For-Profit Colleges Change Higher Education's Landscape

Nimble companies gain a fast-growing share of enrollments

Noah Berger for The Chronicle

The U. of Phoenix's San Francisco Learning Center, in the financial district, offers information-technology, business, and other degrees. As of this month, the university's total enrollment is 455,600.
February 07, 2010

At a time when American public higher education is cutting budgets, laying off people, and turning away students, the rise of for-profit universities has been meteoric.

Enrollment in the country's nearly 3,000 career colleges has grown far faster than in the rest of higher education—by an average of 9 percent per year over the past 30 years, compared with only 1.5 percent per year for all institutions, according to an industry analyst. For-profit universities now educate about 7 percent of the nation's roughly 19 million students who enroll at degree-granting institutions each fall. And the proportion rises to 10 percent, or 2.6 million, if you count students who enroll year round. Just this academic year, the University of Phoenix eclipsed California State University as the second largest higher-education system in the country, with 455,600 students as of this month—behind only the State University of New York.

"It's been a tremendous growth story," says Jeffrey M. Silber, a stock analyst and managing director of BMO Capital Markets, which figures the for-profit sector brought in $26-billion in 2009. Most of that was earned by 13 large publicly traded companies that now dominate the market.

As those companies face shareholder pressure to expand, the for-profit sector is poised to capture students that public institutions can't accommodate and that small private colleges desperately need to maintain their enrollments. The sector is likely to be a key beneficiary of President Obama's $12-billion plan to produce five million more two-year-college graduates over the next decade. That's partly because for-profit colleges, which first opened more than 150 years ago offering certificates and diplomas, are increasingly encroaching into the territory of traditional higher education by awarding degrees. "All of the conditions are there for them to capitalize on their advantages and continue to grow," says David S. Baime, vice president for government relations at the American Student Association of Community Colleges.

Yet most professors and administrators on traditional campuses continue to dismiss for-profit colleges as inferior alternatives that cost too much, consume more than their fair share of federal student aid, and turn out unprepared graduates who default on their student loans. "Traditional faculty members think of this as a little sideshow or as those matchbook places you see advertised on the bus," says Mark S. Schneider, a vice president at the American Institutes for Research.

But the for-profit sector is not only more robust than the rest of higher education, it is helping to force some changes in the way traditional colleges do business. Like for-profit institutions, traditional colleges are reaching out to adult students, starting online programs, and saving money by rejecting tenure in favor of hiring professors by the class. Still, traditional higher education is not known for being nimble. It has been operating in roughly the same way for hundreds of years, so by its very nature it may not be well suited to respond to competition from the for-profit sector. Cary Nelson, president of the American Association of University Professors, likens the for-profit sector to "the blob," an alien life form that consumed everything in its path in the 1958 Steve McQueen movie of the same name.

"The blob would shimmer and then be half again as big as before," Mr. Nelson says. "You'd turn your attention away and look back and suddenly, it's blocking out most of the sun." At the end of the movie, Steve McQueen kills the blob. The difference here? For-profit colleges aren't going away.

Neon Lights

Just over 30 years ago, fewer than 100,000 students attended for-profit colleges and universities. The sector was populated primarily by small, privately owned businesses, "mom and pop" enterprises that looked little like their traditional, four-year counterparts. The colleges—the first of which had started primarily in port cities like New York, Philadelphia, and Boston—taught skills for front-line jobs in high-demand fields, including business and health care, and later, cosmetology and food and secretarial services. And they enrolled people that traditional higher education tended to ignore: working-class adults with children of their own who needed more skills to get better-paying jobs but couldn't take time out to attend a traditional campus.

For-profit colleges maintain much of the same mission today, but the market has seen sweeping changes. Of the roughly 3,000 for-profit institutions, 40 percent are now owned by one of 13 large, publicly traded companies. And whereas only 10 percent of the institutions offered associate, bachelor's, or professional degrees in 1990, half do so today. Further, more than 90 percent of students at for-profit institutions are now enrolled in degree programs. Only about 30 percent attend part time. As the sector expands, it is attracting students who might otherwise have attended community colleges or even four-year institutions. "They are clearly a threat for both public and private schools," says Jim Scannell, president of the higher-education consulting group Scannell & Kurz, "especially for adult students returning to get a B.A. or going part time to get a master's."

Some small, private liberal-arts colleges, seeing enrollments decline because of the economic downturn, are looking to make up that lost tuition revenue by boosting their enrollment of adult students. Such institutions are competing head to head with for-profit colleges. In addition, students who have been turned away by budget-strapped public colleges, or who simply find the bureaucracy there too difficult to deal with, are being welcomed by the for-profit sector. It's not clear whether this shift of students from public institutions to for-profit universities will be permanent, industry analysts say, but for now it adds to the size and legitimacy of the for-profit sector.

Corliss A. Ford attended a public junior college more than 25 years ago to earn her associate degree in nursing. But when she decided to go back to earn her bachelor of science in nursing two and a half years ago, she chose a for-profit, Kaplan University. Because she works two jobs, she says, she would never have had time to travel to a traditional campus. "Trying to make it to a place where you sit in a class was almost impossible," she says. At Kaplan, she started her program during the summer and took online classes in the evenings. "I could start anytime online," says Ms. Ford, who graduated from Kaplan last month and already has a new job as director of nursing for a home-health-aide company.

