For-Profit Colleges & UniversitiesACCESS, COMPETITION & FOR-PROFIT HIGHER EDUCATION CONFERENCE SANFORD SCHOOL OF PUBLIC POLICY DUKE UNIVERSITY SEPTEMBER 21-22, 2012 OMARI SCOTT SIMMONSWAKE FOREST UNIVERSITY SCHOOL OF LAW
What is the public good? Is higher education a private or public good? What aspects: instruction, research, or both? Lack of a specific definition Narrow vs. broad. Short term vs. long term. Economic vs. non-economic.Items associated with the public good: Individual Higher wages and personal happiness Societal Higher tax revenues Better health outcomes Democratic participation Reduced poverty and inequality Lower criminal justice costs Social cohesion
Should for-profits be treated differently thannonprofits? Non-profits versus for-profits Competition among non-selective institutions Competition among specific types of degrees/certificate programs Different treatment among types of for-profit institutions Publicly traded vs. privately held Two-year vs. four-year Bad apples vs. systemic narrative Non-profit and for-profit collaboration (e.g., online degree programs like the Duke Fuqua MBA online)
Apollo Group Owns & Operates:• University of Phoenix • The College for Financial Planning• Western International University • The Institute for Professional Development• Axia College • Insight Public Schools (Online Public H.S.) 2011 Net Revenue for Apollo Group: $4.733 billion. 2011 Gross Profit for Apollo Group: $2.544 billion 2011 CEO Payment: $2.3 million, $7.3 million exercised(2011 Apollo Group Annual Report)
Arguments for FPCUs & Status Quo Since FPCUs serve disproportionately “under-represented,” “vulnerable” and “non-traditional” student populations, regulations restricting enrollments harm these populations. Meet demand for education that non-profits cannot meet. Without for-profit participation there would be undersupply. Education as a free market. Efficiency of new digital technology and online distribution should be embraced. “Vocational” training is the “wave of the future” for a populace in need of job skills.
For-Profit Business Model Publicly-traded for-profits and particularly on-line degrees account for growth in the for-profit industry. Emphasis on volume and expanding capacity. Separation of ownership & control. Attracting investor capital particularly institutional investors, e.g., mutual funds, pension funds, private equity, etc. Potential short-termism and shareholder value maximization myopia. Focus on quarterly earnings and reporting over long term business concerns such as quality. Reliance on government aid and lack of diversified revenue streams. Is this sustainable? Tension between investor concerns and broader public Greater ability to expand capacity than non-profit organizations
Non-Profit Model Public and private Public non-profits particularly impacted by declines in state support Attract donations and do not redistribute earnings to shareholders. Treated differently under Internal Revenue Code and Higher Education Act.
Corporate Governance Definition: systems by which companies are governed includes laws, practices, and norms. Prevalent perspectives: Director Primacy Shareholder Primacy Stakeholder Theory (e.g., employees, communities, students, etc.) Prevailing governance regime does not necessarily penalize anti-public behavior or harm to third parties.
Corporate Governance Federal Law The federal government, to a large extent through the Securities and Exchange Commission (SEC), regulates the external trading of securities and disclosure without addressing the internal affairs of the corporations it regulates. Disclosure requirements, as a general matter, are less intrusive than prescriptive rules and are consistent with market-based theories. Better information ostensibly contributes to healthier markets and presupposes that the greater the disclosure, the lesser the need for judicial and regulatory intervention.
Corporate Governance State Corporate Law: State corporate law addresses the internal affairs of the corporation, primarily the relationship between shareholders and managers. The content of state corporate law, especially Delaware law, is schematically conservative, lacks a degree of contextual specificity, and provides substantial managerial discretion. State corporate laws function like bookends, they do not address a broad range of corporate activity and leave it to managers, in most cases, to fill gaps.
Proposed Gainful Employment Rule Originally, 3 proposed measures. Each had a “in compliance” zone, a “warning” zone, and a threshold for loss of Title IV eligibility. Each program within each FPCU must satisfy 1 of the 3 thresholds. Failure to meet 1 of 3 thresholds would result in loss of eligibility for Title IV funds the next program year.
Student Loan SanctionsRepayment RateOver 45% None.35%-45% Warnings to prospective students about difficulty repaying loans & limitations on Title IV-funded enrollments.Under 35% Loss of Title IV eligibility for each failing program.Annual Loan Payment: Sanctions% of Annual Income8% or below None.8%-12% Warnings to prospective students about difficulty repaying loans & limitations on Title IV-funded enrollments.Over 12% Loss of Title IV eligibility for each failing program.Annual Loan Payment: % of SanctionsDiscretionary Income20% or below None.20%-30% Warnings to prospective students about difficulty repaying loans & limitations on Title IV-funded enrollments.Over 30% Loss of Title IV eligibility for each failing program.
