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Although for-profit colleges and universities have had a long history in the United States, they have garnered significant attention only in the last decade. In the early 20th century, career colleges existed primarily in urban areas to provide training for specific trades or professions—plumbing, restaurant management, art and design, cosmetology, paralegal work, and the like. These institutions were largely small institutions that offered a few classes in rented buildings. They charged relatively low fees to their customers, who in turn learned specific skills that led directly to jobs.
Even in the 1960s, career colleges were still a microscopic part of the higher education universe. In 1967 approximately seven million students attended degree-granting institutions in the United States, and fewer than 22,000 of these students, or less than one-third of 1 percent, attended for-profit institutions. Indeed, the term “for-profit college” was not generally employed; instead they were called “career” and “technical” colleges. For the next few decades, these institutions remained privately owned and largely operated below higher education's radar screen. They were mostly unaccredited, seeking neither federal nor state financing.
The situation began to change with the founding of the University of Phoenix in 1976—now America's second largest postsecondary institution, with over 400,000 students. Today, the mom-and-pop career shops of a half century ago still exist, but they are swamped by Phoenix and other publicly traded entities such as Corinthian Colleges Inc. and DeVry University, with over 80,000 students each.
This history is captured in the development of one of the more well-known early career colleges, the Katherine Gibbs School. Founded in 1911 in Providence, Rhode Island, it originally provided secretarial training to young women. The school eventually developed into a chain of successful career colleges on the Eastern seaboard that taught skills such as typing, stenography, and how to comport oneself in a business setting. In 1997 the Career Education Corporation, a gigantic for-profit, bought the Katherine Gibbs Schools.
Phoenix and other institutions began to experiment with the meaning and purpose of higher education in a number of ways. Part-time working adults were not simply the main focus of the institutions—they were seen as a potentially huge customer base that traditional higher education had either ignored or disdained. These students did not need a campus and the related accoutrements—fitness and student centers, athletics, and so on. Rather than a smörgåsbord of courses whose utility for future work was not apparent, students took a finite number of classes, offered at convenient times and in convenient locations, in as efficient and focused a manner as possible.
Faculty life was also very different at these institutions. Tenure, shared governance, and academic freedom were absent. Whereas in traditional institutions the professor developed his or her syllabus—so that the same course might have very different foci, objectives, and goals, depending on the instructor—at the for-profits, the syllabi were standardized and teaching styles were more similar than different.
Accreditation became an important benchmark for many for-profit institutions. The awarding of accreditation implied more than simply a degree of sector respectability, although that was certainly important. Insofar as the for-profits' clientele were not only part-time working adults but also increasingly first-generation college-goers from low-income families, the tuition that these institutions charged could be prohibitive. But accreditation enabled their students to tap into federal aid; eventually, some states, such as California, allowed students attending accredited for-profit institutions to apply for state aid as well. If federal and state aid had been unavailable to attendees of the for-profit colleges and universities, their growth would not have been anything akin to what it has been.
As profit-seeking enterprises, the for-profits represent a business model that fundamentally differentiates them from traditional colleges and universities. They seek the profitability that results from a combination of growth in both volume and unit margins (the difference between expenditures and revenues). The result is that their incentives and measures of success differ from those of traditional colleges and universities.
By the end of the first decade of the 21st century, the number of students enrolled in for-profit degree-granting institutions had increased to nearly 1.2 million, or approximately 6.5 percent of the total. If non-degree, certificate-granting, for-profit institutions and their students are included in these statistics, the market share of for-profit institutions is estimated to be approximately 12 percent. These institutions also offer more online course offerings than their public and private non-profit counterparts. This is the fastest-growing sector in postsecondary education.
Selling Education
Although customer satisfaction, product development, and community relations may be important, if a profit-making company does not generate revenue, it will eventually go out of business. Thus, over the last generation for-profit postsecondary institutions have figured out ways to do so. Accreditation and the student aid and access to subsidized loans that come with it are one way.
