Are For-Profit Colleges Evil?

Editorial – – I was given this interesting article by a colleage at a for-profit college in which I serve as an adjunct professor, Argosy University (Sarasota campus) in the EDMC umbrella. It’s interesting because so many take shots at for profit schools these days. I attended two great and well respected universities, Loyola University for my undergraduate work in psychology, and the University of Florida for all my graduate studies in becoming a clinical and sports psychologist. Still, I see the extreme value of education wherever and whenever you obtain it. Sometimes a for profit school is the best or only bet for an eager adult learner, so why knock it? Sometimes this avenue offers much more than at traditional institutions of learning. I personally developed three sports psychology courses, for example, for EDMC, and they now offer a rare opportunity to students at their programs that teach it. Since I teach a psychology class each semester at Argosy University, I’m also biased in believing that students are getting much more than they ever would gain at Harvard or Yales (wink! 🙂 … now I did not like how this article took a little pot shot at Washington State University for their large hot tub that holds 50 students in their deluxe athletic facility, and the slam on sports is not fair as sports provide so much to the excitement of a university, but overall I think you will enjoy the arguments put forth below, arguments in defense of for-profit learning. John F Murray, PhD
Author: Matthew Greenfield
I used to be a bit of a snob about for-profit colleges. O.K., more than a snob—I was arrogant, narrow-minded, and misinformed. Before I became a hedge fund manager, I got a Ph.D. in English at Yale University and taught at Bowdoin College and the City University of New York (CUNY), all venerable academic powerhouses. I remember the first time one of my CUNY students told me she was transferring to a for-profit technical college. This student, whom I will call Laura, is a remarkable woman who had been given a very unpromising start in life. After being horribly abused by her parents, she had run away in her early teens and grown up homeless, suffering in ways I could scarcely imagine. In her twenties, after having a child, she had become serious about education, gotten her G.E.D., and shown up in college.

Somehow, despite going nowhere near a classroom for most of her teens, Laura had become a dazzling writer, as good as the best I had taught at Yale or Bowdoin. Her cool, deadpan, yet fiercely moral prose reminded me of Joan Didion’s; she wrote unforgettable portraits of the monsters, saints, and lunatics she had encountered in her travels. Her very first college essay was good enough for Harper’s or the New Yorker. I
encouraged Laura to publish her work, but she was too busy raising her child, organizing for the New York Public Interest Research Group, and getting her degree. She would have made a fine candidate for the Rhodes Scholarship if she had any interest in it—and if she hadn’t already been over the age limit. But Laura’s academic career then took a new and unexpected twist: she told me she was leaving the CUNY system and starting the computer science program at a for-profit college. I was baffled. But Laura had a clear sense of what she was doing. What follows is the story of my own learning process, my education about for-profit education.

I could have understood Laura transferring to Columbia University. But why would she leave for a for-profit school? The CUNY system offered almost infinite opportunities and despite all its flaws had educated
numerous Nobel Prize winners and captains of industry. For-profit schools, on the other hand, were the bottom of the academic pecking order, weren’t they? I thought of the grubby storefront campuses of
some small technical schools, and the ads in the subway cars, alongside the ads for Dr. Jonathan Zizmor, dermatologist (“Are you suffering from acne, scars, or discoloration?â€?).

Why would Laura take on more debt to pay a higher tuition bill? And what about her writing? Had they tricked her in some way? That didn’t seem very plausible. Laura had fewer illusions than anyone else I knew, and after her years on the street she could detect any kind of dishonesty instantly, as if it were lit up in red neon. I tried to talk her out of leaving, but Laura had a clear, well-reasoned set of arguments. She said the for-profit would fit her schedule better, let her get her degree in half the time, probably also prepare her better for her first high-paying job, and definitely provide stronger job placement services. For-profit schools target the job occupations most in demand, work closely with employers, and develop new curricular materials (unlike the Yale professor who in the late eighties was still teaching a machine code course using a microprocessor from Zilog rather than one from Intel). For-profits are doing some impressive innovation in areas like multimedia online textbooks and medical simulation software. The for-profits use practitioners as teachers, and each teacher is thus also a career coach and unofficial placement officer. The for-profits offer rolling course starts every six weeks, so Laura didn’t have to wait for the beginning of a new semester to start a course. For-profits have streamlined, easy-to-use administrative processes, and they monitor the progress of their students closely. After a single absence, a for-profit school will probably follow up to see whether a student needs any help. I hadn’t known that the for-profits had so many positive qualities, but I was worried that Laura’s degree would be less credible and prestigious than a CUNY degree. Laura was
quite unconcerned with prestige. She wanted to know how to do things, and she thought my focus on the reputation of an institution was a little, well, quaint.

