Back to the Future at For-Profit Colleges

Instead of moving toward the “future,” those for-profits that survive today will have to become more like they were in the 1990s, before they went all-in on Wall Street.

By Ben Miller

Tagged EducationFor-profit collegeObama Administration

This spring marked the end of an era for America’s largest private college. In May, the Apollo Group, owners of the University of Phoenix, announced a sale to take the company private. An institution that, at one point, was a highly profitable Wall Street darling that enrolled half a million students, went for $10 a share—nearly an order of magnitude off its peak price.

The cheap sale of the company that was once the symbol of for-profit colleges is the most poignant sign of growing turmoil in the industry. These schools now struggle to find a business model that can survive in today’s stricter and more inquisitive regulatory environment. It’s showing in their enrollment (down by over 13 percent), and in their revenues (federal aid is down 35 percent). The University of Phoenix alone lost a number of students roughly equal to total enrollment in the entire University of California system. Every month seemingly brings new announcements of closures, sales, and double-digit declines in enrollment.

Another telling example of the fall of the for-profit college is that of ITT Technical Institute, which continues to find new rock bottoms on a weekly basis. The chain of for-profit colleges that used to educate nearly 90,000 students announced in late July that new student enrollment would fall another 45 to 60 percent through the end of 2016. The announcement is the latest blow to a company that over the last year-plus has had to pay a $123 million letter of credit to the Department of Education—a company whose executives have previously faced fraud charges from the Securities and Exchange Commission, been sued by the Massachusetts attorney general, and may soon lose access to financial aid. With this litany of problems, the questions of ITT’s closure increasingly feels like a matter of when, not if.  

While the times are tough right now at for-profit colleges, the companies that ultimately survive these challenges will have to inhabit a very different sector. Their size will be much smaller. The credentials they offer will be different. For many, the reliance on federal financial aid will be less. And the results for students will be better. Ironically, instead of moving toward the “future,” this will be a return to where for-profits used to be before they went all-in on Wall Street in the mid-1990s.

Here are key ways the for-profit college sector will have to change to survive:

Creating Minimal Admissions Standards

In 2010 and 2011, the for-profit college sector enrolled nearly 3.3 million students and received 23 percent of federal financial aid dollars. Reaching these highs required, in part, a massive recession that drove thousands of individuals out of the workforce and into higher education. But it also relied on a rapacious admissions apparatus. This was especially true at schools traded on, or backed by, Wall Street, where analysts demanded continual evidence of growing enrollment.

When the pool of suitable candidates dried up, the growth-at-all-costs mentality led for-profit colleges into avenues they should never have pursued. Instead of only enrolling students who wanted to be there, they sought out anyone with a pulse who would fill out the paperwork. To do this, they recruited at homeless shelters. They encouraged students with severe disabilities to borrow for programs they would never be able to complete. And they built aggressive marketing regimes that preyed on students’ weaknesses and sense of self-worth to secure every last possible enrollment.

Today, this model no longer works. Colleges are under much greater scrutiny regarding how their graduates actually fare in the workplace. They have to abide by stronger regulations governing the academic value of coursework. They face lawsuits and state investigations for the non-federal loans they offer. And the Department of Education is currently clarifying a process that would make it easier to hold them accountable for defrauding students.

Surviving this scrutiny requires changing the admissions model at these colleges so that they can no longer accept just anyone. The industry claims this is bad because it means becoming “selective,” therefore excluding some prospective students. But it’s more like obtaining your driver’s license—they aren’t that hard to get, but if you’re too young, can’t see, or face obvious disqualifications, you can’t get one. For-profit colleges are not going to suddenly start requiring SAT scores, GPAs, and personal essays. Rather, they will need to start asking the questions they should already have been asking about whether a student’s life circumstances will allow them to truly commit the time needed to learn. That means enrolling people with stable work hours, child care, and transportation, as well as making sure students definitely want to be there and understand the demands needed to achieve success.

