Lack of oversight allows more misuse

By Sen. Tom Harkin

Haven't we heard this story before? It features a high-pressure sales force persuading consumers in search of the American dream to go deep into debt to purchase a product of often dubious value. Default rates are sky high. Taxpayer money is squandered. Top executives walk away with fortunes.

This sounds like a description of the subprime mortgage industry, which came crashing down two years ago. But what I just described is the reality at many for-profit colleges.

At their best, for-profit colleges deliver top-quality, innovative options for students who want to pursue postsecondary education while managing work and family obligations.

But serious questions have been raised about some of the major players in this rapidly growing industry. Critics charge that many for-profit colleges employ overly aggressive recruiting tactics targeting low-income students. Students take on excessive debt, and though dropout rates are not available, there is reason to believe that they are very high.

Critics say that the entire business model, especially for publicly traded companies that want to meet investors' expectations, is premised on a college's ability to churn through many thousands of students, whose federal Pell grants of up to $5,550 and Stafford loans are paid to the school, with no accountability for student learning or graduation. For more than 50 years, the federal government has provided students with grants and loans to help pay for college. This has been a powerful investment in human capital and our nation's future. However, an ongoing investigation by the Senate Committee on Health, Education, Labor and Pensions has raised serious questions about whether students - and taxpayers - are getting good value from federal dollars flowing to for-profit colleges.

From 2008 to 2009,

23.6 percent of federal Pell grants flowed to for-profit schools, double the percentage from 1999 to 2000. Federal aid to for-profit colleges skyrocketed from less than

$5 billion in 2000 to nearly $26.5 billion last year. At many major for-profits, federal dollars now account for more than

80 percent of their revenue, the Department of Education reports.

Also, 96 percent of associate-degree students at for-profit colleges take out loans, compared with 38 percent of community college students. And for-profit college students are eight times more likely to graduate with a debt larger than $20,000.

For-profit colleges account for only 10 percent of students enrolled in higher education, but those students receive

23 percent of federal student loans and grants, and account for 44 percent of defaults.

Wall Street money manager Steven Eisman told the HELP committee that many for-profit colleges are “marketing machines masquerading as universities. ... The government, the students and the taxpayer bear all the risk,” Eisman testified, “and the for-profit industry reaps all the rewards.”

Some for-profit schools spend nearly half of revenues on marketing and recruiting. They do a poor job of producing graduates but a stellar job of generating wealth for shareholders and executives.

Eisman, one of the first to predict the collapse of the subprime mortgage industry, sees disturbing similarities in today's for-profit college industry. He estimates that students enrolled by for-profit colleges could default on as much as $275 billion in federal loans over the next decade.

Under the law, people cannot discharge student debt in bankruptcy. If they can't pay it off, it will accrue compounded interest indefinitely.

An absence of federal oversight has allowed a dangerous bubble to grow in the for-profit college industry. The challenge is to crack down on the bad actors and abusive practices while preserving the positive options and innovations that many for-profit colleges have pioneered.

Sen. Tom Harkin, D-Iowa, is Chairman of the Senate Committee on Health, Education, Labor and Pensions. Comments: tom_harkin@harkin.senate.gov