Industry Input & LobbyingOver 90,000 Comments Later…
Final Gainful Employment Rule Student Loan Repayment Rate must be 35% or above. Annual loan payments (debt) for graduates must be 12% or less of annual earnings income. Annual loan payments (debt) for graduates must be 30% or less of annual discretionary income. Failure to meet all 3 of these measures for 3 of 4 years results in program ineligibility for Title IV funding.Source: 28 C.F.R. § 667.
GER takes a “Vacation”- APSCU v. Duncan The Association of Private Colleges & Universities (APSCU) challenged the Gainful Employment Rule in APSCU v. Duncan. APSCU argued that the DOE had exceeded its statutory mandate and the Gainful Employment Rule was beyond the scope of its authority. The District Court of D.C. found DOE indeed had statutory authority to enact the Gainful Employment rule. However, the court found the 35% debt repayment rate to be “arbitrary and capricious” under the APA. Finding all 3 debt measures “inextricable,” the court vacated the entire GER under the APA.
Post-APSCU v. Duncan The DOE has challenged the District Court’s ruling, but does not expect an imminent victory. DOE’s main focus is reinstituting the debt measurement requirements, without the consequences. The APSCU continues to vigorously oppose any additional regulations. There has been no indication from DOE that it will begin a new rulemaking process until the G.E.R. is fully litigated.
The 90/10 Rule34 C.F.R. § 668.18(b)(16) All FPCUs must derive at least 10% of their annual revenue from non-Title IV, non-HEA sources. 1 year failure to comply results in provisional participatory status in HEA programs for 2 years. 2 consecutive failures results in ineligibility for HEA & Title IV funding. However, this excludes G.I. Bill funds from the 90%.
Accreditation Issues 20 U.S.C. 1001(a)(5) requires all postsecondary educational institutions to be accredited by “a nationally recognized accrediting agency.” The U.S. Government accredits these agencies by maintaining a list of “reliable” accrediting authorities. Variable accrediting standards allow FPCUs to shop for the most lenient agency. “Accreditation Shopping”- FPCUs purchase struggling non-profit colleges to retain the accreditation status, convert the school into a for-profit without re-accreditation.Sources: Amanda Harmon Cooley, The Need for Legal Reform of the For-Profit EducationalIndustry, 79 Tenn. L. Rev. 515.
Consumer Protection Model? Target abusive practices, fraud, misrepresentations, and predatory aspects. Contract law Consumer protection statutes Education as commodity indistinguishable from other products and services. Who should enforce?
Nature of Higher Education Information asymetries Experience goods Associative goods Giffen goods Conspicuous consumption
Higher Education Stratification Education not a “great leveler” but a sorter along class and racial lines. Do we have two higher education systems: one for the affluent and another for the vulnerable Are for-profits made necessary by non-profit practices that exclude certain student populations? (e.g., class bias and associative goods) Vocational versus liberal arts; on-line versus traditional instruction; selective versus non-selective Does existing portable financial aid system contribute to stratification (e.g., demand side subsidies/vouchers). Types of market failure, e.g., information asymetries
Higher Education Stratification Impact of social capital: college choice persistence toward degree career outcomes
Linkages between for-profits and non-profits Existing competition between for-profits and non- profits. (e.g., HBCU’s, community colleges). Future competition? Non-profit and for-profit collaboration (e.g., online degree programs)
Finance and Structural Issues Structural issues may dictate institutional behavior Impact of economic conditions on for-profit growth Counter-cyclical State budget shortfalls
Developing Better Metrics and Methodologies Institutional level data to provide micro and macro picture. For-profits have proprietary information on student populations that could inform research. Enrollments and completions perhaps insufficient without seeing downstream outcomes (e.g., loan defaults, wage growth, career opportunities). QUALITY. Is education simply sharing knowledge? How do we measure quality?
Potential Solutions and Policy Formation? For profits are here to stay. What does research tell us about potential solutions and fixing problems? Descriptive and normative. Timing constraints. Looking forward rather than backward. Interdisciplinary dialogue including industry representatives. A continuum of approaches and presenting alternatives. Not an all or nothing zero-sum outcome.