In Education, Jobs and Economy, Reports


By: Peter Ruark, Senior Policy Analyst and Simon Marshall-Shah, State Policy Fellow

Introduction 

The past several decades have seen a proliferation of private for-profit colleges. While private nonprofit colleges and universities operate much as other nonprofit organizations—with a board of directors or trustees, a system of by-laws and a charter that are meant to ensure the institution serves a public benefit with surpluses going back into the institution’s mission—for-profit colleges operate with the primary purpose of making a profit for owners and/or shareholders. Some for-profit college campuses are locally-based independent businesses, but many others are owned by educational corporations and holding companies headquartered outside of the states where campuses are located.

While some might argue that profit-making in itself is not problematic for an institution of higher learning, problems quickly become apparent when taking into account that taxpayer-funded financial aid is nearly always used at such colleges, credentials are often seen as substandard in the job market, economically vulnerable populations are disproportionately targeted, and many for-profits have used misleading information and advertising to lure prospective students to their schools.

For-profit institutions comprise 47% of the institutions in the Great Lakes states that are eligible for federal financial aid.1 There were approximately 77 for-profit college campuses in Michigan in 2018.2 In recent years, as the Great Recession encouraged cost-cutting, personal computers became more affordable and home wi-fi increased internet speed and capacity, there has been a shift from brick-and-mortar classroom buildings to online learning. This has enabled for-profits to deliver their services at a much cheaper cost (and likely a higher profit) while providing convenience for students, but it has also made it more difficult for state governments to enforce standards and provide consumer protections.

For-profit colleges are often more expensive for students than public and nonprofit colleges offering similar programs. When comparing two-year colleges nationally, data from the National Center for Education Statistics shows that while tuition and fees at public community colleges cost an average of $3,313 per school year, for-profit two-year colleges cost an average of $15,360 per school year.Nonprofit two-year colleges cost a little more than for-profits in very recent years, but traditionally have been cheaper than for-profits. Some of those costs to students can be offset through institutional scholarships and public financial aid. For-profits, on the other hand, usually do not offer institutional scholarships (which are usually established by donors) and students at those schools cannot receive state financial aid in Michigan, although they can receive federal financial aid and some schools rely almost entirely on federal financial aid for their operations.

For-profit Colleges Especially Target Students from Families with Low Incomes, Black and Latinx Students, and Veterans

Despite comprising a small portion of the postsecondary market (about 3% of enrollment in Michigan in 2019), for-profit institutions use targeted marketing strategies to identify potential students and encourage them to enroll. A 2012 Senate Health, Education, Labor and Pensions (HELP) Committee report on the for-profit industry outlined how these schools employ thousands of recruiters to target as many students as possible in an effort to boost tuition revenue through increased enrollment.4

Many for-profit institutions target those who are considered “non-traditional” or independent students.5 These terms are somewhat ill-defined, though independent students meet criteria such as being older than 24 years of age, being married, having legal dependents (other than a spouse) or being a member or veteran of the Armed Forces. In addition, an analysis of 2016 postsecondary data found that “non-traditional” students tended to have lower incomes and represented 70% of the lowest-income undergraduate students.6 Students who decide to work and save income to pay for college prior to enrollment and students whose income goes toward children and other dependents may contribute to this trend, among other factors. Companies that run for-profit colleges know this; the 2012 HELP Committee report notes that recruitment materials emphasized the need to target people who receive public benefits, may lack financial stability or are less familiar with higher education.7

The industry is successful in its strategy, as 73% of all for-profit attendees were at or below 200% of the federal poverty level (FPL), about $24,000 in 2016. The majority of undergraduate students had incomes below 200% FPL, but when broken down by race, this included 70% of Black students, 64% of Latinx students and 42% of White students.8 Based on these disparities, when for-profit schools target “non-traditional” students with lower incomes, they are targeting a larger share of Black and Latinx students compared with White students. What’s more, race-explicit targeting by for-profits has been documented, including large amounts of money spent on advertising on Black Entertainment Television (BET).9 The result is overrepresentation of Black and Latinx students in the sector: 2015 analysis of postsecondary enrollment found that these students made up 29% of all college students, but nearly half of those attending for-profit colleges.10

