For-profit colleges go under the microscope

When it comes to the state's primarily independent trade schools, for-profits generally cost less, though graduates still have a tougher time paying back their loans


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The for-profit education industry -- the target of congressional hearings and Doonesbury cartoons -- recently has come up for some intense criticism, but the problems exposed nationally are a far cry from the picture the industry presents in New Hampshire, according to an examination of extensive federal data on the colleges in New Hampshire.

"Sometimes there are some for-profit schools that are a problem -- the way they operate, the way they treat students," said Richard Gustafson, the director of the Division of Higher Education at the state Department of Education and former president of Southern New Hampshire University. "But that has not been the case here in New Hampshire."

Indeed, when it comes to the state's primarily independent trade schools, for-profits generally cost less, though graduates still have a tougher time paying back their loans.

But that’s because some of these graduates are "stiffs," said Ronald Maziarz, vice president of Empire Beauty Schools of New Hampshire, which runs four schools with about 500 students among them. "It has nothing to do with the education we are providing. I know some bad schools, but I don’t know of any bad schools in New Hampshire."

The recent bad publicity is because, "for some people, profit is a dirty word."

The for-profit educational industry is a stepchild of the postsecondary world -- about a tenth of its size -- but it is growing up quickly, more than tripling its enrollment nationwide and doubling it in New Hampshire in recent years, while nonprofits and state institutions have grown at a much slower rate.

Nationally, the industry in the last decade has evolved from being composed of trade schools to one dominated by degree-granting institutions owned by publicly held companies and private-equity firms.

Such firms, by targeting a growing population of nontraditional students, have captured about three-quarters of the for-profit student population.

Two of those corporations have reached into New Hampshire. The Washington Post Co. subsidiary Kaplan Higher Education took over Hesser College in 2000 when it acquired Quest Education Corp. -- which had picked up the 100-year business school just two years earlier -- and ITT Educational Corp. acquired Daniel Webster College in 2009.

The two schools -- the only for-profit, degree-granting colleges in the state -- account for 72 percent of the nearly 6,000 students attending for-profit schools in New Hampshire. (Hesser, with its five campuses, is much larger, at about 3,500 students, compared to 700 for Daniel Webster, with its one campus in Nashua, according to the latest enrollment figures on the federal Department of Education website.)

The two schools are the fourth and fifth most expensive in the state -- with net cost at an annual average of about $24,000 for 2010-11.

Both Kaplan and ITT were among the 30 largest higher education for-profits examined by the Senate Health, Education, Labor and Pension Committee, which issued a scathing report over the summer.

The Harkin Report -- named after the committee’s chairman, Sen. Tom Harkin, D-Iowa -- blasted for-profit colleges for taking some $32 billion in annual aid for students, half of whom leave in a median of four months without a degree.

The report criticized the schools for spending nearly a quarter of their revenue on recruiting, taking a profit margin of nearly 20 percent, and paying an average of $7.3 million to their CEOs.

The report spelled out much more in detailed appendices on each company.

 

Kaplan and Hesser

 

Kaplan Inc. is more than a sideshow as a subsidiary of The Washington Post Company, whose stock is traded on the New York Stock Exchange. In fact, the newspaper itself accounted for less than 15 percent of the company’s revenue in 2011, according to the company’s quarterly filing with Securities and Exchange Commission. Kaplan accounted for 58 percent of revenue.

Washington Post Co. gets twice as much revenue from its colleges (which made a $150 million profit in 2011) as from its newspaper (which lost about $18.2 million).

Indeed, both Hal Jones, the company’s chief financial officer, and Veronica Dillon, the company's general counsel, are former Kaplan executives who were compensated $2.2 million and $1.8 million, respectively, in 2011. (The Post doesn’t disclose the pay of Kaplan Inc.'s current CEO, Andrew Rosen, or the CEO of Kaplan Higher Ed.)

Kaplan Inc. includes the SAT test preparation service that it's best known for, but gets most of its revenue through Chicago-based Kaplan Higher Education, which consists of Kaplan University (about 50,000 students, 90 percent online, but with several campuses in places like Iowa and Maine) -- and its 64 college campuses in 18 states (about 24,000 students).

About $1.1 billion -- or nearly 80 percent of Kaplan Higher Ed revenues -- comes from the federal government. And about 70 percent of that federal money went to student loans.

