In Depth March 4, 2010, 5:00PM EST

How Colleges Are Buying Respect

For-profit education companies are scooping up small schools to gain accreditation—and the financial aid dollars that come with it

By Daniel Golden

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David Plunkert

ITT Educational Services (ESI) didn't pay $20.8 million for debt-ridden Daniel Webster College in June just to acquire its red-brick campus, 1,200 students, or computer science and aviation training programs.

To ITT, the third-biggest higher-education company in the U.S., the Nashua (N.H.) college's "most attractive" feature was its regional accreditation, says Michael Goldstein, an attorney at Dow Lohnes, a Washington firm that has long represented the Carmel (Ind.) company. Regional accreditation, the same gold standard of academic quality enjoyed by Harvard, is a way to increase enrollment and tap into the more than $100 billion the federal government pays out annually in financial aid.

The nation's for-profit higher-education companies have tripled enrollment, to 1.4 million students, and revenue, to $26 billion, in the past decade, in part through the recruitment of low-income students and active-duty military. Now they're taking a new tack. By exploiting loopholes in government regulation and an accreditation system that wasn't designed to evaluate for-profit takeovers, they're acquiring struggling nonprofit and religious colleges—and their coveted accreditation. Often their goal is to transform the schools into taxpayer-funded behemoths by dramatically expanding enrollment with online-only programs; most of those new students will receive federally backed financial aid, which is only available at accredited colleges.

"The companies are buying accreditation," said Kevin Kinser, an associate professor at the State University of New York at Albany who studies for-profit higher education. "You can get accreditation a lot of ways, but all of the others take time. They don't have time. They want to boost enrollment 100% in two years."

By acquiring regional accreditation, trade schools and online colleges gain a credential associated with traditional academia. Six nonprofit regional associations set standards on financial stability, governance, faculty, and academic programs. Normally the process takes five years and requires evaluations by outside professors. Most for-profits have been accredited by less prestigious national organizations. Students enrolled at both regionally and nationally accredited colleges can receive federal aid, but those at regionally accredited schools can transfer credits more easily from one college to the next.

"CREATIVE ARRANGEMENTS"

For-profit education companies, including ITT and Baltimore-based Laureate Education, have purchased at least 16 nonprofit colleges with regional accreditation since 2004. The U.S. Education Dept., which doled out $129 billion in federal financial aid to students at accredited postsecondary schools in the year ended Sept. 30, is examining whether these kinds of acquisitions circumvent a federal law that requires a two-year wait before new for-profit colleges can qualify for assistance, says Deputy Education Under Secretary Robert Shireman. Under federal regulations taking effect on July 1, accrediting bodies may also have to notify the Education Secretary if enrollment at a college with online courses increases more than 50% in one year. "It certainly has been a challenge both for accreditors and the Department of Education to keep up with the new creative arrangements that have been developing," Shireman says.

Buying accreditation lets the new owners immediately benefit from federal student aid, which provides more than 80% of revenue for some for-profit colleges, instead of having to wait at least two years. Traditional colleges are also more inclined to offer transfer credits for courses taken at regionally approved institutions, making it easier to attract students.

The regional accreditors, which rely on academic volunteers, bestow the valuable credential with scant scrutiny of the buyers' backgrounds, says Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars & Admissions Officers in Washington.