Subprime Opportunity: The Unfulfilled Promise of For-Profit Colleges and Universities

Let us recall this quote from Steve Eisman.

“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. I was wrong. The for-profit education industry has proven equal to the task.”

Eisman was one of the main characters in the book The Big Short by Michael Lewis. He was one of those who made a financial killing by investing short against the subprime loan mess in the housing market. He delivered the above statement while testifying before a congressional committee. The Government Accountability Office has already issued a report detailing how these institutions encouraged fraud and engaged in deceptive and questionable marketing practices. As of yet, congress has congress has not had the courage to act and reign in the rampant abuse in this industry.


Another voice has been heard. The Education Trust has just issued a report titled: Subprime Opportunity: the Unfulfilled Promise of For-Profit Colleges and Universities. Like Eisman, the report draws a direct comparison between for-profit colleges and the subprime mortgage industry. This report, combined with a little data from Businessweek will make the analogy complete.

“The rationing of opportunity that marginalizes an important sector of American society has ironically become an extraordinarily profitable opportunity for corporations that claim to serve the underserved. In the lead-up to the collapse of the subprime lending industry, homeownership was billed as the cornerstone of the American Dream, as banks aggressively marketed risky financial products to those who could not afford them.”

“The developing showdown between for-profit colleges and the government is another example of how the aspirations of the underserved and the unfulfilled promise of the American dream combine with lax regulation to make the rich, richer and the poor, poorer.”

As was the case with subprime mortgages, the for-profit schools target those least likely to be served by traditional schools. Many such individuals have neither the academic background nor the motivation to complete a degree program and compete in the economy with other degree holders. To entice them with easy loans and promises of a rosy future is not doing them or the nation a favor. What we have here is the opportunity to run a scam to pilfer money from the national treasury via federally subsidized loans that the schools can then pocket as profit.

“The rapid rise of the for-profit industry has largely been driven by the aggressive recruitment of low-income students and students of color—a fact that is not disputed by the sector, but rather heralded as a sign of its commitment to underserved populations. Low-income and minority students make up 50 and 37 percent of students at for-profits, respectively.”

The goal of offering opportunity for advancement via education would be exemplary if advancement was what was delivered. What is provided instead is a path that is unlikely to lead to graduation and commensurate employment. The only certainty for the students is a crushing debt burden.


Consider the chart below. It lists the six-year graduation rates for some of the larger for-profit institutions. The largest organization, University of Phoenix, has a graduation rate of only 9%. The net for all for-profit schools in this category is 22%. The equivalent numbers for public and private, non-profit are 55% and 65% respectively.

The next chart plots the median debt load for students from public, private non-profit, and for-profit schools.

The Education Trust report tells the tale of a woman who graduated with $30,000 of debt; ten years later, with fees and interest, it had ballooned to $60,000. It also pointed out that

“The consequences of default are severe. Student loan debt is not dischargeable in bankruptcy, so it can follow a student for a lifetime. Defaulters can have their wages garnished, their income tax refunds intercepted, and their Social Security payments withheld.”

“These unmanageable debt burdens and high default rates indicate that for-profit schools do not provide students with the education necessary to secure employment at a level that allows them to repay the hefty loans they must borrow.”

Now we have the poor and defenseless being induced, through deceptive—and occasionally fraudulent—means to assume a level of debt that they cannot possibly pay off. One thing is left yet to complete the analogy with subprime mortgages—the rich have to get richer. Businessweek magazine has provided the needed data.

“While for-profit colleges get poor grades for their high dropout rates, student loan defaults, and heavy dependence on federal student aid, their executives excel in another subject: making money. Strayer Education, a for-profit college chain that receives three-quarters of its revenue from U.S. taxpayers, paid Chief Executive Officer Robert Silberman $41.9 million last year. That's 24 times the compensation of the highest-paid Ivy League university president, Columbia University's Lee Bollinger, who received $1.75 million in 2008, including the value of housing and other benefits, according to a study published Nov. 14 by the Chronicle of Higher Education. Silberman's annual pay, including cash and stock-based compensation, would have ranked him eighth on a list of the highest-paid executives at the largest 1,000 U.S. companies, according to Equilar, an executive-pay researcher.”

“It's not just fat paychecks. Top executives at the 15 U.S. publicly traded for-profit colleges, the largest of which are Apollo Group and Education Management, also received $2 billion during the last seven years from the proceeds of selling company stock, Securities and Exchange Commission filings show. Since 2003, nine for-profit college insiders sold more than $45 million of stock apiece. Peter Sperling, vice-chairman of Apollo's University of Phoenix, the largest for-profit college, collected the most: $574.3 million.”

The problem is not that schools are trying to earn a profit. The problem is that these schools are not regulated. They do not have appropriate standards that must be followed. A minimal attempt to correct this was planned by the Department of Education. Lobbyists were able to purchase the allegiance of enough legislators to cause the rule implementation to be delayed. With more Republicans in the houses of congress, the price for the purchase of a legislator will go down and the chance for any meaningful regulation will diminish.