Profit Generation and the Proprietary Schools

The Impropriety of It All: Neo-liberalism, Predatory Proprietary Colleges and the Money-Changers -- Part 2

In the first part of this article we spoke about what a proprietary school is and how government policy aids and abets these for-profit centers at the expense of gutting public education. In this, part two, we will discover how the whole sordid system of profit generation works for the proprietary schools, whose involved and how they operate.

Acting as a collection agency, the federal government collects taxes from ordinary citizens and then distributes the money to proprietary colleges through a middle man, usually Wells Fargo or Sallie Mae. A student must enroll and be accepted at one of the proprietary schools before they can receive Title IV funds in the form of grants, loans or campus-based aid through either Sally Mae, Wells Fargo or any other third party. The schools themselves must also be ‘approved’ by the Department of Education in order to participate in receiving the Title IV funds.

This means the schools must be licensed or otherwise legally authorized to provide higher education in the state they are located in; they must be accredited by an agency recognized for this purpose by the Secretary of the US Department of Education and they must be deemed eligible and certified to participate in the federal student aid programs by the Department of US Education.1 This is what is referred to in government parlance as the “triad” – the threshold colleges must meet for government funding. It is the Department of Education, now under the tutelage of Arne Duncan that must oversee this entire process and ensure that only eligible students receive Title IV monies in accordance with the triad mandates. The Department of Education uses department employees and independent auditors to monitor the efficacy of the Title IV disbursement funds and the overall process of funding.

The Department of Education, office, FSA, manages and administers student financial aid assistance under the Higher Education Act passed in 1965, also known as Title IV. The programs include: William D. Ford Federal Direct Student Loan Program (Direct Loan Program), the Federal Family Education Loan Program (FFELP), the Federal Pell Grant Project (Pell Grant), the Campus Based Aid Program or the Federal supplemental Educational Opportunity Grant (FSEOG), Federal Work Study (FWS), and the Federal Perkins Loan Program (administered directly by the Financial Aid office at each school). In 2008 alone, Title IV funds provided more than $85 billion dollars in student aid of which roughly 16% went to the proprietary schools and colleges. That’s a lions share by any estimates, especially if you look at the 64% default rate which is paid by taxpayers.

Currently, there is what is called a “90/10 rule” which applies only to proprietary schools. What this means is that at least 10 percent of student tuition must come from means other than student-loan funds. And then there was the “50 percent rule,” which required a proprietary school to offer no more than 50 percent of its courses online. These rules were enacted to address rampant fraud among proprietary schools in the 1970s and 1980s. However, in February of 2006, the 50/50 rule was repealed in a reconciliation act passed by congress. The bill, S1932 passed the house by a slim margin, 216 to 214 but it then went on to slide through the senate. Now the schools can offer all their classes online and this means no need for brick and mortar, leading Barmak Nassirian and others to question how all this can be policed.

According to Nassirian, without any brick and mortar, i.e. no real offices with human beings, theoretically proprietary schools could put up a website from a company operating in Belarus, or Slovenia, or the Cayman Islands — virtually anywhere. All they have to do is incorporate in a state of their choice, meet the triad requirements for becoming a Title IV eligible school, turn on the spigots to the federal funds and they’re on their way. Where their actual headquarters is located can theoretically be hidden from the public for their activities are now fully online, from inception to deception; and this includes, application to the school, applications for federal and private loans and aid, check signing to the school, curriculum online, the whole business model. With more than 2,000 of these proprietary online colleges that are identified, there is little in the way of human resources to engage in copious oversight of these institutions; nor does there seem to be any interest. As a matter of fact the opposite seems to be true, re-regulation and deregulation of rules put in place to protect consumers and taxpayers have been promoted, condoned and passed by legislatures.

As to the 90/10 rule which simply mandated that ten cents of every dollar the proprietary school took in had to be from another source other than the federal government, it too has been drastically eroded if not vitiated. In July of 2008, long before the $787 billion stimulus, the federal government increased its guaranteed educational loan limits by $2,000 per student. Why? According to Business Week, they were worried that privately funded lending would dry up in the recession, but one of the shocking implications of this move directly benefited the proprietary colleges. Now, with the federal government increasing its guaranteed educational loan limits by $2,000 per student, these monies are “counted” as part of the 10% by the proprietary schools creating an accounting mish mash — a paper shuffling accounting system with no transparency and where no one can actually really trace the percentages.