I have spent a lot of my life doing things that are prestigious, but I am starting to understand Laura’s point of view. I don’t regret any part of my wonderful education, but I am starting to wish that I had also pursued more knowledge of other kinds. And Ivy League institutions do have a rather narrow definition of what constitutes knowledge. When I learned from my CUNY students what it takes to manage a large construction project or to modify a car engine, I developed a higher degree of humility about my own
particular skill set. I now understand that the things I do seated in front of a computer do not involve a type of cognition that is more demanding or more admirable than that of the plumber or the electrician (for a fascinating elaboration of this point, see Mike Rose’s The Mind at Work: Valuing the Intelligence of the American Worker). And I now look in a different way at diplomas from for-profit institutions: instead of seeing something that is not prestigious, I see something earned by the stubborn, disciplined, even heroic persistence of a working adult.

In the years since that conversation with Laura, I have learned that almost all of my ideas about for-profit colleges were wrong. I was suspicious about the idea of a for-profit corporation educating students, but it turns out that non-profit schools have aspirations and goals that are fully as dangerous as the profit motive. I also thought that, as some hedge fund managers have recently charged, the for-profits were soaking up a
disproportionate amount of government money. But it turns out that for-profit schools cost the taxpayer a lot less than the alternatives, and many for-profits educate students while actually generating a profit for taxpayers. I thought that the drop-out rates at for-profits were too high, but then I learned that for students with similar demographics, the for-profits did better than the non-profits.

I will share some facts and figures later, but first I want to tell you a story about the origins of modern corporate for-profit education. I was surprised to learn that John Sperling, the founder of the Apollo Group and its University of Phoenix subsidiary, was an ardent socialist, a labor organizer too radical even for his fellow California college professors. Sperling, who grew up during the Great Depression, had a tough childhood
and youth, with frequent beatings, horrible medical problems, and severe social isolation. He had great difficulty with books until his teens, but when he joined the merchant marine he suddenly found himself with nothing to do but read. Many of the sailors were educated men and most were ardent socialists, and they talked about politics all day long. Almost overnight, Sperling transformed himself into a high-caliber intellectual. After graduate school at U.C. Berkeley and Cambridge University, he ended up in a teaching
post at San Jose State University. He also discovered that he had a talent for organizing, took over the Californian higher education branch of the American Federation of Teachers, and led a fierce but unsuccessful strike (see Sperling’s autobiography, Rebel With a Cause; I have checked facts with several people who know Sperling, and the book seems generally accurate, except that it may not give enough credit to some of Sperling’s colleagues for their contributions).

Sperling was also a wild and experimental teacher, one who stood out even in the sixties. One class project of his provoked a nationwide debate in the media, and a denunciation by Governor Ronald Reagan. To celebrate Earth Day in 1969, Sperling’s students decided to bury a brand-new car. The students earned money, bought a yellow Ford Maverick, designed the post-interment landscaping, negotiated with various
authorities, acquired all of the requisite permits, and performed a burial ceremony. This project was an example of what Sperling calls “action pedagogy.â€? Several of the students from this program went on to work with Sperling at the University of Phoenix.

Sperling also participated in an innovative program that had been funded to find ways of reducing juvenile delinquency. Sperling focused on teachers and the police, bringing small groups together first for discussions with experts and then for the implementation of a real-world delinquency reduction project. These adult learners loved the course and insisted that Sperling try to put together a full continuing education
program for them. They were unhappy with existing adult education programs.

Sperling never intended to become an entrepreneur. He just wanted to start an adult education program. But the administration of San Jose State was not interested. That was how, at age 53, the car-burying, strike-organizing, pot-smoking, quarrelsome socialist professor started what was to become a multi-billion-dollar corporation at the center of what was more or less a new industry. Initially Sperling ran a consulting firm
that operated adult education partnerships with traditional universities. After three years Sperling decided to try to start his own college.