While Kaplan Higher Education is one of the country's largest for-profit companies, with approximately 103,800 students, it is owned by the Washington Post Company and so is not one of the 13 large publicly traded for-profit universities.

The biggest player among those is the Apollo Group. Its flagship University of Phoenix has morphed from an institution with 25,100 students in 1995 to one with 455,600 today. That means that 15 years ago Phoenix was about the same size as George Washington University. Now it is larger than the entire undergraduate enrollment of the Big Ten.

Phoenix, by far the biggest part of Apollo, has 200 campuses in 39 states, Canada, Mexico, the Netherlands, and Puerto Rico. Still, much of the university's growth has been fueled by students who work primarily online (one of its key targets: working mothers, who can take classes from home in the evenings while their children are sleeping). Phoenix's enrollment dwarfs that of each of the other 12 publicly traded companies, including Education Management Corporation, with 136,000 students; Career Education Corporation, with about 113,900 students; and DeVry Inc., with 101,648 students.

Education Management is a case study in the trajectory of the for-profit sector. When John R. Mc­Kernan Jr. took over as vice president in 1999, the company had 19 art institutes with 24,000 students. Since then, the company's student population has increased more than fivefold as Education Management has purchased a set of junior colleges in the Midwest, a small group of health-sciences colleges, a law school, and Argosy University—which began as a graduate institution. Whereas in 2006, 4,000 of the company's students worked fully online, says Mr. McKernan—who is now the company's chairman—that number has grown to more than 30,000 today.

At first glance, the corporation's flagship art school—the Art Institute of Pittsburgh—doesn't look like a traditional college. The "campus" is a 10-story building, just off the Monongahela River, that blares the institute's name at the top in red and white neon. Each floor is devoted to a different program, starting at the top with culinary arts and descending through industrial design, Web design, fashion and retail management, interior design, and photography. The walls of each floor contain glass cases that display posters, furniture, clothing, photographs, and even wrapping paper and greeting cards—all the work of the institute's students and some of its 55,000 alumni.

But on the fourth floor is a classroom labeled "Western Civ. I," a course the institute added in 2001 after it began offering bachelor's degrees. The institute also has a library and a writing center, where a teacher and a handful of students work quietly. And a few blocks away are three residence halls that the art institute opened in 2007 and 2008.

George L. Pry, the president, says that like other for-profit universities, the institute—which opened in 1921—has reinvented itself during the last decade, converting many of its associate-degree and diploma programs into bachelor's degrees.

"Employers were asking for more well-rounded employees coming out of here, with communications skills and the ability to comprehend more complex issues instead of just hands-on skills, " he says. "What I see happening is the maturation of our sector, moving more and more toward traditional higher education."

Student Focused

A big reason places like the Art Institute have been so successful is that they offer course schedules that suit students' lives. At traditional colleges, students might have a class at 9 a.m., another at 11 a.m. and a third at 3 p.m. The Art Institute of Pittsburgh, however, runs three sessions each day: from 8 a.m. until noon, 1 p.m. until 5 p.m., and 6 p.m. until 10 p.m. By concentrating their courses in one block, it is easier for students to negotiate time for school and work, and 85 percent of the students at the institute have jobs.

The University of Phoenix has pioneered another model that allows students to concentrate on one or two classes at a time. Each class lasts from five to nine weeks, and students take courses year round. When students enroll at Phoenix, the university lays out their entire course plan all the way through graduation. "They know what that schedule will be, and they can plan their lives around it," says William J. Pepicello, the university's president.

Unlike traditional colleges, Phoenix never turns away students because classes are full. It simply adds more, depending on demand. And for-profit institutions move quickly, adding new programs to match careers that are on the rise and getting rid of others that are on the decline. Phoenix can be so agile because it is a business, with a 10-story, glass-and-copper corporate headquarters where most decisions are made. Traditional campuses, by contrast, are run not only by administrators but by powerful faculty committees that must approve most academic changes—a process that can take months, if not years.

Gregory M. St. L. O'Brien left a long administrative career in traditional higher education at the University of New Orleans and then at the University of South Florida before serving as president of Argosy University from 2004 until 2007. "I used to joke that if, at my public university, we were going to host the world's fair and try to develop a program to manage it, the world's fair would be over by the time our committee finished meeting on it," he says.

On traditional campuses, says Mr. O'Brien, the focus is on faculty members. At for-profit institutions, he says, students are the No. 1 concern. "One senior faculty member would say: 'I just don't teach on Tuesdays or Thursdays,' and we'd rewrite our schedule to accommodate that professor," says Mr. O'Brien, recalling his days in traditional higher education. At for-profit institutions, faculty members teach courses established by the university at times that work best for students.

