time.............................. 29.5 (3.2) 13.9 (2.7) 12.2 (2.3) 3.4 (1.0) 15.6 (2.4) 54.9 (3.4) 33.4 (3.2) 7.3 (2.0) 2.1 (0.8) 23.9 (3.3) 27.3 (3.0) 39.3 (3.4)
Intensity of enrollment through 2001:
Always part-time....................... 13.2 (2.9) 11.5 (2.8) 1.7 (0.8) # ( ) 13.3 (3.0) 73.4 (3.8) 10.3 (2.9) 9.7 (2.9) 0.6 (0.6) # ( ) 12.9 (3.8) 76.8 (4.1)
Mixed.................................. 42.3 (2.5) 12.6 (1.7) 20.8 (2.0) 8.9 (1.3) 21.7 (2.1) 36.0 (2.2) 51.7 (1.5) 4.4 (0.6) 5.5 (0.6) 41.8 (1.6) 26.6 (1.3) 21.7 (1.1)
Always full-time....................... 49.5 (3.2) 9.3 (1.4) 22.0 (2.8) 18.1 (3.1) 9.1 (1.8) 41.4 (3.1) 74.2 (1.1) 1.5 (0.2) 3.3 (0.5) 69.4 (1.2) 8.1 (0.6) 17.8 (0.9)
Degree goal at first institution:
Certificate............................ 45.2 (5.1) 38.4 (5.3) 6.2 (2.3) 0.7 (0.4) 6.8 (2.5) 48.0 (4.8) 37.7 (7.0) 16.1 (6.2) 4.2 (7.5) 7.5 (3.0) 19.4 (6.5) 42.8 (6.7)
Associate's degree..................... 40.9 (2.3) 8.7 (1.3) 24.7 (2.1) 7.5 (1.4) 15.6 (2.0) 43.5 (2.3) 52.6 (4.2) 7.3 (2.4) 24.7 (3.7) 20.7 (3.3) 8.9 (2.3) 38.5 (4.2)
Bachelor's degree...................... 40.3\4\ 6.0\4\ 11.7\4\ 22.6\4\ (3.3) 21.9\4\ 37.8\4\ 67.6 (1.0) 2.1 (0.3) 2.7 (0.3) 62.9 (1.1) 14.2 (0.6) 18.2 (0.7)
(3.7) (1.9) (2.4) (3.5) (3.4)
Worked while enrolled 1995-1996:
Did not work........................... 43.0 (3.0) 13.9 (2.3) 21.5 (2.8) 7.6 (1.9) 10.4 (2.5) 46.6 (3.1) 71.1 (1.3) 2.0 (0.4) 3.7 (0.7) 65.3 (1.6) 11.9 (0.8) 17.0 (1.1)
Worked part time....................... 44.7 (2.6) 8.5 (1.5) 20.9 (2.1) 15.2 (2.0) 18.4 (2.4) 36.9 (2.3) 65.0 (1.3) 2.3 (0.4) 4.0 (0.4) 58.6 (1.4) 14.7 (0.8) 20.3 (1.0)
Worked full time....................... 27.2 (2.6) 14.3 (2.2) 9.6 (1.5) 3.4 (0.9) 17.0 (2.5) 55.8 (2.9) 41.7 (2.6) 7.1 (1.3) 4.2 (1.1) 30.5 (2.5) 21.7 (2.2) 36.6 (2.5)
Control of first institution:
Public................................. 36.7 (1.8) 10.1 (1.3) 16.4 (1.4) 10.3 (1.3) 17.4 (1.6) 45.9 (1.7) 60.5 (1.2) 2.8 (0.3) 4.4 (0.6) 53.3 (1.4) 17.4 (0.8) 22.2 (1.0)
Private, not for profit................ 58.9 (5.4) 19.3 (4.6) 27.8 (3.9) 11.8 (3.3) 8.4 (2.4) 32.7 (4.6) 73.6 (1.7) 1.8 (0.3) 2.8 (0.5) 68.9 (2.0) 9.3 (0.8) 17.1 (1.3)
Private, for profit.................... 55.6 (3.2) 27.8 (3.9) 25.8 (3.9) 2.0 (0.8) 4.3 (1.2) 40.0 (3.4) 52.8 17.9 (7.2) 14.9 (6.0) 20.0 (5.1) 11.1 (3.1) 36.1 (8.6)
(10.5)
Socioeconomic status in 1995-1996 \5\:
Not disadvantaged...................... 41.7 (2.8) 8.9 (1.8) 18.1 (2.1) 14.6 (2.0) 20.4 (2.7) 38.0 (2.7) 71.4 (1.1) 2.0 (0.3) 3.3 (0.4) 66.1 (1.3) 12.3 (0.7) 16.3 (0.8)
Minimally disadvantaged................ 33.9 (2.4) 12.8 (1.7) 14.9 (1.8) 6.2 (1.4) 13.1 (1.6) 53.0 (2.7) 59.8 (1.6) 3.7 (0.6) 5.4 (0.7) 50.8 (1.7) 16.4 (1.2) 23.8 (1.3)
Moderately or highly disadvantaged..... 43.7 (3.6) 14.6 (3.0) 21.6 (3.4) 7.5 (1.9) 14.5 (2.7) 41.8 (3.7) 47.1 (2.0) 3.7 (0.8) 3.8 (0.8) 39.6 (2.1) 19.5 (1.9) 33.4 (2.1)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
= Not applicable.
# = Rounds to zero.
= Reporting standards not met.
\1\ Includes a small percentage of students who had attained a degree and were still enrolled. Includes recipients of degrees not shown separately.
\2\ Includes a small percentage of students who had attained an advanced degree.
\3\ Includes students with a standard high school diploma who enrolled in post-secondary education in the same year as their graduation.
\4\ Includes students whose goal was to transfer to a 4-year institution.
\5\ Determined by a socioeconomic diversity index that includes parental income as a percentage of the 1994 Federal poverty level, parental education, and the proportion of the student body at
the student's high school that was eligible for free or reduced-price lunch.
Note: Data reflect completion and enrollment status by spring 2001 of first-time post-secondary students starting in academic year 1995-1996. Race categories exclude persons of Hispanic
ethnicity. Detail may not sum to totals because of rounding. Standard errors appear in parentheses.
Source: U.S. Department of Education, National Center for Education Statistics, 1996/01 Beginning Post-Secondary Students Longitudinal Study (BPS:96/01). (This table was prepared in August).
