For-Profit Colleges and Federal Student Aid: Preventing Financial Abuses

 Senator Dick Durbin
National Press Club
June 30, 2010
For-profit Colleges and Federal Student Aid: Preventing Financial Abuses
Prepared Remarks

I want to thank Tejinder Singh and the National Press Club’s Newsmakers Committee for inviting me.

I’m here to talk about for-profit colleges and trade schools.

Specifically, I want to talk about the rapidly growing number of students enrolled in for-profit schools … the dramatic increase in federal student aid dollars flowing to these schools … and changes that are needed to make sure that students, and taxpayers, are getting a fair return on their investment.

Steve Eisman: “Subprime goes to college”

Last week, as you may know, the Senate HELP Committee held the first of what Chairman Harkin promises will be a series of hearings on for-profit colleges.

Among the witnesses who testified was a man named Steve Eisman.

You may recognize the name. Mr. Eisman is a Wall Street trader who saw the coming subprime mortgage crisis years before most other people, and made a killing off it.

Lately, he’s been turning his analytical eye to for-profit colleges. He warns that what he sees, in many cases, is disturbingly familiar.

He says you can sum up the situation in four words: “Subprime goes to college.”

Mortgaging their futures for worthless diplomas

Steve Eisman isn’t alone in his worries about for-profit colleges.

There is growing concern that we could be looking at a repeat of the subprime mortgage fiasco, with low-income, high-risk students mortgaging their futures – not on overpriced homes this time, but on worthless diplomas.

Let me be clear: There are many good trade schools and for-profit colleges, and they serve a vital purpose, supplying job training that helps people take the next step up the economic ladder.

But there are also a lot of bad for-profit schools that are raking in huge amounts of federal dollars while leaving students poorly trained and over their heads in debt.

Wall Street reform

Soon, Congress will pass the toughest financial reforms since the Great Depression.

The new Wall Street reforms target the outrageous lending abuses that led to the subprime mortgage crisis and pushed the global economy to the edge of collapse.

We ignored warnings about the signs of abuse in the subprime mortgage industry for too long, and the results were devastating.

The financial crisis has destroyed more than 8 million American jobs, wiped out trillions of dollars in home values and retirement savings, and saddled our nation with a staggering budget deficit.

We can’t afford to repeat that mistake with the for-profit education industry.

To be sure, the risks to our economy are not as broad with for-profit schools as they were with the subprime mortgage crisis. But they are serious and they are growing.

What is for-profit education?

What is for-profit higher education?

Supporters call it “market-based education” and “education with a purpose.”

For-profit schools include everything from locally owned beauty schools to giant publicly traded chains such as the University of Phoenix, Kaplan University, and DeVry University, which is headquartered in my home state of Illinois.

They offer professional, vocational, and technical training in fields such as health care, computers, and culinary arts.

Twenty-five percent offer bachelor’s degrees; a few offer master’s and doctoral programs. There even are for-profit medical schools.

But the vast majority of these schools offer associates degrees or certificates in programs like medical billing, massage therapy, welding, fashion merchandising, and even video game design.

Rapid rise in enrollment

For-profit colleges are the fastest-growing sector of higher education.

In my state of Illinois, enrollment at for-profit colleges has more than doubled over the last decade.

Nationwide, enrollment in for-profit colleges soared from 673,000 students in 2000 – to 2.6 million students this year.

Here’s a telling statistic: This year, the largest chain of for-profit colleges, the University of Phoenix, has become the second-largest higher education system in America, behind only the State University of New York.

With 458,000 students, it is now larger than the entire undergraduate enrollment of the Big Ten.

Who are their students?

Who attends for-profit schools?

A large number are women. Many are single parents.

Many are minorities, low-income and first-generation college students.

Many work in low-wage jobs. Others have lost their jobs and are trying to regain their economic footing.

A growing number are active duty military and military veterans.