In addition, Black students are profoundly underrepresented at other postsecondary schools in Michigan. There are systemic inequities that contribute to this underrepresentation. In Michigan, Black children are much more likely to grow up in homes with lower incomes, and there are educational disparities resulting from the impact of economic inequality on children and their school readiness.11 In addition, school funding systems do not meet the need and added cost of supporting schools that predominantly serve students with lower incomes, which influences high school completion rates, which are lower for Black students than White students in the state.12 Systemic barriers also exist at the postsecondary level, with significant weight given to standardized testing—where we see persistent differences in scores based on race as well as class13—and admissions processes that are purported to be race-blind, which limit recruitment, enrollment and support of all students of color.14

Therefore, many students of color, and particularly Black students, face systemic barriers to continuing their education, especially at public colleges and universities in Michigan. Based on a 2019 review, out of 41 states measured, Michigan ranked third lowest in terms of both (1) Black representation among bachelor’s degree earners as well as (2) the share of undergraduates at public four-year institutions who are Black.15 At the same time, there is an effort by for-profit schools to target Black students and encourage enrollment through deceptive marketing regarding cost, degree value and the lengths of programs.16 And, for some Black students with lower incomes in particular, such recruitment is tailored in a way that may present for-profits as an attractive option.

All told, Black students are overrepresented in for-profits schools when compared to the overall population of potential Black students in the state. Recent estimates put the share of Michigan residents—ages 18 to 49 with a high school diploma but no bachelor’s degree—who are Black at 17.1%.17 In 2018, on average 30.6%  of the student body at a Michigan for-profit school was Black.18 This percentage of Black enrollment was at least 20 points greater than that in other types of institutions in the state: Black students comprised an average of 10.7% of students at a four-year private nonprofit institution, 8.8% of students at a two-year public institution and 7.7% of students at a four-year public institution.19 Systemic inequities in postsecondary education by race and targeted, aggressive marketing strategies likely compound, creating overrepresentation of Black students enrolled in for-profit institutions in the state. Unfortunately, many of these students will be saddled with debt and may have earned degrees that do not go as far as promised in the job market, as examined further in this report.

State Financial Aid Can Not Be Used at For-profit Colleges in Michigan

Unlike many states, Michigan does not allow state financial aid to be used at for-profit colleges, but only at public and nonprofit postsecondary institutions.20 This is good public policy; Michigan taxpayers should not be expected to contribute to the profits of out of state investment companies that own many of the for-profit schools, particularly in light of the concerns outlined in this report. This policy has not been seriously challenged in recent years, and needs to be continued in order to ensure that students receiving state financial aid are using it toward a recognized and respected credential and to also ensure that there is enough financial aid to meet the needs of public and nonprofit college students.

There is a downside to this good policy, however. Without the leverage of state dollars, Michigan is less able to collect data on the demographics and success of students at for-profit colleges, and is unable to use state funding as leverage for better practices among the for-profit colleges. This is not the case with public colleges which by definition rely on state appropriations, or for nonprofit colleges that accept state financial aid, as both are required to submit annual data and adhere to certain practices as a condition for receiving public money.

For-profit Colleges Receive Substantial Federal Financial Aid Funding

Although Michigan prohibits the use of state aid at for-profit colleges, the federal government allows the use of federally-funded financial aid at such colleges. Considering their small proportion of postsecondary enrollment, for-profit institutions in Michigan receive a substantial amount of federal funding through Pell Grants, authorized by Title IV of the Higher Education Act. The Pell Grant program provides needs-based grants to students with lower and moderate incomes, helping to reduce the cost of attending college without taking on debt, as one would with a loan. The program is well-targeted: slightly more than half of Pell Grant recipients in 2016 had family incomes below $20,000, with 70% below $30,000.21 Students receiving Pell Grants are more likely to be older than 24 years old, be Black, Latinx or American Indian and be classified as independent.22 In 2018, despite comprising only 3.5% of Michigan’s postsecondary market, for-profit institutions received disproportionately more federal aid in the form of Pell Grants: based on the average amount of Pell Grant funding that undergraduates receive per sector, 6.2% of all Pell Grants to undergraduates in Michigan were distributed to students at for-profits institutions.23

