The Downfall of For-Profit Colleges

The industry has faced numerous investigations, widespread closures, and serious threats to federal funding.

The future of the for-profit college industry is looking rather dismal these days. Maybe that’s not such a bad thing.

Some of the industry’s biggest players have made headlines in recent years for their poor performance, exorbitant pricing, and exploitation of vulnerable, low-income students. And the feds are now poised to ramp up oversight amid larger efforts to reform the country’s besieged higher-education system.

As part of his recently released 2016 budget plan, President Obama wants to eliminate a notorious loophole that allows for-profit colleges to capitalize on financial-aid benefits afforded to U.S. veterans, a move that could severely weaken some of the industry's biggest schools. In particular, Obama intends to change the parameters of what’s known as the "90-10 Rule"—a federal law that bars these schools from receiving more than 90 percent of their revenues through federal student aid, including loans and grants. As it stands the stipulation excludes funding earmarked for veterans, namely financial aid through the GI Bill and the Department of Defense’s tuition-assistance program, but the White House proposes including these veterans’ benefits on the 90-percent side.

The 90-10 proposal intensifies a crusade against the for-profit education industry. That effort has included a series of high-profile lawsuits and investigations—including a federal criminal probe—into many of its colleges and, as The Atlantic reported last September, serious threats to the accreditation of institutions such as for-profit law schools, whose students pass the bar at notoriously low rates. These schools are exactly what they sound like: higher-education institutions that pay taxes and operate as businesses. And they tend to offer vocational instruction targeted at unconventional students, from working parents to returning veterans, at above-average tuition rates.

The vast majority of these institutions’ revenue comes from consumers, many of whom rely on loans and Pell grants. That means the federal government is essentially bankrolling schools that often produce very discouraging outcomes. A 2010 report found that only 22 percent of first- and full-time students pursuing bachelor’s degrees at these institutions in 2008 graduated, compared with 55 percent and 65 percent of students at public and private nonprofit universities, respectively. Meanwhile, nearly three-fourths—72 percent—of the programs offered at for-profit colleges produce graduates who earn less than high school dropouts. And for-profit colleges account for 46 percent of people who entered repayment on their student loans in 2010 and were in default by 2012.

Much of the scrutiny has centered on the catastrophe surrounding Corinthian Colleges, Inc., once one of the largest for-profit higher-education companies in North America operating some of the best-known vocational-degree institutions, such as Everest and Heald. The beleaguered corporation recently agreed to sell or close dozens of its U.S. campuses as part of a deal with the Department of Education, which last summer froze the institution’s financial-aid payments after it failed to provide the DOE with a series of required records, including job-placement and attendance statistics. And just last week, the Ministry of Education in Ontario announced that it was shutting down the company’s Everest College campuses in the Canadian region, leaving an estimated 2,400 students in limbo.

Of course, that wasn’t the first piece of bad news Corinthian got this month: Just a few days prior the company found out that it was being delisted from the NASDAQ stock exchange after repeatedly failing to file quarterly reports on time. And then the state of California decided to stop doling out grants to students enrolled at 10 Heald campuses.

As if that couldn’t get any worse, the company was smacked with the announcement today that a group of former Everest College students calling themselves the Corinthian 15 have called a "debt strike"—evidently the first of its kind in U.S. history. The former students have declared that they cannot and will not repay the federal loans they took out to attend the college and are demanding that the DOE cancel their debts. Not surprisingly, they allege that Corinthian defrauded them by running a "predatory lending scheme" and using "illegal debt-collection tactics," among other wrongdoing. The DOE for its part started increasing oversight of the institution last year amid reports that it was falsifying records on student outcomes.

Lots of for-profit higher-education institutions have come under fire as of late, and it appears that the feds—with the help of some advocacy organizations—are set on weeding out the worst of the bunch.

Obama’s 90-10 proposal threatens the viability of dozens of for-profit institutions. DOE data shows that only 27 of the hundreds of for-profit colleges across the country broke the 90-10 rule in 2013, all but one of them (Baton Rouge College) for the first time. But a Center for Investigative Reporting analysis last fall found that, had the rule included veterans benefits, an additional 133 colleges—including big names like Everest, Heald, Ashford University, Kaplan, and the University of Phoenix—would’ve failed to meet the requirement. What’s more, another 292 schools would’ve come within five percentage points of that 90-percent threshold.

The Institute for College Access and Success (TICAS) has described the 90-10 loophole as one that allows the schools to "aggressively and deceptively recruit" veterans, servicemembers, and their families—particularly spouses—to enroll in "high-priced, low-quality programs." The 90-10 issue has come under a good deal of scrutiny in recent years, largely thanks to former Democratic Sen. Tom Harkin’s two-year investigation into the for-profit college sector—an ambitious probe whose final report in 2012 included subpoenaed emails showing just how unscrupulous those recruitment tactics are.