Peter Waller is CEO of Corinthian Colleges Inc., a company that owns many for-profit colleges including some in Illinois. This is how he describes the students at his company’s schools. Quote: “They are 25- to 27-year-old average age, who frankly have got lost in life, and we are their lifeline to a career.”

Steep tuition costs

That lifeline doesn’t come cheap.

Tuition at for-profit schools is, on average, five-and-a-half times the price of community colleges, and about twice as much as public four-year colleges.

Borrowing heavily to pay for college

Two-thirds of for-profit students receive federal Pell grants, which target low-income students and don't have to be repaid.

But Pell grants don’t come close to covering tuition. To make up the difference, students take out loans.

Listen to these figures:

Among students at four-year public colleges, 64 percent take out loans to pay for school.

At four-year private, non-profit colleges, 72 percent take out loans.

At four-year for-profit schools, 96 percent of students borrow to pay for school.

The debt piles up quickly. According to the College Board, borrowers who graduated from for-profit four-year programs had an average debt of $33,000. That’s nearly $13,000 more than public-college graduates – and $5,000 more than graduates of non-profit, private colleges.

What is driving the enrollment increase?

Why are so many people turning to for-profit colleges now?

The recession is a big reason. Students are eager to improve their skills and boost their employability and income in a bad economy.

The failure of public colleges to meet demand is also creating an opportunity for for-profit schools. Community colleges are being forced to cut classes just when demand is greatest. Public four-year colleges are also laying off staff and turning away students.

Convenience is a big draw. For-profit schools offer convenient scheduling, online courses, and faster completion than traditional colleges.

Slick marketing and hard sells

But those explanations for the dramatic increase in students attending for-profit colleges are dwarfed by two other, more important reasons.

The first is easy access to government loans. For-profit schools make it easy for students to line up loans and enroll with no money upfront.

Another huge factor is slick marketing and hard sells.

Career colleges market their programs as passports into the middle class.

TV commercials urge viewers to “make the call that will change your life and get you on the right track to a rewarding career.”

In another ad, a woman says: “I'm a medical assistant. I make more money than I ever imagined. Get up and pick up the phone and make a better future for yourself.”

Many online programs promise that you can “go to college in your pajamas.” No need to take time away from your family or job, you can go to school online, on your schedule.

The hard sell begins after you call or email the school.

Admissions recruiters at many for-profit schools are instructed to “create a sense of urgency” with prospective students. They say things like: “Don’t wait. Enroll now. There are just a few slots left.”

One reason for the hard sell: Money. In many for-profit schools, recruiters’ salaries are determined by how many students they sign up.

The goal seems to be to bring in as many students as possible – regardless of their ability to succeed or graduate – load them up with loans, and leave taxpayers on the hook if students default.

Just as with the subprime mortgage crisis, private companies rake in the profits, and taxpayers bear nearly all the risks.

We’ve been here before

What makes this doubly frustrating is that we’ve been through this before. Not just with subprime mortgages, but with for-profit colleges and student loans.

In 1992, amid reports that some trade institutions were enrolling unqualified students in order to receive their federal student-aid dollars, Congress placed restrictions on for-profit colleges.

We barred colleges from basing recruiters’ salaries on student enrollment.

We also passed the so-called “85/15 rule,” which made any school that received more than 85 percent of its revenues from federal student grants and loans ineligible to collect federal student aid.

Bush de-regulation

The “85/15 rule” was changed in 1998 to the “90/10 rule.

A more significant change occurred four years later when the George W. Bush Administration loosened many restrictions governing the for-profit education industry.

Most critically, the Education Department relaxed the rules that banned compensating recruiters based on the number of students they sign up.

At the time, the department's assistant secretary for postsecondary education and its deputy assistant secretary for postsecondary education were both veterans of the for-profit education industry.

It was another example of insiders being brought in to regulate the industries they came from – something we saw a lot of during the Bush years, just as energy insiders were brought in to oversee deepwater oil drilling.

