University of Corporate Greed: America's for-profit colleges leave taxpayers and students high and dry

Aug 9, 2012 at 4:00 am
University of Corporate Greed: America's for-profit colleges leave taxpayers and students high and dry
Vlad Alvarez

Bobby Ruffin Jr. was only fourteen when a recruiter from Ashford University called. The Birmingham, Michigan, boy thought he'd clicked on a link promising help finding money for college. It was actually just a lead generator for the for-profit, online school's sales staff.

At the time, Bobby was an A student. His parents had pulled him from the troubled Detroit schools, hoping that home schooling would deliver something better for their son. He told the recruiter that he wanted to be a doctor. She assured him that Ashford could be a stepping stone to that dream.

Never mind that he was only in the eighth grade.

"She said, 'You'll be working toward a degree as a medical doctor, so when you do graduate high school you're almost there,'" Bobby says today. "I'm like, 'This is great; I'm going to talk to my mom.' And she's like, 'No, I wouldn't tell your parents because that would take away from the shock when it happens. If I were you, I'd complete the program and when graduation comes around let them know. Mom and Dad will be super excited.'"

Admission to Ashford requires a high school diploma or equivalency. So when it came time to fill out the financial-aid forms, the recruiter told Bobby to claim that he'd already graduated. He objected, but she insisted "the loan-processing company will go back and correct everything." Still, he left the graduation date blank. Someone filled it in, because Ashford was soon receiving federal student-loan money on his behalf.

Of course, it's illegal for kids Bobby's age to receive financial aid. But for-profit colleges haven't always been scrupulous when it comes to raiding the federal treasury. Between student aid and GI Bill programs, for-profit schools receive 86 percent of their revenue from the American taxpayer. And the recruiters — often little more than salesmen paid largely by how many people they enroll — are driven mercilessly to keep those cash registers ringing.

Students don't get much in return. Though tuition rates can run as high as America's most esteemed universities, the education's generally substandard. In the end, most kids wind up walking away with a questionable degree bought at top dollar — and a mountain of debt to accompany it.

Bobby took online classes for almost a year. But when he wouldn't endorse Ashford's lying on his financial-aid forms, administrators miraculously discovered that he was under eighteen. Since this left him ineligible for federal aid, Ashford was forced to return his loan money to the feds.

The school wouldn't be eating those costs. Bobby would. Ashford, which declined interview requests for this story, sent him a bill for $13,000.

Last fall, Bobby was finally able to enroll at a real university, Eastern Michigan, where he was named a National Collegiate Scholar. Yet he still owes Ashford. Because that's a private debt, he isn't eligible for deferments while he's in school, and any future wages could be garnished.

Unfortunately, this isn't a scam that only targets the young and naïve. The for-profit industry is so rife with deceit, it's been billed as the second coming of the mortgage-loan debacle. And many of the same people are behind it. Three-quarters of all for-profit students are enrolled at schools owned by Wall Street banks and private-equity firms.

All told, for-profit colleges soak $30 billion a year from American taxpayers. And their impact is being felt across the nation and in Missouri. Over the last two years nearly three dozen Missourians have sued the for-profit college Sanford-Brown and its parent company, Career Education Corporation, alleging high-pressure sales techniques and bogus claims of successful job placement.

"They have quotas. And they're instructed to play on people's emotions to get them hooked in — and to get them to apply for student loans," Gary Burger, a St. Louis attorney representing several dissatisfied Sanford-Brown students told Riverfront Times for a story last year.

(Burger is currently negotiating a settlement with the Chicago-based CEC on behalf of some of his clients and declined to be interviewed for this article.)

But even in the age of slash-and-burn government, Congress has shown no interest in stopping it.

"The problem with the subprime [housing] scam was that it got so big it almost brought down the entire world's economy," says Barmak Nassirian, a former official with the American Association of Collegiate Registrars and Admissions Officers. "This one's wisely limited to $30 billion a year, which is highly sustainable. In the context of a multitrillion federal budget, that's not even a rounding error."

Consumer Fraud as a Business Model

You may not know it, but you're sitting on $117,000. That's basically how much every American is potentially worth in government student aid. Want to attend grad school? Throw in another $114,000.

