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For-profit colleges face federal crackdown

The industry has seen growing criticism of its high-powered marketing and the heavy debt many students incur, as well as doubts about the value of the degrees it offers.

February 06, 2011|By Walter Hamilton, Los Angeles Times
  • Student Daniel Morales, right, winces as classmate Ana Gonzales, left, takes a blood sample from his arm in a medical assistant class at WyoTech in Long Beach. WyoTech is a unit of Santa Ana-based Corinthian Colleges, one of the nations largest for-profit chains.
Student Daniel Morales, right, winces as classmate Ana Gonzales, left,… (Brian van der Brug, Los Angeles…)

Chelsi Miller was managing a burger joint when she saw an ad for Everest University promising a better life.

The single mother in a small town near Salt Lake City wanted an associate's degree as a first step toward medical school. She said she chose Everest, a for-profit college, after a recruiter guaranteed that she could apply her credits toward a higher degree at the University of Utah.

It wasn't until after she graduated in 2008 — two years and $30,000 in student loans later — that Miller learned the state university wouldn't take her credits from Everest, a unit of Santa Ana-based Corinthian Colleges Inc.

"I got completely taken advantage of, and now I'm struggling to pay the bill for it," said Miller, now 26. "I got sold my degree by a used-car salesman. I got a lemon."

For-profit colleges have expanded rapidly in recent years, with enrollment nearly tripling in a decade to more than 1.8 million students in 2008. But amid growing criticism of its high-powered marketing and doubts about the value of the degrees it offers, the industry faces a federal crackdown that casts a shadow over its future.

"Rightly so, the industry is going to have to shift focus" from maximizing profits to ensuring student success, said Jeff Silber, an analyst at BMO Capital Markets. "That means slower growth and less profitability."

Among the companies most vulnerable to stiffer rules is Corinthian, which already has undergone wrenching changes. Its chief executive and president both quit last fall, and the firm last week warned that its enrollment of new students, already on the decline, could plunge further. Its stock has slumped 75% since April.

The for-profit industry caters to nontraditional students — 20-somethings with poor academic records and working adults needing flexible class schedules. But the schools lure such students, critics say, by exaggerating their job and salary prospects, then strand them with dubious educations and mountains of debt.

"We're seeing too many examples where students go deeply into debt and either end up with no diploma or a worthless diploma," Sen. Richard J. Durbin (D-Ill.) said. "It is a terrible outcome for a student who was just trying to get an education."

High tuition

Tuition is nearly five times as high at two-year for-profit colleges as at state schools. At four-year for-profit colleges, half of graduates leave school with at least $31,000 in student loans. That's nearly four times that of their public-university counterparts, studies show.

For-profit students borrow heavily, receiving 24% of government-guaranteed student loans while accounting for only 12% of U.S. college students. But many graduates say they can't get jobs in their chosen fields, and certainly can't earn enough to whittle down their debt.

One in four students at for-profit colleges default on their loans within three years, more than double the rates at state schools and private colleges, the U.S. Department of Education says.

Defaults can stay with students forever. Student-loan debt can't be erased by filing for bankruptcy, and collectors can seize money from a borrower's paycheck, tax refund and even Social Security benefits.

Sen. Tom Harkin (D-Iowa), who has spearheaded the federal crackdown, likens the industry to the subprime mortgage business.

"Subprime lenders went out and marketed houses to people who really couldn't afford them, gave them subprime loans and said, 'Don't really worry about it,'" Harkin said.

"At least in the subprime debacle the defaulter could walk away from the house and leave the house. These students have this debt on their head forever."

High-pressure sales tactics laced with false promises are the core abuses that critics ascribe to for-profit higher education.

An investigation of 15 for-profit colleges by the congressional Government Accountability Office last year found widespread problems, including inflated salary projections and misleading tuition information. One school told an investigator posing as an applicant that barbers could earn $150,000 to $250,000 a year.

At Corinthian, recruiters are taught to convince students that their lives are bad and can be improved only by going to the school, according to a former recruiter.

"The ultimate goal was to essentially make them wallow in their grief, feel that pain of having accomplished nothing in life, and then use that pain" to coax them to enroll, the recruiter, Shayler White, testified in an affidavit in a lawsuit filed against Corinthian by Miller and other ex-students.

The schools, accusing critics of overstating the problems, say job-placement and default rates have suffered in the recession.

Filling a niche

Corinthian in particular says it fills a crucial niche by taking troubled students, many of them minority and low-income, whom traditional colleges can't or won't accept.

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