Want to know an easy way to make lots and lots of moolah? Start a for-profit university just like good ol' DeVry and University of Phoenix! Yes indeed, these schools are publicly traded entities on the New York Stock exchange, and bring in revenues in the billions. How do these acclaimed universities make their money and provide such an incredible education to thousands of students? I shall explain.
I will start with some facts about the biggest for-profit university in the world, which is the prototype for almost all for-profit universities today, the University of Phoenix. The University of Phoenix, which is owned by the Apollo Group, in 2002, had fiscal year end revenues at over $1 billion. In 2005 it was reported that Phoenix profits soared to $2 billion, equivalent to the total revenue of one of the top universities in world, MIT. Last year alone, Phoenix spent over $130 million in advertisements; they spent more money on advertising than commercial companies such as Microsoft, FedEx, and Johnson & Johnson. I mean of course it is extremely important for a company focused on higher education to buy the name rights to the Arizona Cardinals football stadium. With such a large amount of money directed towards aspects of the company not related to improving its education, many have questioned the integrity of the company specifically in relation to recruiting. This makes sense since the for-profit model encourages schools to funnel profits to shareholders while keeping overhead low. This means fewer qualified teachers and less investment in instructional quality. Now let's talk about how these corporations dupe students into such high quality education.
Recruiting strategies of the for-profits are extremely sketchy to say the least. For-profits have been known to enforce and use quotas, deceptive tactics, dishonesty, high pressure tactics, and many more unethical procedures all to obtain as many students as possible. How do the Universities encourage such unethical behavior? Recruiters are paid commission based on the number of students they recruit. This obviously encourages recruiters to try and sign up students that they personally know would not be a good fit for the school and would most likely not succeed. Hmm... the combination of teaching recruiters unethical tactics and rewarding recruiters with commission pay seems like it should be illegal. Well after a few years, the government finally caught on and decided this was not okay. A lawsuit against the Apollo Group was filed, and while for-profit lobbyists and University of Pheonix officials insist they did no wrong, rather than go to court, the University of Phoenix quickly settled for $67.5 million. They were as guilty as Weiner.
Want to know when something is inherently wrong with the system? When people are saying it is eerily similar to the housing bubble.
In both cases loans—mortgage loans in the bank case, student loans in the for-profit college case—were made to people who were at high risk of defaulting, and in both cases “rating agencies” (credit-rating agencies in the case of the banks, college accreditation agencies in the case of colleges), were afflicted with a conflict of interest because they were paid by the institutions whose securities (in the case of the banks) or educational programs (in the case of the colleges) they were rating (Becker-Posner).
After a quick inspection on the fundamentals of each system, they do indeed sound extremely similar don't they? To reiterate this point, loans were granted to people that certainly were not be qualified to obtain loans. 86 % of University of Phoenix revenues come from Federal Grants, aka student loans, aka tax payers, aka we are paying for this school. Last year alone, Phoenix made over $2.6 billion in revenue, with 86 % of the revenue provided by the honest American citizen. That equates to around $2.4 billion in profit from us given to the University of Phoenix. To calculate the industry's revenues as a whole we can assume that about 90 % of the revenues come from federal loans, which means that the industry's total costs are 90 % of its revenues. The total annual costs of the industry are equal to the student loans: $26.5 billion.
Now you might be wondering why I am seemingly bashing student loans even though the majority of students nowadays have student loans because of the ever increasing cost of higher education. In fact student loan debt is so large that loans across all universities is roughly equal to all credit card debt at around a whopping $750 billion. Increasing education costs is a totally different matter, and my argument is not to call out student loans. What I am pointing out though is the quality of student loans given to for-profit University students. The difference in the percentage of students who default on their loans in non-profit universities and community colleges as opposed to for-profit is the cog behind the evil money making machine.
Debt load at for-profit schools is more than twice that of private nonprofit and 4x that of public school students. (Source: The College Board) These debt numbers do not represent the ever increasing interest rate that students on the loans have to pay back, increasing student debt ever more. What is more sickening is the demographic that the for-profit colleges are targeting. They aim a majority of their recruiting towards the lower income people that they know will have to take a loan, and will have to pay the higher interest rates. This increases the profit margin for the school and the tax payments on law-abiding citizens. In fact some schools reportedly targeted people housed in shelters, halfway houses, safe houses, and homeless shelters. Schools have been known to recruit former prostitutes, drug addicts, and convicts. I am all for education for the betterment of our society, but isn't it quite obvious that these organizations are preying upon and misguiding these people? If you ask me, prostitutes and drug addicts are not exactly billed for higher education.
This system does not only hurt the tax payers and the government, but also the students of these for-profit universities. Students that are duped into a phony education and monstrous debt, and are not able to pay back default on federal student loans. The key point is that the unpaid balance of the student loans cannot be discharged in bankruptcy. These students are hounded for life. In other words, this pretty much ruins the person's life. For the rest of their lives they will have collectable debt, garnished wages, get sued in court, and be ineligible for both federal and non-federal employment. This also doesn't include the myriad of benefits that these colleges provide to the students. Aside from shoddy teaching and education, most students are not ready for their specific occupations, and have extreme difficulties in obtaining a job. Because of lot of the universities focus is on occupational education, the worthless degrees are seen as even more worthless in the eyes of the potential employers.
On average, according to lobbyists from these for-profit universities, only about 10 % of students default on their loans. This figure is only about 2x that of the default rate of regular university students. This number though is significantly lower than actual figures when changes to the default period are not limited to the small window that lobbyists cleverly created to base their figures on. A more accurate number is about 50 %. To give you a better picture, for-profit students represent about 10 % of all college students, but about half of the total defaults that occur. A total of $20 billion in federal grants is funneled to the universities each year, so for-profit universities account for $10 billion of that $20.
Now the next question you may be thinking is why is the default rate significantly higher than at other Universities. There are a number of factors, but the main reason is because the dropout rate from for-profit colleges is so high. The dropout rate of for-profit colleges exceeds 50 %, much higher than the overall college dropout rate of about 33 %. Overall the federal government is likely to lose about $275 billion on its college loans over the next decade. While small in comparison to the financial collapse created by the housing bubble, the education debt will hurt the economic recovery and increase the federal deficit. So the next time you are laughing at one of the many ridiculous DeVry or Phoenix University commercials, just know it's actually them with the last laugh. The money spent to create and broadcast the annoyingly incessant commercials was paid for by you and me.
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