Education profiteers and the public trough

by Hiroaki Sato

NEW YORK — A college or university, especially of a private variety, may not be “an eleemosynary institution,” as Sen. Sam Ervin, of the Watergate hearings, might put it were he alive, but the American insistence on free-market notions has brought the matter to the other extreme in higher education. It has spawned education profiteers. Worse, many of these colleges get most of their “revenues” from the government.

The troublesome question of “for-profit colleges” came to the fore once again this past August, when the Government Accountability Office (GAO) published a report on the fraud they encourage and the “deceptive and questionable marketing practices” they pursue. The Department of Education (DOE) followed it with findings that student loan default rates were rising — with rates at for-profit colleges (11.6 percent) twice as high as those at public ones (6 percent) and three times as high as those at private, nonprofit ones (4 percent).

More recently, there have been a barrage of news reports on the unseemly acts of these for-profit entities. One of them, “Scrutiny Takes Toll on For-Profit College Company” (The New York Times, Nov 9), described the lawsuits and other problems Kaplan faces. The GAO says there are 2,000 for-profit colleges, of which 15 are publicly traded corporations. Kaplan is one of the latter.

As it happens, I looked at Kaplan at some length seven years ago, when the money-making “higher-education industry” was attracting attention and, along with it, the problems inherent to it.

Kaplan Inc. traces its origins to 1938 when Stanley Kaplan, then 19, started home tutoring in Brooklyn. But his business acumen flared when he came across SAT samples shortly after World War II.

The SAT, “scholastic aptitude test,” is a college entrance examination devised in 1926 as part of an effort to democratize the entry to prestigious universities on the East Coast, such as Columbia and Princeton. Harvard later picked it up as a means of providing scholarships to poor students. It was not meant, in short, for profit making. (For some time now only the acronym SAT has been used to avoid any suggestion of high-handedness.)

The pecuniary opportunity Kaplan saw lay in helping the test-takers. He figured at once that much of the ability to respond to the multiple-choice format was akin to learning to play the piano or ride a bicycle. It was all “practice, practice, practice,” as he put it in his autobiography.

He was so successful with this business that he sold his company to The Washington Post, in 1984, although Kaplan Inc. kept losing money after the newspaper company bought it. The turning point came, it is said, in 1994 when the young marketing man Jonathan Grayer was made the CEO, with part of his pay to come in stock options. Naturally, the Harvard Business School graduate pushed for rapid expansion until Kaplan’s revenues for the first time exceeded those of the newspaper, in the third quarter of 2003.

But a couple of problems were becoming unmistakable by then.

One was the undue stress on marketing. At the end of 2003, the call center in Florida for Kaplan College alone employed 148 people. The pay raise for these “admissions advisers” was determined by the number of students they recruited. Also, any “adviser” who failed to recruit the target number of students two quarters in a row was fired. This was a surefire way to abuses and fraud.

Second, the main target for recruitment for two-year colleges was the people with low income. The average income of the recruits was a little above that of high-school dropouts but far below that of high-school graduates. This suggested that a sizable portion of those who attended Kaplan colleges might not be able to finish the required courses or, even if they did, many were unlikely to find magically superior wages and salaries as often promised.

Third, at the end of 2003, Kaplan colleges heavily relied on government student loans and grants. This was the result of its acquisition, in 2000, of Quest Education Corp., which “managed” 30 two-year colleges across 11 states. The investor Warren Buffett famously thought only for 10 minutes before approving the deal. The test-preparation company began transforming itself into an “education management” corporation.

The reliance on government funds was possible because of Title IV of the Higher Education Act of 1965 and subsequent laws intended to promote college education. The U.S. government today has an array of student loans and grants. Among them are Pell grants for poor students that need not be repaid.

Following the acquisition of Quest, the Washington Post Company said in a SEC statement that more than 70 percent of Quest’s income came from government funds and that the proportion would continue in the future. It would prove an underestimate. Today, 66 percent of the students enrolled at Kaplan receive Pell grants — the highest rate among the publicly traded “institutions for higher education.” Altogether, 91.5 percent of Kaplan’s income comes from the federal government.

For-profit colleges haven’t slackened their marketing efforts. Today, they allocate a bewildering 30 percent of their income for marketing. It was John Kenneth Galbraith who observed that modern American corporations had to create Madison Avenue. But these colleges are supposed to exist for education, living on public funds. Why should they expend one-third of the public money they get to get more public money?

And their academic accomplishments are dismal. The graduation rate for for-profit four-year colleges is 22 percent today, in contrast to 55 percent for public colleges and 65 percent for private ones. Kaplan’s is 44 percent, but its federal loan default rate — another academic measure — stands at 17 percent, the second worst among the publicly traded colleges. The worst is that of Corinthian Colleges, which the DOE raided three years ago for suspected wrongdoing.

Then there is the real aim of these for-profit entities: to enrich those who run them. For their staggering salaries, you can check the Nov. 10 Bloomberg article, “Executives Collect $2 Billion Running U.S. For-Profit Colleges.”

To cite one example: Robert Silverman, CEO of Strayer Education, was paid $41.9 million last year, while Shirley Ann Jackson, president of Harvard University, was paid $800,000.

Hiroaki Sato is a translator and essayist who lives in New York.