This basic level of due diligence is actually the way many for-profit colleges used to operate. For example, at its founding, the University of Phoenix used to only enroll adults over a certain age, with previous work experience. Companies like Strayer and Capella, on the other hand, have maintained this more cautious approach to admissions. They also managed to largely avoid the scandals and lawsuits that have plagued others in the sector.

Fewer Low-Wage Certificates

Another major source of change in the for-profit sector will be the credentials offered by its schools. The industry’s growth in the mid-2000s occurred largely by increasing two types of educational offerings. First, schools established a lot of short-term certificate and associate degree programs targeted at entry-level jobs that did not previously require a college education or a formal licensure. Many of these were programs in the health care fields, such as medical assisting or coding and billing, where salaries topped out in the teens or low twenties. Second, institutions devised a number of “aspirational” programs tied to areas that might seem fun or interesting, but had little real-world demand, or were linked to low-wage jobs when they were. This included criminal justice or video game and graphic design, as well as culinary arts.

Many of these programs are unmitigated disasters. Earnings are low. Defaults are high. They’re also the common source of familiar stories of financial devastation that plague the sector.

Additionally, these programs are incongruent with a more thoughtful admissions model. The very types of students that made up these programs are also the ones that the sector is now supposed to be moving away from. A student with the stability in their personal life necessary to succeed in a postsecondary program can probably seek out something better than a nine-month certificate for a career with minimal job prospects.

This likely adds up to the end, or at least the near-doom, of several of the existing for-profit college companies. Those with a particular focus on the lower end of the credential distribution are missing the thoughtful admissions process needed to survive in a stricter regulatory environment. They lack the programs with more meaningful payoffs that their competitors can offer. And sure enough, these companies are the ones already teetering on the brink of extinction. For example, places like ITT Technical Institute, the Education Management Corporation, and the Career Education Corporation, all of which offer a substantial number of certificates, have shuttered large numbers of campuses, and even closed down entire brands of schools, over the past few years. 

Less Reliance on Federal Financial Aid

While the traditional private for-profit college market may be shrinking, the non-traditional one is growing. Rather than investing in new campuses, for-profit colleges are acquiring new “boot camps.” Also known as “coding academies,” these educational providers offer short-term training specifically designed to set students up with jobs at tech companies.

Coding academies are an attractive investment for struggling for-profit education companies. For one, they are more explicitly linked to higher-wage jobs in the tech sector, instead of the lower-paying jobs that many students completing certificates at for-profit colleges pursue. Second, coding academies are leaner operations. They offer short-term programs that only last a few months. And because they only focus on one specific type of program, they require less physical space and a smaller administrative infrastructure than a more traditional college.  

Not surprisingly, many for-profit college companies have purchased one in recent years. Apollo acquired a portion of Iron Yard in 2015, while Graham Holdings Company, which used to own Kaplan Higher Education, bought Dev Bootcamp in 2014. Strayer owns the New York Code and Design Academy. And Capella bought Hackbright Academy in 2016. None of these are as large as General Assembly, the industry leader in the new boot camp space.

Coding academies have another added benefit for the for-profit industry—they don’t receive federal financial aid. While not taking federal money may make it harder for these schools to grow as big—they need to find students who can foot the bill—it also reduces the inherent risks faced by for-profit colleges. By not receiving federal aid, they can avoid many of the new regulations that have stunted their growth, and profits, in the last few years.

What’s Next

The for-profit college sector has, most likely, yet to hit bottom. Several more companies may well close, unable to make the necessary adjustments in their business model to provide more valuable programs to students who are ready to succeed in them. The Career College Association—the main trade association for the sector—has lost many of its members, and is struggling to define its identity after undergoing its second name change since 2010.

The industry will almost certainly portray these changes as a lost opportunity for students. Such thinking would be a mistake. High student loan default rates, low repayment rates, and abysmal earnings were doing nobody any favors, besides investors and owners, of course. Those for-profit colleges that survive the transition to this new, future model will have to care more about their customers, and about the real-life results they help them achieve. And both students and taxpayers will be better for it.

Read more about EducationFor-profit collegeObama Administration

Ben Miller is senior director of postsecondary education at the Center for American Progress.

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