US: High profits mean online providers here to stay

A cancellation of a large online project between the California community college system and Kaplan University reflects a dilemma faced by higher education in the US: many contact universities rely on for-profit online providers to train the masses.

Kaplan was poised to have been a major beneficiary of the articulation arrangement, both with exposure to a 2.89-million student market and through the revenues it would have earned. But the cash-strapped community college system also stood to gain an affordable way of scaling up operations without having to invest in infrastructure.

It is a situation found throughout the US and worldwide: the challenge of institutional overcrowding, systemic funding cuts and demand for college-level skills in an increasingly globalised economy. And, it is one the for-profit online higher education sector is poised to remedy.

Kaplan's counterpart, the University of Phoenix, a wholly owned subsidiary of the Fortune 500 Apollo Group, enrolled nearly half a million students in 2009-10.

As the largest propriety online college in the US, the university embarked on articulation agreements with more than 200 campuses domestically and abroad, including Britain's first for-profit higher education institution, BPP University College of Professional Studies.

It is also the main higher education provider to serving members of the US Armed Forces.

Importantly, providers like these offer something unique: they cater to the eponymous 'non-traditional' student interested in career, vocational or technology-focused programmes delivered in a flexible manner.

Armed with the knowledge that online education holds advantages to the traditional face-to-face model, colleges have therefore sought to justify their record earnings by claiming they are making education accessible to those people otherwise excluded from the benefits of higher education.

The profits are high, indeed, with 14 of the largest for-profit providers in the US valued at more than $26 billion in July 2010. The most recent quarter earnings for the Apollo Group were $1.34 billion, up nearly 28% from last year. Meanwhile, Princeton Review brought in second quarter earnings of $56.2, a 79% increase on last year.

But, ironically, it is because students in this sector are eligible for federal support that alarm bells have begun to ring. In 2009 alone, their students received more than $20 billion in loans from the Department of Education and $4 billion in Pell Grants.

Significantly, however, not only do students in the for-profit sector receive disproportionately more than their counterparts at public and non-profit institutions, they have the highest default rates. In 2009, it was 11.6% as opposed to 6% (public) and 4% (non-profit).

With such statistics in hand, federal authorities and higher education administrators have stopped to take stock of the situation. In August, findings of the Government Accountability Office led to the proposal of regulations that, as Education Secretary Arne Duncan noted, "will ensure that career college and training programmes use federal aid to prepare students for success."

The measure of their success or President Barack Obama's 2020 college graduation targets aside, for-profit online education, as delivered by on-the-ground colleges or unstable operators, appears to be here to stay.