The Harkin Report used data provided by the colleges to trace the progress of individual students to determine withdrawal rates (which is different than the retention and graduation rates that can be downloaded from the federal Education Department website.) By that measure, some 55.3 percent of those enrolled in associate degree programs in 2008 withdrew after a median of four months -- the third-highest rate among all for-profit schools.

Those seeking bachelor degrees withdrew at 68.2 percent, again higher than the industry average.

Kaplan Higher Ed's two-year student loan default rate --according to the company’s own SEC filings -- was 17.3 percent in 2009, well under the 25 percent threshold at which the government cuts off aid.

The federal DOE, however, is switching to a three-year default rate, upping the limit to 30 percent.

Under preliminary federal data, Kaplan’s trial default rate was 27.7 percent for 2008 (with some individual Kaplan colleges reporting default rates as high as 37.1 percent.) That 27.7 percent rate is the third-highest rate of the 30 companies examined by the Harkin committee.

According to the Harkin Report, Kaplan and other companies attempted to get these rates down not by getting the students to pay back the loans, but by taking out private loans or working out forbearance agreements, which allowed interest to continue to accrue. Kaplan even hired private detectives to track down students to sign the agreements, the report said.

The Harkin Report also faulted Kaplan and other private schools for their emphasis on recruiting.

Using 2009 data that Kaplan provided, the report said that the company spent 23.7 percent of its revenue on marketing and recruiting. It charged that in 2009, the company spent some $2,144 on marketing per student, compared to the $1,550 it spent on instruction.

Kaplan, however, countered that critics often include admission and financial aid services under the "marketing and recruitment" umbrella, "which tends to exaggerate and distort the facts," Kaplan spokesperson Andrea Roebker said.

She added that traditional colleges recruit by spending large sums on nonacademic "resort-like amenities," such as football stadiums.

The report particularly criticized the company’s sales techniques, quoting one document instructing recruiters to find students' "pain and fears" to create a sense of "urgency."

But it did praise the school for implementing a significant reform in March of last year: the Kaplan Commitment.

The reform, explained Roebker, allows prospective students to attend classes for an introductory period without financial obligations.

"No other college/university in New Hampshire, or anywhere else for that matter, provides this ‘risk-free’ period for students," she said.

But the Kaplan Commitment resulted in a 37 percent decline in enrollment, costing KHE some $63 million, according to its financial filing. (Locally, Hesser College's enrollment is at 2,800 students, according to Roebker, which would be about a 20 percent drop compared to the Education Department's latest numbers.)

In addition to the drop-off in enrollment, an increase in the amount of federal loans students can take out makes it more difficult for Kaplan to abide by the regulation that no more than 90 percent of its funding be from the federal government.

Federal benefits for military veterans -- like the post-9/11 GI Bill -- don’t count toward the 90 percent, which encourages some schools, such as Kaplan, to market heavily to veterans.

Kaplan enrolled nearly 5,000 veterans between 2009 and 2011, according to the report, but that amount is far smaller than at other for-profit schools.

Both Kaplan's financial filing -- which noted numerous state probes -- and the Harkin Report barely mention Hesser College.

Here is what federal data reveals:

 • Hesser students received more than $10 million in federal DOE money in 2010-11, with some $5.5 million in loan aid.

 • The college's default rate of 10.8 percent in 2009 was up from 8.9 percent in 2008.

 • Its preliminary three-year default rate, for 2008, was almost 18 percent.

 • The latest retention rate for those pursuing bachelor's degrees is 89 percent, but when all students attending Hesser are taken into account it is 29 percent, the lowest in the state.

 • The college's 4 percent graduation rate is also the lowest, followed by the public Great Bay Community College, with 14 percent.

Still, Hesser is not in danger of losing federal funding. A college needs to exceed federal repayment standards -- a 25 percent, two-year default rate or 30 percent over three years -- for three years in a row.

Similarly, Hesser seems to be in compliance with DOE’s latest "gainful employment" regulations, according to preliminary data.

Under those regulations (which are being challenged in court), all career-training programs offered by a college would have to fail three standards in order to lose federal aid.