Consumers carry their aid and tuition with them, and they need to want to buy the product. In the marketplace, sometimes products already exist, and the new entrant needs to carve out a niche or make the argument that their product is better than the competitor's. At other times, the purveyor needs to create a new niche. The automobile industry is full of models that claimed to be either an improvement over existing cars or a new type altogether. The new model a company rolls out every year is an example of the former and sports utility vehicles of the latter. Obviously, if the product is not an improvement or the consumer decides that the new niche is unnecessary, the product or company will founder and likely go out of business.
Sometimes, a confluence of events exists: A company carves out a new niche at the same time there is a growing need for the product. But frequently the consumers do not know that they need it until an advertising campaign makes a successful pitch. The ubiquitous “Post-its” and “Crocs” were embraced by the public even though no one was clamoring for such products prior to their arrival.
For-profit colleges and universities have grown in just such a manner. Traditional institutions have neither marketed nor catered to first-generation, low-income working adults. But for the last generation there has been a proliferation of studies pointing out that a high school degree is no longer sufficient to ensure a middle-class life and that postsecondary education leads to higher wages. The for-profits recognized the niche that this new perception of the value of postsecondary education potentially created but recognized that they needed to market their product in order to realize that potential.
Public institutions' admissions offices have traditionally engaged in minimal marketing because they had a natural clientele and did not care about attracting the one the for-profit institutions were going after. Meanwhile, the elite private institutions marked their prestige in part by how many students they rejected. The for-profits needed to appeal to people who may have never considered a college education or even set foot on a campus.
The result has been admissions practices that many have claimed are at best irregular and at worst unethical and illegal. Rather than engage in a leisurely admissions process that begins in the summer prior to 12th grade and culminates with an acceptance letter in the spring and a financial aid award letter soon after, the for-profit institutions speed up the process. They find potential consumers, try to convince them of the worth of the product, explain the financing that will enable them to attain it, and get them to sign up. Courses may begin in a manner of days.
Problems arise when consumers do not understand the true costs of the product, what is entailed to attain it, or what the outcome of having it will be. If the for-profit sector offers a product of similar or lesser value at a larger expense than the non-profit sector does, then market mechanisms may be presumed to take care of the problem. But they will do so only if the consumer is accurately informed about the costs and benefits of the product.
On the one hand, those who work in the for-profit sector argue that such misrepresentations have been minimal and that by and large, the sector has reached consumers who benefit from a degree by increased earnings that dwarf the loans they have encumbered themselves with. On the other hand, federal agencies and consumer watchdogs allege that the debt burden for many of those consumers is unmanageable, given the wages they are able to earn with the degree they have been granted—if indeed they are able to get to the finish line in the first place.
Another concern is unique to the product that the for-profits offer. At about the time of the creation of the University of Phoenix, a fledgling airline, Southwest Airlines, also began. In some respects, they are similar for-profit companies. Both decided to function in a different manner from their standard competitors. Both catered to different constituencies and deployed their staffs in different ways than their counterparts. Both needed to turn a profit. Both have been hugely successful. But the comparison pretty much ends there, in large part because of the products they deliver.
Southwest Airlines was a for-profit company that faced immediate legal and regulatory counter-attack by its competitors. Those already in the airline industry saw no need to welcome, and thought it unwise to ignore, a new competitor and instead tried first to stop, and then to stifle, its growth. The University of Phoenix was largely ignored by its competitors. Whereas Southwest Airlines today is seen by its peers as a successful company, the University of Phoenix and its confreres are frowned on, not only because of allegations of wrongdoing but because for many people, the very notion that education is a product that should be bought and sold is anathema.
Education has been thought of instead as a public good. When there has been a need to grow because of a state's priorities or an influx of new constituencies, the assumption has been that new public campuses should be built. Over 20 years ago, for example, discussions began about the need for a new University of California (UC) campus. Eventually, after the state had expended approximately $500 million, UC Merced opened its doors and now educates 5,000 students. During the 20 years of discussion and debate there was little, if any, serious thought given to whether a for-profit college might be a better way to accommodate the needs of these and other potential students.
