For-Profit Colleges: Scooping Up the Stimulus

The University of Phoenix and others are cashing in. Critics say the schools have low graduation rates and dubious recruiting standards

By Ben Elgin and Jessica Silver-Greenberg

President Barack Obama's stimulus package directs billions in new funding to higher education. Poised to cash in on the largesse are a group of large for-profit universities that specialize in scooping up student aid dollars. Some of the schools, known for aggressive recruiting, are increasing advertising and seeing enrollments rise.

But are these education businesses appropriate beneficiaries of fresh taxpayer generosity? For years skeptics have raised questions about the schools' marketing tactics, graduation rates, and quality of education.

Asked about the coming boom in the for-profit industry, Arne Duncan, the new Education Secretary, told BusinessWeek that he intends to increase monitoring of federal student aid to all schools, private and public: "I am creating an internal task force to optimize our procedures and to build better connections to other consumer protection agencies."

Career-oriented schools such as the University of Phoenix, a unit of publicly traded Apollo Group (APOL), have been benefiting from lean times as adults scramble for credentials they hope will help them find work. The stimulus enacted last month will accelerate this trend by providing an additional $15 billion in Pell Grants for students over the next two years.

Apollo, which received more than three-quarters of its $3.1 billion in revenue from federal student aid in the fiscal year that ended Aug. 31, is well positioned to take advantage of the stimulus. Its Phoenix unit already is the biggest recipient of government student aid. In its most recent quarter, which ended Nov. 30, Phoenix boosted ad spending by 24%, to $88 million. Its enrollment rose in the quarter by 18%, to 385,000 students, who study at campuses in 39 states as well as online.

Some of Phoenix's largest for-profit rivals, including ITT Technical Institute, DeVry University, and Capella Education (CPLA), also are boosting student headcounts and advertising. "We're stepping in and filling the unmet need," says Daniel M. Hamburger, CEO of DeVry (DV), which gets 65% of its revenues from government-backed student aid.

Officials at public universities and community colleges, many of which have cut enrollment because of tightening budgets, protest that Phoenix and similar for-profit institutions use questionable methods to lure students. "These schools are clearly attempting to capitalize on the financial difficulties that families face," says Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars & Admissions Officers.

In 2004 the Education Dept. blasted Phoenix for fostering a corporate culture in which "ethics often are set aside" in a race to increase enrollment and profits. The agency charged that Phoenix paid recruiters solely based on the number of students they signed up, a practice barred by the Higher Education Act. Without admitting wrongdoing, Phoenix resolved the case for $10 million, the largest settlement of its kind. Phoenix executives say they have always paid employees only partly based on the number of recruits, which is legal.

The executives stand behind the quality of Phoenix's education and business practices. They say they cater to underserved constituencies, such as adults who want to attend part-time and members of the military and minority groups. Testing of their students shows improvement in reading and math, they say, and adult grads typically earn 9% to 27% more upon receiving degrees. "There's a lot of bias against recruiting into a college," says Terri C. Bishop, Phoenix's vice-president for external affairs. "We recruit properly, and we take care of students once they're here."