Colleges Could be Banned From Using Tax Money for Ads

U.S. colleges would be barred from spending federal taxpayer money on advertising, marketing and recruiting under a Senate bill targeting for-profit institutions.

The 15 largest for-profit colleges, including Apollo Group Inc. (APOL) (APOL)’s University of Phoenix, spent a combined $3.7 billion, or 23 percent of their fiscal 2009 budgets, on advertising, marketing and recruiting, according to a summary of the bill proposed today by Democratic Senators Tom Harkin of Iowa and Kay Hagan of North Carolina. Nonprofit colleges spend an average of half a percent of revenue on marketing, the lawmakers said.

Congress, the U.S. Justice Department and state attorneys general are scrutinizing the marketing practices of for-profit colleges, which have higher student-loan default rates than traditional institutions and can rely on federal financial aid for as much as 90 percent of their revenue. The institutions enroll as many students as they can, skimping on instruction and job-placement counseling, Harkin and Hagan said.

“American taxpayers cannot afford, and should not be asked, to subsidize massive advertising and marketing machines aimed at recruiting more students who are supported by federal financial aid programs,” Harkin, chairman of the Senate education committee, and Hagan, a member, said in the bill summary.

Phoenix-based Apollo, the largest for-profit college chain, fell 1.1 percent to $35.74 at 11:01 a.m. in New York. The Bloomberg U.S. For-Profit Education Index (USEDU), which tracks 13 companies, dropped 1.1 percent.

Aggressive Marketing
Richard Castellano, a spokesman for Apollo, didn’t immediately return messages seeking comment.

For-profit colleges advertise on the Internet, television, radio and in print. They also operate call centers where recruiters sign up students. Harkin and Hagan modeled today’s bill on a 2008 statute that bars colleges from using federal money for lobbying.

In February, lawmakers in the House and Senate, including Harkin, introduced legislation aimed at curbing what sponsors called aggressive marketing of subpar programs to veterans and soldiers.

In a civil-fraud lawsuit filed in August, the U.S. Justice Department accused Education Management Corp. (EDMC) (EDMC) of securing more than $11 billion in U.S. student aid by paying recruiters based on the number of students signed up, a violation of rules for colleges that receive federal grants and loans.

The company, the second-largest for-profit college company and operator of a chain of art institutes, has denied the allegations.

Jacquelyn Muller, an Education Management spokeswoman, said the company had no comment because executives haven’t had an opportunity to review the bill. Education Management, based in Pittsburgh, fell 0.7 percent to $12.30.

BLOOMBERG

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