From the moment it was founded and applied for accreditation, the University of Phoenix has had powerful enemies, much like the infant Hercules. While Hercules was still in his cradle he was attacked by two snakes sent by the goddess Hera. In the case of the University of Phoenix, the attack came from three powerful local deities: the University of Arizona, Arizona State University, and Northern Arizona University. They
didn’t wait to see what kinds of programs the University of Phoenix would develop or how well it would implement those programs: instantly, the three established colleges denounced the University of Phoenix as a “diploma millâ€? and began to lobby the legislature and the North Central Association of Colleges and Schools, the accreditation body that licensed schools in Arizona, to shut down the University of Phoenix. But the
North Central Association proved unexpectedly receptive to for-profit education. The traditional schools then went to plan B, asking the legislature to kick the North Central Association out of Arizona and replace it with the Western Association of Schools and Colleges (WASC), the accreditor of schools in California. WASC was notorious for its fierce hostility to for-profit education. Meanwhile, some unknown party even made an
anonymous accusation of bribery and persuaded the FBI to initiate a RICO investigation of Sperling and his associates, as if they were the Russian mafia instead of a group of socialist educators who had accidentally become entrepreneurs.

When I read this history, I was initially puzzled. The University of Phoenix is a large and powerful firm today, but it started in 1976 with eight students. Why did the traditional universities want so badly to kill it? Why would they put such an enormous effort into lobbying against UOP? Even the most powerful schools have a finite amount of political capital to expend. Denouncing someone to the FBI can easily backfire. And
for the three traditional universities in Arizona to attack their own accreditor was an incredibly risky move: generally even the most venerable universities will do almost anything to avoid irritating their accreditors. Could the traditional universities foresee how successful UOP would be? Or was it just that they were convinced that, even if UOP attracted only a small number of students, it would deliver such a terrible education at such a high cost that it would do all of its students irreparable harm? How could the
traditional universities be so sure that Sperling would do awful, evil things to his students? Didn’t he have strong progressive credentials and a history of successful educational innovation? Didn’t he seem to actually care about working adults? Why did the traditional universities greet the University of Phoenix the way cobras greet a mongoose?

Similar attacks on for-profit education have continued from 1976 to the present moment, waxing and waning at different times and in different regions. Today’s for-profit universities are complex institutions with strengths and weaknesses. At some of these schools there are abuses—misleading and aggressive recruiting practices, curricular weaknesses, and excessive tuitions. No one would argue that these offenses should not
be punished. Non-profit colleges, of course, commit similar offenses, and they should be punished in the same ways. It is unfair to generalize about either for-profit or not-forprofit institutions, and there is something feverish and disproportionate about the current attack.

There is an educational atrocity taking place in this country: we are ruining the lives of millions of innocent, infinitely promising children. But this atrocity is taking place not in colleges but in primary and secondary schools, not in for-profit institutions but in public ones. I wish I could believe that attacks on for-profit education were motivated by concern for students. But the evidence is pretty clear. Few politicians seem
to care about low-income minority students while they are being grievously injured by public institutions staffed by politically powerful unions. Only when some students are being injured by a for-profit institution do we begin to hear wrathful denunciations. And the wrathful denunciations are generally rather sloppy with their facts. The paragraphs that follow are chunky and packed with statistics, for which I apologize. But I am
attempting to present a balanced, accurate picture of a complex issue.

There has been a lot of discussion of how for-profit colleges overcharge. According to the National Center for Education Statistics (, four year public institutions charged tuition and fees of $6,400 for in-state students and $15,100 for out-of-state students; private non-
profits charged $21,100; and for-profits charged an average of about $15,700. And these are just tuition costs. Public institutions actually have a much higher cost basis than for-profits, but taxpayer subsidies allow them to charge students tuition fees well below their actual costs. At public colleges tuition accounts for just 17% of revenues, versus 85% at for-profits. For-profits are also increasing their tuitions at a slower rate than non-profits. In the last three years, public tuitions grew at 9.1% for in-state and 7.5% for out-of-state
students. Over the same period, private non-profit tuitions grew 6.6% and for-profit tuitions grew 5.2%. If one focuses on total costs rather than tuitions, the differences are even more striking. In 2006-7 the total cost per student per year at public four-year colleges was $33,670; at private non-profit four-year colleges, $42,256; and at for-profit four-year colleges, $12,880 (in looking at these figures, one needs to remember that for-profits do a lot more online educating, which is less expensive than the traditional classroom). For two-year institutions, the cost differences are smaller: at public two-year colleges, $11,609; at private non-profit two-year colleges, $19,498; at for-profit two year-colleges, $13,848. Community colleges, which are by far the most efficient nonprofit post-secondary schools, have a slight cost advantage over their for-profit competitors (

