Editorial: Editorial: For-profit colleges are wasting public funds

With federal deficits widening and revenue prospects bleak, Congress needs to become a better bargain hunter. Nowhere is this more evident than with federal subsidies for higher education.

Hundreds of billions of dollars are at stake, so taxpayers have a right to expect colleges and universities to produce students with diplomas in exchange for federal aid. Traditional schools are struggling to keep up their end of that bargain, but it’s at the for-profit colleges that scandalous amounts of waste are taking place.

Enrollment at for-profit colleges, such as the University of Phoenix, Kaplan and ITT Technical Institute, has exploded in the past 15 years, as more people are drawn to the flexibility of online learning. From 1998 to 2008, enrollment tripled at these schools, which are mostly owned by publicly traded companies.

A recent U.S. Senate report looked at the largest companies that own for-profit institutions and found they employed more than 32,000 recruiters but had less than 16,000 workers in student support and career services. Furthermore, more than 80 percent of their revenue was traced to federal financial aid, either through Pell Grants or loans, according to a New York Times article.

No taxpayer money, no profits.

What’s galling is that for-profit colleges tapped those profits to fend off reforms that would hold them more accountable for taxpayer dollars, spending $8 billion in 2010 and the same amount in the first nine months of 2011 on lobbying Congress.

More accountability is precisely what’s needed. The Senate report notes that, on average, 17.7 percent of revenue at for-profits is spent on instruction, while 22.4 percent goes to marketing and 19.4 percent to profits. Public institutions generally spend less than 2 percent of their budgets on marketing. The average annual chief executive pay at the for-profits is $7.3 million.

No wonder the typical associates degree at a for-profit college costs nearly $35,000 versus $8,300 at a community college.

This siphoning of federal funds could perhaps be justified if students were gaining value, but the median enrollee lasts about four months. The default rate on student loans at for-profits is an astounding 47 percent.

For-profit defenders have criticized the emphasis of the Senate report, saying that traditional institutions squander public dollars, too. That’s true. All of these institutions could be more accountable, but the sheer waste at the for-profits is off the charts.

Congress needs to affix strings to federal funds, so that students and taxpayers get more value. One sensible idea is to ban the use of money from federal aid for recruitment, marketing and advertising. Another smart reform would be to establish graduation benchmarks for institutions to meet before they are eligible for federal dollars.

The Senate report shows that for-profit colleges target federal subsidies. Tuition is pegged to how much is available. The only way to get them to change their focus is to change the incentives. It’s only then that taxpayers and students will get a decent bargain.