How the Financing of Colleges May Lead to Disaster!

Bill Clinton at a summit on youth and productivity organized by the for-profit Laureate International Universities, Mexico City, February 2015
Mario Guzmán/EPA/Redux
Bill Clinton at a summit on youth and productivity organized by the for-profit Laureate International Universities, Mexico City, February 2015

When the financial industry—banks, hedge funds, loan companies, private equity—gets too involved in any particular activity of the economy or society, it’s usually time to worry. The financial sector, which represents a mere 4 percent of jobs in this country but takes a quarter of all private sector profits, is like the proverbial Las Vegas casino—it always wins, and usually leaves a trail of losers behind. So perhaps alarms should have been raised among both financial regulators and educational leaders when, two decades ago, for-profit colleges began going public on the NASDAQ and cutting deals by which private equity firms would buy them out. Apollo Group, the parent company of the University of Phoenix, was one of the first, becoming a publicly traded corporation in 1994, at a time when the university had a mere 25,000 students. By 2007 the university had expanded to 125,000 students at 116 locations. This was growth pushed by investors who viewed students as federally subsidized “annuities” that, via their Pell Grants and student loans, would produce a fat and stable return in the form of tuition fees.

It’s an issue that’s been front and center in recent months, not only with the scandal surrounding Trump University and the recent closure of the ITT chain of for-profit colleges, but also the news that Bill Clinton was, during five years, paid a total of $17.6 million to serve as an “honorary chancellor” of the for-profit college company Laureate International Universities. The sector has been raking in money for some time now. Throughout the roaring 1990s, for-profit college and university enrollment grew by nearly 60 percent, compared to a mere 7 percent rise in the traditional nonprofit sector.

As one Credit Suisse analyst looking at the $35 billion industry put it, “it’s hard not to make a profit” in the for-profit education sector. The stock prices of for-profit colleges and universities (FPCUs) reflected that; they rose more than 460 percent between 2000 and 2003 with much support from public subsidies. Their promotional budgets rose, too—Apollo recently spent more on marketing than Apple, the world’s richest company.

But education, sadly, did not benefit. As A.J. Angulo outlines in his detailed history of the for-profit sector, Diploma Mills, that’s because such schools spend a large majority of their budgets not on teaching but on raising money and distributing it to investors. In 2009, for example, thirty leading FPCUs spent 17 percent of their budget on instruction and 42 percent on marketing to new students and paying out existing investors. Is it any wonder, then, that investigations into the industry from 2010 to 2012 found that…


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