It is unjust and counter-productive to generalize about either for-profits or not-forprofits: both groups contain extremely diverse populations. I agree with Senator Richard Durbin that it is obscene for a culinary trade school to charge $27,000 per year for a two-year program. But I also find it alarming that there are now at least 58 non-profit colleges and universities that have fees for tuition, room, and board over $50,000 per year, and the list includes not only Columbia University and Johns Hopkins but also less prestigious institutions like Lafayette College and Dickinson College. Meanwhile, NASDAQ-listed for-profit American Public Education, Inc. (APEI) charges $7,500 for the equivalent of a year of full-time bachelor’s coursework and, because of a recently formed partnership with Walmart, offers a further 15% discount to Walmart employees.
APEI has not raised its undergraduate tuition since 2000, a record probably not matched by any other U.S. post-secondary education institution. APEI management’s decision not to raise tuition might have sound business reasons as well as altruistic ones, but it certainly is good for students. For-profits have also managed to lower many ancillary educational costs. Textbooks frequently cost over $150 per course, which is over $1,500 for the equivalent of a year of full-time instruction (although this is somewhat mitigated
by the resale value of the textbooks). APEI gives students textbooks for free, and Bridgepoint has cut textbook costs in half. Also, since when pursuing online degrees, working parents can avoid transportation and possibly childcare costs.

There has also been considerable discussion of how for-profits waste taxpayer money. Accurate figures here are hard to come by, but it is abundantly clear that just the opposite is true. The University of Phoenix estimates that each UOP student costs taxpayers $1,509 per year, versus $4,509 for the average for-profit school, $7,051 per student at private non-profits, and $11,340 at public postsecondary institutions.
Interested or skeptical readers can check their analysis on pages 20-21 of their white paper “Higher Education at a Crossroadsâ€? ([1].pdf). I think the University of Phoenix has substantially over-estimated the cost to taxpayers of for-profit schools, and their figure for the cost of defaulted debt includes the unpaid accrued interest as well as the principal amount.

Former University of Phoenix president Jorge Klor de Alva, an academic who also taught at Berkeley and Princeton, estimates that for regionally accredited, four-year for-profit schools, the for-profits that most resemble traditional universities, the cost to the taxpayer per student per year is slightly less than zero: the taxes paid by the corporation balance out the cost of government tuition assistance, including grants and
loan defaults (see pp. 5-6 and associated footnotes of Klor de Alva’s presentation at Although I cite several reports from for-profit schools and organizations friendly to them, they are using raw data mostly gathered by the Department of Education). Klor de Alva also estimates the total cost to taxpayers of education at elite traditional institutions: for the 68 colleges that charge more than $50,000 per year, the cost to the taxpaers is $11,392 per student per year. At Yale, the figure is $52,113 of taxpayer money per student per year; at Princeton, $52,508; and at Harvard, $68,319. A significant portion of these enormous sums is not direct cash
subsidies but tax revenue lost because donations to college endowments are tax-deductible. But the numbers are still shocking, at least to me. These figures do not include the amount of government money spent on research at these schools, just the taxpayer resources directly devoted to education, housing, and recreation. This taxpayer subsidy is in addition to the portion of tuition paid by the parents.

I will leave it to you to decide for yourself whether this subsidy of elite institutions and affluent students is a good use of taxpayer money. What is indisputable, though, is that the current system funnels much more taxpayer money per year of study to affluent students than to poorer students. Many students at elite colleges do not come from wealthy families, but average family income is still far higher than at a community
college or a for-profit. Any reduction in the flow of funds to for-profit colleges also further reduces the percentage of education subsidies flowing to the poor and to working adults. At the same time, access to public universities is being severely constricted. For example, because of a budget cut, the California State University system, nominally committed to open admissions, will be forced to reduce its enrollments by over 40,000 qualified students even as it raises tuition and furloughs employees ( And non-profit schools simply do not have enough slots in high-demand specialties like nursing. If this nation is to train the workers it needs, for-profit schools are increasingly necessary.

