TCF senior fellow and director of higher education Carolyn Fast testified before the New Jersey State Senate Higher Education Committee on October 10, 2024. Her testimony, a version of which you can read below, explains how for-profit colleges pose higher risks for students and taxpayers because they are subject to fewer legal constraints than nonprofit and public colleges and identifies not only the current tools New Jersey has at its disposal but also additional common sense actions that would provide much-needed protections for New Jersey students and taxpayers.
Good morning Chair Cryan, Vice-Chair Zwicker and other members of the Committee.
Thank you for this opportunity to submit testimony to the New Jersey State Senate Higher Education Committee. My name is Carolyn Fast, and I am director of higher education policy and a senior fellow at The Century Foundation (TCF). The Century Foundation is a progressive, independent think tank that conducts research, develops solutions, and drives policy change. Prior to joining The Century Foundation, I was special counsel in the New York Attorney General’s Office, where I investigated and brought enforcement actions against predatory for-profit colleges.
I am pleased to present remarks on strengthening oversight of for-profit colleges to better protect New Jersey students and taxpayers.
In 2023, more than 11,000 New Jersey students attended for-profit colleges. For-profit college students pursue higher education in hopes of improving their employment opportunities and financial circumstances. Unfortunately, in many cases, for-profit colleges lure students into high-cost, low-value programs that leave students in a worse position than if they had never enrolled, with dim job prospects and unmanageable student debt.
For-profit college students are more likely to take on student debt, leave school with higher student debt burdens, and have a higher chance of defaulting on their student loans than students in other sectors. A 2020 analysis found that for-profit college students make up 8 percent of all post-secondary students but account for 30 percent of student loan defaults. For-profit college students also have worse labor market outcomes than students at similarly-selective public colleges. In addition, for-profit schools’ built-in incentive to maximize profits for owners and shareholders has led to widespread fraud and deceptive practices in the sector. To make matters worse, for-profit colleges often target veterans, low-income students, and students of color, a practice sometimes referred to as “predatory inclusion.” Black students are overrepresented at for-profit colleges, and this may be a factor contributing to higher rates of student loan debt among Black students.
One reason that for-profit colleges pose higher risks for students and taxpayers: for-profit schools are subject to fewer legal constraints than nonprofit and public colleges.
Nonprofit legal status comes with significant rules on conduct. Nonprofit colleges are subject to prohibitions on how the institution uses funds: when the school generates revenues, these revenues must be reinvested in the institution. Colleges’ nonprofit legal status also requires that decisions about the schools’ tuition, operations, instruction, and recruiting practices are supervised by a board of independent, disinterested individuals charged with furthering the institution’s educational mission.
In contrast, for-profit schools are not subject to any requirements to reinvest revenues into the institution. Decision-making about tuition, operations, instruction, and recruiting practices are instead focused on maximizing profits for the company’s owner or shareholders. For-profit owners and investors pocket any tuition money and fees that the school doesn’t spend on instruction and related costs, creating an incentive for such schools to charge as much as possible, spend as little on education as they can, and to enroll as many students as possible, regardless of whether those students will benefit from the program. As a result of the incentive to generate profits for the owners or investors, for-profit colleges on average spend significantly less on student instruction relative to tuition price when compared to public and nonprofit colleges.
The incentive to maximize profits also leads for-profit colleges to be far more likely to engage in aggressive and sometimes deceptive marketing practices and other misconduct. There are many examples of for-profit abuses that have harmed New Jersey students and taxpayers. For example, in 2023, the New Jersey Attorney General obtained a $4.6 million settlement with for-profit Sollers College resolving allegations of deceptive practices, including using false and misleading advertisements to lure students into a high-cost information technology program. Also in 2023, the New Jersey Attorney General reached a $640,000 settlement with for-profit Capri Institute of Hair Design to resolve allegations of misconduct after the school closed with no warning to students. In 2022, New Jersey students from for-profit college chain Corinthian Colleges were found to be entitled to federal student loan discharges based on the college’s serious misconduct, which included deceptive recruiting practices, and in 2020, the New Jersey Attorney General reached a $1.85 million settlement benefiting students of the now defunct for-profit chain ITT Tech. For-profit schools in New Jersey have also been found liable for violating state consumer protection laws in private lawsuits, including a $9.2 million verdict against Star Career Academy.