The Role and Size of the For-Profit Sector
A generation ago no one, even those working in the for-profit sector, would have predicted that 12 percent of the postsecondary population would be attending for-profit colleges and universities in 2011. And there has been no discussion of what the size of this sector should be to meet the public's need for postsecondary opportunities.
Given their growth and their problems, what might be the realistic and optimal size of the for-profit sector? The need for a postsecondary education will help determine the size of for-profit higher education. If the market is saturated, then expansion seems foolhardy. But the problem would be self-correcting: Those in the for-profit sector would not turn a profit, and they would downsize or go out of business. However, one can easily make the case that the country is moving in the opposite position: The United States has an increased need for more college-educated citizens that traditional colleges and universities cannot meet.
As has been argued in the pages of this magazine before, as the United States gradually evolves from a national industrial economy to a global knowledge economy, a significantly higher level of education for much larger proportions of society is becoming a necessity—for each individual and for the collective benefit. Thus we have the President's goal that the United States will rise again to the top of the Organisation for Economic Co-operation and Development (OECD) nations in the proportion of college graduates in its population. By most estimates, the country needs to increase college participation by one million students a year for the next decade in order to meet this goal. And it cannot do so without significantly increased participation from working adults with little or no college experience and few realistic college options—that is, the majority of citizens in this country.
The for-profit institutions are responding to this challenge more aggressively than any other segment of higher education. Non-profit private institutions have been less focused on the concomitant and increasing demand for “employment-relevant” postsecondary education in a job market rife with unemployment, while public institutions have been struggling with budgetary shortfalls and organizational intransigence.
Public two- and four-year institutions are currently struggling to serve the same number of students as last year, and in some instances, they intend to serve fewer. The California State University system, for example, is serving about 10,000 fewer students than it did last year. The University of California system enrolled the same number of students, but it accepted many more from out of state in order to generate revenue. The California Community College system is serving as many as 400,000 fewer students.
Thus, just when there are calls to increase participation in higher education, public institutions are maintaining or downsizing their student bodies. And when they manage to maintain current enrollments, it is at a cost. Classes are bigger, fewer courses are offered, and summer classes are frequently curtailed. The public institutions, in short, will not be able to absorb the increase in participation largely because they are at capacity as they are currently configured.
Two alternative scenarios are possible. First, states could raise taxes specifically to enable public institutions to increase their enrollments. Second, the public institutions could radically alter the way they do business, cut inefficiencies, and serve significantly more students. Neither scenario seems within the realm of possibility. For better or worse, the citizenry and its elected officials evince no appetite for increasing taxes. Similarly, administrators, faculty, and the unions have shown just as little interest in dramatically reconfiguring their campuses.
If we agree that increased participation in higher education is critical for the country's economic and social well-being and we acknowledge that 1) the public sector is unlikely to increase its enrollments significantly and 2) the private non-profit sector is not able to meet the ambitious goals that have been set, what alternatives exist other than to ensure that the for-profit sector expands in a way that conforms to ethical industry standards?
Like it or not, the country needs the for-profit sector to ensure economic viability. If we concur, either begrudgingly or happily, that it has a role to play in maintaining the health of American higher education, then what are the key sticking points that ensure that it will do so responsibly?
Doing it Right
Ensuring Ethical Admissions Practices
If we acknowledge that recruiting unlikely students to higher education necessitates new ways of reaching out to people, how do we ensure that those practices are ethical as well as effective? Critics of the for-profits have alleged over the last several years that the entire sector is corrupt. The sector's spokespeople and lobbyists have responded that “it's just a few bad apples” and have resisted regulatory oversight. Although we surely need research in this area, states need to put in place standards that acknowledge new kinds of practices but also ensure consumer protection.