A rapidly increasing share of federal financial aid

Since 2000, federal aid for students at for-profit colleges has more than quintupled, to $26.5 billion a year.

For-profit schools educate less than 10 percent of students, but collect nearly 25 percent of all Pell grant dollars – almost double the percentage from a decade before.

For-profit colleges depend on federal student aid far more than other colleges.

On average, they get three-quarters of their revenues from federal grants and loans, and some, like Apollo Group, which owns the University of Phoenix, get nearly 90 percent.

Here is a sobering fact: In the 2008-2009 school year, the top three recipients of federal student aid were all for-profit colleges: the University of Phoenix, DeVry University and Kaplan University.

Penn State came in fourth with $549 million in federal student aid – far behind first-place University of Phoenix, with $4.3 billion in student aid.


The billions that students and taxpayers spend on for-profit education might not be a cause for concern – if the schools were delivering a good product.

As I said, some are. But many are not.

Quality of education

At some schools, students pay $20,000 or $30,000 for an associate’s degree only to learn that the program they attended was not properly accredited, so their credentials are useless. They are no more employable than they were before, but now they are deep in debt.

Default rates

For-profit students are also much more likely than other students to default on student loans.

According to the US Department of Education, students at for-profit colleges make up only 7 percent of the people receiving higher education – but 44 percent of those defaulting on federal student loans.

The consequences of defaulting on federal student loans are serious.

It ruins your credit rating.

It makes you ineligible for federal employment or any other type of federal benefit, including student aid if you want to go back to school.

The government can also garnish your wages and withhold tax refunds.

And unlike most other consumer loans, student loan debt is almost impossible to discharge in bankruptcy court.

It can ruin individuals. It also hurts taxpayers because, when students can’t repay their loans, taxpayers are left holding the bag.

With a record number of students attending for-profit colleges, and a record amount of federal aid flowing to these schools, we need to make sure students and taxpayers are getting their money’s worth.


The Obama Administration is working on new rules to tighten oversight and accountability of federal student aid.

Targeting excessive default rates

It is targeting excessive loan default rates.

Starting in 2014, schools with loan default rates that top 30 percent for three years or 40 percent for one year can lose access to federal aid.

Ending recruiting abuses

The Administration is toughening the rules to more clearly restrict institutions that receive federal student aid from paying their admissions recruiters on the basis of enrollment numbers.

Disclosing job placement rates

The Education Department has proposed new regulations that would require for-profit colleges to disclose job placement rates.

Despite the tens of billions of dollars a year the federal government sends to for-profit colleges, there is little reliable information publicly available about our return on that investment. Since schools only have to report graduation data on full-time students who are enrolling in college for the first time, we don’t even have a reliable picture of how many students are completing their studies in for-profit programs. That has to change.

By the way, I think we ought to have better outcome data from all colleges and universities that receive federal aid, not just for-profit institutions. The American people have a right to know what their tax dollars are paying for, and the government has a responsibility to make sure those tax dollars are well-spent. For that, you need real numbers.

Tying aid to “gainful employment”

The Administration is also tightening regulations to ensure that vocational programs that receive aid dollars prepare students for “gainful employment.”

It is drafting a new regulation that may cut federal aid to for-profit schools in some cases if their students’ income after graduation cannot sustain the debt load they have taken on.

Defining gainful employment would be a direct test of whether the for-profit education industry is fulfilling the role it claims for itself.

The new rule could help assure students that job-training programs and career colleges will lead to good jobs, not just a nightmare of debt.

The good programs that help students find jobs without saddling them with high debt could continue to receive federal funding. The bad programs that lead students into jobs that don’t pay well enough for the borrower to repay loans would be put under closer scrutiny or weeded out.

The for-profit colleges are fighting this proposal aggressively. They hate it like the devil hates holy water. They claim many programs would be forced to close and students’ choices would be diminished.