Attachment 16
[November 25, 2008]
The Chronicle of Higher Education--Graduate Students
NACUBO AND COMMONFUND TO TEAM UP ON ENDOWMENT REPORT
The two organizations that now compile and analyze data on
university endowments plan to announce today that they are combining
their efforts to produce a single report.
The new report, which will be a joint project of the National
Association of College and University Business Officers and the
Commonfund Institute, will cover the 2009 fiscal year and be released
in January 2010.
Nacubo's report on endowments for the 2008 fiscal year, due out in
late January, will be the last one conducted in partnership with TIAA-
CREF, the giant pension and investment company.
The Commonfund Institute now publishes an annual ``Benchmarks Study
of Educational Endowments'' that includes information on endowments of
colleges, independent schools, and other educational institutions. The
institute said it would continue to collect data on such entities, but
publish those statistics in a separate report.
Officials of both organizations said the change would eliminate the
need for institutions to respond to two similar surveys. About 800
institutions now reply to each one, with a rate of duplication of 66
percent. Officials hope to have about 1,000 institutions participate in
the combined survey.--Goldie Blumenstyk
______
[January 24, 2008]
Endowment Spending Rate Drops Slightly
At a time that some lawmakers are pushing colleges to spend more of
their endowments, data being released today suggest that the opposite
was the trend last year. The average spending rate on college
endowments in 2007 was 4.6 percent, the lowest since 1999 and 0.5
percentage points lower than the high point of the last decade, 5.1
percent in 2002 and 2003.
For the wealthiest colleges, the spending rate was even lower.
Colleges with endowments larger than $500 million spent on average only
4.4 percent in 2007. For colleges with endowments greater than $500
million but less than $1 billion, that's the lowest rate since 1999,
and for colleges with endowments greater than $1 billion, that's the
lowest rate since 2001.
The figures come from the annual endowment report of the National
Association of College and University Business Officers. The report
found that the average rate of return of the 785 colleges in the study
was 17.2 percent. As is typically the case, the wealthier institutions
saw the largest gains. The average returns for those in the billion-
dollar plus category were 21.3 percent last year, while those with
endowments up to $25 million saw a rate of return of only 14.1 percent.
Those at the very top saw astronomical gains. Harvard's endowment
grew by just under 20 percent, to $34.6 billion. If you took just the
gain in Harvard's endowment in 2007 ($5.7 billion), that sum alone
would be larger than the endowments of all but 15 universities. Number
16, Washington University in St. Louis, has an endowment of $5.6
billion. Harvard's gains alone are more than the combined endowments of
every historically black college in the country (and plenty of other
categories of college, too). Even within the group of national research
universities, Harvard and a few other institutions are in a completely
different financial league from most others. If you added the
endowments of Johns Hopkins University, Cornell University, Duke
University and the University of Chicago, you wouldn't equal the total
of either Harvard or Yale University, which is in second at $22.5
billion.
The release of the annual report on endowments is both miserably
timed and beautifully timed, from the perspective of those with large
endowments. The timing is poor because there are plenty of figures that
will buttress the arguments being made that colleges are exceptionally
wealthy and should be spending much more of their money. The timing is
ideal--in a somewhat odd way--because a development that endowment
managers hate to see (sharp declines in the stock market) backs up one
of their main points: that endowments shouldn't be pressured to spend
more in good years because they need the money for tight years.
The data on endowment spend rates show a gradual decline over the
last 5 years.
Average Endowment Spending Rates, 2003-2007
----------------------------------------------------------------------------------------------------------------
2007 [In 2006 [In 2005 [In 2004 [In 2003 [In
Endowment Assets
percent] percent] percent] percent] percent]
----------------------------------------------------------------------------------------------------------------
Greater than $1 billion....................................... 4.4 4.5 4.8 5.2 5.3
Greater than $500 million to $1 billion....................... 4.4 4.5 4.7 5.0 5.2
Greater than $100 million to $500 million..................... 4.6 4.6 4.7 5.0 5.2
Greater than $50 million to $100 million...................... 4.8 4.7 4.8 4.9 5.3
Greater than $25 million to $50 million....................... 4.8 4.7 4.7 4.7 4.9
Up to $25 million............................................. 4.6 4.7 4.7 4.5 4.8
All........................................................... 4.6 4.7 4.7 4.9 5.1
----------------------------------------------------------------------------------------------------------------
John Walda, president of NACUBO, said that the declines this year
in spending rates are largely because so many colleges saw large
increases in endowment earnings. ``It takes a while to catch up, and to
direct money into programs that they weren't spending before,'' he
said. The many colleges that are significantly increasing spending on
financial aid this year, Walda said, are generally doing so in part by
increasing their spending rates.
Further, Walda said that ``the focus shouldn't be on what the spend
rate is from 1 year to the next or the value of an endowment from 1
year to the next, but the value over time and over a 10-year period.''
He added: ``You don't set a spend rate based on 1 year's investment
results. You arrive at a spend rate as a matter of policy so you can
maintain value.''
Those arguments are generally accepted by college leaders, but not
by some prominent critics. Lynne Munson, an adjunct research fellow at
the Center for College Affordability and Productivity, is working on a
book on endowment hoarding, and she has written here and elsewhere that
colleges should spend more now to cut tuition and in some cases to
eliminate it.
``Even though many schools continue to get better and better at
managing their endowments, they haven't thought about sharing this
tremendous wealth,'' she said, arguing that the wealthiest institutions
should become free. She noted that Harvard's much-discussed shift in
financial aid policies will cost the university about $22 million a
year--hardly enough to make a dent in the $5 billion-plus coming in
from endowment earnings and gifts. Munson called Harvard's aid plans
``little more than a PR stunt.''
Walda said he was concerned that the public and journalists were
paying too much attention to Harvard. He said that the 76 colleges with
endowments of at least $1 billion shouldn't be used to set policy for
everyone else. Most institutions have far more limited resources and
can't afford to take as much risk as do wealthier universities, he
said.
While the higher education lobbying groups are lining up to oppose
any effort by Congress to push colleges to spend more of their
endowments, some institutions that serve low-income students--and do so
with small endowments--say that they don't have much sympathy for the
idea that Ivy League institutions need to be protected to spend less.
Philander Smith College is a historically black institution in
Arkansas, with an endowment of about $14.5 million. Its president,
Walter M. Kimbrough, said that the college typically spends between 4
and 5 percent of its endowment a year--a proportion similar to that
used at the wealthiest institutions. But Kimbrough noted that his
college doesn't have professional money managers and can't afford to
take much risk, so his endowment is typically earning 5 to 7 percent a
year. So he's spending most (and some years all) of his endowment
growth.