Among the report’s contents is internal correspondence from the for-profit-college operator Education Management Corporation: an executive telling a colleague, for example, that he sought to "[leverage] the military spouse benefits to the fullest extent possible." They also include memos from the corporation outlining the financial incentives of enrolling military-affiliated students, such as this one:

Probably one of the most important potential short and long-term targets for EDMC are the 800,000-plus military spouses who have been authorized, for the first time in history, for a one-time entitlement of up to $6,000 that can be used for training, as well as for counseling and other ways to assist them in finding work. We are told by the DOD that the largest demand among the spouses is for healthcare-related training, although it can also cover almost all other occupational areas.

Moreover, the report includes documentation of military-recruitment guidelines for institutions like Kaplan, which in 2009 promoted a veteran-enrollment strategy that it dubbed "A.C.T.I.O.N.": Activate interest, connect and discover, tie in the solution, initiate and explain the process, and overcome objections.

Controversy surrounding the 90-10 loophole is nothing new, but Pauline Abernathy, the vice president of TICAS, says Obama’s effort to do so could herald a new chapter of accountability in the for-profit education sector. Congress has considered legislation to change the rule in the past to little avail. The budget item marks the first time the Obama administration is taking up the issue, and that bodes well for the effort—especially since it appears to have bipartisan support, according to Abernathy. After all, as of late last year, 37 state attorneys general—Democrat and Republican—were jointly investigating fraud and abuse in the for-profit college industry.

"If a college is a quality product at a competitive price then someone other than the federal government should be willing to fund it," Abernathy said. In other words, if a for-profit college relies on federal funding for 90 percent or more of its revenues, what does that say about the quality of the school? Probably that it’s pretty shoddy; there isn’t enough demand from students willing to pay the tuition.

Ultimately, most for-profit colleges will still comply with the 90-10 rule even if the veterans benefits were included, according to DOE data. On average, these institutions get roughly 72 percent of their revenues from federal financial aid. Indeed, the for-profit college sector isn’t inherently bad, and many institutions are expanding access and producing worthy outcomes. As The Atlantic reported last September, some schools, such as Minerva, are experimenting with unconventional teaching models and virtual platforms in an attempt to reinvent the college experience.

The ones that haven’t filled the gaps in higher education, however, are giving the entire industry a bad rap. Many of the schools that would’ve broken the 90-10 rule if veterans benefits were factored in also have lawsuits pending or are actively under investigation, Abernathy noted. Others are institutions that have attempted to convert to nonprofit status, often surreptitiously. TICAS, Abernathy said, has also urged the education department to crack down on the for-profit colleges that have manipulated their data to stay under the 90-percent threshold, some by delaying student aid until the following fiscal year as a way to meet the requirement. Others, meanwhile, have combined campuses for reporting purposes so that the average falls below 90 percent.

Other campaigns to reform the for-profit college sector are underway as well. Noodle, an online education resource, is lobbying the DOE to develop stronger oversight of "lead-generation" college sites, which lure prospective students with their so-called school rankings and then capture their demographic and contact information, selling these "leads" to advertisers.  The sites cast themselves as valid resources meant to help prospective students find schools that match their interests and needs based on their academic and location preferences;,,, and are a few examples of what are likely hundreds of lead-generation college "databases" on the web. In reality, many of the schools featured on these sites pay to be listed there—and it turns out many of those schools are for-profit institutions.

"The prospective students who use these sites expect to be led to appropriate options; instead, they are far too often misled, being steered either to schools for which they are not well suited or—much worse—low-quality educational options with low graduation rates and higher prices," says the Noodle report. According to Noodle, these sites tend to target consumers who have little information about the "post-secondary education ecosystem," such as first-generation students and military veterans—the same types of consumers sought by for-profit colleges. These for-profit advertisers are, as Noodle spokeswoman Jillian Youngblood noted, "the usual suspects."

A slew of federal and state laws are aimed at regulating lead-generation sites, but few of the education ones adhere to the transparency guidelines, according to Youngblood. A survey commissioned by Noodle found that roughly two-thirds of users believe the pages are providing neutral counseling—legitimate information that will help them make smart decisions about where to apply. Only 6 percent of respondents, meanwhile, knew the schools had paid to be featured on the sites. "The kind of person who’s looking at these sites is not the savviest consumer," Youngblood said.

Noodle is pushing the DOE to hold schools to a higher standard than advertisers on typical lead-generation sites—"appropriately sanctioning schools buying leads from sites that continue to mislead"—and require that sites fully and effectively disclose whether they're being paid to promote certain institutions.

"If substandard schools are tumors on the body of higher education," the Noodle report says, "these sites serve as their blood supply."