For-profit schools take in billions in federal financial aid every year.
A proposal for tougher standards in the for-profit college sector has sent shares of the predominantly-online institutions tumbling, and for-profit school officials are lobbying the U.S. Education Department (ED) to reconsider a new set of regulations that could kick into effect soon.
Several analysts have sounded warnings in recent weeks, concerned about for-profit colleges’ ability to sign up new students and access government-backed financial aid due to increased scrutiny.
Apollo Group Inc., which owns the University of Phoenix, the country’s largest for-profit higher education chain, said that ED is launching a review of how Phoenix administers federal financial aid.
The announcement comes not even five months after the conclusion of another review that cost the school $1.8 million in repayments. The new review will cover the period from the 2009-2010 aid year up to the present.
Program reviews are fairly common, and the launch of a review doesn’t mean a school has violated financial aid rules. Yet back-to-back reviews in the past are unusual, said UBS analyst Ariel Sokol.
ED Secretary Arne Duncan has reassured for-profit college leaders that their institutions will play an important role in President Obama’s goal for the U.S. to have the highest proportion of college graduates in the world by 2020.
Duncan, who spoke at last spring’s DeVry Inc. public policy forum, has also said the sector has “bad apples” that are using misleading and aggressive recruiting practices that burden students with loans they can’t pay.
“The perception perhaps has been that ED has been asleep at the wheel” regarding oversight of the schools, he said. “In that context, it’s not surprising.”
A Government Accountability Office (GAO) report in August found misleading recruitment practices at 15 schools, which ED said it could use to act upon.
Such reviews could result in fines or restricted access to government-backed financial aid, which makes up the bulk of the schools’ revenues.
The University of Phoenix program review “is the initial evidence of an increased enforcement regime” at ED, said Signal Hill analyst Trace Urdan in a research note.
Critics claim the schools are not helping students find better jobs and say enrollment counselors sign up many who are unprepared for higher education.
When students drop out, they are still stuck paying back their student loans — unless they default, and then the bill goes to the taxpayers. Defaults on student loans, most of which are supplied by the government, have been rising throughout the recession.
ED’s “gainful employment” rule could limit schools’ access to federal financial aid if graduates’ debt levels are too high or too few students repay loans.
It was supposed to be announced by Nov. 1, but intense lobbying from the for-profit sector helped delay finalization until 2011. ED officials held public hearings on the rule proposal Nov. 4-5 at the department’s headquarters in Washington, D.C.
School chains, including Apollo, have been warning investors that they expect student enrollments to drop as they accommodate new rules.
Becoming ineligible for federal student aid would mean an annual loss totaling in the hundreds of millions for many of the largest for-profit colleges.
The University of Phoenix, with more than 200 locations and 476,000 students nationwide, took in slightly more than $1 billion in Pell Grants during the 2009-10 school year, according to ED statistics. Kaplan University, a school with 66,000 students, received $211 million in Pell Grants, and DeVry received $207 million. Ashford University took in $162 million in Pell Grants last academic year.
For-profit college enrollment has grown from 365,000 to more than 1.8 million in recent years, according to a report released this summer by the GAO. The industry received $20 billion in federal student loans last year, including $4 billion from the Pell Grant program.