The reality is: For-profit programs have very high operating margins. Many have operating margins that exceed 20 percent and one reported a margin in 2009 of 37 percent. That margin is triple that of Raytheon, and double that of Apple. They could still make healthy profits if they lowered their tuition to avoid running afoul of the new rules.


Congress also has a role to play in strengthening oversight and accountability for for-profit schools.

That’s why we are holding hearings in the HELP Committee.

George Miller, Chairman of the House Education and Labor Committee, Senator Harkin, and I have also asked GAO to assess the quality of for-profit institutions and the outcomes for students attending those programs. Everyone should examine those results.


There are other changes Congress should consider to prevent a replay of the subprime mortgage disaster in the for-profit education industry.

Changing the 90/10 rule

First: I believe it is time for Congress to take a serious look at the “90-10 rule.”

Let’s be clear here. Some of these colleges are practically government institutions. Between 75 and 90 percent of their revenues are coming directly from the federal government.

In some cases, it may even be higher since tuition assistance programs through the Department of Defense and Department of Labor can be counted on the 10 percent side of the ledger.

We need to consider whether it is wise for corporations that are more beholden to their shareholders than to their students to profit so lavishly from taxpayer dollars.

The industry claims that tightening the 90/10 rule would force it to cut programs or raise tuition.

Given their high operating margins, I question those claims, but I look forward to hearing the evidence the industry has to back up its claim.

Marketing limits

Second: Congress should consider whether it is appropriate for federal funding to be used on slick marketing campaigns.

The big for-profit colleges spend more than a quarter of their revenue on advertising and marketing. To compare, McDonald’s only spends 3 percent of its revenues on advertising.

One major for-profit education company spends more on advertising than on faculty.

Congress needs to take a serious look at whether federal financial aid dollars that are meant to provide students a chance at an education should be spent on billboards, television commercials, and advertisements on the sides of buses.

Regulation of private loans

Third: A study by the College Board found that students at for-profit schools – unable to get enough government aid to pay their tuition – turn to private loans much more than students at other schools.

Many for-profit schools have ramped up their own lending to meet this growing need.

This private lending is a boon for the schools. It keeps students in school. And it helps the college meet its “90/10” requirement, which keeps the student aid flowing.

But the loans are risky.

One of the largest for-profit education chains recently told its investors it expects half of the private loans it makes to students to go into default.

In other words, they are willing to lose some of their own money to collect a whole lot more money from taxpayers.

That sort of lending should be closely scrutinized.

I am the author of the original legislative version of the new Consumer Financial Protection Bureau that is part of the new Wall Street reform bill Congress is about to pass.

The new Bureau will have the authority to write and enforce rules to keep these private student lenders in check, and I intend to see that the new Bureau uses that authority to take a hard look at private lending by for-profit colleges.

If it serves a legitimate purpose, fine. But if it’s just a scam, it needs to stop.

Buying accreditation

Finally, Congress should consider whether it is appropriate for companies to be able to buy accreditation simply by purchasing non-profit, accredited colleges.

Accreditation is the key to unlocking federal student aid. Schools must be accredited to be eligible for student aid.

Increasingly, we’re seeing investors bail out struggling non-profit colleges and transform them into for-profit schools. The new colleges hardly resemble the old version, but they retain their valuable accreditation.

This practice should not be allowed to continue.

Conclusion: “Are we going to do it all over again?”

In his testimony last week to the HELP Committee, Steve Eisman asked an important question: “Are we going to do it all over again?

“We just loaded up one generation of Americans with mortgage debt they can’t afford to pay back,” he said. “Are we going to load up a new generation with student loan debt they can never afford to pay back?”

Now is the time to face those questions – before the next crisis hits. We have the time, and the obligation, to get this one right.

I intend to pursue legislation to address some of these issues, and I plan to work with Senator Harkin and other interested legislators as the HELP Committee moves forward.

I hope you’ll be watching closely as well.

Thank you for your interest in this important subject. And now, I’ll be happy to try to answer any questions you may have.