And as for-profit colleges have discovered, an eighteen-year-old with 100 large makes for a very easy mark.

In order to get in on the gravy train, a school only needs accreditation from some supposedly neutral body. But Congress neglected to say who should do that accrediting, resulting in a system loaded with charlatans. Some agencies have built sturdy reputations over decades. Others are little more than rubber-stamp factories, more geared toward gobbling up members' dues than safeguarding kids.

"It never occurred to [Congress] that, as billions of dollars get attached to the recognition process, the process would get corrupted," says Nassirian. "When you say yes, you gain membership dues. After all, you're living off these dues."

Yet even bargain-bin accreditation takes several years. So the investors behind for-profit colleges found a way around this by purchasing small, failing schools to snatch up preowned accreditation.

Take Bridgepoint Education. Its majority stockholder is Warburg Pincus, a New York private-equity firm. When it needed accreditation for Ashford University, it bought the 85-year-old Franciscan University of the Prairies, a struggling, 300-student religious college in Clinton, Iowa. Overnight, it was transformed into the online powerhouse Ashford.

Bridgepoint, which also owns the University of the Rockies, grew from just 12,623 students in 2007 to 77,892 in 2010. Its profits also exploded, going from just $4 million to more than $216 million annually. About 85 percent of its revenue comes directly from the federal treasury.

But if Bridgeport and Warburg Pincus are billing top dollar, they're unrepentant misers when it comes to educating kids. In 2009, Bridgepoint spent less than $700 per student on actual instruction. By comparison, the nearby University of Iowa spends seventeen times that figure.

What Bridgeport doesn't short is its marketing, spending $2,714 per student to keep the turnstiles spinning. Overall, the fifteen largest for-profit colleges spend nearly $13 billion a year on recruiting and marketing.

Needless to say, it's a terrific business if you don't have to worry about educating kids. Nearly 80 percent won't complete their program within six years — almost double the failure rate at traditional schools.

The tactics have become so brazen that even accreditors are taking notice. Last month, Ashford conceded that the Western Association of Schools & Colleges had denied its accreditation renewal, noting that the school had just 50 full-time faculty members to teach 90,000 online students. Within a week, Bridgepoint's stock price had plunged 50 percent.

It's not the only so-called "for-profit education provider" that has seen its market value plummet. Over the past year the stock price of Sanford-Brown's Career Education Corporation has dropped from $24 to its current trading price of just over $3 per share.

In an earnings call last week, CEC's president Steve Lesnik acknowledged that the company has made a few "missteps" while continuing to trumpet the merits of for-profit colleges amid the backlash.

"It's a year of transition as we and others in the private sector education deal with public criticism, as well as regulatory initiatives aimed at limiting the sector's growth in providing post-secondary education in America," said Lesnik.

In 2010 slightly more than 85 percent of CEC's revenue came from federal educational funds, according to a Senate study. The same Senate report found that the company spent 26 percent ($477 million) of its 2009 revenue on marketing and recruitment. Meanwhile, 53 percent of students enrolled in CEC schools in 2008 and 2009 withdrew before completing their degree.

"It's basically consumer fraud rendered to a business model," says Nassirian of the for-profit business model. "Over-advertise, oversell, overcharge and under deliver. They found a system where the pitch goes to one guy and the bill to someone else."

Failure at a Luxury Price

For-profit colleges like to place their alarming failure rates in charitable terms. They claim to disproportionately serve low-income students who struggle in school.

But if they're serving people of lesser means, why are they charging so much money?

On average, a four-year degree from a for-profit runs twice what in-state tuition costs at a public school, according to the U.S. Department of Education. When it comes to two-year programs, the disparity widens: For-profits charge three to four times the rates of their public counterparts. Yet they've still managed to lull the political class into believing their competition is driving down tuition.

During the Republican primary Mitt Romney praised a major donor and co-chairman of his Florida fundraising team — Bill Heavener, owner of Full Sail University — for helping to "hold down the cost of education." What Romney failed to mention is that a 21-month degree in video-game art at Full Sail costs over $80,000. And that's not unusual.

