June 18, 2010
DONALD E HELLER, The Pennsylvania State University
The for-profit, or proprietary sector of higher education has been in the news quite a bit recently. Frontline, the PBS investigative series, broadcast "College Inc." in April, which painted a less-than-flattering portrait of the sector. And then in the end of May, Steve Eisman of FrontPoint Financial Services Fund, an analyst featured in Michael Lewis's book The Big Short, spoke at the Ira Sohn Investment Research Conference. He was quoted as saying:
"Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry," said Eisman. "I was wrong. The For-Profit Education Industry has proven equal to the task."
Pretty strong words from someone who supposedly has a good track record for reading markets and industries.
Mother Jones has a good recap of Eisman's perspective on the sector, and why he thinks it's ready for a tumble. He blames the Obama administration's push for gainful employment regulations, which would force the sector to demonstrate that graduates of their institutions make enough money to shoulder the higher debt burdens students there have on average (see the recent College Board report, Who Borrows Most? for more on this issue).
Criticism of this sector is not new; as far back as almost two decades ago, in the 1992 reauthorization of the Higher Education of 1965, the regulations on student loan defaults were changed and hundreds of proprietary institutions were thrown out of the Title IV programs. But the sector has demonstrated an incredible resilience - and profitability - over the years. The Chronicle of Higher Education has done a good job tracking the share prices and market cap of the key players in the sector. Its reporting has shown how prices of many of the large companies, such as Apollo Group (parent company of the University of Phoenix, the 640 pound gorilla in the industry), ITT Tech, Capella, and others, have risen far faster than most market indices over the last decade (and fell less rapidly in the decline of the last couple of years).
I am sure that the proprietary institutions broke out the champagne when Bob Shireman announced in May that he was leaving the Department of Education. He has been the pointman of the efforts to rein in the sector, which has seen its share of Pell Grant dollars increase to 21 percent, even though they represent only 9 percent of undergraduate enrollment. Their glee may be shortlived, however. It is likely that others in the Department, as well as Congress, will continue the scrutiny of which Shireman was the figurehead. Steve Eisman obviously agrees.
The other sectors of higher education should not be jumping with glee at this criticism of the for-profits, however. It is likely that the gainful employment regulations, while initially targeted at the proprietaries – and perhaps appropriately so, because of their primary focus on vocationally-oriented education – will in the not-too-distant future be used also to test whether graduates of public and private, not-for-profit institutions can support the loan burdens they incur.
DONALD E HELLER is Professor of Education and Senior Scientist, and Director of the Center for the Study of Higher Education at The Pennsylvania State University
This content of this commentary is solely reflective of its author and is no way representative of the thoughts or policies of the Educational Policy Institute or EPI International.