Looks Like Reform Is Coming to the For-Profit Education Industry

Looks Like Reform Is Coming to the For-Profit Education Industry
Looks Like Reform Is Coming to the For-Profit Education Industry

While not the biggest issue facing America, the damage wrought by the for-profit education industry is still something which urgently deserves attention from Washington. In the previous administration, the industry found a generous partner that gave it virtually unrestricted access to government-provided student loans -- access which for-profit schools used to prey on the weakest members of our society.

Recently, I wrote an article for DailyFinance about the case for selling short the shares of leading players in this industry. I concluded it with a note of caution about whether new rules to clamp down on those abuses would really be put into practice. Now things are looking better for the short case -- and the students.

A Senate committee will hold hearings on June 24 about the $20 billion in federal student loans that end up going to the for-profit education business. This industry induces many people to take out student loans they won't be able to repay: The students are stuck with the debt, but the money goes directly to the schools, which have been growing in profitably. The industry's revenues are up 26.4% a year, with an average return on equity of 33.5% during the last five years.

The exploitation of people who can't repay the loans is endemic. At the University of Phoenix -- with an enrollment of 400,000, it's the nation's largest for-profit university -- only 18% of students get their degrees in six years. The number drops to 6% at some campuses, and among online students, falls even further to a scant 4%. The many dropouts default on loans "as big as $100,000 for incomplete bachelor's degrees and up to $200,000 for advanced degrees," according to Business Insider.

How Strong is the For-Profit Education Lobby in Washington?

The Department of Education wants to change the regulations governing the for-profit education industry in ways that would seriously crimp that growth and profitability. According to Bloomberg News, those new regulations could be out for comment as soon as next week. Bloomberg reports that these regulations "would cut federal aid to for-profit colleges whose graduates' starting salaries make it difficult to repay their loans as well as tighten rules against tying recruiters' pay to the number of students they enroll."

Meanwhile, on Capitol Hiil, Sen. Tom Harkin (D-Iowa) will convene hearings on the subject before the Health, Education, Labor and Pensions Committee that he chairs. "We need to ensure for-profit colleges are working well to meet the needs of students and not just shareholders," Harkin's statement said. "We owe it to students and taxpayers to make sure these dollars are being well-spent."

The for-profit education industry has worked with government officials to gain access to new markets. Bloomberg News reported on Apollo Group (APOL) and its efforts to use campaign contributions to influence New York state to let it open a campus there. Interestingly, that case reveals that the for-profit industry does not always succeed.

It's likely that by July, the nation will have a clearer picture of how Washington plans to change the rules governing for-profit education to a smaller, more slowly-growing business -- one that isn't permitted to thrive by taking on students who have no hope either of graduating or of repaying their student loans.