The Sketchy World of Commercial Colleges
Commercial colleges have received a lot of attention lately, and not the best. They are being sued, government officials are turning against them, and reports are revealing their dark practices. If you have a business college on your radar, you should think twice and know what you’re heading for.
You’ve heard of these colleges: ITT Tech, the University of Phoenix, and the Institute of the Arts are popular examples of commercial schools (and those that have recently run into trouble). Education Management Corporation, one of the largest commercial networks, recently agreed to pay $ 95 million to settle claims of illegal recruitment tactics and consumer fraud .
As enrollments rise, federal and state governments are starting to take tough action on these schools, which is good because for-profit schools are the main cause of common problems you hear alumni complain about: student debt burden and unemployment, for example.
What is a Business School?
Commercial colleges are more like businesses than institutions of higher education. And this shouldn’t come as a surprise: their very name suggests that they want to make money.
The National College Admissions Counseling Association (NACAC) explores the differences between public, nonprofit, and commercial schools. The differences are mainly in how they are funded:
- Government: Funded in part by tuition and donations, but mostly government or local taxes. Because of this, most public higher education institutions are run by the state, so tuition fees for students in the state are lower.
- Private, Nonprofit: Mainly funded through student tuition and donations. They function as non-profit organizations, usually led by a board of trustees. They do receive some government support in the form of tax breaks and student loans, but most of their activities are funded by private support, which allows them to follow their own institutional plan.
- Private, commercial : companies that seek to make a profit for their owners and shareholders. While they can (and usually receive) up to 90% of their income from federal student aid, they are acting in accordance with “the requirements of investors and shareholders,” explains NACAC.
By their very nature, for-profit schools must do everything business-related, which non-profit and government universities do not: for example, pay financial returns to shareholders. In recent years, private colleges have come under criticism for commodifying education: for example, adding trendy objects to attract students. Nonprofit schools may merit criticism for treating education as a business, but for-profit schools are literally business.
There is nothing wrong with doing business. But when your business cheats people to make money from them, that’s not good, heart capitalism in action is a scam.
How They Stoke the Student Debt Crisis
When I researched the story of student debt, one statistic surprised me. Although the national student debt has skyrocketed, the average borrower carries less than $ 30,000 . It’s no small thing, but with a student debt of $ 1.3 trillion, $ 30,000 per person seems a little low.
The numbers don’t seem to converge, and it turns out that commercial colleges are a big reason for this. According to a US Department of Education report, commercial students make up only 13 percent of “all higher education,” but they account for 31 percent of all student loans (and about half of all bad loans). Commercial students account for a disproportionate percentage of the government’s student loan debt because their loan balances are very high. In a report published in the Brookings Papers on economic activity , Treasury Department’s Adam Looney and economist Constantin Yannelis explain:
Most traditional borrowers do not have large account balances … Most borrowers with large balances are graduate students, parents and “independent” undergraduate borrowers, mostly from commercial schools.
Basically, even a four-year degree from a non-profit organization means you’ll have “a very large balance sheet,” according to the report. In fact, this is comparable to the cost of a graduate diploma! Some might argue that commercial college students are more likely to borrow, resulting in an increase in student numbers. It’s true: statistically, they come from low-income households and have a higher borrowing rate than students in nonprofit or public schools. That would make sense, except for the fact that many for-profit schools prey on borrowers and encourage them to take on more than they need to. The Center for American Progress reports :
Commercial college students not enrolled in four years experienced the largest increase in student loan debt of any student borrower group. In 2001, 62 percent of freshmen at these schools took out student loans, and just eight years later that number jumped to 86 percent. These trends are the result of insufficient supervision by private lenders and the marketing of these loans, in particular by commercial schools.
An acquaintance told me about her own experience of borrowing money to study at a commercial school. At 18 or 19 years old, she received permission to receive a $ 100,000 loan (which she still pays off), although her tuition was much lower. When she explained that she didn’t need that kind of money, the creditor encouraged her to borrow it anyway, saying that she didn’t need to spend it on education expenses; she could spend the money as she pleased.
Yes, this is anecdotal evidence, but it confirms what is now being confirmed: many for-profit schools are largely predatory.
How they recruit students
Commercial colleges are not only predators, they also prey on the people who need an affordable education the most. There are even a couple of cases where schools try to recruit homeless people . They target low-income people who are in desperate need of high-paying jobs and may receive government assistance. The Center for American Progress details some of these predatory recruiting strategies:
These methods include direct marketing to borrowers who are often unaware of their full potential, a tactic that has been widely criticized for its role in burdening borrowers with unmanageable levels of debt. In addition, these schools have made a concerted effort to market and hire veterans, even relying on third-party marketing firms to give the illusion that they are part of or approved by the federal government … The result is often depleted benefits and unnecessary. student debt.
