A recently-released report from the U.S. Department of Education shows for-profit colleges account for 12 percent of college students but nearly half of all student loan defaults. Also, stock analysts are warning that the for-profit college sector is in a nosedive. However, there are many bright spots in the world of for- profit universities. Derrick M. Anderson:Assistant Professor, School of Public Affairs, Advisor to the President for Innovation, Office of the President, Arizona State University, will discuss the current state of for-profit universities.
Ted Simons: Coming up next on "Arizona Horizon," a new rule goes into effect today that could impact the future of for-profit universities. Find out what it takes to become a foster parent in Arizona, and see how one company is providing employment for the developmentally disabled. Next on "Arizona Horizon." "Arizona Horizon" is made possible by contributions from the Friends of Eight, members of your Arizona PBS station. Thank you.
Ted Simons: Good evening, and welcome to "Arizona Horizon," I'm Ted Simons. A new Department of Education rule focused on for-profit colleges goes into effect today. The move is expected to accelerate closures in the for-profit college industry. Derrick Anderson is an assistant professor at ASU's School of Public Affairs. Good to have you.
Derrick Anderson: Its a pleasure to be here thank you for having me.
Ted Simons: What exactly happened today?
Derrick Anderson: well, today is sort of the latest chapter in several year-long process creating rules that ultimately hold universities for-profit public and private accountable for the outcomes of their students. Today specifically a new set of rules were enacted that try to create a mechanism to balance student debt relative to potential student earnings.
Ted Simons: This is the Department of Education's gainful employment rule?
Derrick Anderson: Precisely, Ted.
Ted Simons: Why did and why has the Obama administration especially been so focused on reining in these for-profit colleges?
Derrick Anderson: I think there are a lot of different motivators here. The empirical reality is that there is a lot of different attributes of universities that help predictors for performance and outcomes for students. But one thing that seems to be the case that status as for profit is a strong negative predictor of outcomes. We see a lot of students with very high levels of debt and a lot of student loan defaults and for-profit higher education.
Ted Simons: I read that 11% of students go to for profit colleges but 44% of the federal loan defaults are from those colleges.
Derrick Anderson That's true, It's important to note that that's 11% of student education, that's 11% of students, not just borrowers. That's 44% that are in default.
Ted Simons: So basically this gainful employment rule uses debt to income metrics. What's that all about?
Derrick Anderson: So this is a metric that says if you're a graduate of a program at an institution, and your earning is -- and your monthly earnings are for example $3,000 a month -- I'll give you a concrete example. If your monthly earnings are $3,000 a month according to these rules your student loan payment, which is a function of how much you took out, how much you borrowed, shall not be more than 8% of your total earnings or 20% of your discretionary -- of your discretionary income. So the way to sort of keep that in compliance with those rules is to have lower debt and to have higher earnings when you come out of college.
Ted Simons: Which apparently isn't happening.
Derrick Anderson: It's not happening and we see a trend of this sort of becoming increasingly problematic, not just in higher education but in for-profit higher education specifically.
Ted Simos: So -- students will be affected by this rule, it sounds like, again, from what I'm reading, 99% of the students that will be affected by this rule again are from for-profit. The rule applies to nonprofit, as well.
Derrick Anderson: This is a rule that is required for all institutions to be in compliance with in order for them to participate in federal student aid programs, including student loan programs and also student grant programs for students from low-income families.
Ted Simons: So why would 99% of the student hit by this rule come from the for-profit colleges? What's going on with for-profit colleges?
Derrick Anderson: I think several different things can help answer your question. In the first place, there's tremendous growth in for-profit higher education. It's the only area that's had sustained year over year growth in the past few decades. It accounts for, even though we're talking about 11% of students, that's still a substantial number of students. Also we see that there is a lot of sort of incentive and a lot of opportunity to have tuition levels and costs that are high and the end result and high levels of debt for students.
Ted Simons: I know there are misleading promises and students saddled with debt and again, much of this debt comes from government loans, are those among the reasons the administration seems to be focusing?
Derrick Anderson: Yes, there were some things that happened from the Senate into the industries' behaviors and that identifies sort of very specific and concrete examples of a systematic engagement in predatory and bad practices. And so that is a concern. And one thing also to note, there has been some engagement from lawmakers and from regulators in for-profit higher education, but historically it hasn't been because of their status as education institutions, it's been because of bad business practices. Up until now it really hasn't been an issue of bad Universities, it's been about bad businesses. And so we've made a lot of headway in the system relative to reducing some of those bad business practices. Now we're turning towards education quality.
Ted Simons: But again a for-profit college is a for-profit enterprise. It is a business; it's beholden to shareholders first and foremost.
Derrick Anderson: Right. That can create some problems for sort of mixed incentives. But you know, I'm also pretty optimistic. I've said this publicly, I don't think the for-profit model is inherently bad. But I think it has to be designed appropriately. We've seen a couple of examples of universities that have been able to adopt really innovative designs, that have been able to sort of comply with the general spirit of education and lead to good outcomes for students.
Ted Simons: And those will change either because they have to or because they want to, and that's their business model and it's a successful one. But as far as this rule and the impact on the industry, sounds like a lot of these schools are going to close.
Derrick Anderson: Yeah, I think so -- I think one of the sort of ambitions that we have with our businesses is that they are adaptive and responsive. And so now I think we're going to see which of these institutions are adaptive and responsive to sort of this demand for accountability and also for adequate performance.
Ted Simons: For the schools that close what happens to the enrolled students?
Derrick Anderson: That's a really good question. We're still trying to figure that out. In the case of some institutions we've seen the Department of Education explore opportunities relative to discharging their student debt on the basis that that debt was accumulate under false pretenses. In the case Corinthian Colleges which have recently gone out of business, discharging student debt to those students loans will cost taxpayers $500 million, it's not a trivial amount of money.
Ted Simons: No, it's not.
These for-profit colleges, in order to adapt and change could they be nonprofit colleges?
Derrick Anderson: There's been some talk of that. And there's been a couple of examples of it. But I think it's -- in order to do that, it's a very difficult process.
Ted Simons: Yeah. We should mention, as well, these for-profit colleges, they argue there is a place for them out there, for the older student who has to work, who has to borrow more, this gives them an opportunity. And for enrolling high-risk students. It's an opportunity for them, as well. Valid?
Derrick Anderson: I think that actually is valid. I think it's been historically valid and it's becoming increasingly sort of an elusive point. But I will say that historically I think we've seen the emergence of innovation in higher education in the for-profit sector, really catering to neglected markets, the trades that traditional Universities don't care that much about, and also to demographics that traditional Universities don't really care that much about and also to demographic that traditional universities don't care about . that's also kind of a critique on traditional higher education to be fair, it could be said these institutions have emerged because higher education as a system has failed to respond to some of the core needs we have as a society, relative to educating everyone.
Ted Simons: Before we let you go, Grand Canyon University and the University of Phoenix, two major players in the for-profit college business here in the Valley, do they survive?
Derrick Anderson: I think both are adopting strategies also already that look promising.
Ted Simons: Okay. It's good to have you. Thanks for joining us, appreciate it.
Derrick Anderson: My pleasure, thank you.
Derrick M. Anderson:Assistant Professor, School of Public Affairs,