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 Minority Committee Staff Views .................................................................................. 177 Selected Appendices .....................................................................................................A3-1 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. 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