For-Profit Education

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Date: 2019
Publisher: Gale, a Cengage Company
Document Type: Topic overview
Length: 1,928 words
Content Level: (Level 5)
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More than 50 million students in the United States attended public elementary and secondary (K–12) schools in 2017. Public elementary and secondary schools, including public charter schools, are funded by taxpayers and governed by local school boards and state governments. For-profit companies, both privately and publicly held, manage a small percentage of the nation’s nearly 7,000 charter schools. While some states prohibit this practice, for-profit companies play other roles in K–12 education by providing goods and services through curriculum design, professional development, standardized testing, facilities management, and other partnerships that allow schools and businesses to work together. In the early twenty-first century, several companies involved in for-profit K–12 education came under fire for failing to achieve anticipated improvements in student performance, while other companies damaged the reputation of the for-profit education industry through questionable and sometimes illegal business practices.

For-profit companies have also drawn widespread attention for their participation in the postsecondary education sector. Of the 17 million students pursuing an undergraduate degree in 2015, 13.1 million attended a public college or university, 2.8 million attended a private nonprofit institution, and 1.1 million undergraduate students were enrolled in an undergraduate program managed by a for-profit corporation. Many for-profit colleges and universities have been accused of misleading students and abusing the federal student loan program, leading to government investigations and reprimands. Proponents contend that the potential benefits of for-profit education should not be overshadowed by the misdeeds of a handful of bad actors. In both K–12 and postsecondary education, companies have struggled to create sustainable business models and many have ceased operations or been acquired by other companies.

Elementary and Secondary Education

Though the US constitution does not guarantee a right to free education, unlike many other developed nations, state laws require that the government provide free primary and secondary education (elementary through high school) for residents, typically students between the age of five and twenty-one years old depending on the state. For-profit businesses have several opportunities to generate revenue by providing elementary and secondary education services. Tuition-funded instruction, such as afterschool music lessons or language courses, may be offered by a for-profit institution but can also be offered through public programs or nonprofit organizations. Private elementary and secondary schools can be run as either for-profit or nonprofit entities, though most private elementary and secondary schools choose to operate as nonprofit entities in order to receive donations and financial gifts without being taxed. Much more common than a company or private individual owning and operating its own school, for-profit companies have offered their services to public and private schools, as well as homeschoolers, in the form of an individual service, such as providing curriculum or testing services, or through the management of a charter school. A charter school enters into a performance contract with a local school board to receive public funds while being administered by an independent body, such as a community organization or a private company. A company that administers a charter school is referred to as an education management organization (EMO).

The first charter schools in the United States opened in Minnesota in 1992, after the state legislature passed the nation’s first charter school law the prior year. Many states passed similar laws in the decades following, with forty-three states and the District of Columbia having enacted charter school laws as of January 2018. An EMO contracts with the local school district or other charter-granting body to manage the charter school for a fee. State laws feature varying rules for charter schools, with common requirements including mandates to provide free education, open admission policies, a nonreligious curriculum, and an adherence to specific academic standards that are often accompanied by state-mandated testing. Less than 15 percent of US charter schools are managed by EMOs, though companies that also operate EMOs often provide other services to charter schools. Beyond the requirements stipulated in a school’s charter, charter schools face less oversight and regulation than traditional public schools. Proponents of charter schools contend that this greater degree of autonomy allows the schools to tailor lessons to student needs and eliminate inefficiencies without navigating a burdensome bureaucracy.

Having experimented with allowing for-profit EMOs to manage public charter schools, several states, including Mississippi, New Mexico, Rhode Island, Tennessee, and Washington, have since enacted legislation banning it or heavily restricting it. More than three quarters of the charter schools run by for-profit EMOs can be found in Michigan, Florida, Ohio, and Arizona. Though many educators had long opposed relinquishing management duties to a for-profit company, much of the backlash stemmed from evidence that EMOs were unable to fulfill their promises to improve student performance and reduce costs. In states where the direct management of a charter school by an EMO has been restricted, the charter school is typically managed by a nonprofit entity that remains somewhat beholden to the school’s investors.

In the realm of K–12 education services, the largest private company to offer such products is KinderCare Education, originally established as Knowledge Universe by controversial financier Michael Milken, who was indicted for racketeering and securities fraud and served time in prison before becoming involved in for-profit education. From its inception, the company sought to revolutionize education and involved itself in many projects, including early childhood learning centers, daycare centers, educational toys, and a wide range of online curriculums for children and adults. As Knowledge Universe, the company helped launch K12 Inc., the largest EMO in terms of enrollment, which offers both online charter schools and tuition-based online schools where local laws do not allow for charter schools. Defenders of for-profit online schools maintain that companies such as K12 Inc. are satisfying a demand in the marketplace that traditional schools have failed to fulfill. In rural areas where the talent pool for local teachers may be limited, for example, students may have a greater variety of instructors from which to learn with an online education option.

