The Downfall of For-Profit Colleges

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Have you heard of the recent government action taken against the Accrediting Council for Independent Colleges and Schools (ACICS)? Do you know what it could mean for students, tax-payers, and the general loan industry?

It can be rather tempting to turn a blind eye to the recent developments, but the recent decision undertaken by government to withdraw recognition of the nation’s largest accreditor of for-profit schools will have huge implications – impacting you both directly and non directly.

It’s been clear for quite some time now that for-profit colleges have been costing tax payers millions and millions of dollars – from higher drop out rates to a larger portion of student loan defaults – for-profit colleges have been responsible for selling false dreams and contributing to an industry built on shaky legs. Countless lobbying groups, advisory boards, and education commissions have therefore called for the abolition of for-profit colleges and it looks like the government is finally taking heed.

The Education Board withdrew recognition of the ACICS – meaning over 600,000 students may need to find other schools if their college fails to find another accrediting agency.

Even though nothing is final yet and the Accrediting Council for Independent Colleges and Schools Plans to appeal the decision – this news has shed light on a far larger issue – the issue of how for profit colleges have been abusing the taxpayer funded system for years now without any serious repercussions.

To understand how we got to this point and what the future has in store for students, taxpayers, and the industry alike – we dig deep into the issue by examining the role of for-profit colleges, the ACICS, and how the accreditors getting shut down affects the whole industry.

What are for-profit colleges and why have they come under such scrutiny?

If you have ever come across an ad for a flight school, beautician school, or a real estate school – you’ve come across a for-profit college. For profit colleges came into existence to satisfy the demands and needs for higher education. The increase in non-traditional students drove the need for for-profit colleges, considering more and more students wanted access to higher education without having to change their lifestyle and workload to accommodate their pursuit of higher education.

For-profit colleges thus proved to be the superior alternative for these individuals since they offered greater convenience in the form of learning – allowing students to easily start and cease classes.

So where did it all go wrong?

Although started with noble reasons – for-profit colleges are registered with the IRS as a profit making company – meaning they are built and operated like any other business.

One of their mains goals therefore is to maximize shareholder return – majority of the for-profit colleges you see are either owned by private equity firms or a company traded on the stock exchange. This heavy reliance on the bottom line encourages many for-profit colleges to sacrifice education in exchange for increasing returns, meaning their entire premise is to enroll people into inferior programs so they can increase profits – the quality of education isn’t much of a concern.

Evidence proving the lack of concern for the quality of education can be found in an analysis of how for-profit colleges spend their money.  For example, in the fiscal year 2009 for-profit colleges spent:

22.7 percent of all revenue on marketing, 19.4 percent of revenue on pre-tax profit, and 17.2 percent of revenue on instruction – making it clear that advertising, recruitment, and marketing are top priorities for schools rather than the quality of education.

This isn’t tough to understand, considering for profit colleges work by enrolling people into inferior for-profit universities online or on physical campuses with federal loan money – by doing so they can keep the money even though majority of students enrolled in for profit colleges don’t complete their degree.  The alarming rate of people who enroll but do not complete their degree is astonishing – from the years 2008-2009 for-profit colleges enrolled 596,556 students, however 54% of those students dropped out without acquiring a degree or certificate.

What’s worst is due to the high cost of tuition, majority of these students had to take out large amounts of student loans – student loans they will have a very difficult time paying back. It is thus clear that for-profit colleges represent a big problem because even though they have 10% of students – they account for a much larger portion of student loan defaults.

It’s no surprise why these schools have thus become under scrutiny because they focus on “starts” and not graduates – in other words, they just want the federal loan funds – for profit colleges have been abusing the taxpayer funded system for decades.

The quality of education compared to the cost of tuition is very alarming – for-profit colleges are characterized with a large number of pressing issues – the most serious of which are noted below:

-The federal government has spent a considerable amount of time investigating for-profit colleges and have discovered many of the colleges engage in deceptive tactics with the purpose of enrolling as many students as possible with complete disregard to whether or not the students will actually succeed or will be able to afford tuition

-For-profit colleges appeal to a large number of people because of their high acceptance rates – these high acceptance rates however indicate that the colleges are mostly concerned with making money – it’s a known fact that high acceptance rates are almost always tied with a low quality of education.

-For-profit colleges appeal to a large number of people because of their high acceptance rates – these high acceptance rates however indicate that the colleges are mostly concerned with making money – it’s a known fact that high acceptance rates are almost always tied with a low quality of education.

-Students are forced to accrue huge amounts of student loan debt – even those who cannot afford to do so. For-profit colleges have come under severe criticism for convincing low-income students to take on large amounts of student loan debt to finance their education – what’s worst is since majority of the students actually don’t complete their degree – they’re left with inferior education and large debts to pay off.

-Investigations into for-profit colleges also revealed that many colleges were characterized with fraudulent activities and deceptive recruitment processes – recruitment processes that are illegal for higher education facilities to perform

From the above analysis it’s apparent that for-profit colleges are characterized with an alarming number of red flags.

So how have they been getting away with it?

