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Utah's for-profit colleges brace for new regulations

Critics say schools prosper, while students default on federal loans

SALT LAKE CITY — In April 2004, officials from Utah-based Stevens-Henager College flew a delegation to the South Pacific island nation of Tonga.

A week later, after meetings with the royal family, they returned with commitments from at least 100 Tongans to come to Utah to study at the for-profit school. The bottom line for Stevens-Henager: $30,000 per student, or $3 million in revenue.

This "Polynesian Program," which also included a plan to create a campus specifically for Pacific Islanders at the Porter Rockwell Center in Bluffdale, fell apart without ever being fully implemented and has been part of a legal dispute between Stevens-Henager and one of its rivals ever since. But it's an indication of how creative for-profit colleges have been as they seek an edge in an increasingly competitive and cluttered market.

Utah has dozens of for-profit colleges that offer alternatives to traditional higher education and work with employers to meet the local labor market's demand. Ranging from beauty school to business school, it's impossible to paint all for-profits with one brush.

And they lay claim to successes: The locally-based Eagle Gate College Group reports that 92 percent of its graduates are placed in jobs, and the colleges say they are ahead of traditional schools in measuring what their students actually learn.

But the growing sector has come under intense scrutiny in recent months over concerns that too many students default on their loans while for-profit schools cash in on federal subsidies. This summer, congressional committees held hearings and the U.S. Department of Education proposed new regulations.

According to figures released recently by the Education Department, Utah's overall default rate for all college students is 4.3 percent, below the national average of 7 percent. But 20 percent of the Utah students who started paying back federal student loans in 2007 to attend for-profit colleges defaulted within three years, compared to just 4.5 percent at nonprofit schools. Nationally, students at for-profit colleges — about 10 percent of the total student population — accounted for 26 percent of borrowers but 43 percent of defaulters.

"While for-profit schools have profited and prospered thanks to federal dollars, some of their students have not," Education Secretary Arne Duncan said in a statement. "Far too many for-profit schools are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use."

Still, officials in Utah see continued growth at for-profit colleges in the coming years. In fact, they're depending on it, saying they will need the private sector to contribute toward meeting Gov. Gary Herbert's demand to increase college-degree attainment.

"We expect them to grow rather significantly," said William Sederburg, the Utah commissioner of higher education. "Utah probably needs them to grow if we're going to get the people educated that need to be educated."

The state Board of Regents, which oversees the Utah System of Higher Education, is planning for a "Big Goal" for 55 percent of Utahns ages 25 to 64 to have a college certificate or degree by 2020. That means the state will have to educate about 100,000 more people at the college level in the next 10 years, and officials say traditional colleges can not pick up all the slack.

Fueled in part by the federal stimulus, for-profit colleges brought in $26.5 billion across the country last year, up from $4.6 billion in 2000. In Utah alone, they took in almost $213 million in federal grants and student loans last year.

Much of that went to schools that teach cosmetology or massage therapy. The Utah College of Massage Therapy got $24 million in federal grants and loans. Similarly-sized Snow College, a state school, took in about $7.7 million.

Stevens-Henager had $26.5 million in revenue just from Pell Grants for low-income students, almost $4 million more than the University of Utah. The most successful for-profit college, the University of Phoenix, which has 6,000 students in Utah and almost half a million across the country, took in more than $1 billion in Pell Grants nationwide.

The biggest nonprofit Pell Grant recipients took in much less: Baker College, a Michigan-based career college with a large online presence ($103 million); Miami Dade College, the country's largest community college system ($75.2 million); and Pennsylvania State University ($75 million).

For-profit colleges emphasizes the fast time to a degree. One recent Stevens-Henager graduate said that's why she chose to attend a nursing program there. (She asked to remain anonymous because of the sensitive nature of her work in a local hospital's adult psychiatric unit).

"It was a better fit for me to continue on as quickly as possible," she said. "I needed to get in and get done and move on with my life."