``I have to squeeze out every bit I can for my students, so I'm not
going to have a strict policy. I spend what I need to,'' he said. With
70 percent of his students eligible for Pell Grants, a year when
Federal aid spending is flat is going to be a year he has to spend
more, or he would lose students, he said.
Kimbrough said he understands the principles that college
endowments should be saved for rainy days, and that the market can
never be a sure thing. But from the perspective of an institution
without much of an endowment, he said it's hard to understand why
others aren't spending more.
``When you have successive years of earning double-digit increases,
15 percent and above, you can't spend 5 percent?'' he asked, noting a
figure some critics say should be a minimum. ``There isn't a
substantive reason why those institutions can't spend 5 percent.''
Imagine what might happen if colleges with mega-endowments gave
some of that money to Pell Grants for use anywhere, Kimbrough said.
While the idea may seem unrealistic, he said there comes a point when
enough money should be enough. ``There's a point where you should say:
They have plenty of money. They don't need any more. Don't give them
any more. There isn't a greater good any more.''
Over all, the 1-year returns have been exceptionally good for the
wealthiest colleges, especially in the last year. But Walda noted that
taking a 10-year perspective, the returns are healthy but not as
spectacular.
Returns by Endowment Size Over 1, 3, 5 and 10 years
------------------------------------------------------------------------
1-Year 3-Year 5-Year 10-Year
Return Return Return Return
Endowment Assets [In [In [In [In
percent] percent] percent] percent]
------------------------------------------------------------------------
Greater than $1 billion......... 21.3 16.4 13.9 11.1
Greater than $500 million to $1 19.3 14.2 12.3 9.5
billion........................
Greater than $100 million to 18.0 13.1 11.5 8.5
$500 million...................
Greater than $50 million to $100 16.7 11.9 10.8 7.9
million........................
Greater than $25 million to $50 15.9 10.7 9.8 7.3
million........................
Up to $25 million............... 14.1 9.7 8.8 6.7
All............................. 17.2 12.4 11.1 8.6
------------------------------------------------------------------------
The data continue to show the impact of wealthier colleges' ability
to invest with riskier strategies, which may also have the highest
potential payoff. Generally, wealthier colleges have larger shares of
their endowments in hedge funds, private equity and venture capital--
and smaller shares in fixed income and domestic equity. Walda said he
expected that the current market downturn would probably prompt
strategy shifts at some institutions, but he said it was too early to
tell exactly what they would be.
The NACUBO data on individual colleges show endowment growth, but
not rates of return. Endowment growth includes earnings and gifts, and
takes away spending. Not every college participates in the NACUBO
survey, although generally the wealthiest institutions do. So it is
possible that in some of the subcategories noted below that other
colleges would be in the lists had they participated in the survey. The
rank figure refers to the colleges' ranks among all survey
participants. So Williams College, first among liberal arts colleges,
is 33 among all institutions.
Among the top institutions, there was relatively little change,
with the very top remaining the same and some institutions moving up or
down a few spots. In the liberal arts category, Williams and Pomona
Colleges displaced Grinnell College from its recent position on the top
of the list.
Top 20 Endowments
----------------------------------------------------------------------------------------------------------------
1-Year
Change
Rank Institution 2007 Endowment [In
percent]
----------------------------------------------------------------------------------------------------------------
1.............................................. Harvard U......................... $34,634,906,000 +19.8
2.............................................. Yale U............................ $22,530,200,000 +25.0
3.............................................. Stanford U........................ $17,164,836,000 +21.9
4.............................................. Princeton U....................... $15,787,200,000 +21.0
5.............................................. U. of Texas System................ $15,613,672,000 +18.0
6.............................................. Massachussetts Inst. of Technology $9,980,410,000 +19.3
7.............................................. Columbia U........................ $7,149,803,000 +20.4
8.............................................. U. of Michigan.................... $7,089,830,000 +25.4
9.............................................. U. of Pennsylvania................ $6,635,187,000 +24.9
10............................................. Texas A&M U. System............... $6,590,300,000 +16.8
11............................................. Northwestern U.................... $6,503,292,000 +26.5
12............................................. U. of California.................. $6,439,436,000 +16.2
13............................................. U. of Chicago..................... $6,204,189,000 +27.5
14............................................. U. of Notre Dame.................. $5,976,973,000 +34.7
15............................................. Duke U............................ $5,910,280,000 +31.4
16............................................. Washington U. in St. Louis........ $5,567,843,000 +18.9
17............................................. Emory U........................... $5,561,743,000 +14.2
18............................................. Cornell U......................... $5,424,733,000 +25.5
19............................................. Rice U............................ $4,669,544,000 +17.1
20............................................. U. of Virginia.................... $4,370,209,000 +20.8
----------------------------------------------------------------------------------------------------------------
Top 10 Liberal Arts College Endowments
----------------------------------------------------------------------------------------------------------------
1-Year
Change
Rank College 2007 Endowment [In
percent]
----------------------------------------------------------------------------------------------------------------
33............................................. Williams College.................. $1,892,055,000 +29.4
38............................................. Pomona College.................... $1,760,902,000 +20.8
40............................................. Grinnell College.................. $1,718,313,000 +16.7
42............................................. Amherst College................... $1,662,377,000 +24.3
43............................................. Wellesley College................. $1,656,565,000 +17.3
50............................................. Swarthmore College................ $1,441,232,000 +15.7
53............................................. Smith College..................... $1,360,966,000 +17.7
68............................................. Berea College..................... $1,102,272,000 +16.2
84............................................. Middlebury College................ $936,354,000 +20.7
87............................................. Vassar College.................... $,869,122,000 +17.2
----------------------------------------------------------------------------------------------------------------
Top 5 Canadian University Endowments
----------------------------------------------------------------------------------------------------------------
1-Year
2007 Endowment Change
Rank College (U.S. $) [In
percent]
----------------------------------------------------------------------------------------------------------------
37............................................. U. of Toronto..................... $1,763,764,000 +24.7
75............................................. U. of British Columbia............ $1,013,532,000 +31.2
88............................................. McGill U.......................... $863,405,000 +18.3
99............................................. U. of Alberta..................... $722,539,000 +29.6
122............................................ Queen's U......................... $614,739,000 +22.5
----------------------------------------------------------------------------------------------------------------
Top 5 Historically Black College Endowments
----------------------------------------------------------------------------------------------------------------
1-Year
Change
Rank College 2007 Endowment [In
percent]
----------------------------------------------------------------------------------------------------------------
138............................................ Howard U.......................... $523,690,000 +23.5
189............................................ Spelman College................... $340,261,000 +16.7
223............................................ Hampton U......................... $256,990,000 +18.1
433............................................ Meharry Medical College........... $78,421,000 +19.5
502............................................ Morehouse School of Medicine...... $56,385,000 +22.3
----------------------------------------------------------------------------------------------------------------
Top 5 Community College Endowments
----------------------------------------------------------------------------------------------------------------
1-Year
Change
Rank College 2007 Endowment [In
percent]
----------------------------------------------------------------------------------------------------------------
462............................................ Valencia CC (Florida)............. $68,004,000 +19.4
612............................................ Florida CC at Jacksonville........ $32,923,000 +35.9
623............................................ Harrisburg Area CC (Pennsylvania). $30,563,000 +10.6
642............................................ Sinclair CC (Ohio)................ $27,690,000 +17.3
644............................................ Kentucky Community and Technical $27,422,000 +29.3
College System.
