US: For-profits controversial but driving growth

For-profit colleges and universities represent the fastest-growing but also most controversial sector of private higher education in the United States. Universities like Phoenix, DeVry and Kaplan have helped turn the for-profit sector into a massive revenue generator and the engine for higher education growth. From 1998 to 2008, for-profit enrolment grew by 225%.

But recently, they have also come in for heavy criticism from various states and also from the US government for dubious recruiting tactics and high student loan default rates.

In 2009, for-profit colleges enrolled 9% of all undergraduates - up from 3% a decade ago, according to a recent report by the National Center for Education Statistics, or NCES.

The number of degrees awarded by for-profit institutions also increased faster than public and private non-profit universities - for-profits conferred 5% of all bachelor degrees in 2008-09, and 10% of all masters degrees.

For-profit colleges target students who cannot get into conventional institutions, veterans and those already working in low-wage jobs. Nearly half of the two million US students attending for-profits are black or Hispanic.

The colleges sell themselves on their flexibility and practical skills training - courses are offered online or at night, and cover fields such as nursing, information technology and policing.

Daniel Levy, director at the Program for Research on Private Higher Education (PROPHE), said it is not surprising that for-profit colleges have experienced a boom in business during a recession.

"Young people, or the not-so-young person, are not giving up that much," said Levy, a distinguished professor at the State University of New York. "They might not be able to find employment, so the idea of increasing skills and credentials becomes attractive."

But instead of landing a well-paid job after graduating, many for-profit college graduates find themselves unemployed and saddled with massive debt.

According to the NCES, students at for-profit colleges were more likely to take out larger loans and default on them. The average loan amount for 2008-09 at four-year for-profits was $9,800 and $7,800 at two-year for-profit colleges.

Critics say for-profits exploit students through fraudulent recruitment tactics, exaggerating job prospects post-graduation and misleading students about loan costs. Students at for-profit colleges make up only 12% of all higher education students, undergraduate and postgraduate, yet account for nearly half of all student-loan defaults.

High fees, low costs, public funding, dubious recruitment

The for-profit industry has turned into a lucrative business. Students at for-profit colleges pay on average $30,900 a year, compared with $26,600 at non-profit private universities and $15,600 at public institutions, according to the NCES.

Despite this, for-profits spend far less on instruction per student than non-profit institutions - $2,659 compared to $15,289 at non-profit private universities.

For-profit colleges receive more than half their revenue from federal financial aid. According to a recent senate report, for-profit schools receive 23% of all federal student financial aid dollars, around $24 billion in the 2008-09 school year.

The report, called Emerging Risk? An overview of growth, spending, student debt and unanswered questions in for-profit higher education, found that while public and private non-profit institutions saw a decrease in Pell funding, for-profit colleges saw an increase, accounting for 23.6% of all Pell Grants, compared to 13.1% in 2000.

"The big paradox of the whole game is with the term 'for-profit'. You'd expect that to be the most private part of our private higher education system," said Levy, "when in fact, it's heavily dependent on public money."

Almost every student who walks through the door of a non-profit is essentially a paid-for student, said Levy. Even if a student drops out, which is often the case at for-profits, the institution still benefits.

"The argument goes that even if they're recruited and they don't last, [the institution has] gotten revenue," he said. "The institutions are very dependent on that revenue."

Some high-profile for-profit schools have recently come under fire for their aggressive - and legally questionable - recruitment strategies.

According to the senate report, the eight publicly traded for-profit schools spent on average 31% of costs on recruiting and marketing, including television advertising, billboards, and web marketing, in what the report describes as "abusive recruiting" tactics.

New rules, boundaries blurring

The department of education recently issued a series of regulations in an attempt to crackdown on for-profit colleges. The new rules will block federal aid to a for-profit school if fewer than 35% of graduates are paying off their loans, and if they have a debt-to-income ratio greater than 12% of their total income.

In August, the US government took it a step further when the department of justice and four states - Florida, California, Indiana, and Illinois - filed a multibillion-dollar fraud suit against Education Management Corporation, the country's second-largest for-profit college company, charging that it fraudulently received $11 billion in federal aid. The company was also charged with illegally basing recruiters' salaries on the number of students they enrolled.

"There are federal rules against certain forms of recruitment including hiring people to just recruit," said Levy.

For-profit enrolment has since dropped. New student enrolment decreased by 14.1% at 10 of the most high profile institutions. At DeVry University, undergraduate new student enrolment fell by 25.6%, while Corinthian experienced a 21.5% drop.

Even so, for-profit colleges continue to rake in money, giving public universities pause for thought.

As federal and state education funding continues to get cut, these institutions are struggling to keep pace with private colleges and for-profits, so much so that a number of high-profile public universities have considered legally changing their status to private.

Already, "upper public are more private than they used to be," said Levy. "Institutions have taken on more private ways of fundraising and tuition has gone up. I would stand by the generalisation that there is a trend of separation."

Whatever direction private higher education goes, Levy said he trusts institutions will find their way.

"I believe very much that part of the enormous strength of our higher education system has long been the various abilities to adapt and innovate without the guidance of a central plan or a great idea that comes in and transforms the system," he said.