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Lure of for-profit schools can lead to unwieldy debt

Students saddled with loans, few job prospects

By Peter S. Goodman
New York Times / March 14, 2010

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NEW YORK — One fast-growing American industry has become a conspicuous beneficiary of the recession: for-profit colleges and trade schools.

At institutions that train students for careers in areas such as health care, computers, and food service, enrollments are soaring as people anxious about weak job prospects borrow aggressively to pay tuition exceeding $30,000 a year.

But the profits have come at substantial taxpayer expense while often delivering dubious benefits to students, according to academics and advocates for greater oversight of financial aid.

Critics say many schools exaggerate the value of their degree programs, selling young people on dreams of middle-class wages while setting them up for default on untenable debts, low-wage work, and a struggle to avoid poverty. And the schools are harvesting growing federal student aid dollars, including Pell grants awarded to low-income students.

“If these programs keep growing, you’re going to wind up with more and more students who are graduating and can’t find meaningful employment,’’ said Rafael I. Pardo, a professor at Seattle University School of Law and an expert on educational finance. “They can’t generate income needed to pay back their loans, and they’re going to end up in financial distress.’’

For-profit trade schools have long drawn accusations that they over promise and under deliver, but the woeful economy has added to the industry’s opportunities along with the risks to students, according to education experts. They say these schools have exploited the recession as a lucrative recruiting device while tapping a larger pool of federal student aid.

“They tell people, ‘If you don’t have a college degree, you won’t be able to get a job,’ ’’ said Amanda Wallace, who worked in the financial aid and admissions offices at the Knoxville, Tenn., branch of ITT Technical Institute, a chain of schools that charge roughly $40,000 for two-year associate degrees in computers and electronics. “They tell them, ‘You’ll be making beaucoup dollars afterward, and you’ll get all your financial aid covered.’ ’’

Wallace left her job at ITT in 2008 after five years because she was uncomfortable with what she considered deceptive recruiting, which she said masked the likelihood that graduates would earn too little to repay loans.

As a financial aid officer, Wallace was supposed to counsel students. But candid talk about job prospects and debt obligations risked the wrath of management, she said.

“If you said anything that went against what the recruiter said, they would threaten to fire you,’’ she said. “The representatives would have already conned them into doing it, and you had to just keep your mouth shut.’’

Lauren Littlefield, a spokeswoman for the school’s owner, ITT Educational Services, said the company had no comment.

The for-profit educational industry says it is fulfilling a vital social function: supplying job training that provides a way up the economic ladder.

“When the economy is rough and people are threatened with unemployment, they look to education as the way out,’’ said Harris N. Miller, president of the Career College Association, which represents approximately 1,400 such institutions. “We’re preparing people for careers.’’

Concerned about aggressive marketing practices, the Obama administration is toughening rules that restrict institutions that receive federal student aid from paying their admissions recruiters on the basis of enrollment numbers.

The administration is also tightening rules to ensure that vocational schools that receive aid dollars prepare students for “gainful employment.’’ Under a plan being floated by the Department of Education, programs would be barred from loading students with more debt than justified by the likely salaries of the jobs they would pursue.

“There is a lot of Pell grant money out there, and we need to make sure it’s being used effectively,’’ said Robert Shireman, a deputy undersecretary of education.

The administration’s push has provoked fierce lobbying from the for-profit educational industry, which is seeking to maintain flexibility in the rules. The stakes are enormous: For-profit schools have long derived the bulk of their revenue from federal loans and grants, and the percentages have been climbing sharply.

The Career Education Corp., a publicly traded global company, last year reported revenue of $1.84 billion. Roughly 80 percent came from federal loans and grants, according to BMO Capital Markets, a research and trading firm. That was up from 63 percent in 2007.

The Apollo Group, which owns the for-profit University of Phoenix, derived 86 percent of its revenue from federal student aid last fiscal year, BMO said. Two years earlier, it was 69 percent.

Two years ago, students at for-profit trade schools received $3.2 billion in Pell grants, according to the Department of Education, less than went to students at two-year public institutions. By the 2011-12 school year, the Obama administration now estimates, students at for-profit schools should receive more than $10 billion in Pell grants, more than their public counterparts.