----------------------------------------------------------------------------------------------------------------
Attachment 17
[Washington Times, April 12, 2010]
Community Colleges Enjoy Attention But Need Money
(By Eric Gorski, Associated Press)
Politicians and policymakers are lavishing unprecedented attention
on community colleges, promoting them as engines to train workers in
the recession and boost the country's college graduation rates.
Where rhetoric meets reality on campus, you'll find people like
Tania DeLeon, a student at Folsom Lake College in California who has
trouble getting into the classes she wants, must shuttle between two
campuses 45 minutes apart and is spending spring break earning a
paycheck so she can pay for gas and graduate on time.
Grappling with soaring enrollment and plummeting State support,
community colleges are grateful for the higher profile but disappointed
that money has yet to materialize to help them keep up with demand, let
alone meet ambitious Obama administration goals to make the United
States the global leader in college graduation rates again by 2020.
``It's a difficult, challenging time for us,'' said George Boggs,
president and chief executive officer of the American Association of
Community Colleges. ``But in the longer-term view, we've never seen the
image of community colleges as high as it is right now. Overall, I'm
optimistic for the future.''
No longer the afterthought of higher education, the Nation's 1,200
community, technical and junior colleges enroll more than 6 million
students--almost half the Nation's college population. Public colleges'
open-door policies and low fees draw many low-income, first-generation,
immigrant and Hispanic students.
The economic downturn has pressured schools as well as their
students, most of whom work long hours. Sinking tax revenues at State
and local levels have forced public colleges to cut courses or schedule
them around the clock, slash summer sessions, eliminate academic
programs and even restrict enrollment.
In Detroit, record demand prompted the Wayne County Community
College District to cap student enrollment this spring for the first
time in its 40-year history. Louisiana's community and technical
colleges, facing a 4.5 percent State budget cut, have slashed 100
academic programs in the past year.
A survey of 128 community college systems released last week found
that 52 percent reported reductions in their operating budgets this
year, a slight improvement over last year's grim numbers. But those
facing cuts face steeper ones: The number of campuses with cuts
exceeding 10 percent more than doubled.
The crunch leaves little money for remedial education reform,
counseling to better prepare students for college's challenges and
other innovations to improve completion rates. Just 35 percent of
community college entrants earn a certificate or an associate or
bachelor's degree within 6 years, estimates show.
``You put all these factors together, it's sort of a perfect
storm,'' said Michael Kirst, professor emeritus of education and
business administration at Stanford University. ``One would predict our
graduation rates will decline, not increase, from the community
colleges. We'll move backwards.''
Consider the challenges facing Miss DeLeon, who, like many other
community college students, is trying to become the first in her family
to graduate from college.
When she started at Folsom Lake College outside Sacramento in 2007,
Miss DeLeon had no problem finding courses. She finished school by
midday and went to work. Then the budget crisis struck California.
``Now I'm taking a class that ends at 10 o'clock at night,'' she
said.
Miss DeLeon commuted between two campuses in the Los Rios Community
College system--California's second largest--to take the courses she
needed to finish on time. Next month, Miss DeLeon will graduate and
transfer to California State University at Sacramento to pursue a
career in juvenile justice.
The picture is even bleaker for some schools that rely on local as
well as State tax dollars.
Montgomery College in Maryland, renowned for its engineering
program, is facing a proposed 12 percent cut in county money and $14.5
million less than it requested--the cost of operating one of its three
campuses.
``Everyone talks about jobs, jobs, jobs,'' interim President
Hercules Pinkney said. ``Well, we're the ones training the workforce.
Hopefully, that argument will win the day.''
The timing couldn't be worse coming off a record fall enrollment of
26,000, State budget cuts and proposed tuition increases.
Community colleges received their latest lesson in economic and
political realities recently when President Obama signed legislation
overhauling the Federal student loan program.
The law, a centerpiece of Mr. Obama's education agenda, strips
banks of their role as middlemen in the loan business and puts the
government in charge, saving an estimated $61 million over 10 years.
The House version approved last fall called for community colleges
to receive $10 billion to help fulfill the White House's American
Graduation Initiative, providing an infusion of Federal cash for job
training, building projects and initiatives to get more students out
the door with degrees or certificates.
But because the projected savings from axing the bank subsidies
were less than anticipated, community colleges instead will get only $2
billion for job training alone.
Most of the money from the overhaul will go to expand the maximum
size of Pell grants for needy students. Additional money set aside for
Hispanic-serving institutions will benefit community colleges.
Frank Chong, the U.S. Department of Education's deputy assistant
secretary for community colleges, said the $2 billion is ``something of
a down payment'' on the graduation initiative.
``We need to use those funds to move the cause forward,'' said Mr.
Chong, former president of Laney College, the flagship of California's
Peralta Community College District. ``We know our work is not done
yet.''
For now, community colleges are doing what they've always done:
more with less.
One case in point is Northern Virginia Community College, the
setting for Mr. Obama's bill-signing ceremony for the student loan
initiative.
The school has experienced a 23 percent cut in State funding and 24
percent enrollment growth in the past 3 years. Yet it has expanded
online offerings to better combine electronic learning with classroom
instruction and used its world language program to attract
international students, who pay higher tuition.
