The College Corporation- For Profit vs. Traditional College
We always discuss the Fat Cats on Wall Street and the demise of the financial industry, but there’s a huge hole being burned in our pockets from secondary education.
Fat cats in the education sector and for-profit colleges fly under the radar, but the numbers speak for themselves.
The Beginning: The For Profit Model
“Traditional institutions hoping that Congress will rid them of for-profit competition will very likely be disappointed.”[5]
What exactly are “for-profit” colleges?[10]
Institutions managed and governed by private corporations and organizations
High spend on marketing and recruiting
Higher than average tuition rates
Smaller class sizes
Multiple locations
From the mid to late 90s through 2000, there’s been substantial revenue increases with for-profit colleges.
Examples of Revenue Increase Percentages:
1998-2000: Advantage Schools- Revenue Increase + $54 Mill
1995-2000: Edison Schools- Revenue Increase + $205 Mill
Where is that going?
Executive Compensation
When looking at the highest paid executives from for-profit schools between bonuses, stock and base salary, there’s an unnecessary bloat to the point where their salary is matched to some of the most successful CEOs in the country from the same year.
Highest Paid Executives 2009 example
[1] [Comparative money stacks, $10 mill = 1 stack]
*Total includes base salary, bonus + stocks + other compensation
Robert Silberman[1] $41,489,800
More than Boston Scientific CEO
Ray Elliot- $34.4 Million in 2009[2]
Andrew Clark[1] $20,532,304
$1 million less than Walt Disney CEO
Robert Iger- $21,578,471[3]
Karl Mcdonnell[1] $10,839,800
More than Community Health Systems CEO
Wayne Smith- $10,251,009[4]
John Sperling[1] $8,617,597
Kevin Modany[1] $7,629,172
“the CEOs of the publicly traded, for-profit education companies took home,
on average, $7.3 million in 2009. In contrast, the five highest paid leaders of large public
universities averaged compensation of $1 million, while the five highest paid leaders at nonprofit colleges and universities averaged $3 million. “ Quoted from help.senate.gov.
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And what do the colleges do with their money that’s different from a traditional college that’s not-for-profit? The marketing spend and visibility of the school is greatly increased, with less dollar amounts being spent on the actual students.
In fiscal year 2009, a sample of committees spent the following amounts from their overall revenue:[5]
o $4.2 billion or 22.7 percent - marketing or advertising, recruiting, and admissions staffing. [5] o $3.6 billion/19.4 percent - pre-tax profit. [5] o $3.2 billion/17.2 percent - instruction. [5] o Companies devoted less to actual instruction costs than marketing and recruiting or profit.
Staffing up Recruiters = More Paid Salaries
[insert chart from page 6 of source 5 to illustrate the disparity with what’s spent on recruiting vs. other needs]Meanwhile… For-Profit degrees are generally extremely higher in cost than traditional college.
Average Cost
[5]Bachelor’s Degrees average 20% more than cost of analogous programs [5]Associate degrees = average 20% more than analogous programsWhat’s the Disparity? When looking at comparisons and examples between not-for-profit and for-profit schools, there’s a large cost disparity between the two.
ITT Tech vs. Indiana University
Bachelor’s in Business Admin
For Profit: ITT Tech: $93,000
Public Not For Profit: Indiana University: $43,000
National American University vs. University South Dakota
Bachelor’s in Business Admin
For Profit: National American University: $62,000
Not For Profit: University South Dakota: $32,000
Universal Technical Institute vs. Mesa Community College
Certificate in Automotive Technology
For Profit: Universal Technical Institute: $30,000
Not For Profit: Mesa Community College- $1,500
Then there’s the failure. For-profit colleges have a tendency to produce high percentages of student loan defaults within the first 3 years of repayment.
[5]Students attending for-profit college=47% of all federal student loan defaults
22% enrolling in for-profit college default within 3 years
“The number of student loan borrowers and the amount each borrower owes have both risen 70 percent since 2004.” [10]
The current trajectory is nothing but up and to the right, as demonstrated in this graph below, with the bulk of the debt belonging to those under 30:
The student loan debt is at an extremely high number, and it’s finally broken the $1 trillion dollar club. To put that into perspective, the US Debt is in the trillions and rising.
Current student loan debt: over $1,000,000,000,000 [8]
Compare that to the US debt at $16,000,000,000,000. [9]
Businesses disguised as colleges are contributing to the low graduation rate and high debt in the United States, where tuition is raised and spent on recruiting, marketing, and paying executives rather than what traditional colleges spend on.
The Market of Military Benefits
For-profit colleges have been heavily tapping into the market of Veterans. Why?[12]
Expansion of benefits = expansion of student pool = higher potential revenue
Benefits do not require repayment. Impacts total percentage of average loan defaults
Avoidance of key regulations- No more than 90% (90/10 rule) of revenue can come from federal financial aid dollars
Between 2009 and 2010, revenue from Military benefits jumped 211 percent.[12]
When will the model collapse and the pool become shallow?
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[1] Page 84 http://www.propublica.org/documents/item/407797-help-senate-report[2] http://www.equilar.com/CEO_Compensation/Boston_Scientific_J._Raymond_Elliott.php
[3] http://www.equilar.com/CEO_Compensation/Walt_Disney_Robert_A._Iger.php
[4]http://www.equilar.com/CEO_Compensation/Community_Health_Systems_Wayne_T._Smith.php
[5] P. 2, 3, 5, 7 http://www.help.senate.gov/imo/media/for_profit_report/ExecutiveSummary.pdf
[6] http://www.finaid.org/loans/studentloandebtclock.phtml
[7] http://files.consumerfinance.gov/f/201207_cfpb_Reports_Private-Student-Loans.pdf
[8]http://www.finaid.org/loans/studentloandebtclock.phtml
[9]http://www.brillig.com/debt_clock/
[10]http://libertystreeteconomics.newyorkfed.org/2013/02/just-released-press-briefing-on-household-debt-and-credit.html
[11]http://www.ncsl.org/issues-research/educ/for-profit-colleges-and-universities.aspx
[12] 7, http://www.harkin.senate.gov/documents/pdf/4d01011f6076e.pdf