Not all degrees are faster to obtain, and they can be more expensive. An associate degree in nursing at Stevens-Henager, leading up to the test to become a registered nurse, costs more than $56,000 and takes 26 months, while the same degree takes 24 months at Salt Lake Community College and costs less than $10,000.

Margaret Reiter, a former deputy attorney general in California who prosecuted several for-profit colleges in that state, told a congressional committee in June that the problem of students graduating with high debt and poor job prospects goes beyond a few bad apples.

"Because proprietary schools are not required to demonstrate they really can prepare students for careers that pay adequately to support student loan payments, we have no data to support the often-stated notion that most are doing an adequate job," she said, adding that in her experience, "the consumer abuses in the proprietary school industry are among the most persistent, egregious and widespread of any industry."

A student often starts life at a for-profit college as a "lead": a name, contact information and academic interests entered into a database, or lead list. A lead also indicates any military service, which makes more federal grants available.

When Chandler Horsley, CEO of Draper-based Lead Media Partners, started working in lead generation seven years ago, there were about 10 companies in the field. Now, he estimates there are 400 across the country.

Horsley said he sees some deceptive messaging and improper incentives that encourage recruiters and lead-generators to be too aggressive.

"That's not our game (and) it's not characteristic of the industry as a whole," he said. "What we do is completely above board. We're totally against encouraging people to consume something they're not capable of consuming effectively."

Horsley said his company won't work for schools that are perceived as degree factories. He thinks his clients reach a population, especially working adults, inadequately served by traditional schools.

"Their success indicates there's something they have to offer that is compelling for students," he said. (Deseret News president and CEO Clark Gilbert sits on the board of Lead Media Partners).

Colleges guard their lead lists closely. Stevens-Henager filed a lawsuit in 2004 when college officials believed several ex-employees continued to access and use Stevens-Henager's lead list to recruit students after they went to work for Eagle Gate College and its affiliate, Provo College.

For the past several years, the colleges have traded accusations of predatory hiring, "cyber-terrorism" and attempts to lure each other's students. Stevens-Henager said Eagle Gate tried to steal its "Polynesian Program" and in one hearing, its attorney called Eagle Gate an "evil company." Eagle Gate's attorney responded by saying Stevens-Henager was using the lawsuit as a "competitive tool" by trying to unearth Eagle Gate's own lead lists.

A 3rd District judge dismissed Stevens-Henager's complaint in March 2008, ruling the college had not shown a calculation of the $10 million in damages it claimed. That decision is now on appeal, and Stevens-Henager's request for a permanent injunction to keep Eagle Gate from using the list in the future is still pending.

One of the Eagle Gate employees sued by Stevens-Henager is Mosese Iongi, who immigrated from Tonga to Utah County in 1999 to get a business degree. In August 2003, when Iongi was a student at Stevens-Henager's Orem branch, an admissions director asked him to use his network of personal acquaintances in Utah's large Polynesian community to recruit students.

Iongi took a job as an admissions consultant and the next spring, he was among the group who traveled to Tonga to set up the Polynesian Program. But he claimed Stevens-Henager officials nixed the program even before presenting it to the royal family and signed up the 100 students under false pretenses.

Iongi said that when he quit in protest and took the same idea to Eagle Gate, Stevens-Henager retaliated by withholding his transcript. Attempts to reach Iongi through his former attorney were unsuccessful.

Stevens-Henager chief executive Eric Juhlin declined to comment on the lawsuit. Juhlin, a commissioner of a career college accrediting body and former chairman of the Career College Association, the chief lobbying organization for the sector, was hired to run Stevens-Henager in May.

Eagle Gate said it does not target ethnic communities, but "our student population tends to reflect the communities where our campuses are located."

Also pending is another lawsuit Stevens-Henager filed last year against Utah Career College (now Broadview University) for $2.5 million, alleging again that two former employees had stolen a lead list after moving there.

Congress has turned its scrutiny to for-profits, most notably in Health, Education, Labor and Pensions Committee hearings led by Sen. Tom Harkin, D-Iowa. He said federal spending on for-profit colleges and the evidence of abuses underscore "the need for rigorous government oversight and prudent regulation to safeguard the investments of taxpayers and students."