These state actions came at the heels of multiple national enforcement actions against for-profit colleges, include a $100 million settlement obtained by the Federal Trade Commission against for-profit chain DeVry University for deceptive practices and a $95.5 million settlement by the U.S. Department of Justice against for-profit chain Education Management Corporation, also for deceptive practices.
For-profit colleges are also more likely to close their doors without warning, disrupting students’ education. In recent years, large for-profit chains enrolling tens of thousands of students, including ITT Tech, the Art Institutes, and Corinthian Colleges, all closed with little warning, harming thousands of New Jersey students and costing taxpayers millions in federal loan discharges.
For-profit colleges pose significant risks not only to students, but also to New Jersey taxpayers, who help foot the bill for expensive, low-value programs at for-profit schools that receive millions, or in some cases, even billions in taxpayer funding through the schools’ participation in federal financial aid funding programs. Not only do taxpayer dollars support high-cost, low-value programs offered by for-profit colleges, but taxpayers are also left to foot the bill for federal loan discharges when for-profit colleges close without warning. In addition, some for-profit colleges in New Jersey receive New Jersey taxpayer funds in the form of New Jersey Tuition Assistance Grants (TAG). In the 2021–2022 academic year, more than $10 million in TAG funding went to for-profit colleges.
While the state provides Tuition Assistance Grants to New Jersey students to help make college more affordable, schools that seek to deliver profits to owners often see additional funding as a reason to raise tuition. Researchers with the Federal Reserve Bank of New York found that for-profit colleges raised tuition at nearly four times the rate of not-for-profit colleges. For-profit schools that are eligible for federal financial aid programs charged 75 percent more than comparable programs where students pay out of pocket. Following one expansion of student aid, executives at the for-profit University of Phoenix told investors that they would be raising tuition to match the expansion of available aid—with no connection to any increase in educational value.
While for-profits pose a host of risks to students and taxpayers, New Jersey has the tools to strengthen oversight of these institutions to better protect students and taxpayers. In fact, New Jersey has already demonstrated leadership in protecting students and taxpayers from investing in high-cost, low-value programs: in 2022, New Jersey passed legislation establishing performance standards for career training programs. The legislation establishes that career-focused programs must leave students with manageable debt relative to their earnings. The legislation establishes a “tuition-and-fees-to-earnings ratio” standard that will prevent career-oriented programs from charging tuition and fee amounts that are out of proportion to program graduates’ anticipated earnings. The law will help prevent students and taxpayers from investing in career training programs that provide little or no benefit and leave them with unmanageable debt. It will also create incentives for schools to lower tuition, improve program quality, and/or shift resources into higher-value programs, and away from overpriced, low-value programs.
While the New Jersey performance standard legislation is a significant step forward, more must be done to protect New Jersey students and taxpayers from the risks posed by for-profit programs. New Jersey can strengthen protections for for-profit students by setting a minimum requirement for instructional and student support spending relative to tuition costs for for-profit college programs. Research indicates that spending on instruction relative to tuition is one of the most important factors in promoting students’ success in college. Schools that answer to owners and investors spend the least on instruction in comparison to what they collect in tuition, while public colleges spend the most on instruction relative to tuition.
Setting minimum requirements for for-profit schools investment in educational spending will have several benefits. First, an instructional spending and student support services requirement will help to counteract the incentive for for-profit institutions to allocate the lowest amount possible to instruction and student support in order to maximize profits for the owner or investors. It would also counteract for-profit institutions’ incentive to raise tuition costs to the highest possible level and will help to keep tuition costs more in line with the costs of providing instruction and student support services. In addition, since allocation of tuition to instructional spending is linked to better outcomes, the instructional spending benchmark will also help improve program quality and student outcomes for New Jersey students.
New Jersey can also help strengthen protections for students at for-profit colleges by establishing a fund to reimburse students for tuition when for-profit schools close without warning or defraud students. This will help to remedy the harm that for-profit students experience when their school closes suddenly, disrupting their education, and will help to ensure that some of the burden of making students whole falls onto the schools, rather than onto taxpayers.