In short, the same type of “non-traditional” students who are more likely to receive Pell Grants—those who are older, who are Black or Latinx and who have lower incomes—are being targeted for enrollment by for-profit institutions.  In the 2017 school year, Pell Grant recipients were three times as likely as those who did not receive Pell Grants to be enrolled at for-profit institutions compared to public or private nonprofit ones, continuing a trend that has persisted over the last decade.24

This alignment is a driving force behind why we see for-profit institutions in Michigan enrolling a much greater percentage of undergraduate students who are receiving Pell Grants, compared with other types of institutions. When examining schools by sector, the for-profit sector overall enrolled a greater percent of undergraduate students receiving Pell Grants in 2018—at minimum 50% (across four-year for-profits) and up to 65% (across two-year for-profits) of total students enrolled in the sector. Across four-year nonprofit and public institutions, the percent of undergraduates receiving Pell Grants is typically less than 40%.25 What’s more, there are 25 individual postsecondary institutions in Michigan in which more than 65% of students are receiving Pell Grants, and of those, 23 are for-profit institutions, whose Pell Grant recipiency among enrolled students reaches up to 95%.26 This is further evidence of the aggressive marketing in low-income communities referenced earlier in this report.

In 2018, the maximum Pell Grant awarded was $5,920; the average amount in Pell Grant funding that a Michigan student received ranged from just over $3,000 for a student attending a less-than two-year public institution (such as a technical school) and up to $5,789 for one attending a two-year for-profit.27 The chart below shows the breakdown of Pell Grant funding for Michigan students compared to the maximum award per each institutional sector. The majority of students educated at for-profits in the state attend less-than two-year institutions; on average these students are awarded just over $4,000 in Pell Grant funding to put toward their educational expenses.

The amount of Title IV federal aid that for-profit colleges can receive is limited by what is called the “90-10 rule,” but a loophole in the rule has resulted in targeted enrollment of another group: members of the military and veterans. The 90-10 rule states that at least 10% of a for-profit institution’s revenues must come from non-federal sources. Based on available 2018 data from 44 for-profit colleges in Michigan, many are easily meeting the 90-10 rule; while some approach the 90% threshold for federal aid, a number have a 90-10 percentage below 50% and the average from this sample is 65.2%.28 However, military and veterans benefits, such as GI Bill funds and Department of Defense Tuition Assistance, are not counted toward the 90% limit for federal aid; instead, they are considered in the private 10%.29 This means that for-profit institutions have an incentive to enroll veterans and receive federal funding without it counting toward the 90-10 rule, and they are successful in doing so. In fact, aggressive recruitment, as documented by the 2012 Senate HELP Committee report, has resulted in about one in three veterans who receive GI Bill funds attending a for-profit institution.30

Despite the wide use of Pell Grants at for-profit colleges, the net price to attend such a college in Michigan—after factoring in all grant aid and scholarships—is much greater than that of a public institution and is on par with a four-year nonprofit one (see table below). For the students with the lowest incomes ($30,000 per year or less) who are awarded financial aid, the median of the institution-wide average net price that students pay is nearly $17,500 per year at a for-profit college and $17,400 per year at a four-year nonprofit college, based on 2018 prices.31 Comparatively, students in an equivalent financial situation paid only $7,800 per year to attend a four-year public college and only $4,800 per year to attend a two-year public college.

For the lowest-income students attending public institutions in Michigan, the average Pell Grant award helps lower the cost of attendance to well under $10,000. At some private institutions, however, students can be on the hook for thousands of dollars even after federal grant money is applied, requiring them to take out loans to pay for school while burning through their lifetime eligibility for Pell Grants (six years’ worth of funding) if they decide in the future to pursue a different credential.

Furthermore, there is evidence that the availability of student aid incentivizes for-profit colleges to raise their tuition costs. A Harvard University study showed that for-profits that are eligible for financial aid charged tuition that was 78% higher than for-profit institutions offering similar or identical programs that were ineligible for aid, and found that the difference was roughly equal to the amount of grant aid and loan subsidy received by students in eligible institutions.32 Colleges using publicly funded aid in a way that brings little economic benefit to students while increasing share-holder dividends should give pause to policymakers and regulators alike.