At one hearing, the General Accounting Office detailed recruiting abuses — including lying about the value of degrees and suggesting applicants falsify financial information to maximize federal grants — at all 15 for-profit colleges the GAO targeted in an undercover sting. (None of them were in Utah.)

Steven Eisman, a hedge-fund manager who gained fame by betting against subprime mortgages, told the committee the for-profit college sector is another bubble waiting to burst. He estimated students at for-profits could owe $330 billion on defaulted loans over the next 10 years.

"Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive as the subprime mortgage industry," he said. "I was wrong. The for-profit education industry has proven equal to the task."

The U.S. Department of Education has proposed regulations that would require each for-profit college to post online graduation rates, program cost, job-placement rates and median debt load. Other new rules would cut off federal aid if too many students default on loans.

Officials at for-profit colleges in Utah say it's too soon to tell how the regulations would affect their business. Eagle Gate College Group said in a statement the new rules would not threaten its schools' existence but may change how they operate.

"We feel the gainful employment proposed legislation may seriously restrict access for the career college student, a historically under-served group of adults who are working students with jobs and family responsibilities," the statement said. "Most of these students pay for their own schooling, and they are dependent on federal student loans to improve the lives of themselves and their families."

Federal sources make up 80 percent of the company's revenues, roughly the same ratio as at Stevens-Henager. By law, a career college can draw no more than 90 percent of its revenue from federal aid. In contrast, the University of Utah draws only about 20 percent of its nearly $3 billion in revenue from state and federal sources (excluding Medicare and Medicaid payments).

"We've seen these cycles before," said Juhlin, the Stevens-Henager CEO, referring to regulations imposed on for-profit colleges in 1992. "Anytime this sector of higher education tends to be doing very well, there's concern and resentment from the traditional sectors."

The problem with setting up an "arbitrary" ratio of debt to earnings, he said, is that students may not reach their ultimate earning potential in the first few years after graduation. Like many defenders of for-profit colleges, he said it's only natural to see more defaults because they reach an under-served, low-income population.

"There are some bad players in the industry" that get media attention, Juhlin added. "The next thing you know, the perception is the entire industry is horrible."

U.S. Sen. Orrin Hatch, who also sits on the HELP Committee, told the Deseret News the proposed regulations give "a free pass to traditional colleges and universities with the same record."

"There are problems, but they are not limited to the private or for-profit sector," Hatch said. "We may need to protect students from predatory practices, but the government has no business limiting student choice in higher education and career selection. … It makes no sense to unfairly target and penalize good schools."

Some collaboration between traditional and for-profit colleges has already begun. In January, the University of Utah started a program with the parent company of for-profit Kaplan University to offer bachelor degrees to international students lacking English language skills. About 90 undergraduates have already signed up, 70 percent from China, according to Suzanne Wayment, the U.'s associate director of international admissions.

Officials from the University of Phoenix say they have also met with state officials about how to tackle the "mammoth undertaking" of boosting college completion.

"It's going to have to be a partnership of public and private institutions," said Darris Howe, director of the school's Utah campus. "There are so many who need education, and we meet different educational needs."

Sederburg said Utah's colleges will be "very cautious" in exploring any partnership.

"There is concern about some fiscal abuses," he said. "Not all for-profits run good, clean operations."

Still, the commissioner said there is much to be learned from how for-profit colleges function. At their best, they offer students flexible schedules and personalized care, and they can quickly adjust curriculum to market demand without having to cut through reams of red tape.

Alan Clawson, 53, part owner of an assisted living facility in Sandy, said he picked the University of Phoenix to get his master's in business administration because it met his needs best.

"I just wanted to improve myself," Clawson said. "I'm already learning things I wish I knew in my previous business."

Certainly, for-profit colleges are still optimistic despite the barrage of criticism.

"As a sector and as a school, we could do more to explain the great value our schools offer and the outstanding accomplishments of our graduates," Eagle Gate said in its statement. "Our schools can always get better, and we will."