No Good Guys in the Fight Over For-Profit Colleges

For a case study in the tawdry and twisted world of Washington policymaking and lobbying, you can’t do much better than the current fight over the subsidies and regulations for for-profit colleges. Behind every argument is an ulterior motive, around every corner is a conflict of interest, and in every pocket there is cash procured through government policy supposed to serve the public good.

We’re not talking here about Ivies or Stanford or Duke — those schools may be expensive and private, but they are still operated as non-profit entities (and taxed accordingly). For-profit colleges often are publicly traded corporations (or subsidiaries), whose products are education and a degree. The University of Phoenix and Kaplan University are two of the best-known for-profits. The industry fills a niche by serving "non-traditional" students, such as parents and older immigrants. The clientele is similar to that of community colleges, but the for-profits typically offer more convenient campuses (University of Phoenix’s DC-area locations are all near highway exits and metro stops) and more online learning. Partly because of the makeup of the student body, and partly because of aggressive marketing, students at the for-profits (including both graduates and drop-outs) default on their student loans about four times as much as other college students.

But don’t confuse "for-profit" with "capitalist." Without federal subsidies in the form of Pell grants and federal loan guarantees, the for-profits might not exist. At the very least, they would be much smaller. About 87 percent of the revenue at the biggest for-profits comes from federal taxpayers, according to the Chronicle of Higher Education. They belong to a class of company that I call Subsidy Sucklers.

Sen. Tom Harkin, D-Iowa, earlier this year declared war on the for-profits, ordering the Government Accountability Office to investigate these schools’ marketing techniques. The GAO produced a scathing condemnation. Harkin also held a hearing, with witnesses testifying about the failures of these schools.

But a closer look revealed a murkier picture. The GAO last month corrected the paper, modifying 16 of the report’s 28 findings. At Education Week, Rick Hess wrote, "all 16 of the errors run in the same direction — casting for-profits in the worst possible light." The credibility of Harkin’s star witness in his August hearing, Steven Eisman, was also called into question.

Eisman is a short-seller who reportedly stands to make big money if the stocks of for-profit colleges collapse. He also is a vocal lobbyist for new regulations that would cripple these colleges. The term for Eisman is Regulatory Robber Baron.

Eisman presumably cashed in sometime in late July when the Department of Education issued a draft of its "gainful employment rule," cutting off federal aid to schools whose graduates’ debt-to-income ratio is too high. Two GOP Senators have called on the Education Department’s Inspector General to investigate which shortsellers might have had advanced warning of the regulation.

The shortsellers went further: One investment firm sent out a consultant to homeless shelters to collect signatures from shelter directors complaining about the for-profits’ pushing the homeless to enroll. Thanks to the perverse incentives provided by Pell Grants and subsidized student loans, the for-profit colleges can make money off students even if they can’t pay — because the taxpayers will.

In effect, the for-profit colleges created a clash between two evils, with one side exploiting the homeless and the other side exploiting the homeless shelters. One director complained to ProPublica of the investors’ tactics: "I think it’s sleazy to basically use me and use other executive directors that have a real issue to make a profit for some companies."

Bill Clinton’s former special counsel Lanny Davis first flagged Eisman’s role in a Politico op-ed, and liberal ethics "watchdog" Melanie Sloan followed up, criticizing Harkin for allowing Eisman to testify, sparking the liberal American Prospect to ask in a headline, "Why Are Progressives Fighting Student Loan Reform?" The answer: money.

On September 17 — about three months after Davis’s op-ed — Davis registered as a lobbyist for the Coalition for Educational Success, a trade group of for-profit colleges. Then in November, Sloan announced she was joining Davis’s lobbying firm. Also lobbying for the for-profit colleges are six former Democratic congressmen and three former Republican lawmakers.

This tale has no good guys, but it does have a moral: When you inject government into an industry, you get some pretty unsavory results.


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