``A significant portion of higher education is hunkered down,
trying to wait out the storm,'' said college President Robert Templin.
``We've taken the approach that while things will get better, they will
never get back to the way they were. We're going to have to find new
ways to do our work.''
______
DeVry Inc.,
Downers Grove, IL 60515-5799,
July 22, 2010.
Hon. Tom Harkin, Chairman,
Committee on Health, Education, Labor, and Pensions,
428 Dirksen Senate Office Building,
Washington, DC 20510.
Hon. Michael B. Enzi, Ranking Member,
Committee on Health, Education, Labor, and Pensions,
835 Hart Senate Office Building,
Washington, DC 20510.
Dear Chairman Harkin and Ranking Member Enzi: As per our previous
communication on July 15, 2010, below please find the answer to
Chairman Harkin's question 4(d):
Question 1. What was the number of students who enrolled between
October 1, 2008 and August 1, 2009 but were no longer enrolled in
September 2009?
Answer 1. Of those undergraduate students counted in 4(c), the
number who had not graduated and were not enrolled in summer 2009 is
provided below for DeVry University and Chamberlain College of Nursing.
The number who had not completed their program and were not enrolled as
of July 1, 2009 is provided for Apollo College and Western Career
College.
Apollo College: 4,294
Chamberlain College of Nursing: 1,436
DeVry University (U.S.): 33,745
Western Career College: 2,580
Thank you again for the opportunity to provide this information to
the Senate Committee. Should the need arise for further information;
please contact me directly at (630) 515-3146 or at [email protected].
Sincerely,
Sharon Thomas Parrott,
Senior Vice President, Government and
Regulatory Affairs Chief Compliance Officer.
______
Response to Questions of Senator Harkin, Senator Enzi, Senator Dodd,
Senator Casey, Senator Hagan, Senator Brown, and Senator Coburn, M.D.*
by Steven Eisman
QUESTION OF SENATOR HARKIN
Question 1. In exploring comparisons between the subprime mortgage
crisis and the business model used by large for-profit schools, it was
discussed that student loans, unlike other consumer debt may not be
discharged in bankruptcy except in cases of extreme hardship. You were
then asked if a home mortgage could be discharged in bankruptcy and
responded that you did not believe it could. My understanding is that
if a borrower files for bankruptcy and stops paying his or her
mortgage, he or she loses her house. Is that your understanding as
well?
---------------------------------------------------------------------------
* The views expressed herein and at the June 24, 2010 hearing are
exclusively those of Steven Eisman and do not necessarily reflect those
of FrontPoint Partners LLC or its affiliates.
---------------------------------------------------------------------------
Answer 1. Yes. A mortgage is not dischargeable in bankruptcy but a
borrower can default and lose his house. Generally, a lender will not
go after the borrower any longer.
QUESTIONS OF SENATOR ENZI
Question 1. Mr. Eisman, I understand you are a hedge fund manager
and that you and your hedge fund profited from short selling mortgage
investments during the subprime crisis. What financial interests do
you, your firm and its current clients have in the topic of this
hearing? Please explain, including whether your fund has or will take
short positions in any for-profit educational investments. Are you
willing to commit to this committee that you will not take short
positions in for-profit educational investments?
Answer 1. I am a hedge fund manger who has the ability to go long
and short stocks. My research has led me to believe that the for-profit
education industry is loading its students up with too much debt. And
that, in many cases, the education provided by the for-profit industry
is poor. I am short several companies in this industry under an
assumption that changes that can and should be made will hurt the
profitability of the industry. I have been very transparent that I am
short in this industry and I will not make any commitment that I will
not take short positions in this sector.
Question 2. Have you done a similar analysis of student debt,
default rates, graduation rates and placement rates at other
institutions of higher education? Specifically, have you compared your
findings regarding for-profit schools to community colleges? If so,
what did your research reveal?
Answer 2. Tuition and fees at for-profit institutions averaged
$14,174 in 2008-2009. During the same years, the average in-state
tuition and fees at public 4-yr institutions was $7,020 per year and
the annual tuition and fees at public 2-yr colleges (community
colleges) was $2,544 per year.
For-profit students borrow much more than traditional 4-year and
community college students. Eighty-eight percent of students in the
for-profit sector took out Stafford Loans in 2007-2008, compared to 42
percent of public 4-year students, and only 10 percent of public 2-year
college students.
For-profit students also borrow substantially more on a per student
basis. According to data from the College Board, the debt incurred from
attending a 2-yr program at a community college is about $4,550; the
debt incurred from attending a for-profit 2-yr program is approximately
$20,100. The debt incurred from attending a for-profit institution is
roughly 5x the debt incurred from attending a community college for
both associates degrees and certificate programs.
Distribution of Undergraduate Debt by Sector and Type of Degree or Certificate, 2007-2008
----------------------------------------------------------------------------------------------------------------
$0-10K $10K-20K $20K-30K $30K-40K $40K+
Institution Type $0 [In [In [In [In [In [In Average
percent] percent] percent] percent] percent] percent] Debt
----------------------------------------------------------------------------------------------------------------
Bachelor's Degree:
Public 4-yr.................... 38 16 19 14 6 6 $12,850
Private 4-yr................... 28 10 19 17 10 15 $20,1000
FOR-PROFIT..................... 4 4 12 23 33 24 $33,700
Associate's Degree:
Public 2-yr (comm college)..... 62 23 9 3 2 1 $4,550
FOR-PROFIT..................... 2 22 34 23 13 6 $20,100
Certificate:
Public 2-yr (comm college)..... 70 21 7 1 1 1 $2,825
FOR-PROFIT..................... 100 46 34 8 2 1 $10,400
----------------------------------------------------------------------------------------------------------------
Source: College Board Trends in Student Aid 2009.
According to the Department of Education's recent release of 3-yr
trial cohort default data, for-profit institutional default rates are
higher than every other institution type.
------------------------------------------------------------------------
2-Year 3-Year
default default
Institution Type rate [In rate [In
percent] percent]
------------------------------------------------------------------------
Private 2-Yr.................................. 7.7 14.7
Private 4-Yr.................................. 3.7 6.3
Public 2-Yr (comm college).................... 9.9 16.2
Public 4-Yr................................... 4.4 7.1
FOR PROFIT.................................... 11.0 21.2
------------------------------------------------------------------------
In addition, recent data released by the Department of Education
shows that the 15-year default rate (closer to true lifetime rates) for
community college students is 31 percent, while the 15-year default
rate for for-profit students is 40 percent. This also mirrors the
Department's view of expected lifetime default rates for for-profit
versus community college students. For community college students
entering repayment in 2007, the DOE expects 31.6 percent of students to
default; for the for-profit students of the same year (2007), the DOE
expects 47 percent of the students to enter default. With the way
current default rates are trending, we expect that the DOE's lifetime
default expectations for the for-profit student classes of 2008 and
2009 will be north of 50 percent.