"We have crafted our entire world around students," says Donna M. Loraine, vice president for academic affairs at DeVry University, which offers undergraduate and graduate degrees in technology, science, business, and management. "We are here to improve their futures, not make it more convenient for us." Ms. Loraine, who has worked for DeVry for 17 years and was a professor there herself, says the university offers early Saturday-morning classes because students have said that's a convenient time for them. And in major urban areas like Washington, DeVry waits until after 10 a.m. to start the day because students complained that crowded commutes made it difficult for them to get to class earlier. 

The process of enrolling at a for-profit institution is often much quicker than at a traditional college. Prospective students who make an inquiry at a traditional campus might get something in the mail a week or two later, telling them how to apply. Then it takes months for the college to review their application and either admit or reject them for the following fall.

At for-profit institutions, the timetable is entirely different. "If you express an interest today at a for-profit, you will get a phone call from someone within 15 minutes, and that person will work with you to complete your application and figure out what program makes sense for enrollment starting the next month," says John Katzman, chief executive of 2tor—a company he founded that works with traditional universities to establish online degree programs.

For-profit universities spend a lot of money to get students in the door. For the three-month period ending November 30, 2009, the Apollo Group spent $275-million on "selling and promotional" expenses, or about 20 percent of its total net revenue of $1.3-billion for that quarter, according to a report the company submitted to the federal government. Turn on a television, and within a half-hour, you'll most likely see a slick commercial touting a for-profit university, complete with personal testimonies from graduates who say the experience changed their lives—and pushed them up the economic ladder. If you telephone the main number of a for-profit university, a recruiter is likely to call back to ask when you want to enroll (even if you are a newspaper reporter trying to reach the university's president). The big-bucks advertising campaigns and marketing savvy, plus the high-pressure recruitment techniques, have helped the for-profit industry blossom.

Once students are enrolled, for-profit institutions work hard to hold on to them. Phoenix has what it calls an "early alert" system. If a student is absent or struggling in class, the student's professor contacts one of three counselors who are part of the student's "graduation team": an enrollment counselor, who helps choose and plot out students' program of study; an academic counselor, who works with them on any classroom difficulties; and a financial counselor, who helps them complete student-aid applications and sort out financial concerns. Of course, it's in a for-profit university's financial interest to hang onto students through graduation, so that tuition money (and financial aid) keeps flowing.

Cost Questions

Proprietary schools charge a lot more than public colleges—an average of $14,174 this year, compared with $2,544 at public two-year institutions and $7,020 for in-state tuition at public four-year institutions, according to the College Board. But students frequently choose proprietary schools over public colleges because for-profits do so much to limit the hassle of enrolling and applying for aid, and because students can take the classes they need quickly and get on with their lives. Ms. Ford, the Kaplan student, said she chose it for her nursing degree "because I could get into the class without having to wait."

Still, there are plenty of horror stories about career-college students who never graduate, or those who leave with large student-loan bills and then fail to get jobs. Students from proprietary institutions borrow more than students in other sectors of higher education, and have the largest student-loan default rates. But they graduate from two-year programs at a much greater rate than do students at community colleges: 60 percent in 2007 compared with 26 percent, according to the U.S. Education Department. In addition, for-profit university leaders say their students are bound to have higher loan-default rates because they are more likely than students on traditional campuses to be low income, to live on their own—without their parents' support—and to be the first from their families to attend college.

When it comes to jobs, some for-profit institutions have become key suppliers of workers in certain markets. Keiser University, a privately owned institution with 15 campuses in Florida, has been the No. 1 producer of associate-degree graduates in health professions and related sciences in the state for three of the last five years. "Students like our culture," says Arthur Keiser, founder and chancellor of the university. "It's very personal."

And employers like his graduates. The Cleveland Clinic Florida has hired more than 50 Keiser graduates in the last five years. Keiser students, who become radiology or surgical technicians and medical assistants, for example, are more mature and focused than those from other institutions, clinic officials say.

Harris N. Miller, president of the Career College Association, acknowledges that for-profit institutions aren't for everyone. "You don't go to one of our schools to be a classics major," he says. But proprietary schools are often the top choice of students who want skills "related to a real job in the real world," he says. And not just in the United States. If the growth curve for proprietary schools continues, they could be educating more students than any other sector of higher education worldwide by 2020, says Mr. Miller.

The stocks of publicly held for-profit education companies have outperformed the Standard and Poor's 500 by about 40 percentage points in each of the past two years. And companies like Stifel Nicolaus that analyze the market predict that the sector will continue to enjoy a "significant tailwind." Indeed, BMO Capital Markets predicted in the fall that revenue from the for-profit sector would rise by 10 percent per year through 2014.

But a report issued last month by Stifel Nicolaus says there is evidence that the rate of growth may be slowing and that for-profit universities may have seen their largest enrollment gains this past summer and fall. "Although we believe the benefits of the economic cycle will eventually wane, and growth for these entities will slow to more normalized levels (and in some cases turn negative)," says the report, "we see favorable prospects for potential price appreciation."

That doesn't deter Mr. Miller. "When you ask where the capacity is," he says, "the short answer is primarily in our sector. We have the capital to invest the dollars to hire faculty, to make sure technology is up to date, and to make sure these are real skills people can contribute to the economy."