There have been complaints by politicians, journalists, and hedge-fund investors about the cost to the taxpayer of student loan defaults. But a loan default is not necessarily a loss. Interestingly, even on defaulted loans the government on average recovers 102% of the value of the original loan (see the 2011 Presidential budget, table 3: Direct Loans; spreadsheet downloadable at The University of Phoenix seems to feel that the 102% number is gross rather than net and does not include collection costs. I have as yet been unable to determine whether they are correct. But even if the government continued to have high loan collection costs, they would be more than balanced by the corporate tax payments of for-profits. The government gets an excellent return on its investment in for-profit college education. In fact, if one uses hard measures like salary increases and tax receipts, the government gets a substantially higher return on investment from for-profits than the hedge fund industry has delivered to its investors. So short-seller Steven
Eisman’s characterization of for-profit colleges as “the new subprimeâ€? is rather misleading ( If there is a waste of taxpayer money, it is not primarily at the for-profits. I recommend to Mr. Eisman that he take a closer look at not-for-profit universities before condemning the for-profits. I also recommend that, before continuing his jihad, he try a little harder to find an accurate figure for the amount the government recovers on defaulted loans. Rather than looking for the facts, he looked at the loans extended to students by two atypical for-profits, Corinthian and ITT, noticed that they had reserved for 50-60% losses on those loans, although they had not yet experienced such losses, and then blithely assumed that the government would collect less than this hypothetical 40% recovery. In fact, the government is an extremely effective and efficient collector of bad debt. The government’s figures are extremely complicated, and different documents seem to contradict each other, but the president’s budget seems to make the calculation in a reasonable manner. If I am wrong, I would be grateful for further information. Obviously, UOP and Klor de Alva are interested parties, but they clearly articulate the basis for their calculations, and their results concur with those of other studies like the
Delta Project ( Unlike Steve Eisman’s presentation, the UOP and Klor de Alva white papers admit their biases openly, present their case in a balanced and reasonable manner, document their sources, and invite further dialogue.

Another accusation is that for-profit colleges aggressively recruit students who do not belong in college and saddle them with big debts. There are definitely institutions that recruit too aggressively, and these should be punished. But for-profits do not accept all applicants: on average, they reject 25%, a number only slightly smaller than the 31% rejected by public colleges and the 35% rejected by private not-for-profit schools. When Senator Harkin wrote to the Government Accountability Office, asking for statistics on recruitment standard violations by for-profit schools, the GAO failed to tell a story of rampant misbehavior. In the years from 1998 to 2009, the GAO recorded violations at a total of thirty-two schools out of over 2,800 (Harkin, clearly unhappy with this result, was inspired to commission his own highly selective GAO sting operation; see Like Harkin’s sting, many of the news stories about recruiting abuses have been built to order. A Bloomberg story about the recruitment of students at homeless shelters turns out to have been fabricated by a researcher working for a hedge fund ( It is possible that the
Department of Education was lax in its oversight. But it must be remembered that whistleblowers in successful suits against for-profit schools can potentially collect tens of millions of dollars. This alone provides a major incentive for for-profit schools to follow the regulations closely.

For-profit schools also have other strong financial incentives not to recruit students who cannot complete degrees and who default on their student loans. If a school’s cohort default rate stays above 25% for three years, that school can no longer obtain federal education grants or loan guarantees for its students, and the school is out of business. Enrolling large numbers of under-qualified students is a form of institutional
suicide. Delivering an inferior educational product is also at the very least extremely dangerous for a for-profit institution. In the words of Richard Ruch, a dean at Devry, “My years in the for-profit sector have taught me that the two factors above all others that drive profitability are educational quality and customer service. No for-profit college or university can survive without providing a reasonably high-quality educational
experience and a high level of customer service. If someone imagines that these institutions make profits merely because they offer a substandard education on a massive scale, they are largely mistaken. Student consumers, especially the more mature students typical of the for-profit providers, are knowledgeable and demanding customers who are not easily satisfied. They demand a substantive and rigorous educational experience for their tuition dollars, along with a high level of convenience and customer service. And if they do not find it, they will go elsewhereâ€? (See p. 17 of Ruch’s Higher Ed, Inc.: The Rise of the For-Profit University).