----------------------------------------------------------------------------------------------------------------
Cohort Yr Cohort Yr Cohort Yr Cohort Yr Cohort Yr
2003 2004 2005 2006 2007
----------------------------------------------------------------
Budget Budget Budget Budget Budget
Institutional category lifetime lifetime lifetime lifetime lifetime
default default default default default
rate [In rate [In rate [In rate [In rate [In
percent] percent] percent] percent] percent]
----------------------------------------------------------------------------------------------------------------
2-Yr Nonprofit................................. 26.4 27.4 29.3 31.2 31.6
2-Yr Proprietary............................... 42.5 42.5 42.3 43.5 47.0
4-Yr Freshman & Sophomores..................... 19.3 20.5 21.9 22.2 22.0
4-Yr Juniors & Seniors......................... 8.2 8.5 9.8 11.6 12.3
Graduate Students.............................. 3.4 3.7 4.5 5.9 6.3
----------------------------------------------------------------
Overall...................................... 11.5 12.2 13.2 14.6 15.3
----------------------------------------------------------------------------------------------------------------
Source: http://ifap.ed.gov/eannouncements/attachments/121409EACDRlifetimerateattachment2ratechartPPD.pdf.
QUESTION OF SENATOR DODD
Question 1. Mr. Eisman, to your knowledge, are there other Federal
funding streams that are such a large percentage of another industry's
profit? Do you know what percentage of these funds are spent on
executive compensation? Are these funding streams equitable to the
spending practices and investments of this sector?
Answer 1. The Defense Industry receives as a large a percentage of
its revenues and profits directly from the Federal Government. In 2009,
companies such as Lockheed Martin, Raytheon, and Northrop Grumman
received 85 percent, 88 percent and 91 percent of their revenues
(respectively) directly from the U.S. Government. In 2009, Lockheed
earned a 9.9 percent operating margin (pre-tax profits) on U.S.
Government contracts. Raytheon earned a 12.4 percent operating margin
and Northrop earned a 7.4 percent operating margin. This basically
means that defense companies earns about 7 to 12 cents of pre-tax
profit on every dollar of revenue received from the U.S. government.
This pales in comparison to some of the larger for-profit education
companies such as Apollo Group, ITT Technical Institute and Strayer
Education, who in 2009 reported 28 percent, 37 percent, and 34 percent
operating margins, or between 28 cents and 37 cents of pre-tax profits
on every dollar of revenue. Education companies earn roughly 3 times as
much profit as Defense companies on every U.S. government dollar they
receive.
In terms of compensation, the table below shows the top 5
executives at major for-profit institutions earn more than 7 times as
much as the top 5 executives at major Defense Companies on every dollar
of revenue received from the U.S. Government.
----------------------------------------------------------------------------------------------------------------
Defense companies Education companies
-------------------------------------------------------------
Apollo
Lockheed Raytheon Northrup Group ITT Tech Corinthian
----------------------------------------------------------------------------------------------------------------
2009 Sales........................................ $45,189 $24,881 $33,755 $3,974 $1,319 $1,308
Percent of revenue from U.S. Govt................. 85% 88% 91% 89% 85% 89%
2009 Top 5 total compensation..................... $52.9 $34.8 $41.8 $34.7 $14.4 $11.2
Percent of 2009 Sales............................. 0.12% 0.14% 0.12% 0.87% 1.09% 0.86%
Defense company avg. percent sales................ 0.13% ........ ........ ........ ........ ..........
For-profit company avg. percent sales............. 0.94% ........ ........ ........ ........ ..........
For-profit vs. Defense comp....................... 7.4 x ........ ........ ........ ........ ..........
----------------------------------------------------------------------------------------------------------------
Source: Company financials and proxy statements. Sales and compensation dollars in millions.
In 2009, the top 5 executives at the largest for-profit education
company (Apollo Group) earned roughly the same amount as the top 5
executives from Raytheon, or $35 million. In 2009, Raytheon reported
$25 billion in revenues and Apollo reported $4 billion. Therefore,
Apollo executives took home more than 6 times as much in total
compensation on every dollar of revenue received; revenue which is
predominantly from the U.S. government.
QUESTIONS OF SENATOR CASEY
Question 1. The President has set the goal of the United States
leading the world in college graduates by the year 2020. In your
opinion, what is the role of for-profit colleges in trying to achieve
this goal?
Answer 1. It is not my place to comment on the role of for-profit
education in the larger scheme of education. I believe that is the
appropriate role for policymakers and lawmakers. I am simply trying to
bring out the problems of the for-profit education industry and how it
might be fixed.
Question 2. What are for-profit schools currently required to
report to the Department of Education around graduation rates and
placement rates? How are placement rates tracked?
Answer 2. For-profit schools are not required to report either
graduation or placement rates. They must maintain certain placement
rates (typically >70 percent) to remain in compliance with their
accrediting bodies, but there are no legal requirements for graduation
or placement rates.
For-profit schools report graduation rates of 1st time 1st borrower
students to the DOE (those are true ``traditional'' 1st time college
students, who have no prior college experience or loans). Those
students however, only make up a fraction of total students at the for-
profit schools, so it is very difficult to know what the true
graduation rates are. For placements, some schools disclose graduate
placement rates (although I don't believe they are required to) yet the
numbers are not independently verified. There are no formal
requirements or official mechanisms to track actual graduation and
placement rates that we are aware of.
Question 3. What, if any, statutory or regulatory changes should be
made to strengthen the rules governing for-profit colleges? Are the
penalties strong enough to hold these institutions accountable?
Answer 3. The problem with the for-profit education industry, in my
view, is that risk and reward have been divorced. The for-profit
education industry receives close to 90 percent of its revenue from
Federal loans and grants but it bears none of the risk of default. That
risk is borne by the government, the student and the taxpayer. Risk
sharing is appropriate. In the power point presentation I submitted to
the committee along with my original testimony, I outlined how such a
risk sharing would work. Essentially, the industry should take the
first loss position up to a certain level chosen by Congress and/or the
Department of Education. That way, all losses up to a certain
percentage are borne solely by the industry. Because the companies
would be financially penalized for recruiting students that they didn't
believe would ultimately succeed, a measure of this sort would force
companies to focus on and improve outcomes. These schools are profit-
motivated operations; to keep their profits (or avoid losses from
defaults), this measure would change the behavior of the industry by
making it accountable for the product/service it is delivering. This
should ultimately bring default rates down dramatically.
