Is For-Profit Education the Next Subprime Mortgage Crisis?

By Olivia Scheck

In 2005, Yasmine Issa was a 24-year-old homemaker, raising twin toddlers in Yonkers, New York. Having just divorced, the newly single mom, with no college degree or professional training, was also in need of a job.

So, like 2.8 million others, Issa enrolled at a for-profit postsecondary school – the kind that you see advertised on TV and highway billboards – called the Sanford-Brown Institute in White Plains.

The program, for people training to become ultrasound technicians, included 12 months of classes, a 6-month internship and the assistance of their career services center, all for around $32,000. Issa used her savings and child support payments to pay for half of the training and took out a federal student loan of $15,000 to pay the rest.

What Issa didn’t realize, until she’d finished the program and spent five months unsuccessfully searching for a job, was that the Sanford-Brown ultrasound program was not accredited by the American Registry for Diagnostic Medical Sonographers (ARDMS).

Without a degree from an ARDMS accredited program, which she could have obtained for half the price at a New Jersey community college, Issa was left with no job prospects and thousands in student loan debt, which was now accruing interest.

Issa related these facts late last month at a senate committee hearing on the ticking time bomb that is for-profit education. But, believe it or not, Issa’s testimony was not the day’s most distressing.

That honor belonged to Steven Eisman, the portfolio manager whose foresight about the subprime mortgage crisis was profiled in Michael Lewis’ book The Big Short.

“Until recently,” the matter-of-fact financier began his testimony. “I thought that there would never again be an opportunity to be involved with an industry as socially destructive as the subprime mortgage industry. I was wrong.”

What followed was a chilling account of how the for-profit education sector has managed to capture billions of taxpayer dollars while, in many cases, bankrupting the students it was meant to educate.

Though students at for-profit schools accounted for less than 10 percent of U.S. higher education students overall, they soaked up almost 25 percent of federal student aid in 2008-2009 and contributed 44 percent of the federal loan defaults, according to both Eisman and an independent report by Senator Tom Harkin, Chairman of the Health, Education, Labor and Pensions Committee.

For the five largest for-profit schools, federal student aid made up 72 percent of revenue, with only half of that money, on average, going to actual education spending, the Harkin report reveals.

The Apollo Group, for instance, parent company of the familiar University of Phoenix and the largest for-profit education company, received $1.1 billion in federal loans and grants in 2009, Eisman said in his written testimony to the committee. However, of that total, only 99 million – or, about 10 cents on the dollar – went towards instructional costs. The rest, Eisman claimed, was spent on marketing and executive salaries.

But school administrators aren’t the only ones who have profited from this bleeding of federal education dollars. Fourteen of these institutions are owned by publicly-traded companies, with Wall Street shareholders collecting cuts and pressuring companies to grow profits.

This is where Eisman, who became famous for short-selling subprime mortgage CDO’s, comes in.  According to Eisman, without immediate intervention, the for-profit education industry will be the next “subprime.” Or as he put it last month, “[I]f nothing is done, then we are on the cusp of a new social disaster.”  

Harris Miller, President and CEO of the Career College Association, an advocacy group for for-profit schools, impugned Eisman’s testimony, pointing out that the money manager was poised to gain from a collapse of the industry. Eisman conceded in the committee hearing that he has taken a short position on the market, but nevertheless insisted that he was speaking out to prevent against another economic disaster.

Whatever Eisman’s motivations for coming forward, he is not the only one to acknowledge the looming crisis posed by for-profit education. In fact, a week before the June 21st committee hearing, the Department of Education outlined a 13 item list of proposed regulations for the industry.

Some of the proposals were aimed at protecting students against predatory marketing practices, while another sought to standardize the state accreditation system that makes schools eligible for federal grants and loans.

(See this May 3rd episode of Frontline to learn how some for-profit institutions simply bought accreditation by taking over financially troubled schools.)

But the outline was most notable for what it lacked – a much anticipated definition for the term “gainful employment."

Currently, for-profit schools must demonstrate that their students are prepared for “gainful employment in recognized occupations” in order to be eligible for federal aid. The ambiguity of the requirement makes it impossible to enforce. And so, to correct this, the DOE said it was considering new metrics, such as the debt-to-income ratios of graduates, to determine which schools were measuring up. But the June 16th outline did not include a new definition for gainful employment, which had been opposed by 18 congressmen and women in a letter to Education Secretary Arne Duncan.

"We have many areas of agreement where we can move forward,” Duncan explained in a statement, following the outline’s release. “But some key issues around gainful employment are complicated and we want to get it right so we will be coming back with that shortly."

For-profit education stocks reportedly climbed after word got out that the new definition, which would have taken a hefty chunk out of for-profit schools’ revenue, would not be included in the initial DOE proposal.

Despite the DOE’s recent attempts to stem the flow of federal dollars to undeserving for-profit institutions, Duncan has defended the necessity of for-profit schools if the U.S. is to regain the highest proportion of college-educated citizens by 2020 – a stated goal of the Obama administration.

Duncan conveyed this sentiment in a speech at The 2020 Imperative: College Attainment and U.S. Workforce Development, sponsored by the for-profit DeVry University:

"Let me be crystal clear: for-profit institutions play a vital role in training young people and adults for jobs. They are critical to helping America meet the President's 2020 goal. They are helping us meet the explosive demand for skills that public institutions cannot always meet."

But the secretary’s defense of for-profit education seemed to highlight yet another parallel to the subprime mortgage crisis.

As Daniel Golden, an education reporter for Bloomberg News, told Frontline’s Maritin Smith, “They're almost getting to the point where they’re too big to fail. There would just be too many students left out on the street with nowhere to go.”