Barmak Nassirian stated flat out that the 90/10 rule has been compromised allowing the proprietary schools to get their hands on more federal monies. Furthermore, with new another twist in new regulation the window for violations has been opened now for two years, meaning that a proprietary school can be found in violation of the 90/10 rule for two years in a row before they are put under the microscope, all this under the Federal Family Education Law. This hardly speaks to a concern for regulation. Instead, it provides an incentive to bend the rules, a license to steal.

Assuming a student qualifies for federal aid, the money is then disbursed by the Department of Education to a middle man, Sallie May or Wells Fargo, where it then journeys on to the students who immediately sign the checks over to the proprietary schools for tuition and fees. Students are responsible for paying the loans back to the federal government and if they default, the government has guaranteed the loans, so the taxpayer is left paying the defaults. The proprietary schools already made their profits when the federally guaranteed monies were signed over by the students, so they just walk away.

Borrowers must begin repayment after dropping below half time enrollment, according to the rules of Title IV. Usually, the default rate can be seen after nine months, or 270 days when the borrower, in this case the student, has not obtained cessation of the debt through myriad and complicated processes, or, in the case of some students referred to deferment or forbearance due to hardship or disability.2

It’s a great business plan, a cash cow, really. When I asked Barmak Bassarian about the huge profits involved, he estimated that 50% of each dollar goes to the company or proprietary owner of the prorprietary college for profits (ibid). This is how neo-liberalism works, the government walks hand in hand with business to assure lax regulations when necessary for businesses and new regulations when profitable for the companies.

Just Who Attends the Proprietary Schools?

According to the GAO report, the students who attend proprietary colleges are more likely to come from low-income families whose parents do not hold college degrees (United States Government Accountability Office, Proprietary Schools: Stronger Department of Education Oversight needed to help ensure only eligible students receive financial aid , August 2009). This is what government and business leaders refer to as “the non-traditional students”. Furthermore, the majority are students of color. These colleges register a higher percentage of minority students, specifically African American and Latino students, than public or non-profit private colleges. In other words, they occupy the sub-prime private sector, right up there with the Rent To Own corporations; here they cannibalize the Pay Day Loan students, the subprime population, some of the must vulnerable students who become low-hanging fruit for the for-profit schools. Fifty six percent (56%) of attendees at these for-profit colleges are under the age of 25, as compared to attendees at public colleges where only 35% are under the age of 25 and in private, non-profit colleges the percentage is 38%.

Many of the students see the ads that perpetually run on TV hawking the educational degrees and the consumer life — they promise the student this degree or that degree will bring them out of poverty or help them gain some of the material wealth they see on TV and in ads throughout their young lives.3 They advertise themselves as conveyor belts to successful jobs in the middle of the Second Great Depression. Many of the schools exclusively prey on low-income people and many candidates find out information about proprietary schools from presentations given or brochures left at food stamp offices, welfare offices or at low income housing projects. Cars with large signs on the doors have also been known to drive through housing projects slowly, like ice cream trucks.1 The schools employ recruiters who also attend staged or legitimate ‘job fairs’, in an attempt to attract the unemployed who they can then cannibalize on at the fair itself. One young woman I recently talked to at a proprietary college told me she was recruited this way. At a job fair she was approached by an “academic counselor” who aggressively got her to the school’s “financial aid counselor’ the same day. These are drive by schools, without a doubt and their tactics are ruthless and their owners are without conscience.

Marketing Mad Cow Disease as disabling education

Proprietary College Recruiters

The whole proprietary enterprise can best be metaphorically seen as if it was a large privately owned cattle ranch, subsidized completely through federal loans and/or bank loans, with the students as cattle or ‘cash cows’. The private owners of the ranch hire what they like to call “admission counselors”, who are really recruiters or salesmen in disguise. Lured by the chance to make a large amount of money recruiting students, or wrangling the steers, these recruiters are responsible for getting the cattle to the ranch. The ranch owners or their management team teaches the recruiters sales tactics for bringing the cattle “to slaughter”. They are given orientations, scripts they can use on the phone when talking with prospective candidates, they attend workshops that train them “how to sell” the product, appeal to the psychology of disenfranchised candidates for education, all in the interest of herding the cows to the killing floor. They pose as your friend, over the phone or online, but their job is very clear and they are handsomely rewarded, as long as they bring in the cattle.