Recruiters are also taught to emotionally exploit prospective students. The same US Senate Committee study reports that recruiters are trained to find pain points in prospective students. A person’s “pain point” can be a dead end job, an inability to support their children, or a fear of disappointing parents. Once they find a person’s pain point, they use it to convince them that “easy, fast, affordable college” is the answer. You’ve probably noticed this tactic in their commercials , promising viewers to break the deadlock to pursue a dream career in a high-paying industry.
Here’s another tactic that the US Senate committee found:
Students who have concerns about enrolling or obtaining a loan are faced with commercial offers known as overcoming objections. Students and faculty interviewed by committee staff, and complaints about company abuses, indicate that students who enroll using this tactic are likely to be less prepared to deal with college problems and more likely to leave with debt without a degree. when the promised benefits cannot be realized or are much more complex than those presented.
They also mislead students about tuition fees, completion rates, and employment rates.
This is why the Education Management Corporation had to pay out $ 95 million. They misled not only students, but also the government. They paid recruiters based on how many students they enrolled, which is illegal if schools want to accept federal loans and grants.
Why should everyone else care
As a result of their recruiting tactics, these schools are recruiting a group of students who cannot afford their degree. According to this Brookings report , commercial college students account for 44% of student loan defaults.
These recruiters target veterans and low-income families due to what’s called the 90/10 rule . This rule allows commercial institutions to receive up to 90% of their income from federal student aid, so they target low-income students who may need help. However, the remaining 10% must come from private dollars. And there is a loophole where GI funds and Department of Defense funds are considered private , which means that aid from veterans counts towards that 10%.
There are other ways to play the commercial school system. Schools will stop the flow of financial aid on certain campuses by the end of the fiscal year to cut federal aid revenues by up to 90 percent, according to a report by the Senate Committee on Health, Education, Labor and Pensions . Or they will raise their tuition just enough so that students can pay out of pocket or by credit card — private dollars. And since a school cannot receive federal aid if their default rates are below a certain threshold, some of these companies will pay suppliers and employees to “cure” students of default.
All of these methods are harmful to students, but they are also harmful to taxpayers. Most of our taxpayer dollars go to federal bailouts. Taxpayers spend tens of billions of dollars on companies running nonprofit colleges, according to this two-year study by the Senate Committee on Health, Education, Labor and Pensions . Given that many of these students default and / or never graduate, this does not seem like a good investment.
How to tell good from bad
Our government is trying to crack down on these companies to solve some of these problems. Education ministry regulators, for example, have stepped up investigations, and politicians are introducing bills (such as the Students Before Profits Act ) that seek to protect prospective students and hold colleges accountable.
Politicians and analysts say most commercial schools fall under the dark banner, but there are hundreds of them, so it might be unfair to generalize. In addition, the above arguments have counterarguments.
For-profit school proponents argue that they offer opportunities to veterans and low-income families. They have flexible class schedules, so students can attend classes at night and work or raise children during the day. My mom actually went to a commercial college and they helped her find a job after completing her degree (and she’s still in that job). Again, this is just one example and does not represent the big picture (I also have friends who say their commercial degree is useless), but still: it is possible to go to a commercial school and get a job in your field.
So, if you are thinking of visiting one of them, there are a few things to look into carefully , keeping all of the above in mind. You will definitely want to look at student loan defaults, graduate rates (how many students actually get their degree), and employment rates. Of course, all this data is self-reported and schools are making up numbers, so you want to dig a little deeper. My College Guide invites you to ask the following questions:
- Are the job rates “placed” or “employed”? Hiring can mean that the student has gone on to graduate school, while employment means that he has found a job.
- Have they been employed or employed in their field of study? There is a huge difference. You can get a job and work in a job with the minimum wage that does not require your education. One school was recently fined $ 30 million for high employment rates, although many of its graduates have worked in fast food and other low-paying jobs.
- What is the time frame for statistics? Do students find work after six months, or did they study employment rates years after graduation?
Obviously, you should also research the reputation of the particular school. Nonprofit colleges on the Internet, for example, have a list of the 25 worst commercial colleges . And you can read student reviews on a site like Niche.com . The Ministry of Education’s enhanced cash monitoring list includes troubled schools that are on their radar, so you probably want to make sure your future school isn’t on that list.
Students and taxpayers have long been wary of the commercial college model, so it’s interesting to see what the reality is now that regulators are taking tough action. At the very least, you want to know how these colleges work, especially if you are planning on taking out a loan.