As an element of state licensure, college admissions counselors could be required to receive certification that ensures their understanding of ethical standards and acceptable and unacceptable admissions practices. Any institution that provides false information on its website or through advertising should not only have these unethical practices brought to light but face fines and eventually closure by states' consumer-protection offices. But since there are states in which institutional licensure regulations are weak or non-existent (see below), the federal government may need to work through the regional accreditors to make sure that institutions train admissions staff appropriately and represent the institution and its programs accurately in both online and print marketing materials.
Educating Consumers about Debt Burden
Other than flim-flam artists out to make a quick buck, no one benefits when individuals assume so much debt that they never climb out from under college loans. The taxpayer loses millions of dollars if consumers default on their loans and the government must repay them. For-profit providers that want to stay in business know that consumers will not continue to flock to them if the costs are too high. And the individual will have spent thousands of dollars on an undertaking that ultimately has been of negligible benefit.
The federal government needs to ensure that consumers enter into agreements with full knowledge of what they are required to pay back. The government's role is, on the one hand, to educate the consumer and on the other, to stop fraudulent practices. Cigarettes have a warning attached to them, and there has been an intense public education campaign about the dangers of smoking. When a harmful product has been sold, the US Consumer Product Safety Commission issues a recall. Potential consumers of higher education should have similar protection.
Two key questions pertain to student loans and debt.
First, what are students told when they apply for a federally backed loan, and whose obligation is it to educate the consumer? Students may be provided with what seems to be sufficient information, but because the financial literacy skills of low-income, first-generation students are generally quite low, that information may be meaningless to them.
Although all institutions could be required to have students take a financial literacy tutorial prior to enrollment, the effectiveness of a one-shot tutorial would be minimal and impossible to assess. By way of analogy, restaurants might be required to list the number of calories with their offerings, but no one suggests that it is the obligation of the restaurant to educate its customers about caloric intake and healthy foods. Financial literacy is a process that takes place over a number of years. So the burden of such an educational service needs to lie largely with both federal and state levels of government, which should create and fund programs about loans, scholarships, debt, and the like for potential consumers of higher education—and not just those attending the for-profits.
Second, whose job is it to protect the consumer? If a pattern exists of an institution's students amassing unacceptable levels of debt, any number of remedies are possible: consumer warnings, mandated statements on the institution's websites and in promotional materials (akin to warnings on cigarette labels), and so forth. Both the federal and state levels of government play a role here, because some for-profit institutions are national in reach, whereas others operate within a single state.
And third, what might occur to an institution at which students incur excessive debt? The federal government's role would be to eliminate the ability of the institution to access federal grants and loans; the state should do the same for state financial aid. The states could also monitor the debt burden students assume at every institution and, when an institution exceeds a certain average debt level, issue consumer warnings. Ultimately, it is the states' responsibility, under their licensure powers, to put fraudulent companies out of business.
Skills that Lead to Good Jobs
Students primarily attend a proprietary school in 2011 for the same reason young women went to Katherine Gibbs in 1911: to learn skills that lead to jobs. A student who wants to become a chef and pays money to acquire the requisite skills will be disappointed to learn that the only employment available with the degree is to wash dishes.
To be sure, such an observation comes with caveats. Jobs are easier to find in a good economy rather than a bad one. Some careers necessitate that the individual work his or her way up the ladder. And there is not always a linear relationship between what one learns in school and the employment one initially finds.
However, to assume that there is no relationship is also fallacious. Policies need to be put in place that acknowledge the various contextual factors that exist for students looking for jobs but that also protect consumers and the taxpayers.
Few postsecondary issues over the last year have been more contentious than those pertaining to gainful employment. There are those who think that institutions should be held accountable for the sorts of jobs students find and others who think that they should not. While the graduate always plays an important role in finding a job, students should not be assured that they will find jobs when none exist or when the sort of job promised pays significantly less than what the student has been led to believe.