Incentive compensation is the term that is used in the industry when it comes to how the recruiters are paid, but the words do little to convey the actual reality. Many of these ‘recruiters’ are paid in relationship to the amount of cattle they can herd, their salaries tied to how many cattle they can hog tie and wrangle for the ranch. The more the ranch hands funnel to the ranch owners, the more they meet their quotas or herding goals and the more they make in salary. The less they herd, the less likely they are to continue in employment. Some of the ranches give out bonuses in the form of paid vacations for the cowboys or recruiters who herd the most cattle. Other attractive incentives are offered to high level recruitment officers. But the problem doesn’t stop there. According to one former recruiter at the Phoenix Institute:

Yes, advisors are trained to lie and manipulate. I did this training myself they call it the AMOPS process. It is a technique used to manipulate leads into buying a product.

Yes, advisors are paid off of the number of enrollments.

It’s called the Matrix; they changed it in 2004 to look more in line with requirements of the DOE. This led to a record number of pay decreases across the board, a record turn over rate for employees, and a mass exodus of their top advisors.4

For example, the GAO found that one recipient proprietary school spent more than $100,000 of its Title III money on “questionable expenses … such as student trips to locations such as resorts and amusement parks, and an airplane global positioning system.” (United States Government Accountability Office, Proprietary Schools: Stronger Department of Education Oversight needed to help ensure only eligible students receive financial aid , August 2009). All part of the allure. Bassirian generally estimates that 25% of the monies brought in by these schools is spent to simply market the schools themselves, with their glitzy TV ads, radio internet printed brochures. Many other proprietary schools spend upwards of 50% for marketing alone.5 This means little is spent on actual students.

At the University of Phoenix, the management stressed in 2003 that the recruiters must get “butts in seats” or “asses in classes.” The United States Department of Education, Program Review of the Phoenix Institute, 2003). They were also told, according to the report, that if they were contacted by any member of the government they were to let management know right away for they were operating under the Department of Education’s “radar.”

Recently the executives at the Phoenix Institute (the Apollo Group) boldly announced that they stand behind the quality of Phoenix’s educational system and questionable if not shady business practices. They use the same propaganda in their defense” that they are providing college for students who cannot attend public institutions, even going so far as to appealing to ‘the troops’ such as shoveling out rhetoric about catering to underserved constituencies, like adults who want to attend part-time and members of the military and minority groups.

The colleges claim that they provide quality education and that one does not have to drive two and from a community or state college to receive their degree but can comfortably do it in the safety of their own homes. They argue as well for the removal of any safeguards on their business practices, for this is what they pay the government for, isn’t it? To remove any vestige of regulation that might block their ability to accumulate greater and greater profits? This is the same logic that Pay Day Loan centers employ, the “I’m providing a public service”, argument. It’s enough to send a person to a porcelain bowl clutching ceremony.

Terri C. Bishop, Phoenix’s vice-president for external affair declared in defense of the bill:

“There’s a lot of bias against recruiting into a college. We recruit properly, and we take care of students once they’re here.”6

Sure, that’s why Phoenix settled with the government for $10,000.

Pressure to enroll unqualified students the norm

In order to attend these for-profit, proprietary schools a student must meet minimum eligibility requirements. In other words, according to the law, they must demonstrate that they have an ability to succeed in college before the institutions, or the ranch hands, can get their fingers wrapped around the federal financial aid. There are essentially four ways to show eligibility to attend one of the for-profit colleges.

One way is to have a valid High School diploma. The other is to have passed an equivalency, such as a GED or General Education Degree. Another way to evidence eligibility is to show that one has taken and completed six credit hours towards a degree, such as in a junior college or at another proprietary school. But the fourth and by far the most abused method for determining eligibility is to have a potential student take an an “ability to benefit test” or ABT, as they are known in the business.

The stated intent of the ABT is to see if students really have the potential to benefit from what is called a “higher education”. The test must be approved by the Secretary of Education and then administered by a privatized third party. Students must pass this test prior to enrollment and prior to the college receiving Title IV funds. Since the inception of the ATB test requirements, hundreds upon hundreds of thousands of non-high school graduates have qualified for the Title IV funds – which mean the for-profit institutions have seen a soaring rise in their admissions and with this rise, soaring profits from the federal loan guarantee program. It is a virtual public trough feeding and the for-profit colleges are making a killing while public institutions slowly die.

