In the late 1980s, for-profit colleges, then better known as "trade schools," were a nationwide scandal. Newspaper reports, hidden cameras, and a Senate investigation found that some did their recruiting outside welfare offices and homeless shelters, collected tuition money from the federal government, and offered useless courses or folded overnight. Student-loan defaults peaked in 1992 at 22%; for-profit schools accounted for just a fifth of all loans yet nearly half of all defaulters. Some 1,500 of the nation's then 4,000 trade schools lost accreditation, and the feds tightened regulations. Two trade-school groups merged to form the Career College Association and began million-dollar lobbying campaigns.
Even as for-profit colleges go mainstream, the Government Accountability Office reported in September that students at for-profits are much more likely to default on student loans — 23% default after four years compared to fewer than 10% of public-university grads. For-profit investors attribute the poor financial track record to the schools' population of working adults and low-income people. "Usually, these reports out of the government are not comparing apples to apples," says Michael Clifford of Significant Federation. "Our students are adult learners with very different persistence percentages than the normal traditional colleges."
"Default rates are where the rubber meets the road," says Kevin Carey of the think tank Education Sector, who concedes that the for-profit sector has a role to play. "The government should crack down on misleading advertising and move more aggressively to cut colleges with high loan-default rates out of the federal financial-aid system. If students can't pay back their loans, then by definition they are not getting sufficient value for their money."
A version of this article appeared in the December/January 2010 issue of Fast Company magazine.