New Jersey can also help prevent for-profit schools from masquerading as nonprofit schools by requiring schools that have recently changed status to provide their Internal Revenue Service reports to New Jersey regulators, who can review to make sure that the schools are in fact operating in a manner consistent with their purported nonprofit status.
New Jersey can also help protect students and safeguard taxpayer funds by phasing out state tuition aid grants for students at for-profit colleges. Redirecting funding to public and nonprofit schools will help to ensure that taxpayer funds are not used to line the pockets of owners or investors, but rather, to support students’ education.
New Jersey is already a leader in higher education, and taking these additional common sense actions will provide much-needed protections for New Jersey students and taxpayers.
Tags: public college, for profit college, Student protections
New Jersey Students and Taxpayers Deserve Better Protections from Predatory For-Profit Colleges
TCF senior fellow and director of higher education Carolyn Fast testified before the New Jersey State Senate Higher Education Committee on October 10, 2024. Her testimony, a version of which you can read below, explains how for-profit colleges pose higher risks for students and taxpayers because they are subject to fewer legal constraints than nonprofit and public colleges and identifies not only the current tools New Jersey has at its disposal but also additional common sense actions that would provide much-needed protections for New Jersey students and taxpayers.
Good morning Chair Cryan, Vice-Chair Zwicker and other members of the Committee.
Thank you for this opportunity to submit testimony to the New Jersey State Senate Higher Education Committee. My name is Carolyn Fast, and I am director of higher education policy and a senior fellow at The Century Foundation (TCF). The Century Foundation is a progressive, independent think tank that conducts research, develops solutions, and drives policy change. Prior to joining The Century Foundation, I was special counsel in the New York Attorney General’s Office, where I investigated and brought enforcement actions against predatory for-profit colleges.
I am pleased to present remarks on strengthening oversight of for-profit colleges to better protect New Jersey students and taxpayers.
In 2023, more than 11,000 New Jersey students attended for-profit colleges.1 For-profit college students pursue higher education in hopes of improving their employment opportunities and financial circumstances. Unfortunately, in many cases, for-profit colleges lure students into high-cost, low-value programs that leave students in a worse position than if they had never enrolled, with dim job prospects and unmanageable student debt.2
For-profit college students are more likely to take on student debt, leave school with higher student debt burdens, and have a higher chance of defaulting on their student loans than students in other sectors.3 A 2020 analysis found that for-profit college students make up 8 percent of all post-secondary students but account for 30 percent of student loan defaults.4 For-profit college students also have worse labor market outcomes than students at similarly-selective public colleges.5 In addition, for-profit schools’ built-in incentive to maximize profits for owners and shareholders has led to widespread fraud and deceptive practices in the sector. To make matters worse, for-profit colleges often target veterans, low-income students, and students of color, a practice sometimes referred to as “predatory inclusion.”6 Black students are overrepresented at for-profit colleges, and this may be a factor contributing to higher rates of student loan debt among Black students.7
One reason that for-profit colleges pose higher risks for students and taxpayers: for-profit schools are subject to fewer legal constraints than nonprofit and public colleges.