According to the GAO the abuse in proctoring and using the ATB is rampant and involves collusion with the licensing agencies. In other words there is a lot of “Liar Education” going on in favor of higher education.1 Why? Easy, each student that passes the ATB will be eligible for the tens of thousands of dollars in federal funds that will then be literally signed over to the for-profit schools. It is a veritable bonanza for the shareholders and private owners of these schools as the colleges seek as many ‘cattle’ as they can, and of course this is all part and parcel of the privatization and debasement of education.

The ‘certified test administrators’ who are required to proctor the ABT, are like corrupt gatekeepers who oversee the cattle crossing, while the private for-profit test publishers are the ‘nodders and winkers’, are the self-regulators that can be compared to the Wall St. rating agencies who were supposed to keep an eye on financial transactions and banking institutions, hedge funds and CDOs.

‘Recruiters’ have told government officials in the past that they have been pressured to enroll students that are unqualified. At the University of Phoenix, recruiters were actually told not to worry if the student drops out after five weeks for the school would by then have gotten their grimy hands on the funds by that time and the recruiters would have received their pay. They were also told to do whatever it takes to get them enrolled, even if it means moving them to a private loan if Title IV does not qualify the student for the amounts they need. It’s a “move ‘em up, get ‘em on’, Rawhide system of higher, for-profit education and it is draining our public funds while providing soaring debt for cash strapped students who really have little chance in the depression economy and will increasingly default o the debts. In the interim, public institutions bereft of the monies needed to support their missions are undercut and financially underfed.

Part three will continue to comb through the proprietary business plan of these colleges, how they advertise and entice students as well as examine the $700 billion dollar stimulus package passed by Hank Paulson, Treasury of the Secretary under Bush, at the time and how this benefited the for-profit, proprietary universities.

Read Part 1.

  1. United States Government Accountability Office, Proprietary Schools: Stronger Department of Education Oversight needed to help ensure only eligible students receive financial aid , August 2009. [] [] []
  2. United States Government Accountability Office, Proprietary Schools: Stronger Department of Education Oversight needed to help ensure only eligible students receive financial aid , August 2009. []
  3. Matt Smith, “Stimulus Wreckage,” September 30, 2009. []
  4. Recruiter at Rip Off Reports. []
  5. Interview with Barmak Nassirian, 11/24/2009. []
  6. Business Week. []
Danny Weil is a junior college teacher at Allan Hancock College in California where he teaches philosophy. He is a former kindergarten, first grade, and second grade teacher who has written a great deal on education. Read other articles by Danny.

10 comments on this article so far ...

Comments RSS feed

  1. Citizen Kane said on December 2nd, 2009 at 11:40am #

    Please site your sources for the 65% national student default rate. Where are you getting this number from?

  2. Danny Weil said on December 2nd, 2009 at 1:59pm #

    GAO, add up the defaults in all areas, predatory schools, public and non profit

    Danny

  3. cripes said on December 2nd, 2009 at 2:10pm #

    Another racket in the great tradition of american bidness rackets.

    But, hey, we don’t want no gubmit interference, and cut those food stamps for all those welfare queens! We bidnessmen!

  4. Lisa Gordon said on December 2nd, 2009 at 2:12pm #

    Where did YOU (Danny) go to college? Quit knocking UOP grads and take a look at yourself.
    What is wrong with the following…
    “The colleges claim that they provide quality education and that one does not have to drive TWO and from a community or state college to receive their degree but can comfortably do it in the safety of their own homes” ha ha ha! you didn’t proof your work.
    I am so sick of people knocking UOP! I am a Phoenix and I am very proud! I did not come from a low income family, my parents both have degrees, and I am a UOP grad.
    Find something else to dig your claws in:(

  5. Danny Weil said on December 2nd, 2009 at 3:29pm #

    Lisa Gordon-

    Yes, an error on the word TWO but no error on the millions Phoenix has paid and will pay for fraudulent recruiting. You’ll see tomorrow if you stick aroundd.

    But the big issue is really this: do we want for profit colleges that put profit ahead of students’ needs? not me. This is the next big bubble to burst, the student loan bubble so I hope you can pay for your education at Phoenix, Lisa, because if you cannot I will have to along with other citizens. It is a scheme o n a grand scale and the lawsuits are brewing like coffee.

    These schools are scams, preparing people for late state capitalism like you wouldd prepare a patient for late stage cancer.