A four-year bachelor's degree in business from Indiana-based ITT Tech costs almost $89,000. That's more than twice the in-state tuition at more venerated Indiana University.

Worse, subprime degrees from places like ITT and Full Sail are typically held in such low regard that it's difficult for grads to find jobs that pay enough to cover their loans. Nearly one in four for-profit students default on their loans within three years of leaving school, more than double the rate of public-school students.

But there's nothing like advertising to paper over your shortcomings. So for-profits carpet-bomb the airwaves to make earning a degree seem as easy as downloading an app. Who hasn't seen those late-night TV ads for "college in your PJs," or the Education Connection commercial featuring that rapping, dancing waitress? These ads drive viewers to websites that generate leads for schools' sales staffs, prompting an unending stream of solicitations. And when those leads are exhausted, schools buy lists from companies such as the California-based marketing firm QuinStreet, which made its name providing leads to subprime-mortgage brokers.

In June, QuinStreet reached a settlement with attorneys general from twenty states, including Missouri, who'd accused it of fraud for operating The website was made to look as if it were run by the government to help veterans, but it was actually just a lead generator for for-profit colleges.

"It is reprehensible that a company would target United States veterans with the hope of profiting from their hard-earned educational benefits," said Missouri Attorney General Chris Koster in a June statement announcing the settlement.

Federal data shows that for-profits are increasingly targeting veterans. In 2009 they took in almost as much military money as public colleges — though they were educating just one-third of veteran students.

"I think sometimes the emphasis is on signing up the student as opposed to whether or not the student is really ready to be successful at that school," says Holly Petreaus, an official with the Consumer Financial Protection Bureau and wife of General David Petreaus. "The top ten recipients of GI bill aid, eight are for-profit schools, and they are very heavily engaged in marketing to the military — quite successfully, frankly."

The idea is to prey on people's hopes and desires, offering that yellow-brick road to the American dream: an education and a better job. Workers are trained to identify emotional weaknesses and exploit them. That's undoubtedly what made Suzanne Lawrence an attractive hire at EDMC. She had a master's in psychology when she went to work for Argosy's online division in Pittsburgh.

"It was really funny because they used a lot of the same skills I was trained to use in grad school as therapeutic skills — like empathy and reflective listening — on the sales floor," Lawrence says. "It was evil and slimy. Your big job was to create trust, make them think you were their friend. The main goal in your first conversation was to find something they called 'the confirmed need,' which was the hot button you were going to push if that person tried to back out on you. Like, 'My dad wasn't really proud of me,' and that's what you write down. You keep that on your file so when you call them and they say, 'I don't want to go,' you say, 'What about your dad? Don't you care about what he thinks anymore?'"

Lawrence worked with more than 2,000 others in a sea of cubicles and an auto-dialer making 500 calls a day. The leads were generally so stale most calls were no answers, hang-ups or people screaming "Stop fucking calling me!" Dry-erase scoreboards kept track of everyone's application numbers, horse-race style. Those who sold were loved. Those who didn't were berated, cajoled and threatened, says Lawrence. Managers monitored calls and circled the cubicle bays encouraging workers to "always be closing."

The harsh, boiler-room atmosphere prompted her to make references to Glengarry Glen Ross. No one got it. They were too preoccupied with keeping their jobs.

The pressure prompted all sorts of illicit shenanigans, including falsifying documents, says Lawrence. Salespeople were coached to evade questions about cost and repeat the lie that "99 percent of our students don't pay anything out-of-pocket to go to school."

She was even instructed to sell online courses to people who didn't own computers. "Tell them to go to the library," her managers would say.

It's All About the Benjamins

The University of Phoenix will never be confused with Yale. According to one 2010 report, 90 percent of its students fail to graduate within six years.

Still, by pure monetary standards, former CEO Todd S. Nelson was a success. During his tenure, he tripled revenue for the school's parent company, the Apollo Group. Enrollment surged to more than 300,000.

Unfortunately, he accomplished this the old-fashioned way — by cheating. Since 1992 it's been illegal to pay recruiters based on how many students they bring through the door. Phoenix did it anyway until two recruiters blew the whistle, initiating a suit that would ultimately cost the school $88.3 million in settlements and fines.

