For-profit schools take a course in politics

  • Article by: JIM SPENCER
  • Star Tribune
  • February 2, 2011 - 7:36 AM

Capella Education CEO Kevin Gilligan has been doing a lot of politicking recently.

In recent months, Gilligan met personally with five members of Minnesota's congressional delegation, including Sens. Amy Klobuchar and Al Franken. He met twice with U.S. Secretary of Education Arne Duncan.

Minneapolis-based Capella -- one of the nation's larger for-profit colleges with an enrollment of 38,000 -- also paid $100,000 last year for lobbyists to talk to legislators and regulators.

The message from Capella, as well as the entire for-profit college industry, has been the same: Stop new regulations that would withhold federal education loans and grants from for-profit colleges with high student debt and low student loan repayments.

Critics contend that too many students of for-profit programs leave with useless degrees and heavy debt. Now, new rules would stop funding to individual programs when two-thirds of their students do not pay down the principal on education loans and do not earn enough to do so, a measure called "gainful employment."

For all its lobbying, Capella does not appear at risk of losing federal funds. Its student loan default rate is 3.3 percent, less than a third of the overall average at for-profit colleges and lower than the averages for public and nonprofit private schools.

But the company, an industry leader that got 78 percent of its $335 million in revenue from government loans and grants in 2009, remains part of an expensive, time-consuming and sometimes acrimonious campaign by the entire for-profit college sector to safeguard billions of dollars it receives each year. Without that funding, the industry argues, thousands of students couldn't afford to enroll.

There would also be an obvious toll on the companies. "I think they're spending this money appropriately," said Peter Appert, an analyst with Piper Jaffray who specializes in publicly traded for-profit colleges. "For a while, it seemed like for-profit education companies had no friends."

In the 2009-2010 election cycle the industry donated millions of dollars to the campaigns and political action committees of nearly 100 Democratic and Republican congressional candidates. More than $100,000 went to Rep. John Kline of Minnesota's Second District, the new Republican chairman of the House Education Committee.

"Congressman Kline is deeply involved in these issues," said Kent Jenkins, communications chief of Corinthian Colleges Inc., a publicly traded for-profit college group that gave $15,750 to Kline's political action committee. "We're trying to make sure these issues are addressed in a way that is constructive."

Kline was one of three Minnesota congressmen Gilligan met with recently; the others were Democratic Reps. Tim Walz and Keith Ellison. Capella contributed money to Kline and Walz, and Kline also got a personal donation from Gilligan.

Kline vows to pass legislation with bipartisan support to undo or neuter gainful employment regulations if the U.S. Department of Education implements them. "We've looked at the regulations, and they're not just aimed at bad actors," he said. "They're aimed at everyone."

Media campaign

In addition to campaign and PAC contributions, for-profit colleges spent more than $6 million on lobbyists in 2010. In recent months, a trade group funded television, print and radio advertising that urged viewers, readers and listeners: "Don't let Washington get in the way."

Gathering and disclosing to the government student income and debt information bothers many for-profit colleges, said Harris Miller, who heads the Association of Private Sector Colleges and Universities, which paid for the ads. His members would prefer performance benchmarks.

Miller's group hired a consultant who estimated the new rules would displace 300,000 for-profit college students in the first two years after implementation, including a disproportionate number of poor and minority students.

The group has 1,500 member schools nationwide, including 14 member institutions and a total of 42 campuses in Minnesota. It passed out $359,946 in political contributions to 91 candidates or their political action committees during the 2009-2010 election cycle. Like Gilligan, Miller met personally with Kline and Secretary of Education Duncan to express his opposition to the proposed rules.

Capella worries about "one- size-fits-all" regulations, said Mike Buttry, the school's corporate communications director. Capella, Buttry said, differs dramatically from many other for-profit schools in that it has mostly graduate students, not students seeking certificates, associate or bachelor degrees.

"We're not saying don't do anything," Buttry said of Gilligan's meetings with politicians and regulators, "we're saying get it right."

Ellison, who supports the new rules, along with groups such as the NAACP, the National Council of La Raza and the National Consumer Law Center, believes the education department did get it right.

"If your business model is not based on bilking the public," Ellison said, "you've got nothing to worry about."

That hasn't stopped the controversy from taking a toll on the stock prices of publicly traded for-profit colleges. Shares of the Apollo Group, a $4.9 billion giant that owns the University of Phoenix, have lost about a third of their value over the past year. Capella shares are down more than 20 percent in that period.

Piper Jaffray's Appert said the first step in getting such stocks back on track is "regulatory clarity."

One obstacle: Several hedge funds that have taken short positions and stand to profit from declining for-profit college shares continue to lobby for stricter regulations. One prominent short seller, Steve Eisman, testified before the Senate Health, Education, Labor and Pensions (or HELP) Committee and met with Department of Education officials. Eisman likened high default rates by for-profit college students to the subprime mortgage scandal.

Still, with the industry lobbying furiously, the education department delayed putting the rules in place late last year. It now promises implementation sometime in early 2011.

Pressure to dilute, delay or even defeat the regulations seems to be gathering momentum.

Klobuchar said she supports efforts to crack down on for-profit schools that take advantage of students. But, she added, "We also need to make sure we aren't inadvertently penalizing effective programs that we have in Minnesota, like Capella and Walden Universities, which provide flexible educational opportunities for Minnesotans who are balancing a career and school."

Mixed marks

Supporters of the proposed policies point to a Government Accountability Office audit that alleged deceptive, high-pressure sales tactics, as well as a study of 16 for-profit colleges by the HELP committee that found that 57 percent of students dropped out within a year, almost all carrying loans they would be hard-pressed to repay. These schools, the committee report concluded, "are more likely to offer their students debt without a diploma."

Noting generally high profits among for-profit colleges, which now enroll roughly 2 million students, the committee report further concluded that "some for-profit schools are efficient government subsidy collectors first and educational institutions second."

Minnesotan Jamie Durand said a for-profit school, Brown College, recruited her out of high school. Durand, now 25, attended Brown for four years, got a degree in broadcasting and graduated with $80,000 in debt. She struggled to make payments. Interest accrued. Today, Durand says her total college debt has ballooned to $130,000.

But that experience isn't universal. Twin Cities human resources professional Susan Smith praised the online graduate program she's taking at Capella. "I travel a lot, and it gives me the opportunity to go to school," Smith said. "I can be logging on at 11 at night and still doing homework."

The two cases sum up the dilemma that Franken said he and his colleagues face.

"For-profit schools that don't actually educate and prepare students for employment shouldn't receive taxpayer dollars," said the senator, who sits on the HELP committee. "I'll be working with my colleagues this year on coming up with common-sense measures to help separate the good actors from the bad."

Star Tribune computer-assisted reporting editor Glenn Howatt contributed to this report. Jim Spencer • 612-673-4029

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