ACCESS, COMPETITION & FOR-PROFIT HIGHER EDUCATION CONFERENCE

S A N F O R D SC H O O L O F P U B L I C P O L I C YD U K E U N I V E R SI T Y

S E P T E M B E R 2 1 - 2 2 , 2 0 1 2

OMARI SCOTT SIMMONSWA K E F O R E ST U N I V E R SI T Y S C H O O L O F L AW

For-Profit Colleges & Universities

Research Synthesis and Response

Themes

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 than nonprofits?

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:

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)

• University of Phoenix• Western International

University• Axia College

• The College for Financial Planning• The Institute for Professional

Development• Insight Public Schools (Online Public

H.S.)

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.

Regulatory Environment

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 Repayment Rate

Sanctions

Over 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: % of Annual Income

Sanctions

8% 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 Discretionary Income

Sanctions

20% 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 & Lobbying

Over 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 Rule

34 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 Educational Industry, 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.

Additional Themes?

Open Discussion