Senate Democrats took aim at for-profit colleges at a hearing on Thursday, promising to crack down on "bad actors" in the rapidly growing sector to protect federal student aid dollars from being wasted through fraud and abuse.
"This is taxpayer money," said Sen. Tom Harkin, the Iowa Democrat who is chairman of the Senate's education committee. "We have to seriously question the profit margins and how much is going into actual instruction."
He added that "those that know how to game the system are pulling a lot of good schools into the vortex" of bad practices. "That compels us to do something about it and stop it before it goes too far," he said.
Mr. Harkin didn't say what he had in mind but promised additional hearings on for-profits, with the next to come in July.
"We're going to be delving into this," he said.
Thursday's witness list was stacked with critics of the for-profit sector, including a former California deputy attorney general who prosecuted cases against for-profit colleges and a student who said she was defrauded by a for-profit college.
The most critical—and most controversial—witness was Steven Eisman, a hedge-fund manager who, as a short-seller, would profit from a drop in the value of stocks of for-profit colleges. Mr. Eisman made his reputation (and a fortune) betting against subprime mortgages, and in his prepared testimony, he likened for-profit education to the real-estate market before the collapse, with easy credit driving prices ever higher and large defaults looming.
"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."
He accused for-profit colleges of peddling false hopes to "the most vulnerable of society," much as mortgage issuers did with low-income home buyers.
"We just loaded up one generation of Americans with mortgage debt they can't afford to pay back," he said. "Are we going to load up a new generation with student-loan debt they can never afford to pay back?"
Mr. Eisman predicted that students of for-profit colleges would default on $275-billion in student loans over the next decade, and suggested that for-profit colleges be required to bear some of the loss when their students default.
Meeting 'an Enormous Unmet Need'
The task of defending for-profits was left to Sharon Thomas Parrott, the only representative of the sector to testify at Thursday's hearing. Ms. Thomas Parrott, who is senior vice president of government and regulatory affairs and chief compliance officer for DeVry Inc., said that for-profit colleges "empower students to achieve their career goals" and serve students who have been underserved by nonprofit colleges.
"Institutions like ours grow for a reason," she said. "There is an enormous unmet need, especially among nontraditional students."
She got some tepid support from Republicans on the panel, who acknowledged problems in the sector, but cautioned against a rush to regulate.
"In combating this behavior, it is essential that we use a scalpel and not a machete," said the panel's top Republican, Sen. Michael B. Enzi of Wyoming.
Thursday's hearing comes amid increased federal scrutiny of the for-profit sector, which educates a growing share of students and is highly dependent on federal student aid. Enrollment at for-profit colleges has grown by 225 percent over the past 10 years, with most students borrowing to pay for their education. While for-profits enroll fewer than 10 percent of American college students, they accounted for 23 percent of Pell Grants and federal student loans in 2008, and for 44 percent of defaults among borrowers who entered repayment in 2007, according to a report issued by Sen. Harkin's office.
Congress, which recently provided billions of dollars in additional Pell Grant aid, wants to be sure that taxpayer dollars are being spent wisely. Last week, the education committee of the House of Representatives held a hearing to examine whether accrediting agencies are doing enough to ensure that students studying online are getting adequate instruction for the degrees they earn.
But weeding out the "bad actors" in the sector won't be easy, as lawmakers acknowledged at Thursday's hearing. Though the federal government and accreditors collect reams of data from colleges, there are still significant gaps in information about for-profit colleges' success rates.
"There is much that we don't know," said Mr. Harkin. "We don't know how many students graduate, how many get jobs, how schools that are not publicly traded spend their Title IV dollars, and how many for-profit students default over the long term. More broadly, we don't know exactly what risk we are taking by investing an increasing share of our federal financial-aid dollars in this sector."
When Ms. Thomas Parrott said she would be "happy to share" DeVry's data on its graduation and placement rates, Mr. Harkin expressed doubt about how the numbers are calculated.
"Statistics can be self-serving when they're produced by the entities that are getting the taxpayer dollars," he said.
During the first half of the Senate hearing, lawmakers heard from Kathleen S. Tighe, inspector general of the Education Department, who said that 70 percent of her agency's postsecondary investigations center on for-profit colleges. She described cases in which colleges have falsified students' eligibility for aid, exploited loopholes in a ban on compensating recruiters based on enrollments, and failed to return federal aid money when students withdrew.
She praised the Education Department's proposed new rules on for-profits, which would tighten the ban on incentive compensation, among other things, and called for stricter rules on distance education. She also suggested that the government track student-loan borrowers all the way through repayment, to get a better measure of how many students default. The government now tracks loans through only two years, though it will soon switch to three.
Later Thursday, Harris N. Miller, president of the Career College Association, expressed frustration with the hearing, saying it failed to provide a big-picture look at the issues facing higher education.
"Rather than being insightful and providing information," Mr. Harris said in a conference call with reporters, the hearing "led to a certain amount of confusion. There was no attempt to offer any context or balance."
For more coverage of the hearing, see The Chronicle's live tweets.