Under pressure, Nelson was forced out in 2006, walking away with a generous $18 million severance. Founder John Sperling put a polite spin on the exit, saying only that Nelson was "preoccupied" with stock price to the detriment of the school's long-term health.

Yet if Nelson's profit motives were too lusty for Phoenix, they were a match made in corporate heaven for Goldman Sachs. The Wall Street bank had partnered with two private-equity firms to buy EDMC. Nelson was hired as the company's new CEO. Former Maine Governor John McKernan Jr. — the husband of U.S. Senator Olympia Snowe — was named chairman of the board. Over the next five years, the company's revenue would nearly triple to $2.8 billion.

Last year, Nelson took home $13.1 million in salary and stock. By the standards of for-profit executive pay, he was working on the cheap.

Gregory Cappelli, his replacement at the University of Phoenix, received $25 million last year. CEO Robert Silberman of Strayer Education raked in an astounding $41.9 million in 2009. Yet even this pales next to Jonathan Grayer, the former CEO of Kaplan University, who walked away with a $76 million severance package — courtesy of Kaplan's parent company, the Washington Post.

By comparison, Harvard president Drew Faust collected a meager $875,331 in 2010.

Nelson's bad-boy practices have caught up with him. Last year the U.S. Department of Justice and attorneys general from five states charged EDMC with fraud for paying recruiters based on the money they generated. Six more states have joined the suit.

EDMC claims its sales pay is not just based on bodies enrolled, but such things as business ethics, professionalism and job knowledge. Kathleen Bittel would beg to differ. She was an EDMC recruiter when Nelson arrived and will readily attest to the change in atmosphere.

Over the next three years, the sales staff increased from 950 people to more than 2,600. "Once Goldman Sachs took over, and they brought in [Nelson], everything changed," she says. "Everything became much more cutthroat. It was just more oppressive and very high-pressure.... They were watching you constantly. We used to joke it was like being on the cotton plantation, and they were the overlords coming by on their horses. The only thing they were missing were the whips — but they had the whips verbally."

Like Lawrence, Bittel had studied psychology and proved adept at forging bonds. She'd gone back to school in her forties to support her family of four after her husband was diagnosed with cancer. She understood the difficulties of raising kids, working full-time and going to college. At first, she admits to "drinking the Kool-Aid," believing Argosy's online program could help people like her.

But after six months on the job, she was allowed to take Argosy courses for free. That's when she discovered she'd aided a bait-and-switch. Many of the features she heralded to students were barely functional or didn't exist. The Worldwide Professionals Network, where students could find graduate mentors in their field, was nothing more than a bulletin board. Promised MP3 downloads of classes also didn't exist.

Worse, the classes themselves had less content than a political sound bite. "When I saw what they were passing off as college, I was appalled and mortified," Bittel says. "I'm a fabulous salesman if I believe in my product. But I was blown out of the water. I couldn't sell it anymore."

On the sales floor, she would soon go from golden child to problem student. Managers threatened to fire her. She protested that she'd excelled at EDMC's other barometers, like leadership, calls made and conversations engaged. None of that mattered, they told her.

"Those are just put in there because the law says we're not allowed to pay you directly," she recalls her boss saying. "We don't look at those. Those don't really matter. The only thing that matters is how many bodies you bring in."

Bittel wasn't the only worker feeling the pressure. A man she carpooled with would cry on the way home.

"If you weren't unscrupulous, you struggled," she says. "Half the people I worked with, their previous job was in the mortgage industry. They targeted people in that industry.... They were the ones that did the best because they were so unscrupulous."

She eventually transferred to EDMC's career-placement department, where the same deceit wore a different outfit.

She was supposed to help Art Institute grads find jobs. But the school was churning out students with abysmal portfolios — if they had one at all.

She was also supposed to generate stats on how many of them found employment in their fields. The numbers were used to not only sell future students, but by accreditors in maintaining a program's standing. So EDMC, she says, was prepared to rig these stats by any means necessary.

