Source: Corbis

Day of reckoning: for-profits¡¯ students take out more loans and default at higher rates, and a sector expert says that shrinking enrolment indicates that more people are asking what they would get for their money

After a decade of increases in enrolment and profits, America¡¯s private, for-profit universities appear to have fallen on hard times.

The number of students at these institutions is dropping as the economy improves. Relentless bad publicity about questionable recruiting practices and low graduation rates has taken a toll, as have decisions by some states to stop students of for-profits from being eligible for taxpayer-funded financial assistance.

Meanwhile, conventional non-profit universities are seeking to tap into the huge working-adult education market and are starting to compete for this key clientele of the for-profits, at a lower price.

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¡°Students and prospective students are questioning the whole value proposition of all ÖйúAƬ,¡± says Jeff Silber, managing director at BMO Capital Markets, which analyses the private, for-profit universities. ¡°[They ask:] ¡®Am I going to reap the benefits of all this money I¡¯m spending?¡¯ More often than not, folks are saying ¡®no¡¯.¡±

A spokesman for industry trade group the Association of Private Sector Colleges and Universities did not respond to requests for comment. Its president, former Republican congressman Steven Gunderson, has previously attributed the decline in enrolment to the slowness of the economic recovery, saying that students are delaying spending money on ÖйúAƬ until they are certain there will be jobs worth getting afterwards.

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However, other observers say that it is the improving economy ¨C sluggish though it is ¨C that is partly to account for the drop in student numbers.

¡°More people go to college when there are economic hard times, and certainly the for-profits¡¯ enrolment increased substantially during the recession,¡± says Michelle Asha Cooper, president of the Institute for ÖйúAƬ Policy, which carries out research on for-profit ÖйúAƬ. ¡°We¡¯re seeing a cooling off of that now.¡±

Until recently, Americans have been willing to go deep into debt to obtain a university degree. But a survey by the private student loan provider Sallie Mae found that two-thirds of students now take cost into consideration when deciding on a ÖйúAƬ, a far higher proportion than in the past.

Enrolment at all US ÖйúAƬ institutions is falling. It decreased 2.3 per cent in the spring compared with the previous year, according to the National Student Clearinghouse. But at for-profit universities, enrolment in the spring was down by nearly 9 per cent.

This shrinkage comes in the wake of a period of extraordinary growth. In the preceding two decades, the number of students at for-profit institutions had soared 225 per cent to 2.4?million students in the 2010-11 academic year (about 12 per cent of US post-secondary enrolment), according to the National Conference of State Legislatures. Students were attracted by the for-profit sector¡¯s focus on convenient hours and locations as well as flexible online courses.

There were eight publicly traded ÖйúAƬ companies at the end of the 1990s with just under 200,000 students enrolled; in 2010, the 14 publicly held companies in business have a combined total of 1.4 million students.

Critics say that, in addition to economic turbulence, this growth was fuelled by questionable recruiting practices that lured students who never managed to graduate and were left with significant debt. On average, only one in four students at private, for-profit universities receives a four-year degree within even six years, compared with 64?per cent at public and 55?per cent at private, non-profit institutions, according to a 2010 US Department of Education report.

Student loan default rates are also significantly higher at for-profit universities. According to US Department of Education figures, 30?per cent of their students default on loans ¨C three times as many as at public universities and more than three times as many as at private, non-profit institutions.

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In addition to the hardship this causes for students, it forces the for-profits to recruit aggressively to keep seats filled and money coming in.

One unnamed group of for-profit universities started the 2008-09 academic year with 71,246 students, recruited 120,638 new students over the course of the year and ended it with 89,479, according to an investigation by the US Senate Committee on Health, Education, Labor, and Pensions.

The committee investigated a total of 16 for-profit universities and discovered that 14 had to recruit more students during the year than they started with at the beginning. A total of 57?per cent of the students who enrolled at the 16 institutions in 2008-09 dropped out. Over a three-year period, the Senate committee found, an estimated 1.9 million people left without receiving degrees, but often with significant debt.

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Publicity about statistics such as these has not benefited the sector.

¡°For-profit institutions have been under intense public scrutiny about their dropout rates, their recruitment tactics, and their level of student debt,¡± Cooper says. ¡°That plays into the declines we¡¯re seeing.¡±

She adds: ¡°The student loan issue cannot be underestimated. Students at for-profits tend to take out more loans and default at higher rates than [in] any of the other sectors, and students are becoming more savvy shoppers. People are asking themselves questions about what they¡¯re getting for their money.¡±

So, too, are many policymakers. While the for-profit ÖйúAƬ industry has so far fought off attempts at the federal level to make them prove that students are getting degrees worth what they are paying, several states in which they operate have moved to regulate them more closely.

California, for example, now ties eligibility for its state-funded student financial aid programme to institutions¡¯ graduation and student loan default rates. Students can no longer receive grants to attend institutions that have low graduation and high default rates. This change has excluded 80?per cent of for-profit universities from the programme.

A similar proposal is under consideration in Illinois, and Maryland has banned for-profit universities from receiving money from state financial aid programmes, except for two small sets of grants. Connecticut requires all ÖйúAƬ institutions to provide clear information about costs and debt to every applicant.

Although some of the largest, publicly traded for-profit universities remain very profitable, many of the smaller ones are showing signs of strain. Of the 153 ÖйúAƬ institutions nationwide that had failing scores on an annual test of their financial stability by the US Department of Education, 37 were private, for-profits. The results are from 2011, but were not released until this year.

One chain of for-profit colleges, American Career Institute, abruptly closed in January, leaving more than 2,200 students trying to transfer elsewhere or obtain tuition fee refunds to repay loans. Another, Academic Enterprises, shut down some of its campuses, which served 650 students, in January. Both had financial problems.

Even industry behemoth the University of Phoenix closed 115 campuses and other offices last year and laid off 800 non-instructional employees, after a near 14?per cent decline in enrolment over a three-month period that followed a 19 per cent drop the year before. It has said it expects enrolment to rebound and that it plans to grow by expanding internationally. The parent company of the University of Phoenix, the Apollo Group, is also the parent of the UK¡¯s BPP University.

Other for-profit institutions are taking another unusual step: cutting their tuition fees. While conventional public and private, non-profit universities continue to increase their costs, the average tuition paid by students at four-year, for-profit universities, when adjusted for inflation, fell 15?per cent between 2006 and 2011, according to figures contained in an analysis by independent thinktank Education Sector, using federal government data. Another major player, DeVry, has started advertising scholarships and discounts.

But many remain more expensive than public universities and community colleges, which are also beginning to compete more aggressively for working-adult students.

¡°Now you see many of the traditional schools going after what had historically been the market for for-profit schools,¡± BMO¡¯s Silber says. ¡°And unfortunately the price points for for-profit schools, for the most part, are much higher.¡±

He said he did not necessarily see private, for-profit enrolment rising again in the immediate future. ¡°It¡¯s shrinking and will continue to shrink. Maybe we¡¯ll bottom out in a year or so.¡±

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Cooper has this advice for the industry: ¡°The for-profits that are able to produce strong academic outcomes and workforce outcomes and focus on the needs of particular markets are going to be the ones that will weather the change. But they¡¯re going to have to put students, rather than profits, first.¡±