New school rules could take a toll on Capella

Investors are paying hefty tuition for Capella Education's crash course in the ways of Washington.

Shares ofthe for-profit university, which hit an all-time high of $98 in April, lost almost 40 percent of their value after Congress and regulators began raising sharp questions about the value and cost of a for-profit education. Revelations about abusive student recruiting tactics, questionable degrees, burdensome debt and high student loan default rates followed, and the Department of Education is set to release new rules early in 2011 that could make it tougher for Minneapolis-based Capella and other for-profit colleges and universities to qualify for federal student aid.

Capella has not been named in any of the investigations, and there's plenty of evidence, including higher graduation rates and lower student-loan default rates, to suggest that it may be one of the industry's better operators. But if regulators come down hard on the entire industry, it will feel the sting.

"We've been successful because our learners have been successful," said Kevin Gilligan, Capella's chief executive officer. "The key to sustainability in this business is providing our students with a quality education."

This isn't the first time the for-profit education sector has found itself in the dean's office. On at least three previous occasions -- the 1940s, 1970s and early 1990s -- regulators stepped in and imposed tougher rules and restrictions on the industry. Over time, industry lobbyists eliminated or weakened those restrictions, and the industry surged. In 1997, there were 170 private for-profit four-year institutions. In 2007 there were 490.

One of the supreme ironies of the for-profit education sector is its almost total dependence on taxpayer dollars, in the form of federally subsidized education grants and loans. The average for-profit school gets 84 percent of its revenue from federally subsidized loans and grants, and many schools max out at the federal limit of 90 percent.

How are they doing with our money? Not so good. Students who attend for-profit schools are less likely to graduate and two to five times more likely to have debt of $40,000 or more. And while for-profit schools represent only 11 percent of all higher education students, they account for 26 percent of all student loans and 43 percent of all loan defaulters.

At the Minnesota School of Cosmetology, for example, the default rate on federal loans as of 2008 was 16.9 percent. At the University of Phoenix, which has 200 campuses and a total enrollment topping 450,000, it was 12.9 percent. Capella's default rate was 3.3 percent, about twice the rate at the Twin Cities campus of the University of Minnesota.

Capella, which began life as a graduate school, has no campus. Its 38,000 students are scattered around the country and attend class online, on their schedule. Three-quarters of them are graduate students, and about half earn their degrees in six years or less, twice the rate for most for-profit four year colleges. The average age of a Capella student is 39, and most attend part time.

"Most of our students come here wanting to know exactly what they are going to get out of this experience," said Kim Pearce, who directs a unit that helps students and faculty track and measure academic progress against clearly defined outcomes. Earlier this year Capella was one of four schools, and the lone for-profit, to win an award from the Council for Higher Education Accreditation for its work on outcomes-based assessment and accountability.

Unlike many of its peers, Capella does not offer two-year associate degrees or certificates. Nor will it accept anyone younger than 24 into its bachelor's program, unless they are on active duty in the military. Still, in November Capella instituted an additional assessment test for bachelor's degree applicants after it noticed that dropout rates for those students, which currently average slightly more than 50 percent, were beginning to creep up.

Capella is trying to get its message across in Washington. Through the first six months of this year it spent $100,000 on lobbying, more than three times what it spent in all of 2009. Gilligan also has met privately with Education Department officials, hoping to influence the shape of the final rules on a new "gainful employment" standard.

With so many of its students in graduate programs, that could be a problem for Capella. The total cost of those programs can range from $27,000 to $61,000, and the payoff -- in terms of higher wages -- may not come in three or five years, if at all.

"There are bad actors and there are bad practices, and they need to be addressed," Gilligan said. "At the same time, you have to be careful not to develop standards that punish everyone."

But as we know from our own school days, sometimes the whole class pays the price when just a few act up.