Bittel's boss liked to say that "every student is placeable. It's all a matter of technique." This "technique," she says, involved convincing people to sign affidavits saying they were employed in their field. She witnessed cases where someone with a degree in video-game design was counted as working in his field because he sold video games at Toys "R" Us. She was told to convince a Starbucks clerk that making the menu sign each day was using her graphics-design degree.

Once, Bittel saw a coworker lying on a form about a graduate's salary. The same employee showed her how to doctor e-mails so that students' replies favored the Art Institute. Both times she reported the scams to her boss. But instead of being fired, the coworker soon received EDMC's North Star Award for exceptional performance.

EDMC is hardly alone in its transgressions. Two years ago, the feds conducted a sting on for-profit colleges, with investigators masquerading as prospective students. They tested the sales practices of fifteen schools. Four encouraged outright fraud. They were all found to be deceptive.

Congress Sees No Evil

In the age of austerity, you'd think Congress would be anxious to root out waste, especially after allowing mortgage fraud to decimate the economy. But money talks loudly enough to make any congressman hard of hearing. So despite a twenty-year history of fraud and failure, for-profit colleges appear as bulletproof as ever.

Washington's been aware of the racket since Sam Nunn, a Democratic U.S. senator from Georgia, held high-profile hearings in 1992 demonstrating how for-profits were recruiting students from welfare offices, housing projects and homeless shelters — anything to get bodies through the door. They were subsequently barred from paying salespeople based on enrollment.

It would take just a decade for Washington to eviscerate these protections. In 2002, President George W. Bush created a series of loopholes and announced that violators would no longer be punished.

Then Bush and Congressman John Boehner opened the door even wider, working to repeal a rule that required schools to educate at least 50 percent of their students on-campus. It gave birth to an online gold rush, with for-profits flooding the Internet. Last year, 6 million students enrolled.

The industry had discovered the value of paying protection money to Congress. It spent $16 million on lobbying last year alone, buying a dream team of former officials that includes former House Majority Leader Dick Gephardt and no less than fourteen former congressmen.

"I didn't know when I got into the issue of for-profit schools that it was the best way for me to have a reunion with every member of Congress as they parade through the door, all representing these schools," says U.S. Senator Dick Durbin of Illinois, who's held hearings investigating for-profits. "There is so much money on the table they can afford to hire everybody."

Needless to say, Durbin hasn't gotten far with his probe. He's found some support among fellow Democrats, but not a single Republican bothered to attend his hearings.

"I don't want to hear their sermons from the mount about wasting federal money when they won't even take a look at these obscenely subsidized for-profit schools," he says. "If they were talking about food stamps, they would cut people off in a second for this level of fraud. This is a wasteful expenditure of hard-earned consumer dollars to some of the wealthiest people in America, and that has to come to an end."

Congress' shrillest Republican voices on waste refuse to even look at the industry. Despite sitting on the Senate committee examining for-profit fraud, Rand Paul of Kentucky has expressed no curiosity about this money pit. Nor have fellow committee members Lamar Alexander from Tennessee or deficit hawk John McCain of Arizona. Not one responded to repeated interview requests for this story.

President Obama has stepped into the breach, though with customary timidity. In July the Department of Education made it once again unequivocally illegal to base salespeople's pay on enrollment. But other reforms were so watered down they were meaningless. Taxpayers should probably be thankful Obama did anything at all. At hearings last year, the Iowa Democratic senator Tom Harkin called it the most intense lobbying campaign he'd seen in his 32 years in Washington.

To truly appreciate how weak the final regulations were, consider this: The day they were revealed, for-profit stocks soared. The stock prices of EDMC and ITT Tech in particular increased by 20 percent. In one day.

The government ignores the problem at the country's peril. Total student-loan debt, now over $1 trillion, has surpassed credit-card debt. These burdens will limit students' ability to contribute to our consumer economy for years to come. Worse, unlike an underwater mortgage, Congress has made it illegal for people to walk away from student loans they can't pay. The debt will follow them the rest of their lives.

"This is basically a parasitic industry that is preying upon not just some of the most vulnerable members of our society, but the best of these most vulnerable members, people who listen to the rhetoric we feed them and who are actually attempting to better themselves," says Nassirian. "This is an industry that takes people's hopes and dreams and cashes them out."

And they won't stop until they've emptied the till.