It is true that on average for-profit schools have lower graduation rates than not-for-profits. But this is because they serve different populations: for-profits are much more focused on working adults. If one wants to make an apples-to-apples comparison of graduation rates, one can look just at two-year schools, where public and for-profit institutions serve students with similar demographics. According to a study by the
Parthenon Group using Department of Education data, two-year for-profits have a graduation rate of 65% versus a graduation rate of 44% for public community colleges ( position%25204%25201%252010.pdf). Part but not all of the difference is that more students transfer out of community colleges than out of two-year for-profits. Students at community colleges take on an average of $8,300 in debt, while students at two-year for-profits take on $14,600 and pay an average of $162 per month to service that debt— roughly equivalent to a cable television bill, if one has a premium channel or two.

What about four-year institutions? Department of Education statistics show average debt loads at degree completion of $19,839 at public institutions, $24,635 at for-profits, and $27,349 at private non-profit schools. The majority of students at American Public Education, Inc., take on no debt whatsoever. Students at Bridgepoint’s Ashford University take on an average of $13,500 of debt. We do not hear senators denouncing auto dealers for selling people new cars, but the average debt levels for a four-year degree
are comparable to the $28,000 average cost of a new vehicle ( It is true that this comparison excludes the payments a student makes while completing a degree, but remember, the true cost of ownership of a car includes many expenses other than loan
repayments, and you don’t have to get a new bachelor’s degree every seven years.

Current University of Phoenix students—those still working on their degrees–have an average annual income of $56,000. They are entirely capable of paying several hundred dollars per month on their student loans.
One must also remember that colleges and universities cannot control how much student debt people take on or how they spend it. Students are free to take on student debt for living expenses and even entertainment. It is the government that sets annual limits for federally guaranteed student loans, and schools are not permitted to prevent students from borrowing up to the limit, even if the amount borrowed exceeds the cost of tuition, fees, and supplies. Currently, over-borrowing on student loans is an extremely seductive option for students: the terms of student loans are infinitely more attractive than those of credit card debt. It seems bizarre to punish for-profit schools for excessive student debt when schools have no control over the amount of debt that students take on.

In fact, the Career College Association has begged the Department of Education to enact regulations preventing students from borrowing more than the cost of tuition and other academic expenses. Another common accusation against for-profits is that they deliver a weak education. This is a murky area, since outcomes assessment in higher education is still rudimentary. One can, though, make a general observation about the teachers who deliver this education: full-time tenured and tenure-track faculty do less and less of the teaching even at non-profit colleges and universities. Both public and private non-profit traditional universities are increasingly reliant on adjunct teachers. This is especially true for the divisions of non-profits that focus on working adults, like the Harvard University Extension School and NYU’s Gallatin School of Individualized Study (both of these schools, by the way, are extremely profitable for their parent universities and indistinguishable from for-profits in almost every respect except, perhaps, for their avoidance of taxes and their superior branding). Often the very same adjuncts teach at both for-profit and non-profit schools. Research universities, of course, have another source of low-cost teaching labor: their own graduate students (for whom fewer and fewer tenured jobs wait at the end of the rainbow). In general, it is just a subset of graduate schools and liberal arts colleges where full-time instructors still do most of the teaching, and it is a still smaller subset of schools where those full-time instructors do their teaching exclusively in small seminars rather than partially in large lectures.

One common refrain in indictments of for-profit higher education is that online education is ineffective, an inferior substitute for the traditional classroom. But a Department of Education study which screened over a thousand research papers reached an unambiguous conclusion: “The meta-analysis found that, on average, students in online learning conditions performed better than those receiving face-to-face instructionâ€?
( A mix of online and classroom instruction works even better than online alone. Particularly effective, apparently are tools or features that encourage students to reflect on their level of understanding and their learning process. The use of technology to individualize and personalize the learning experience also looks extremely promising (for a vision of the future of personalized learning at the primary and secondary level, see My own experience of mixed-mode classroom and online teaching supports the conclusions of the DoE study: classroom discussion can be a powerful tool on a good day, but there are many students who do not speak in class and yet will contribute extensively to online
discussions, and there are others who need to examine material at their own pace to assimilate it. And the tools for online teaching are still in their infancy.

