By Ellen Anderson, Director of Research.

 

University of Phoenix. Argosy. DeVry. Kaplan. You see their commercials on television and likely see their buildings alongside interstates. These universities and others like them represent the growing market of for-profit colleges. Earlier this year The Chronicle of Higher Education reported on the sector’s remarkable growth:

 

Enrollment in the country's nearly 3,000 career colleges has grown far faster than in the rest of higher education—by an average of 9 percent per year over the past 30 years, compared with only 1.5 percent per year for all institutions, according to an industry analyst. For-profit universities now educate about 7 percent of the nation's roughly 19 million students who enroll at degree-granting institutions each fall. And the proportion rises to 10 percent, or 2.6 million, if you count students who enroll year round. Just this academic year, the University of Phoenix eclipsed California State University as the second largest higher-education system in the country, with 455,600 students as of this month—behind only the State University of New York. As those companies face shareholder pressure to expand, the for-profit sector is poised to capture students that public institutions can't accommodate and that small private colleges desperately need to maintain their enrollments.

 

The New York Times recently reported that Walmart has partnered with American Public University, a for-profit online university, to offer reduced rate classes in areas like retail management and logistics to its associates. The university will offer a 15 percent discount to eligible employees and Walmart is making $50 million over the next three years available for other forms of tuition assistance. It sounds good in theory, but even after the discount an associate’s degree for a cashier would cost about $11,700 and a bachelor’s degree about $24,000. Their average wage is $11.75/hour. According to the American Association of Community Colleges (AACC), the average annual tuition at a public community college is $2,544 meaning an associate’s degree earned from one of these schools would run a student about $5,088. This begs the question: why are so many giving their business to for-profit institutions when they can cost more than twice as much as public alternatives?

1. Demand: President Obama has also rolled out a $12 billion plan to increase the competitiveness of the American labor force by working to put associate’s degrees in the hands of five million more Americans. Traditional bricks and mortar colleges and universities simply do not currently have the overall capacity to meet this need. According to a 2009 report put out by AACC, full-time enrollment at community colleges increased 24% between fall 2007 and fall 2009. Some colleges have expanded their facilities, allowing for greater capacity, but others have not and are often forced to turn students away. Additionally, enrollment caps at public four-year institutions and rising unemployment rates have increased demand nationwide. It is by no coincidence that stocks of publicly held for-profit education companies outperformed the S&P’s 500 by 40% in each of the last two years.

2. Flexibility and agility. The University of Phoenix never turns students away. If a course section fills up, it simply creates another section. It can also create a new course in a matter of a few short weeks by contracting with business leaders to develop the curriculum and hiring only non-tenure track adjunct instructors. Because instructors are paid by the credit hour, many welcome teaching additional sections to make more money. The University of Phoenix model runs shorter classes lasting from five to nine weeks year round. This allows students to “get in and get out” rather than waiting for fall, spring, or summer enrollment to come around. Additionally, when a student expresses interest in attending a for-profit school, they typically receive a response within one business day where financial aid and enrollment options for the following month are discussed. This compact timeline is more attractive to many students compared to that of traditional colleges and universities, where an informational packet can take weeks to arrive, admissions councilors can be difficult to get on the phone, and admissions decisions are only made at certain times during the year.

3. Marketing: The Apollo Group, one of the 13 publicly traded groups that dominate the for-profit education sector and which owns the University of Phoenix, notes in a November 2009 report to the federal government that it spent 20 percent of its $1.3 billion quarterly profits on marketing, or $275 million. Let me repeat that: $275 million spent on marketing, in one quarter, by only one of the 13 largest groups. This sector spends an inordinate amount of money on marketing – billboards, television and radio commercials, job fairs, etc.

 

The sector has come under increasing fire by lawmakers and industry advocates who find the sometimes unclear or weak academic standards, growth pressures from investors, and increasing share of federal dollars funneled through for-profit schools unsettling. Businessweek recently reported that Senator Tom Harkin plans to hold a series of hearings examining some of these issues. Arne Duncan, the U.S. Secretary of Education, admits that more needs to be done to place oversight on these schools.

 

A recent documentary which aired on PBS’ Frontline, College Inc, examined some of these issues clouding the for-profit education sector. It includes interviews with students who are suing their for-profit alma maters for inadequately preparing them for the job market. Three nurses were interviewed who had never set foot in a hospital (so-called clinical rotations took place at a day cay center and other inappropriate facilities) and consequently have been unable to locate employment. Each is more than $30,000 in debt from their schooling. Another woman who earned her PhD in psychology was misled about the accreditation status about her program and is now more than $200,000 in debt after completing her five-year program which never ultimately received accreditation. She too has been unable to locate employment and is crippled by debt under which she will likely never get out. Critics claim that the pressures to grow for-profit schools to make investors money have led to misleading and sometimes predatory recruitment techniques.

 

Industry insiders have speculated that student loans may be the next “bubble to burst” as an increasing share of students rack up education debt (which can never be wiped away by bankruptcy) and are unable to find employment to pay it down in the long term. According to the Project on Student Debt, “Almost one in four (24%) of all 2008 graduates from for-profit four-year colleges owed at least $40,000 in student loans, compared to just 6% of graduates from public four-year colleges and 15% from private nonprofit four-year colleges.” Considering these statistics its clear why this sector has come under scrutiny. But, like it or not it appears that for-profits are here to stay. It is important for economic developers to consider how these schools can both increase the competitiveness of their communities from a workforce development perspective and threaten it by leaching students from traditional schools that are more community oriented and graduating more debt ridden students in the long-term.