Only one of Hesser’s numerous programs comes close so far. Its Medical/Clinical Assistance Program has a 37.4 percent loan repayment rate (slightly above the 35 percent standard), and a 102 percent debt-to-discretionary income ratio (far above 30 percent), but the program's debt-to-income rate is 5 percent, well below the 12 percent standard.

 

ITT and Daniel Webster

 

ITT Education Services, located in Carmel, Ind., is devoted entirely to postsecondary education, with some 73,000 students in 144 locations in 39 states. All of its colleges are run under the ITT Technical Institute umbrella, except for Daniel Webster College in Nashua, which the company acquired in 2009 for $20.8 million.

DWC also is its only residential college.

Federal aid -- primarily grants and student loans -- represent some 75 percent of the company's revenue, with 54 percent of that coming in the form of loans.

According to the company’s annual financial filing, the Education Department puts the average default rate at 22.3 percent in 2009, close to the 25 percent limit. But ITT is challenging that finding, blaming the department for not servicing the loans correctly and arguing that the two-year default rate should be between 13.8 and 19 percent.

The challenge is important, the company said, because the three-year default rate could be pushed to more than 30 percent using the federal numbers, which could threaten the company’s federal funding.

The company also disclosed that the U.S. Consumer Financial Protection Bureau notified it in May that it is investigating the company over "whether for-profit post-secondary companies, student loan origination and servicing providers, or other unnamed persons have engaged or are engaging in unlawful acts or practices relating to the advertising, marketing, or origination of private student loans."

ITT maintains that its practices are lawful.

Such negative publicity surrounding the for-profit industry could hurt enrollment, the company warned, though the end of the economic freefall of 2009 to 2010 might have drawn some people back into the workforce. In addition, the company devoted fewer resources to advertising, changed some of its programs and increased internal lending as outside lending dried up.

Whatever the reason, enrollment fell 13.5 percent in 2011, causing revenue to decline in 2011 for the first time this century, from $1.6 billion to $1.5 billion.

The decline continued into the first half of 2012, with enrollment down by 15.4 percent, and revenues down by nearly $100 million to $672 million.

The decline didn’t affect executive compensation, however, which was roughly the same as last year. ITT's five top executives earned $12.3 million, with a little more than half of that going to CEO Kevin Modany.

The Harkin Report criticized ITT for having one of the most expensive for-profit programs, forcing students to borrow privately, but it did credit the company with lower withdrawal rates (52 percent from 2008 to mid-2010).

It also zeroed in on how it spent that money in 2009: 19 percent ($3,156 per student) going to recruiting, 37 percent ($6,127 per student) as profit, compared to $2,839 per student on instruction. (According to the company's filings, ITT employed some 1,500 recruiting representatives at the end of last year, about one-tenth of the company’s 10,000-strong full- and part-time workforce in 2011.)

The recruiters are allegedly very aggressive, with some "instructed to make 140 calls a day if they have no appointments." Again, "pain and fears" were allegedly used as a tactic.

"By getting to the pain, the representatives will be able to solidify the appointments and have a better show rate," the report said, publishing diagrams of "pain funnel training" that ITT staff allegedly used.

The Harkin Report devotes a small section to Daniel Webster College, noting that the "primary rationale for the purchase was to acquire a regionally accredited college."

The report alleged that ITT eliminated a quarter of the college's staff following the acquisition, including the outgoing president, who allegedly said that ITT came in and said, "We only want faculty to teach, we’ll develop curricula in Carmel, Ind., and give them to you."

But in its financial filings, ITT noted that DWC was in financial trouble when it was acquired, and that the New England Association of Schools and Colleges had issued a notice of concern because of the college's financial condition, a notice that was removed in April 2011.

While Daniel Webster costs the same as Hesser, its 2009 default rate was lower, 3.6 percent, although that was before ITT acquired it.

Similarly, the retention rate -- from 2009 to 2010 -- was 72 percent, higher than many nonprofits and public schools. However, the graduation rate in 2011 was 43 percent, which is at the low end.

The Education Department did not release any preliminary gainful employment data for DWC, but the data did show that the median debt was $43,404 for its commercial airline pilot and flight crew program, and about $8,500 for its airway and management operations.

Daniel Webster is phasing out its aviation program by not accepting new students, according to the college's website.

Daniel Webster referred a list of questions to ITT’s public relations specialist, who declined to comment.


 

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