What the DoE study does not say is that learning outcomes are much easier to measure in online programs, and online education providers are continually using these data to improve instructional methods. Over time, we can expect data-driven online programs to improve their edge over traditional classrooms (for a compelling vision of the future of assessment, see It is possible that some of today’s most prestigious universities are the Sperry Univacs or the Wang Laboratories of tomorrow, unable to adapt to a rapidly changing environment. Online education is a good example of what Clayton Christensen calls disruptive innovation. Stanford University will certainly continue to prosper, but over time there will probably be more and more functions that for-profit Capella University performs better (for physicist and former USC provost Lloyd Armstrong’s thoughtful take on this topic, see For-profit post-secondary schools have done a poor job of getting the message out, but they are innovating at a much faster pace than traditional schools. As someone who studied, wrote about, and taught Shakespeare for seventeen years, I have a keen sense of the value of tradition and
resistance to change. But innovative, flexible institutions are also necessary. Remember, for a long time institutions like Harvard and Oxford wanted to stick to theology and the classics: only reluctantly did they embrace flashy, unsound new disciplines like engineering, sociology, and modern literature.

It is inarguably true that for-profits do not graduate many students with degrees in the traditional liberal arts. But this neglect of the liberal arts is driven not by philistinism but by regulatory constraints. Since in order to survive for-profits must keep their job placement numbers high and their cohort default rates below 25%, they no longer have the ability to produce significant numbers of liberal arts graduates, whatever the student demand might be. Congress and the Department of Education have decided, for better or worse, that working adults should probably not major in comparative literature.

The current assault on for-profit education will have both good and bad effects. The Senate hearings probably will lead nowhere. I think Senators Harkin and Durbin have been displaying their indignation in order to improve the chances of their teammates in the midterm election. If Senator Harkin had any real intention of creating new legislation, he would have tried to get it passed before the elections. This is a partial
excuse for the biased, uninformative nature of Harkin’s hearings. Political kabuki theater requires broad, unambiguous gestures.

The Department of Education’s negotiated regulation process, on the other hand, will have a powerful and lasting impact on for-profit education. The DoE regulations will apply a new set of restrictions for eligibility to federal funds. The old regulations focused on the cohort default rate (the percentage of students who default on their loans within three years of the inception of the repayment period). The new “gainful
employmentâ€? regulations contain three tests of eligibility for federal funding. The second and third tests, which focus on debt service as a percentage of income, still remain somewhat nebulous. The first test focuses on the percentage of student borrowers who begin paying principal as well as interest. Unlike the old cohort default rate thresholds, this new test focuses on dollar amounts rather than numbers of borrowers. The draft regulations require that principal as well as interest be repaid on at least 45% of loans to students of any for-profit school. Schools that pass this “principal repaymentâ€? test will not be required to pass the second and third tests. For some schools, like Bridgepoint’s Ashford University and the University of Phoenix, the principal repayment figures were unexpectedly good. Others, like Grand Canyon Education and American Public Education, were expected to do well and did so. For some high-quality schools, most notably Strayer University and Capella University, the figures were much worse than anticipated. Strayer came in at 25%, a figure which they are disputing. It is worth noting that Harvard Medical School came in at 24%: their graduates aren’t defaulting, but they tend to use interest-only loans until they have finished their low-earning internships. This is just one little reminder of how regulations can have unexpected effects, some of them extremely undesirable. Harvard University Medical School is not in the regulatory cross-hairs at the moment, but Strayer probably shouldn’t be, either.

Many journalists, politicians, and, ironically, hedge fund managers seem to feel that the profit motive corrupts and dirties the educational process. They don’t seem bothered by the astonishing profitability of NYU’s Gallatin School or the Harvard University Extension School, and they maintain a touching faith in the purity of the motives of non-profit institutions. But if the for-profits worship Mammon, non-profit schools have their own violent, carnivorous hunger for something other than student success. What non-profits crave is prestige.

One aspect of academic prestige is luxuriousness. Non-profit schools are spending absurd amounts of money, in some cases the majority of their budgets, to brand themselves as luxury goods like Prada handbags and Juicy Couture tracksuits—the things the hyper-affluent must buy for their children as a proof of their love. In their quest for prestige, non-profit colleges and universities build monumental sports complexes and recreation centers that divert hundreds of millions of dollars away from teaching. Washington State University-Pullman’s 160,000-square foot student recreation center has a 50-person Jacuzzi, doubtless very helpful in raising Washington State’s standing among its educational peers. One excellent liberal arts college with 2,350 students has its own 18-hole golf course, a ski slope, a private beach, and a hockey rink with 2,600 seats. Numerous non-profit universities offer such recreational amenities as water slides, in-line
skating courts, juice bars, indoor waterfalls, climbing walls, massage tables, facials, golf simulators, and salt-water fish tanks. In the water park in the University of Missouri Columbia’s recreation center, students can watch large-screen televisions while floating on the “Lazy Riverâ€? or soaking in “the Vortexâ€? or the 20-student spa. The University of Wisconsin-Oshkosh has leaped into the upper academic echelon by offering its students manicures and pedicures as well as massages.