QUESTIONS OF SENATOR HAGAN
Question 1. Mr. Eisman, in your testimony you give an example of a
school that has roughly a 40 percent operating margin--as compared to
the 7-12 percent margin other companies that receive major government
contracts.
Can you give us some perspective on how the proprietary education
sector's profits compare to other major industries?
Answer 1. Please see answer to Senator Dodd's question above.
In addition to that answer, below is a table of the Dow 30
companies 2009 operating margins versus for-profit education companies.
------------------------------------------------------------------------
2009 OM
Ticker Name [In
percent]
------------------------------------------------------------------------
MMM UN Equity...................... 3M Co................. 20.8
AA UN Equity....................... Alcoa Inc............. ^5.2
AXP UN Equity...................... American Express Co... 10.6
T UN Equity........................ AT&T Inc.............. 17.5
BAC UN Equity...................... Bank of America Corp.. 10.1
BA UN Equity....................... Boeing Co/The......... 3.1
CAT UN Equity...................... Caterpillar Inc....... 1.8
CVX UN Equity...................... Chevron Corp.......... 9.0
CSCO UW Equity..................... Cisco Systems Inc..... 20.5
KO UN Equity....................... Coca-Cola Co/The...... 26.6
DD UN Equity....................... DuPont................ 6.1
XOM UN Equity...................... Exxon Mobil Corp...... 9.5
GE UN Equity....................... General Electric Co... 6.5
HPQ UN Equity...................... Hewlitt Packard Co.... 30.5
HD UN Equity....................... Home Depot Inc........ 7.3
INTC UW Equity..................... Intel Corp............ 16.9
IBM UN Equity...................... International Business 17.8
Machines Corp..
JNJ UN Equity...................... Johnson & Johnson..... 26.9
JPM UN Equity...................... JPMorgan Chase & Co... 18.2
KFT UN Equity...................... Kraft Foods Inc....... 13.5
MCD UN Equity...................... McDonald's Corp....... 29.8
MRK UN Equity...................... Merck & Co. Inc....... 25.6
MSFT UW Equity..................... Microsoft Corp........ 35.4
PFE UN Equity...................... Pfizer Inc............ 31.0
PG UN Equity....................... Procter & Gamble Co./ 20.4
The.
TRV UN Equity...................... Travelers Cos Inc./The 20.6
UTX UN Equity...................... United Technologies 12.2
Corp..
VZ UN Equity....................... Verizon Communications 18.1
Inc..
WMT UN Equity...................... Walmart Stores, Inc... 5.9
DIS UN Equity...................... Walt Disney Co./The... 15.8
------------------------------------
Average Operating 16.1
Margins.
------------------------------------
Apollo Group.......... 28.2
Corinthian Colleges... 9.5
Career Education 12.3
Corporation.
Capella Education 19.1
Company.
DeVry Inc............. 16.7
ITT Technical 37.1
Institute.
Strayer University.... 33.7
------------------------------------
Average Operating 22.3
Margins.
------------------------------------------------------------------------
Question 2. Mr. Eisman, you have spent a great deal of time
studying the for-profit education industry.
That said, could you elaborate on parallels you see between the
oversight of subprime lenders and the oversight and accountability
system that deals with for-profit colleges?
Answer 2. Some subprime lending occurred at banks and their
activities were overseen by Federal regulators. But much subprime
lending occurred at non-bank financials, and they were regulated by
State authorities, if at all.
The for-profit education industry is partially regulated by the
Department of Education. However the accreditation process is performed
by independent accrediting bodies.
There are two kinds of accreditation--national and regional.
Accreditation bodies are non-governmental, non-profit peer-reviewing
groups. Schools must earn and maintain proper accreditation to remain
eligible for title IV programs. The relationship of the for-profit
education industry and the national accrediting boards is, in my view,
similar to the relationship between the rating agencies and investment
banks. There, Wall Street paid the rating agencies for ratings on
subprime securitizations that turned out to be overly optimistic. Here,
the industry, we believe, controls the national accrediting bodies by
actually sitting on the boards of those very same institutions.
Historically, most for-profit schools are nationally accredited but
national accreditation holds less value than regional accreditation.
The latest trend of for-profit institutions is to acquire the dearly
coveted Regional Accreditation through the outright purchase of small,
financially distressed non-profit institutions and then put that school
on-line. In March 2005, BPI acquired the regionally accredited
Franciscan University of the Prairies and renamed it Ashford
University. On the date of purchase, Franciscan (now Ashford) had 312
students. BPI took that school online and at the end of 2009 it had
54,000 students.
Question 3. At the end of fiscal year 2010, there are estimated to
be over $700 billion in outstanding, federally backed student loans.
Taxpayers are backing almost all of those loans.
I realize that this question can apply equally to non-profit
institutions as well, but since we're talking about the for-profit
industry today, could any of the witnesses tell me what specific,
quantitative measurements we have across the industry to tell us what
the taxpayers are getting for all that money? What sort of industry-
wide performance measures are available to help us better understand
the performance of institutions that survive on the largess of the
taxpayer?
Answer 3. There are virtually no independently verifiably
performance measures that exist to determine the quality of the
education delivered by for-profit education companies. While some
companies report graduation and placement rates and starting salary
data, all of these numbers are internally generated within the
companies and are not verifiable. They do not paint an accurate picture
of quality. Cohort default rates help to highlight some degree of
quality--generally schools with higher defaults are perceived to be of
lower quality (in our view). But default numbers are also misleading
due to their short timeframe and the widespread use of forbearances and
deferrals to bring default numbers down. We have even seen instances of
schools paying down student's government loans to reduce reported
default rates. In sum, we don't believe there are any reliable measures
to measure the quality of programs at for-profit institutions and have
no means of gauging the return taxpayers are getting on their
investment.
Question 4. Some say that the for-profit sector is highly regulated
with oversight from the U.S. Department of Education, State licensure
agencies and accrediting bodies. Others may disagree, citing that much
more needs to be done.