Accreditors should ensure that institutions educate potential students not only about the costs of a degree but about the sorts of employment that are likely to exist upon its completion—and this is true for both for-profit and non-profit colleges and universities. Some students need to be informed that a certificate in massage therapy from a small for-profit provider will only generate $40,000 a year in salary, with no health benefits and little opportunity for advancement; others may need to be told that a faculty position may not await them when they earn a PhD in Victorian literature from an elite private university. Then, whatever decisions they make will be informed ones. But gainful employment also needs to be pegged to wage earnings over a longer time horizon than the first job after graduation.
The student, the institution and the larger economic environment are inextricably intertwined in ways that may not have been the case a generation ago. We no longer have the luxury of letting students figure out on their own what they should study and hope that they will find a job at some point. Colleges and universities are doing more than simply training people for the workforce, but they also have a vital role in enabling individuals to have high-skill jobs and careers at high wages.
The Regulatory Role of Government
Over the last few years, the for-profit industry has fought virtually every regulation that the Department of Education has proposed. While it has begun to reform itself to some degree and is more open to external research than when I first began studying it a decade ago, its philosophy is largely libertarian and market-driven. The assumption is that the market has self-correcting mechanisms that will take care of any problems and that disreputable institutions will go out of business. The role of the government, in this view, is little more than to provide subsidies to students/consumers to facilitate the growth of the companies.
If we are going to increase college going, we need a healthy postsecondary sector, which will not happen either if the for-profits are regulated out of business or if market mechanisms are expected to solve all problems. If we are going to create a vibrant for-profit sector, the following broad policies need to come into play.
First, the for-profit sector needs to be drawn into states' higher education system planning, either by including them among the institutions coordinated by state higher education boards or through the development of separate state councils. Planning is impossible if the sectors of an industry have no formalized means of communication. Then, all institutions need to communicate with consumers and policymakers by providing them data on costs, retention rates, graduation rates, and the employment of graduates.
Some states also need to strengthen their capacity to regulate for-profit institutions. At present, for example, California has a handful of public employees monitoring the activities of hundreds of them. They have very little time in which to discover fraud, never mind to inform the public about it or close fraudulent institutions and deal with the consequent litigation. Moreover, in an age when technology enables organizations to cross borders with ease, the states need to develop cooperative mechanisms to regulate regional and national institutions, as well as to support their legitimate growth.
Although education and profit may not be oxymoronic, educating our citizenry is not the same as making ice cream. The country may be less happy without ice cream, but our economic and social well-being will not be put at risk without double-dip rocky road. Advanced education—whether offered by private non-profit, public, or for-profit providers—is crucial to the country's future.
For-profit colleges and universities have a vital role to play in the 21st century, for without them we will not reach the goals for college attainment that have been set. But while the for-profit institutions should—indeed, must—have a place at the postsecondary table, they also need to accept the responsibility and oversight that participation in postsecondary education demands.
Resources
1. Hentschke, G. C., Lechuga, V. M. and Tierney, W. G. (eds) (2010) For-profit colleges and universities: Their markets, regulation, performance, and place in higher education, Stylus, Sterling, VA.
2. Tierney, W. G. and Hentschke, G. C. (2007) New players, different game: Understanding the rise of for-profit colleges and universities, Johns Hopkins University Press, Baltimore, MD.
3. Tierney, W. G. and Hentschke, G. C. (2011) Making it happen: Increasing college access in California higher education: The role of private postsecondary providers, National University System Institute for Policy Research, La Jolla, CA. Retrieved from http://www.nusinstitute.org/assets/resources/pageResources/NUSIPRMakingItHappen.pdf
4. Weisbrod, B. A., Ballou, J. P. and Asch, E. D. (2008) Mission and money: Understanding the university, Cambridge University Press, Cambridge, UK.
William G. Tierney (wgtiern@usc.edu) is a university professor and Wilbur Kieffer Professor of Higher Education at the University of Southern California. He directs the Center for Higher Education Policy Analysis and is president-elect of the American Educational Research Association. He has written (with Guilbert Hentschke) New Players, Different Game: Understanding the Rise of For-Profit Colleges and Universities.
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