For-profit Colleges Have Poor Outcomes Compared to Other Types of Colleges

A recent national study showed that students who sought certificate credentials at for-profit institutions were 1.5 percentage points less likely to be employed and have 11% lower earnings after attendance than students in public institutions.33 (The one exception to this was cosmetology programs, in which students in for-profit colleges had better outcomes than their public college counterparts.) Of the for-profit college students, the outcomes were worse for those in online and multicampus chain institutions than for students in more traditional campus-based and independent institutions. The study also revealed no real difference in earnings between those who completed a program at a for-profit school and those who had no postsecondary education at all, although the for-profit students had slightly better unemployment outcomes.34 Given the much higher cost and lower earnings for for-profit school students compared with public college students, the study concluded that public colleges provide a stronger return on investment than for for-profit ones.

When comparing Michigan for-profit, nonprofit and public colleges, one sees that of the for-profits for which earnings data is available, the median earnings of students 10 years after initial entry into college are lower at most for-profit schools than in the other two types of schools. Of the 44 for-profit school campuses or online programs for which the information was available, students at only five had a median salary of $30,000 per year or more ten years after their initial entry, compared to all public universities, nearly all nonprofit colleges, and half of community colleges  (see Appendix A).35

Loan Debt and Default is Particularly High Among For-profit College Attenders

Student loan debt for all types of colleges (public, nonprofit and for-profit) has risen at a perplexing rate. The American Association of University Women (AAUW) estimates that the overall student debt burden in the United States has more than doubled over the past decade. Americans carry $1.54 trillion in student loan debt, with nearly two-thirds (around $929 billion) carried by women.36 AAUW has found that Black women tend to borrow the most, owing $37,558 compared to $31,346 for White women, $27,029 for Latinx women and $25,252 for Asian women.37

The most recent nationally representative data for for-profit colleges is for 2016 graduates, and it shows that 83% of graduates from for-profit four-year colleges took out student loans, and they graduated with an average of $39,900 in debt– 41% higher than 2016 graduates from other types of four-year colleges.38 Among bachelor’s degree recipients, the Institute for College Attainment and Success estimates that 30% of those who started at for-profit colleges defaulted on their federal student loans within 12 years of entering college, compared to 4% of those who started at public colleges and 5% of those who started at nonprofit colleges.39

At the national level, five-year repayment rates are historically the lowest for those who attended for-profit institutions, and those who completed programs in the for-profit sector had lower repayment rates than those who attended but did not graduate from a private nonprofit four-year institution.40 The data demonstrates that despite their high cost and the debt many students take on to attend them, for-profit colleges are not providing opportunities, career prospects or degree value that align with the price. While we can assume that most postsecondary graduates want to pay off their debt, the particular inability of graduates who attended for-profits to make loan payments underscores questions as to these institutions’ ability to prepare students for jobs that provide financial security.

Data on for-profit college student loan debt and default is difficult to get on the state level, or by race or other demographic. A large part of the reason is that many states including Michigan do not provide state aid to students attending for-profits and hence are unable to require those institutions to submit data on those students. It is also likely that some for-profit college students borrow money through channels other than conventional student loan providers. However, given the high level of recruitment done by for-profits in Black and Latinx communities, we can assume that a significant share of the debt is held by students in those communities.

Many For-profit Colleges Have Engaged in, and Been Prosecuted for, Consumer Fraud

The 2012 HELP Committee report found that for-profit college recruiters have used misleading claims about cost, time it takes to complete a degree and job placement after obtaining a degree, in addition to other deceptive tactics that are widespread across the industry.41 Following the publishing of that report, various government entities such as the Federal Trade Commission, the Consumer Financial Protection Bureau, and various state Attorneys General—including Michigan’s Attorney General Dana Nessel—have scrutinized and ultimately prosecuted specific for-profit colleges and their parent companies for consumer protection violations and other transgressions. A number of institutions that have or once had a presence in Michigan (some now operating online, but formerly with campuses in Michigan) have been penalized in these lawsuits (see Appendix B).42

As shown in the HELP Committee report, many for-profit education companies aggressively recruit in communities with large Black and Latinx populations, so it is likely that many of the consumer fraud offenses disproportionately affected Michigan’s Black and Latinx residents.  Moving forward, those working in state higher education policy must keep in mind the fact that many adults have exhausted their Pell Grant eligibility and carry student debt, yet remain without competitive skills or recognized credentials in the job market.