The livelihood of for-profit colleges depends entirely on their ability to receive accreditation – accreditation gives them access to federal loans and makes it possible for them to operate their business.

The issue in all of this is for-profit schools are in charge of selecting their own accreditors – what’s more is accreditors create their own standards for what constitutes as an effective for-profit college – congress has cast a limit on the governments ability to include a baseline benchmarks. The end result of all of this is the accreditors hold all the power in deciding which for-profit colleges to approve and which ones to reject – unfortunately the ACICS hasn’t been doing a great job at keeping up with their responsibilities.

ACICS – Who are they, what do they do, and why are they to blame?

The ACICS is one of the largest accrediting agencies – responsible for accrediting over 200 for-profit colleges. Collectively these colleges enroll roughly 600,000 students. The role of these accreditors is huge – they ensure students get access to high quality education while making sure for-profit colleges aren’t cheating students and taxpayers.

The accreditors responsibility cannot be understated, considering the seal of approval granted by the accreditors allows for-profit colleges to gain access to billions of federal dollars – just last year the for-profit colleges accredited by ACICS were on the receiving end of $5 billion in federal loans – money that is provided by taxpayers.

So, why did the government decide to revoke the ACICS ability to approve for-profit colleges?

It appears as if the accreditors have been doing a horrible job at ensuring high quality levels of education for the for-profit colleges it oversees – after all majority of for-profit colleges accredited by the ACICS are characterized with the lowest graduation rates and the highest rates of student loan defaults – these schools are so bad that the Obama administration called out the accreditors for being “watchdogs that don’t bark.”

The government therefore decided to put an end to the ACICS ability to approve for-profit colleges – this isn’t surprising since various education boards have blamed the accrediting agency of having lax oversight over its schools. A great example of this is in the fact that the ACICS continued to accredit institutions such as Corinthian Colleges and ITT Technical Institute – institutions that have been under federal investigation for fraud – both these institutions were investigated for misappropriating information related to jobs placement rates and claims for federal aid. It’s interesting to note that a study conducted by the Center for American Progress discovered that 52% of federal dollars went to schools under federal investigation for fraud – proving the fact that the accreditors have clearly failed at overseeing the effectiveness of for-profit colleges.

So, where did things start to go wrong?

There’s a severe conflict of interest between the accrediting agency and for-profit colleges – two-thirds of ACICS commissioners served as executives at the for-profit institutions. What this ultimately means is the accrediting agency approved colleges that it clearly shouldn’t have. The ineffectiveness of the ACICS is clearly documented in the fact that the Department of Education found 21 red flags back in June related to the agency’s inability to effectively verify the school’s metrics and quality of education.


What does this all mean?

From the above analysis it is clear that the accrediting agency and for-profit colleges have been running a scheme to take advantage of the tax payer funded system for years now.

The conflict of interest between the two parties has led to a broken system of accreditors poorly monitoring for-profit colleges, ultimately leading to lower graduation rates and higher student loan defaults.

This recent news of the Education board revoking the ability of the accrediting agency therefore brings forth major repercussions.

Below we analyze the effects on students, taxpayers, and the general industry:

What does this news mean for students?

If you’re a student at an ACICS-accredited institution you shouldn’t be too alarmed – after all your institution has at least 18 months to find a new accrediting agency. During this time span it’s quite likely that you’ll finish your degree and will be unaffected by this news.

If, however, you’re still enrolled in an ACICS-accredited institution and your institution cannot find another institution during the next 18 months – you will most likely have to transfer to another university if you desire to continue using your federal loans.

This has been the unfortunate reality for students at Corinthian Colleges and IT Technical Institute – numerous students have been forced to begin their degree from scratch despite having been very close to graduation.

What does this news mean for tax-payers?

If the for-profit colleges cannot find another accrediting agency this will prove to have great implications on tax-payers, meaning more and more students will be asking for loan forgiveness – this could lead to a taxpayer bailout costing billions and billions of dollars.

Just the bailout associated with the Corinthian Colleges and IT Technical Institute could cost taxpayers $5 billion.

What does this news mean for the general industry?

The implications on the industry as a whole cannot be understated – more and more students will be seeking loan deferrals, not to mention student loan defaults are expected to increase even more.

Although this is the case – the general trickle down effect will prove to be positive for students – meaning they will be better protected and will know with greater certainty that the college they’re enrolled in provides them with the best in value in exchange for their hard earned money.

Thus although the short term implications may be negative – the overall implications are positive and will greatly help students decipher through the large number of for-profit colleges in order to find the schools that best fit their needs.

If you’ve enjoyed this article – make sure to check out the rest of our blog so you can learn about everything from private loan settlement to federal loan consolidation, and many other topics about the student loan loan industrial complex.

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About Andrew Weber, NACCC Certified Student Loan Counselor

Andrew Weber is a NACCC Certified Credit Counselor and a NACCC Certified Student Loan Counselor. He is the only certified student loan Counselor who specializes exclusively on private student loan issues in the US. He's helped hundreds of borrowers drastically reduce their debts.