For-Profit Colleges and Universities

Though Dutch settlers established for-profit colleges in the country more than a century before the United States claimed its independence, for-profit colleges and universities became more prominent and grew in number following amendments in 1972 to Title IV of the Higher Education Act of 1965. The amendments stipulated how federal aid, including Pell grants and federal student loans, would be distributed, including aid to students at for-profit colleges. By allowing for-profit colleges to capitalize on federal student aid programs, these amendments enabled for-profit colleges to grow rapidly. In the first decades of growth for the proprietary higher education industry, lawmakers and educators developed concerns that these schools might be taking advantage of their students and the federal government by offering poor substitutes for a traditional, nonprofit education.

Investigations by the Federal Trade Commission (FTC) in the 1970s determined that widespread fraud had occurred in for-profit higher education. The FTC recommended broad reforms, though many of the recommendations were challenged in court and could not be implemented. Investigations launched by the Government Accountability Office (GAO) in the 1980s and by the Senate Permanent Subcommittee on Investigations in the early 1990s came to similar conclusions as the FTC. As of 1992, over 20 percent of all borrowers had defaulted on their federal student loans. Among those who had defaulted, almost 50 percent had attended for-profit institutions, despite students at for-profit schools making up only 20 percent of total borrowers. To address this phenomenon, Congress enacted the 85-15 rule as part of 1992 amendments to the Higher Education Act of 1965, which determined that a for-profit college could only receive 85 percent of its tuition from federal Title IV student aid. When Congress reauthorized the Higher Education Act in 1998, the amount that for-profit colleges could receive from federal Title IV sources was increased to 90 percent, resulting in the 90-10 rule.

For-profit colleges and universities can operate in traditional classrooms or online. Many for-profit colleges, such as DeVry University, have physical locations throughout the country. Others, such as Kaplan University and Strayer University, operate primarily online. Online for-profit university programs came under scrutiny following a 2010 investigation by the US Government Accountability Office that found all fifteen of the schools it had investigated regularly misled students about the cost and duration of their programs as well as the schools’ graduation rates and the employment prospects for students who do graduate. In addition, nearly one-third of the institutions were found to have encouraged students to engage in fraud by falsifying financial aid to secure federal loans. At the time, for-profit universities, including those offering online courses, were receiving more than $20 billion in federal loans and more than $4 billion in federal Pell Grants. A 2013 Harvard study determined that students at for-profit schools had lower completion rates, fewer employment opportunities, lower earnings, and higher loan default rates than students at public colleges and universities.

The Apollo Education Group, which began in 1973 with the University of Phoenix, its most prominent and profitable product, manages many for-profit education systems and has locations in Australia, Brazil, Canada, Chile, India, Mexico, South Africa, and the United Kingdom. Both the management group and the university became the subjects of several lawsuits and government investigations in the early twenty-first century, including an investigation into providing financial incentives for recruiters that resulted in the group paying a $67.5 million fine to the US Department of Education (ED) in 2009.

Though the 90-10 rule regulates the amount of Title IV funds that a for-profit college or university can receive, those funds do not include education assistance granted to members of the US military. In 2008 Congress widely expanded education assistance to servicemembers and veterans through the Post 9/11 Veterans Educational Assistance Act as part of a supplemental appropriation act, commonly referred to as the Post 9/11 GI Bill. Recruiters at several for-profit colleges seized on the money-making opportunities created by the Post 9/11 GI Bill. In 2015 the US Department of Defense (DOD) placed restrictions on the University of Phoenix, banning the school from recruiting on military bases and denying tuition assistance and loans for students to enroll there. Employees from the University of Phoenix and several Republican lawmakers criticized these actions by the DOD, arguing that the University of Phoenix had been unfairly targeted. The ban was lifted in 2016 as representatives from the DOD worked with the school to prevent the exploitation of students from the military.

Corinthian Colleges, another for-profit higher education system, came under fire for committing widespread fraud and misrepresentation, resulting in a $29.7 million fine by the ED. Within months of being charged, Corinthian Colleges shut down their remaining campuses and declared bankruptcy. A group of Corinthian students urged the ED to forgive all loans made to Corinthian students, citing that systemic fraud affecting every student had been committed and submitting “borrower defense to repayment” applications to the ED. The administration of President Barack Obama processed many of these claims and enacted new guidelines to prevent student fraud by for-profit colleges.

The Obama-era changes face significant challenges, however, following the appointment of Betsy DeVos as secretary of education by Obama’s successor, Donald Trump. In her first year as head of the ED, DeVos, a prominent Republican donor and supporter of limited government, processed very few debt cancellation claims. Of those claims processed by the ED, approximately 40 percent were denied and the remaining were offered only a fraction of the debt relief requested by former students. DeVos was also criticized for appointing a former dean of DeVry University, Julian Schmoke, to lead the Student Aid Enforcement Office, a unit within the ED created by the Obama administration to combat fraud in higher education.

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Gale Document Number: GALE|PC3010999081