Federal Rules to Protect Students Were Put in Place—and Then Taken Out

In 2014, the Obama administration put in place a gainful employment rule that required most for-profit college programs prepare students for “gainful employment in a recognized occupation” in order to qualify for federal student aid. A program would be considered to lead to gainful employment if the estimated annual loan payment of a typical graduate does not exceed 20% of their discretionary income or 8% of their earnings. Programs that exceed these levels would be at risk of losing their ability to offer taxpayer-funded federal student aid to their students. The rule, which strengthened an earlier 2011 rule, also required institutions to provide information on former students’ earnings, graduation success and debt accumulation.43 Unfortunately, while many expected the gainful employment rule to be weakened by the Trump administration, in 2019 the U.S. Department of Education completely eliminated it, essentially leaving the for-profit college industry with no student outcome quality assurance as a prerequisite to participating in Pell Grant and GI Bill programs.44

The Trump administration also rolled back the borrower defense rule established by the Obama administration in 2016 following the bankruptcies of Corinthian Colleges, Inc. and ITT Technological Institute, both of which had campuses in Michigan and which closed down following prosecution on the federal and state level for having defrauded students. The rule was intended to help relieve students of debt incurred at colleges that made misleading claims.45 The Trump administration significantly weakened the rule in several ways, the most significant being that students would not automatically get debt relief when a school is shown to have used deliberately fraudulent tactics, but must apply individually for relief and present proof of having been personally defrauded even after widespread and systemic fraud has been shown.46 

Conclusion

At first blush, the high usage of Pell Grant and GI Bill dollars might lead one to believe that for-profit colleges in Michigan are fulfilling a need by serving a substantial number of students that might otherwise be underserved—veterans, students with lower incomes and “non-traditional” (older) students. However, such federal aid is beneficial to students and society when it truly helps fill in the margin between what a student can reasonably be expected to pay and the cost of the education, and when the investment results in better employment prospects and higher wages after graduation. When instead the cost of the education is increased to maximize the availability of grant dollars for the sake of profit, and when the earned credential does not have meaningful job market value, the intended purpose of Pell Grants and GI Bill benefits has not been met and students and society are worse off for having invested time and money in the attainment of the credential.

A recent study looked at the impact of the loss of federal aid on the enrollment of Pell Grant recipients in for-profit colleges that were sanctioned and were stripped of the ability to accept financial aid. On average, sanctioned for-profit colleges experienced a 40% decrease in annual enrollment in the five years following the sanction receipt, but those enrollment losses were offset by enrollment increases within local community colleges. Moreover, such sanctions tended to decrease enrollment even in local for-profit colleges that had not been sanctioned, likely due to improved information about local higher education options or damages to the reputations of for-profit colleges in general. The study also finds that students who enroll in community colleges following a for-profit college’s sanction are less likely to default on their federal loans.47

It is time for Michigan policymakers and stakeholders to look this situation squarely in the eye. In our state’s most economically struggling communities, people who are earning low wages and often raising families are being aggressively recruited by for-profit educational companies promising a way forward to the “American dream.” Many of these workers and parents would love to make the investments and sacrifices required in order to attain marketable skills, economic security, and a career and credential that one can be proud of. Those hopes are dashed when gainful employment does not materialize, and one is instead holding a large debt burden and no longer eligible for a Pell Grant to enable a better choice of college in the future.

Are all for-profit colleges intrinsically bad? Not necessarily. But to have a beneficial rather than parasitic role in Michigan’s communities, they must offer quality education and recognized credentials at a reasonable net cost to the student without exploiting the availability of taxpayer financial aid dollars for their own profit. When schools receive public dollars to deliver educational services at a profit, there is a structural incentive to spend as little as possible on the services in order to increase the profit margin for the company and its shareholders.