That said, what are your thoughts on how can we better align the
goals of each of these agencies so that everyone is demanding the
highest quality outcomes for every institution?
Answer 4. No answer.
Question 5. Many of you in your testimony mention the ``90/10
rule,'' the provision that requires proprietary institutions of higher
education to have at least 10 percent of the institution's revenues
from sources that are not derived from funds provided through Federal
financial aid.
Is there a way to more accurately track the percentage of title IV
dollars that schools receive?
Answer 5. The Department of Education already tracks gross
disbursements to students, by institution. They would need to factor in
title IV returns and refunds on an annual basis and match that with
annual gross disbursements to get to a net title IV disbursement
number. I am not sure if the Department tracks returns and refunds by
school.
The problem with 90/10 is that it is a company-reported figure
(similar to graduation rates, placement rates and other measures of
quality). There is no way to independently verify the accuracy of any
of these company-reported metrics. What would help is to have the
government report whether each company is using a net title IV
disbursement figure.
Question 6. As you know, the purpose of this hearing is for all of
us to get a better sense of how well the for-profit education industry
is serving students. We know that there are good actors as well as bad
actors in the for-profit education industry.
For those of us who want to ensure that anyone who has the drive
and desire to get a high-quality education is able to do so, how do you
suggest we work together to better identify those schools that are
getting the job done and those that aren't?
Answer 6. The way to ultimately identify good from bad players in
our view is entirely outcomes-based. Schools that overcharge and under
deliver (the majority of schools we have researched), will often have
higher than average defaults as a result of high tuition, high drop-out
rates and poor placement rates for their graduates. Therefore, defaults
are critical in understanding the quality of an institution.
In addition, we believe that it is critical to look at the percent
of revenues spent on education. Of the 12 for-profit schools we have
done research on, not one spends more than 50 percent of their revenue
on education. Across 12 schools, the average percent of revenues spent
on educational-related items is 37 percent. A few of the schools such
as Grand Canyon and Bridgepoint actually spend more money on marketing
and advertising (33 percent and 32 percent of sales respectively) then
they do on education.
question of senator brown
Question 1. Your proposal about adding an element of risk sharing
to the for-profit sector in higher education is intriguing. Would you
set up a risk sharing requirement based on size or loan volume? Would
you base it on the ratio of student aid revenue to other revenue? Would
there be a requirement for a reserve fund to reimburse the Federal
Government for loan losses? How would you design a risk sharing
program?
Answer 1. See answer above.
QUESTIONS OF SENATOR COBURN
Question 1. Are institutions of higher education clients of any of
the funds within FrontPoint Financial Services Fund? If so, please
provide a list of the institutions of higher education that FrontPoint
Partners currently represents.
Answer 1. No Answer.
Question 2. Is there an inherent conflict of interest for a hedge
fund to testify before Congress on an industry it is potentially
selling short? Please explain.
Answer 2. I believe in full disclosure. I am short companies in
this industry. But I believe my arguments should stand or fall on their
own merit. In 2007, I was short the mortgage sector, the rating
agencies and the investment banks. I was quite vocal that I was short
and for the reasons why I was short. Being short did not make those
arguments right or wrong; it just turned out I was right. The same
research process that led me to short the financial services sector has
led me to short the for-profit education industry.
Question 3. In your testimony, you allege that the for-profit
college sector is piling debt onto students who cannot afford to repay
their debt obligations. However, you fail to discuss the numerous
repayment options available to help Federal student loan borrowers
fulfill their debt obligations. How do repayment options such as the
Income-based Repayment (IBR) program--an option that allows borrowers
to scale their student loan repayment amounts to their income, with a
total payment due of $0 for the lowest income earners--factor into your
analysis? Given that the IBR program discharges all outstanding Federal
student loan debt for these borrowers after 20 years, are taxpayers not
already on the hook for a potentially substantial amount of student
loans that borrowers will never repay?
Answer 3. Our analysis does take into account programs like IBR.
IBR has been around for a while and to-date, most schools have admitted
that using IBR has relatively no impact on overall default rates. We do
not know why using IBR has proven ineffective at reducing defaults but
we assume that the historical impact of IBR will continue going
forward.
Question 4. Concerning student loan cohort default rates (both the
current 2-year and draft 3-year rates), how do the cohort default rates
of non-profit and private 2-year colleges and minority serving
institutions compare to those of for-profit institutions? How do the
graduation rates of these institutions compare to those of for-profit
colleges?
Answer 4. See Enzi question #2 answer concerning default rates by
institution-type. Graduation rates are not reported by institution type
and so I do not know how the rates compare.
Question 5. Given the current law sanctions associated with high
cohort default rates, is it the fiduciary responsibility of for-profit
institutions to maintain low default rates?
Answer 5. I don't know if I would call it a fiduciary
responsibility. But the industry is careful to keep its cohort default
rates below those levels. We believe schools manage cohort defaults
through the extensive use of forbearance and deferral options to push
defaults out past the regulated 2-year window. Schools face no
financial or regulatory penalties for operating high default rates so
long as they meet the 2-year threshold requirement.
Question 6. In your opinion, how would Wall Street react to the
Gainful Employment regulations that have been contemplated by the U.S.
Department of Education?
Answer 6. It is always impossible to predict how the market will
react because no one ever knows what is and is not priced. In my view,
the stocks are down from their year highs because of increased
regulation by the DOE and the potential for the imposition of gainful
employment, as well as the potential for new legislation. My
fundamental research indicates that if GE goes through as originally
proposed many schools will have to cut tuition and that would cause
margins to decline.
Question 7. Do nonprofit and public colleges and universities use
the Federal student aid programs to suit their business models? Are
for-profit colleges the only sector of higher education that capitalize
on the Federal student aid programs?
Answer 7. No Answer.
Question 8. Does it concern you that, as a country, we have created
a student aid system that has helped fuel tuition costs? According to
the National Center for Public Policy and Higher Education, from 1982
to 2007, tuition and fees increased 439 percent while median family
income rose 147 percent. Does the overall framework work in your mind,
or has the government created a system that helps drive up tuition and
that invites waste, fraud and abuse into all sectors of higher
education?
Answer 8. I cannot speak to waste and fraud throughout the entire
higher education system because I have not researched the topic.
Question 9. What responsibility do post-secondary students, as
adult consumers, have in taking their futures into their own hands and
researching their post-secondary education and training options?
Answer 9. No Answer.
[Whereupon, at 1:06 p.m., the hearing was adjourned.]