Where athletic programs are concerned, it is not just the facilities that are costly. Some college football coaches make salaries of as much as $4 million per year. Do these athletic superstars pay for themselves? Not even close. The total cost for a Pac-10 athletic program? Don’t ask. Who can put a price on the glory of a winning NCAA division III team? Major athletic programs also have a high human cost. Many high-level athletes simply do not have time for real coursework: they are being used and injured for the glory of the school. Non-profit colleges also build rather swanky dormitories, with grocery delivery and maid service, and gourmet dining facilities. If, dear reader, you have a morbid curiosity about just how far universities will go in
marketing the superiority of their gourmet offerings, I highly recommend that you watch Boston University’s video about its visiting chef series ( Wild partying, vile fraternity misbehavior, and underage drinking are also essential selling points for many non-profit colleges.

Many commentators have complained that for-profit schools think of their students as customers. Well, yes, but at least the for-profits are thinking of their students as customers who are buying an education rather than a leisure experience. Capella University does not ask taxpayers to foot the bill for four years of beer pong, jello shots, bong hits, and recovery from hangovers. Non-profit schools also pursue various forms of academic prestige, some less healthy than others. Non-profits create new doctoral programs whose graduates are unlikely to find tenure-track jobs. They hire expensive academic super-stars for endowed
chairs with almost no teaching responsibilities, although this expense is trivial next to the recreational and athletic ones listed above, and is pardonable because it is so closely related to the task of educating students. Non-profit schools also divert precious scholarship money away from the poor and into the pockets of students with high SAT scores who come from affluent families (SAT scores correlate more closely with family income than with academic success, but SAT scores are what count for rankings like those of U.S. News and World Report).

Even notoriously lax ratings agency Moody’s, which entirely overlooked the housing bubble, has gotten off its La-Z-Boy to offer some mild disapproval: “we continue to see institutions borrowing heavily for projects that serve more to enhance an institution’s status rather than to advance its mission or to meet current pressing facility needs. These projects include mixed-use commercial developments, high-end residential facilities, research parks and lavish student recreation buildings and performing arts centersâ€? (the Moody’s quote and many of the colorful facts above come from a wonderful Bloomberg article by Liz Willen; see: Prestige is very, very expensive, and it would be difficult to argue that the quest for cash is more corrupting at for-profits than at non-profits.

When they aren’t pursuing prestige, non-profit schools have an unfortunate tendency to focus on what is best for professors and administrators rather than for students. In the years from 1993 to 2007, the University of Phoenix’s old nemesis, Arizona State University, has increased the number of administrators it employs by 94% while actually decreasing the number of instructors and researchers by 2% (of course, this
has something to do with the increasing burden of regulatory compliance). For some reason, school administrators across the nation seem to think of hiring more administrators as one of their highest priorities, regardless of the need. American research universities employ more administrators than teachers. In 2007 private nonprofit universities employed 53.6 employees for every 100 students, 11.3 of them full-time administrators and only 8.2 of them engaged in teaching, research, or academic service (see The figures for public universities are only slightly better. Creating a streamlined and usable interface for students is not a high priority: somehow, despite the presence of all of those administrators, students in search of answers still frequently get sent from one office to the next. Full-time faculty members have many goals, most of them laudable, but a crucial goal is to be left alone—in some cases, left alone to do research, and in other cases left alone to pursue other forms of self-cultivation.

Of course, despite all of these awful institutional malformations, the U.S. university system is probably still the most effective in the world. We are fortunate to have a diverse educational eco-system, one where innovations flourish and competition forces everyone to try a little harder. But make no mistake: for-profit schools are an essential part of this ecosystem. Disclosure: I believe that some but not all for-profit education companies do useful and honorable work, and my fund owns stock in American Public Education, Inc., Bridgepoint Education, Capella Education, and Grand Canyon Education. My family owns stock in these companies as well as Strayer University, privately held Post University, and several educational software startups. I have in the past shorted Moody’s.

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