On the other hand, it is instructive that for-profit students who leave due to their college no longer being able to accept public financial aid often subsequently go to a public community college. Community colleges exist, as their name suggests, to serve their communities, and they are held accountable to those communities through board elections and state oversight through the appropriations process. Michigan community colleges have the lowest tuition costs among the Upper Midwestern states, and unlike most for-profit colleges, their credits are largely transferable to other community colleges, public four-year universities and some nonprofit colleges.48

Those who work with individuals considering a for-profit college program should encourage and assist the individual to compare the costs and benefits with similar programs at a community college, a public four-year university or a local nonprofit college in order to make a fully informed choice.  And state and federal policymakers need to do what they can to ensure truth in advertising, responsible use of financial aid dollars, and protection for those who have been defrauded by a for-profit college.

State Level Policy Recommendations

Leverage state licensing to ensure that for-profit educational companies that operate in Michigan are transparent about finances and costs. In order to provide services in Michigan, for-profit colleges must be licensed.49 Through stringent licensing requirements around financial transparency paired with strong enforcement, states can obligate for-profit institutions to disclose all federal funding—including GI Bill funds and Department of Defense Tuition Assistance—and close the loophole that allows these benefits to be counted in the private 10% of the federal 90-10 rule (see federal recommendations below). Maryland enacted legislation to do so in the spring of 2020 and Oregon is also considering similar legislation.50 Such a policy would ensure that regulators in Michigan had a robust and accurate picture of for-profit institutions’ annual revenues.

Continue the prohibition against state financial aid being used for private for-profit colleges. With limited funds available to provide state need-based financial aid to students through Michigan’s three primary grant programs (the Michigan Competitive Scholarship, the Michigan Tuition Grant and the Tuition Incentive Program), Michigan should continue its policy of allowing these grants to be used only at public and nonprofit postsecondary institutions and apply the limitation to any new state aid programs enacted in the future.

Encourage or require high school counseling offices to provide materials and/or advising services to students on how to weigh costs and benefits when choosing a college. When provided with sufficient information and guidance, students and their families will be better able to make choices in their best interests. Many high schools establish academic partnerships with local community colleges to provide Advanced Placement classes and occupational skills training. In lower-income communities targeted by for-profit colleges for advertising and recruitment, these partnerships should be strengthened where possible to ensure students know of and can consider the community college option.

Continue to use the power of the Attorney General’s office to robustly enforce good practices and prosecute harmful practices. Michigan’s Attorney General Dana Nessel has signed Michigan on to at least three multistate lawsuits against for-profit educational companies that owned colleges in Michigan and were shown to have defrauded students (Art Institutes of Michigan, American Intercontinental University and ITT Technological Institute) and won monetary relief for those Michigan students. The office must continue to be assertive against for-profit colleges that commit consumer fraud.

Federal Level Policy Recommendations

Strengthen the 90-10 rule along with reporting requirements for federal funding. Not only state but also federal policy changes could strengthen the 90-10 rule and ensure that federal funding, particularly in the form of military and veterans benefits, does not flow as easily to for-profit schools. Through Congressional action at the national level, the 90-10 rule could return to its original ratio of 85-15 (before the rule was changed in 1998), which has gained traction over the last few years. A 2019 Brookings Institution report found that this change could have a measurable difference in the number of for-profit schools who passed the test: if the 90-10 rule was strengthened to 85-15, 13% of all for-profits would have failed to meet the rule in 2015.51 Increased reporting requirements as a condition of licensure combined with federal changes to the 90-10 rule would lead to fewer taxpayer dollars supporting the for-profit industry and likely fewer veterans being targeted for enrollment.

Restore the strong gainful employment and borrower defense rules enacted by the Obama administration. These important student protections can be reinstated through departmental policy without Congressional action. If the U.S. Department of Education declines to make these important restorations, Congress can pass legislation to require it to do so and, with enough votes, can override a presidential veto.

Appendices | Endnotes

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