United States Senate HEALTH, EDUCATION, LABOR AND PENSIONS COMMITTEE For Profi t Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success Majority Committee Staff Report and Accompanying Minority Committee Staff Views July 30, 2012 Contents Executive Summary ........................................................................................................... 1 Introduction ...................................................................................................................... 12 Institutions Examined ...................................................................................................... 20 Publicly Traded Companies ..................................................................................................... 20 Private Equity Owned Companies ........................................................................................... 22 Closely Held Corporations ....................................................................................................... 23 The Federal Investment and the Changing Sector ........................................................ 24 Increasing Federal Investment .................................................................................................. 24 Increasing Reliance on Federal Dollars .................................................................................... 24 Pell Grant Funds ....................................................................................................................... 25 Military Education Benefits ...................................................................................................... 27 Growth and Change in the For-Profit Sector ............................................................................ 30 Why Are Companies that Own For-Profit Colleges Financially Successful? ............. 35 High Cost of Attendance .......................................................................................................... 35 Higher Tuition at For-Profit Colleges ....................................................................................... 35 Tuition Decisions Made To Maximize Revenue ...................................................................... 37 Executives’ Recognition That Higher Tuition Leads to More Withdrawals ............................ 43 Concealing the Cost of Tuition ................................................................................................. 44 Aggressive and Deceptive Recruiting ...................................................................................... 46 Recruiters Operate in a Boiler-Room Sales Atmosphere ......................................................... 49 Misleading and Deceptive Tactics ............................................................................................ 53 Techniques to Close a Sale ....................................................................................................... 59 Military Focused Recruiting ..................................................................................................... 68 How Are Students Performing? ...................................................................................... 72 Inadequate Public Data for Meaningful Oversight ................................................................... 72 Low Student Retention ............................................................................................................. 73 Worst Performing Programs ..................................................................................................... 74 Online Student Retention .......................................................................................................... 75 Publicly Traded Company Student Retention .......................................................................... 77 Heavy “Churn” ......................................................................................................................... 77 The Costs of Withdrawal .......................................................................................................... 80 Why Do Many Students Fail to Complete For-Profit Programs?................................ 81 Spending Choices of For-Profit Education Companies ............................................................ 81 Marketing, Recruiting, and Profit ............................................................................................. 81 Executive Compensation .......................................................................................................... 84 Instructional Spending .............................................................................................................. 86 Student Success is Divorced From Company Success ............................................................. 88 Academic Quality ..................................................................................................................... 89 Part-time Faculty ...................................................................................................................... 94 Student Services ....................................................................................................................... 95 Career Placement Services ....................................................................................................... 98 Incentives for Career Services Staff ....................................................................................... 100 Programmatic Accreditation and Licensure............................................................................ 102 What Is Programmatic Accreditation...................................................................................... 102 Students Are Not Informed About Programmatic Accreditation ............................................ 103 A Case Study of Sanford-Brown’s Disclosures for Popular Program Areas .......................... 104 A Comparison of Multiple Schools’ Disclosures for Two Smaller Degree Programs ............ 109 Lower Licensing Exam Pass Rates ..........................................................................................110 Conclusion ...............................................................................................................................111 What Are the Consequences for Students? .................................................................. 112 High Debt ................................................................................................................................112 What Default Means for Students and Society ........................................................................118 Higher Unemployment ........................................................................................................... 120 Credentials in Lower Demand Careers ................................................................................... 121 Why is This Happening? ................................................................................................ 122 Accreditation .......................................................................................................................... 122 Structural Defects in the Accrediting Process ........................................................................ 123 Accreditors Are Not Equipped to Properly Regulate Large For-Profit Institutions ............... 125 Higher Learning Commission of the North Central Association of Colleges and Schools ... 126 Federal Law and Regulation .................................................................................................. 132 Evasion of Regulatory Requirements ..................................................................................... 136 90/10 Strategies ...................................................................................................................... 137 Student Loan Default Rate Management And Manipulation ................................................. 150 Return of Title IV Funds ........................................................................................................ 159 Job Placement Rate Manipulation .......................................................................................... 160 The Consequences of Inaction ....................................................................................... 167 What Needs to Be Done? ............................................................................................... 169 Enhanced Transparency .......................................................................................................... 169 Stronger Oversight .................................................................................................................. 171 Meaningful Protections ........................................................................................................... 173 In accordance with Rule XXV of the Standing Rules of the Senate, the U.S. Senate Committee on Health, Education, Labor, and Pensions (the committee) holds legislative jurisdiction over all pro- posed legislation, messages, petitions, memorials, and other matters relating to education and student loans and grants. Proprietary schools and institutions of higher education, henceforth referred to as for-profit colleges, fall under this jurisdiction both as academic institutions and as eligible recipients of Federal loans and grants provided through Title IV of the