    Danny

  6. lichen said on December 2nd, 2009 at 4:52pm #

    Danny’s reactionary fear of having to subsidize the college education of young people is laughable. As it is, no student loans are dischargable for bankruptcy, putting the economically disadvantaged into a usurious situation when they are unable to pay; even if they are retired or on disability, the bills and harassment keep coming, their social security or disability income is garnished. College education, though at real public universities, should be free for everyone.

  7. Danny Weil said on December 2nd, 2009 at 8:35pm #

    Danny’s reactionary fear of having to subsidize the college education of young people is laughable.

    No, that is not my point.It is subsidizing corporate education. And this is what must be seen; education is only one part of a society dominated by privatizers; every sphere of public space,from community colleges to social services is being privatized, contracted out. It is putting profit before people.

    As it is, no student loans are dischargable for bankruptcy, putting the economically disadvantaged into a usurious situation when they are unable to pay; even if they are retired or on disability, the bills and harassment keep coming, their social security or disability income is garnished. College education, though at real public universities, should be free for everyone.

    Absolutely so you either missed the point of my article or Ididn’t write it well enough. This is about free public education for everyone, not for-profit subsidized education that leaves people both functionally illiterate and monetarily destroyed.

    Aslong as the privatized pikers are in the public lake, there will never be free education for all.

    Danny

  8. Todd S Nelson said on December 2nd, 2009 at 11:52pm #

    Danny,

    Did you do your training at Education Management Corp?

    Todd

  9. Knife Twister said on December 9th, 2009 at 2:25pm #

    Do you really believe Apollo settling for $10,000 is saying something? That’s a rounding error! Doesn’t even cover a day’s time the government joes spent on it. Tacit surrender by the DoE, don’t you understand?

    Not-for-profit education = capacity constrained. For-profit education = the only higher education providers that are adding capacity. Do you propose that the federal government should start building universities?

    You proceed from a grotesque bias assuming that people who attend for-profit schools get no value out of it. Your elitism is disgusting and certainly not earned by merit or accomplishment. I very much doubt you are qualified enough to be on the faculty of a school as good as Strayer University, which is for-profit with a legitimately good set of academic programs.

    And how on earth do you expect to be able to pay for free higher education for all? Too bad you didn’t pass an economics class.

  10. Danny Weil said on December 9th, 2009 at 3:17pm #

    Do you really believe Apollo settling for $10,000 is saying something?

    No, they settled for over 200 million since 2008. Do the research

    That’s a rounding error! Doesn’t even cover a day’s time the government joes spent on it. Tacit surrender by the DoE, don’t you understand?

    you miss the point. They engage in corrupt criminal activity and then use your tax money to pay the fines. They have spent 100 million just in lawyers fees. All your money, all due to their crimes

    Not-for-profit education = capacity constrained. For-profit education = the only higher education providers that are adding capacity. Do you propose that the federal government should start building universities?

    Yes, public education requir4s a public not private rational profit maximizers thatt look out for only themselves. You are seeing the dismantling of everything public. Want to nation build in Afghan or here?

    You proceed from a grotesque bias assuming that people who attend for-profit schools get no value out of it.

    They get value all right, debt. And this widll stick with them forever for in 2002 the Supreme Court ruled they are not dischargeable. They ‘sell’ education, rote dummied down learning no doubt about it.

    Your elitism is disgusting

    now, now be civil. Is dit elitist to want universal education for all that can afford it? Is it elitist to want education that does not breakd peoples legs? No, the elitism is on the privatizd side, those who make decisisons in smoke filled rooms and saddle you with debt and a failing society

    and certainly not earned by merit or accomplishment. I very much doubt you are qualified enough to be on the faculty of a school as good as Strayer University, which is for-profit with a legitimately good set of academic programs.

    Yes, but you do not know, you rail and yell but cannot deal with any of the claims made in my article. Ad hominen attacks are what you learn in this culture, not to critically think. You must be one of these proprietary students. If you are, you prove the point nicely and I commend you

    And how on earth do you expect to be able to pay for free higher education for all? Too bad you didn’t pass an economics class.

    By cutting the military, cutting the tax loopholes for the rich. Basically, changing a society that runs based on profit, not people. Think about it, for you are in heriting the collapse of social life, no jobs, no way to pay the mounting debt.

    As to economics, the issue is clear: capitalism cannot provide for its citizens and all you have to do is look around.

    Danny