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“Your Taxes Supporting For-Profit Firms as they Acquire Colleges…”

… runs the headline at Business Week, and this one’s worth unpacking a bit.

Almost all of the colleges and universities University Diaries writes about are non-profits. They exist not to generate money for investors, but to educate people. They need enough funds, of course, to operate on as high a level as possible; but because their primary function involves a public good – enhancing the knowledge and skills of people – they receive various and significant state and federal government subsidies and tax exemptions.

Public institutions, like Berkeley, some of whose students and faculties have taken to the streets in protest against
state cutbacks (today, March 4, is a Day of Action, and a number of large rallies representing many public schools are expected), and private institutions (even insanely rich ones like Harvard), both receive all sorts of tax breaks along with government financial support.

The furloughs Mr UD and his colleagues at the University of Maryland have experienced, and the many other signs of institutional strain that this blog has noted at virtually all American universities, have of course to do with varying degrees of withdrawal of government funds from schools under the pressure of a bad economy.


Because our taxes support non-profit universities, we have a stake in making sure these places don’t use our money to give their presidents millions of dollars, or, like Harvard, to hoard massive endowments. Likewise, we have an obligation to keep an eye on the tax-exempt NCAA and tax-exempt universities with Division I-A football and basketball programs (indeed, many people now argue that the NCAA and these sorts of campus sports programs should lose their tax exemption).

My point is that all sorts of goodies, subsidized by the American taxpayer, come to universities, and universities expect (should expect) some level of government scrutiny (think too of Senator Charles Grassley’s many letters of inquiry to universities about possible conflicts of interest in their medical schools) and citizen scrutiny because of this.


Things start to get muddy when we turn to America’s burgeoning for-profit university industry.

For-profits aren’t bound by the non-profit ethos which says that our primary goal is to enhance the public good. For-profits are for profits. They’re doing what they do primarily to yield as much money as they can for investors. Because of this, the for-profit story, as UD has chronicled it over the course of this blog, has featured the sort of scandals you’d expect: Brazen recruitment of any student with a pulse, almost exclusively online curricula, and a practice of lying to recruits about graduation rates and job placements. One firm “paid a $6.5 million settlement in July 2007 to the California attorney general’s office, over allegedly misrepresenting graduates’ job placement rates and salaries. It also agreed to cease enrolling students in 11 programs at nine campuses.”

Now keep in mind that for-profits get massive federal support too. Typically over eighty percent of their revenue comes from you and from me.

So let’s go back to the headline on the Business Week article: Your Taxes Supporting For-Profit Firms as they Acquire Colleges.

How does that work?

Let’s start here:

A 2006 regulatory change fostered online growth and made takeovers more attractive… That year, Congress eliminated a rule prohibiting colleges that offered more than half of their courses online from receiving federal financial aid.

Well, this blog ain’t keen on online – UD calls it the poor white trash of education – but, you know, that’s just me. Congress loves it, and has made it easier for you to make an entirely online university. (I know. Diploma mills have been at this for years. Whole other subject.)

Anyway. Okay. So you can now make a really low-cost, really profitable university. Zillions of students all over the world, a few professors doing a lot of typing (How many students does each online class contain? I dunno. A thousand?), very little physical campus to maintain… You get the picture.

But – Did I say diploma mills were a whole other subject? They’re not really. You need to differentiate yourself from them, and that means real accreditation. Which is where we reenter the Business Week story:

ITT Educational Services Inc. paid $20.8 million for debt-ridden Daniel Webster College in June. In return, the company obtained an academic credential that may generate a taxpayer-funded bonanza worth as much as $1 billion.

ITT Educational, the U.S.’s third-biggest higher education company with a market value of $3.8 billion, may increase it by 26 percent, or $1 billion, within five years because of the purchase of 1,200-student Daniel Webster in Nashua, New Hampshire, according to Michael Clifford, an investor in Del Mar, California, who has participated in the acquisitions of four nonprofit colleges. At least 75 percent of new revenue would come from access to the more than $100 billion a year in financial aid the U.S. hands out to college students, he said.

Key to tapping that money is Webster’s regional accreditation, which is the same gold standard of academic quality enjoyed by Harvard University and helps students transfer course credits from one college to another. Daniel Webster’s accreditation was its “most attractive” feature to ITT, said Michael Goldstein, an attorney at Dow Lohnes, a Washington law firm that has long represented the company.

“Companies are buying accreditation,” said Kevin Kinser, an associate professor at the State University of New York at Albany, who studies for-profit higher education. “You can get accreditation a lot of ways, but all of the others take time. They don’t have time. They want to boost enrollment 100 percent in two years.”

Let’s look more closely at what you’re getting as a student here:

The cost of attending an ITT Technical Institute, including tuition, fees and off-campus room and board, was $26,775 in 2008-09, according to the National Center for Education Statistics. Of students who entered ITT’s two-year schools in 2004, 29 percent graduated. ITT derived 70 percent of its 2009 revenue from federal financial aid, according to a company filing.

Wow. Where do I sign up? You get to pay Harvard rates for flunking out of a little-known academic institution. Plus, our taxes are paying for seventy percent of the school’s revenue!

Is our government watching out for us here?

The scrutiny these new for-profits get

“doesn’t remotely satisfy the sloppiest of due-diligence requirements,” said [Barmak] Nassirian of the American Association of Collegiate Registrars & Admissions Officers. “There is no methodical review of who has bought the college. If the Cosa Nostra applied, you would think you’d take a look.”

But the Department of Education is on it, man!

The U.S. Department of Education, which doled out $129 billion in federal financial aid to students at accredited postsecondary schools in the year ended Sept. 30, is examining whether these kinds of acquisitions circumvent a federal law that new for-profit colleges can’t qualify for assistance for two years, Deputy Undersecretary of Education Robert Shireman said in a telephone interview.

Under federal regulations taking effect July 1, accrediting bodies may also have to notify the secretary of education if enrollment at a college with online courses increases more than 50 percent in one year.

“It’s an area that we are watching closely,” Shireman said. “It certainly has been a challenge both for accreditors and the Department of Education to keep up with the new creative arrangements that have been developing.”

Kind of reminds you of the SEC when it was run by Bernie Madoff, doesn’t it?

Margaret Soltan, March 4, 2010 6:07AM
Posted in: CLICK-THRU U.

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6 Responses to ““Your Taxes Supporting For-Profit Firms as they Acquire Colleges…””

  1. Bill Gleason Says:

    Very interesting.

    You can pay as little as $100 for 4 credits and the credits are transferable. You don’t even have to buy a college. Just give them a cut.

    Williams (and Harvard) educated Burck Smith has figured out how to do this. His company, StraigherLine, has partnered with several colleges that take StraigherLine courses for credit. These courses are also accredited by the American Council on Education – another possible transfer mechanism.

    Concurrently, a lot of colleges and universities are actually charging more for online courses than they do for the regular butt in the seat versions. This can’t last. The for profits are going to make this a race to the bottom as Burck Smith has demonstrated.


    For more info the WaPo has an article:


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