For-profits curry favor on Capitol Hill

For-profit colleges are poised to cash in on federal funds historically reserved for traditional institutions of higher education. With Congress scrutinizing the Higher Education Act, the for-profit sector continues to exercise influence, grabbing for a bigger slice of the financial aid pie and competing with cash-strapped nonprofit public and private schools for financial aid.

To gain the attention of lawmakers reworking the Higher Ed Act, for-profit schools and loan industry officials contributed $1 million to members of the House Committee on Education and the Workforce in the last year and a half, according to a report from the Chronicle of Higher Education. The Apollo Group, parent to the nation’s largest for-profit college, the University of Phoenix, donated close to $70,000. Phoenix already has the ear of the U.S. Department of Education. Bush appointee Sally Stroup, assistant secretary for the Office of Postsecondary Education, was the University of Phoenix’s chief lobbyist until the president brought her to Washington. Her deputy is a former consultant for the Career College Association.

These for-profit proponents are pushing for a number of changes in the Higher Ed Act, including a single definition of higher education. If included within that definition, for-profits would gain access to an array of federal aid programs previously unavailable to them, swelling the pool of applicants for Title V funds (for Hispanic-serving institutions) and Title III (for developing institutions including Native American and historically black institutions) and making it more difficult for students at nonprofits to compete.

They also favor changing the 50 percent rule, which withholds financial aid from institutions where more than 50 percent of enrollment is through distance education. Also at stake is the 90/10 rule requiring institutions to receive at least 10 percent of their income from nonfederal sources. The percentage rules were established in the 1990s in response to abuses that exposed some proprietaries as greedy and fraudulent; that image has changed in recent years and for-profits have become the darlings of Wall Street.

Traditional educators are concerned that such schools are too profit-driven to qualify so easily for financial aid, reasoning that corruption continues to plague the industry. Just two months ago, the Department of Education fined the University of Phoenix $9.8 million for violating financial aid rules prohibiting pay-based incentives for recruiters. Such practices have led to the admission of unqualified students who then default on their loans, costing taxpayers millions.

Investigations are also under way at Career Education Corp., for falsifying records, and ITT Educational Services, for fraud. The National Consumer Law Center reports that audits at seven proprietary schools documented outright fraud in 2003. Most of the schools deny the charges.

“There was a reason for these rules when they were established,” says AFT vice president William Scheuerman. “The profit-driven nature of these schools requires careful scrutiny.” For example, he notes, they set their tuition to the amount of a Pell Grant because there is no other source of income. To make a profit, they cut costs, frequently in instruction. Also, they have to be concerned with marketing, making their product look attractive. Thus, they need to have large advertising budgets and a product that appeals to busy or underprepared adults. “These were the considerations behind the earlier provisions of the Higher Education Act,” explains Scheuerman, who is president of the United University Professions/AFT. “You have to ask what has changed today.”

Loophole lets lenders make killing on students

In the past three years, student loan companies have raked in hundreds of millions of dollars in profit at taxpayer expense, according to a Government Accountability Office study released in September. Revelations about how one company, Nelnet, has taken advantage of a loophole in a federal law are so extreme that on Sept. 21, Sen. Edward Kennedy (D.-Mass.) called for a Securities and Exchange Commission investigation into its practices.

At issue are payments the U.S. Education Department makes to lenders for student loans financed before 1993. In the 1980s, to encourage lenders to issue student loans under the federal Family Education Loan program, the government guaranteed lenders a return of 9.5 percent on loans, regardless of the interest rates borrowers paid. In 1993, Congress rescinded that policy, but active loans made before 1993 still fall under the 9.5 percent guaranteed return rate. Thus, for pre-1993 loans, when the interest rate is less than 9.5 percent, the government pays lenders the difference—termed a special allowance payment.

The policy was intended to encourage student loans during poor economic times; lenders are now using it as a source of tremendous profit, however, finding ways to extend or refinance pre-1993 student loans so they can keep receiving the guaranteed 9.5 percent return. The GAO estimates that as of June 2004, these special allowance payments have cost taxpayers more than $600 million and could cost nearly $1 billion by the end of the year.

The report cites the case of Nelnet, one of the largest for-profit loan companies. At the end of 2002, it held more than $375 million in 9.5 percent loans. Through financial maneuvering, it had increased those holdings to $3.5 billion by June 2004. In calling for an SEC investigation, Sen. Kennedy charged that Nelnet had used the subsidies to mislead its investors, manipulate the market and profit from insider trading.

In early October, the House put a one-year hold on making the subsidies, but as AFT On Campus went to press the Senate had yet to pass its own measure. The GAO—the investigative arm of Congress—believes the Bush administration has the authority to change education regulations to stop the hemorrhage but, the report notes, the Education Department is dragging its feet. The department claims its hands are tied in handling this type of situation quickly, and that the loophole does not constitute a genuine emergency.

The 50-page GAO report provides a fascinating look at how the for-profit loan industry works the system to divert student aid dollars into private profit. To download a copy, go to www.gao.gov/cgi-bin/getrpt?GAO-04-1070.