For-profit colleges respond to increased scrutiny

They gather in a generic suburban office park, working-class students chasing a fast track to success: a college degree.

But the message at the University of Phoenix orientation is not quite what these secretaries, mental health aides, working moms and single dads expect.

"We want you to decide if this is right for you," says Sam Fitzgerald, director of academic affairs at the school's four St. Louis campuses. "We're here to help you figure it out."

That candor would have been anathema not too long ago in the lucrative world of for-profit colleges, where recruiters received hefty bonuses and often oversold career prospects.

Yet these are new times for the industry that now accommodates one in every eight American college students, either in class or online. Lawmakers in Congress are probing its excesses, from high loan default rates to reports of exploitative sales pitches to wounded veterans.

The Obama administration in June unveiled new rules that could cut off government aid for programs where too few students repay their loans or acquire decent-paying jobs. Disenchantment — and lawsuits — continue among both former students and skittish investors.

"They have a huge bulls-eye on them," said Kevin Kinser, an associate professor at the State University of New York at Albany who studies the industry. "They can't risk business as usual anymore."

The for-profit industry, which prefers the term "career colleges" or "proprietary" schools, grew rapidly over the last decade amid renewed calls to increase the nation's college graduation rate and a need to help laid-off workers find new careers. The private sector's slice of federal aid money grew from $4.6 billion to more than $26 billion between 2000 and 2010.

Now, the industry will see if it can still make healthy profits from its challenging demographic __ low income workers, older students and those with spotty academic backgrounds — while being much more accountable for its results.

The changes are most apparent at the University of Phoenix and its corporate parent, Apollo Group Inc., which, with nearly 400,000 students, ranks atop the industry.

The school has created its own social network, PhoenixConnect, to better link its far-flung students as well as 600,000 alumni who could help those students and graduates find jobs. It boasts of new alumni association chapters, hundreds of student clubs and mentorship programs.

The three-week orientation program is now required of all prospective students with fewer than 24 college credits. The program is free, but those who don't pass can't continue. The company scrapped its financial incentive program for enrollment counselors and there's less reliance on outside sales companies to generate leads, and more emphasis on finding corporate partners willing to help pay for their employees' education.

The results have been dramatic. New student enrollment has declined by nearly half, and the company reported $159 million less in net revenue after the first three quarters of fiscal year 2011 compared to the previous year.

Officials expect further enrollment declines and more short-term financial pain but insist the approach will pay off with fewer dropouts, higher graduation rates and lower federal loan default rates.

"We have made a conscious decision to make sure the students coming through the door are more likely to be successful," said Mark Brenner, senior vice president for external affairs.

Change is also afoot at Kaplan University, which is owned by The Washington Post Co. and serves about 62,000 students. Another 50,000 students study at Kaplan Higher Education career colleges, which focus more on specific trades.

Stung by a series of whistleblower lawsuits by former employees and a Florida attorney general's investigation, Kaplan created a program that allows new students to attend classes for four or five weeks at no cost before deciding whether to continue. Kaplan also stopped paying incentives to recruiters.

The company reported a 48 percent decline in new enrollments as of April and an attrition rate of 25 percent. Of the latter group, 60 percent are dismissed by Kaplan for lack of academic progress.

The for-profit industry's staunchest defenders include Donald Graham, chief executive officer of The Washington Post Co.

"If we are to be guided only by those factors — student graduation rates and how much debt they incur — we would probably close down all, or almost all, of the institutions of higher education — whomever they may be run by — that serve poor students," Graham said at the company's annual meeting in May.

A committee led by Sen. Tom Harkin, D-Iowa, has held multiple hearings on for-profit colleges over the past year — most recently in early July, after the Obama administration issued its new "gainful employment" rules. Those rules require schools to meet at least one of three conditions to continue receiving Pell Grants and other federal paid-tuition: a loan repayment rate by former students of least 35 percent; annual loan payments of no more than 30 percent of an average student's discretionary income; or annual loan payments that don't exceed 12 percent of a typical graduate's salary.

Regulators say those conditions are needed to ensure that for-profit graduates won't face crippling debts, which combined with low-paying jobs could lead to more loan defaults.

The Senate committee found an average dropout rate of 57 percent within two years of enrollment at 16 unnamed for-profit schools. More than 95 percent of students at two-year proprietary schools, and 93 percent at four-year schools, took out student loans in 2007, the committee found. That compares to fewer than 17 percent of community college students and 44.3 percent of students at four-year public schools. Students at for-profit schools also account for nearly half of all student loan defaults, the committee found.

"Some for-profit schools are efficient government subsidy collectors first and educational institutions second," the committee concluded in its report.

In contrast to most nonprofit colleges, proprietary colleges have emphasized expanding their student rolls, regardless of the academic prospects of those enrolled.

"State institutions might like to grow, but they can't afford to. Elite schools define themselves by the fact they don't grow," said industry analyst Trace Urdan, the managing director of Signal Hill Capital Group. "This is a place where growth is the essence of the institution."

Harkin, the industry's most vocal critic, recently compared the high default rates to the subprime mortgage loan meltdown. He remains skeptical that the sector has mended its ways.

"For-profit education must work for students, not shareholders," he said.

Eric Schmitt, 36, earned an associate's degree from Kaplan University's campus in Cedar Falls, Iowa, and then a bachelor's degree from its online school three years ago The aspiring paralegal said he has been unable to find a job in the field. He owes nearly $45,000 in student loans and is working a temporary warehouse job to help support his wife and two children.

Schmitt, who testified before Harkin's committee in June, called the Kaplan Commitment and other industry initiatives "a step in the right direction" but said the gap between education costs and real job prospects could mean "you're going to keep seeing students thrown under the bus."

In a statement issued by Kaplan after Schmitt's testimony, the company said he turned down a paralegal job it helped him line up.

The conversations in Washington and Wall Street mean little to Carl Tabb, a 36-year-old father of 10 who hopes to earn a bachelor's degree in information technology from the University of Phoenix while continuing to work full-time for the Missouri Department of Mental Health and moonlighting repairing home computers.

"I really was not the best student when I was in school," he said. "I always thought I wouldn't make it to college."

Fitzgerald, a former Price Waterhouse consultant, said nontraditional students such as Tabb deserve just a chance to earn a degree and a shot at better future.

"Yeah, we're a for-profit. But that doesn't mean we're in it for the wrong reasons," she said. "We want to set up our students for success."

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Alan Scher Zagier can be reached on Twitter at http://twitter.com/azagier