Nonprofit legal status comes with significant rules on conduct. Nonprofit colleges are subject to prohibitions on how the institution uses funds: when the school generates revenues, these revenues must be reinvested in the institution. Colleges’ nonprofit legal status also requires that decisions about the schools’ tuition, operations, instruction, and recruiting practices are supervised by a board of independent, disinterested individuals charged with furthering the institution’s educational mission.8
In contrast, for-profit schools are not subject to any requirements to reinvest revenues into the institution. Decision-making about tuition, operations, instruction, and recruiting practices are instead focused on maximizing profits for the company’s owner or shareholders. For-profit owners and investors pocket any tuition money and fees that the school doesn’t spend on instruction and related costs, creating an incentive for such schools to charge as much as possible, spend as little on education as they can, and to enroll as many students as possible, regardless of whether those students will benefit from the program.9 As a result of the incentive to generate profits for the owners or investors, for-profit colleges on average spend significantly less on student instruction relative to tuition price when compared to public and nonprofit colleges.10
The incentive to maximize profits also leads for-profit colleges to be far more likely to engage in aggressive and sometimes deceptive marketing practices and other misconduct. There are many examples of for-profit abuses that have harmed New Jersey students and taxpayers. For example, in 2023, the New Jersey Attorney General obtained a $4.6 million settlement with for-profit Sollers College resolving allegations of deceptive practices, including using false and misleading advertisements to lure students into a high-cost information technology program.11 Also in 2023, the New Jersey Attorney General reached a $640,000 settlement with for-profit Capri Institute of Hair Design to resolve allegations of misconduct after the school closed with no warning to students.12 In 2022, New Jersey students from for-profit college chain Corinthian Colleges were found to be entitled to federal student loan discharges based on the college’s serious misconduct, which included deceptive recruiting practices,13 and in 2020, the New Jersey Attorney General reached a $1.85 million settlement benefiting students of the now defunct for-profit chain ITT Tech.14 For-profit schools in New Jersey have also been found liable for violating state consumer protection laws in private lawsuits, including a $9.2 million verdict against Star Career Academy.15
These state actions came at the heels of multiple national enforcement actions against for-profit colleges, include a $100 million settlement obtained by the Federal Trade Commission against for-profit chain DeVry University16 for deceptive practices and a $95.5 million settlement by the U.S. Department of Justice against for-profit chain Education Management Corporation, also for deceptive practices.17
For-profit colleges are also more likely to close their doors without warning, disrupting students’ education.18 In recent years, large for-profit chains enrolling tens of thousands of students, including ITT Tech, the Art Institutes, and Corinthian Colleges, all closed with little warning, harming thousands of New Jersey students and costing taxpayers millions in federal loan discharges.
For-profit colleges pose significant risks not only to students, but also to New Jersey taxpayers, who help foot the bill for expensive, low-value programs at for-profit schools that receive millions, or in some cases, even billions in taxpayer funding through the schools’ participation in federal financial aid funding programs. Not only do taxpayer dollars support high-cost, low-value programs offered by for-profit colleges, but taxpayers are also left to foot the bill for federal loan discharges when for-profit colleges close without warning. In addition, some for-profit colleges in New Jersey receive New Jersey taxpayer funds in the form of New Jersey Tuition Assistance Grants (TAG). In the 2021–2022 academic year, more than $10 million in TAG funding went to for-profit colleges.19
While the state provides Tuition Assistance Grants to New Jersey students to help make college more affordable, schools that seek to deliver profits to owners often see additional funding as a reason to raise tuition. Researchers with the Federal Reserve Bank of New York found that for-profit colleges raised tuition at nearly four times the rate of not-for-profit colleges.20 For-profit schools that are eligible for federal financial aid programs charged 75 percent more than comparable programs where students pay out of pocket.21 Following one expansion of student aid, executives at the for-profit University of Phoenix told investors that they would be raising tuition to match the expansion of available aid—with no connection to any increase in educational value.22
While for-profits pose a host of risks to students and taxpayers, New Jersey has the tools to strengthen oversight of these institutions to better protect students and taxpayers. In fact, New Jersey has already demonstrated leadership in protecting students and taxpayers from investing in high-cost, low-value programs: in 2022, New Jersey passed legislation establishing performance standards for career training programs.23 The legislation establishes that career-focused programs must leave students with manageable debt relative to their earnings.24 The legislation establishes a “tuition-and-fees-to-earnings ratio” standard that will prevent career-oriented programs from charging tuition and fee amounts that are out of proportion to program graduates’ anticipated earnings. The law will help prevent students and taxpayers from investing in career training programs that provide little or no benefit and leave them with unmanageable debt. It will also create incentives for schools to lower tuition, improve program quality, and/or shift resources into higher-value programs, and away from overpriced, low-value programs.
While the New Jersey performance standard legislation is a significant step forward, more must be done to protect New Jersey students and taxpayers from the risks posed by for-profit programs. New Jersey can strengthen protections for for-profit students by setting a minimum requirement for instructional and student support spending relative to tuition costs for for-profit college programs. Research indicates that spending on instruction relative to tuition is one of the most important factors in promoting students’ success in college.25 Schools that answer to owners and investors spend the least on instruction in comparison to what they collect in tuition, while public colleges spend the most on instruction relative to tuition.26
Setting minimum requirements for for-profit schools investment in educational spending will have several benefits. First, an instructional spending and student support services requirement will help to counteract the incentive for for-profit institutions to allocate the lowest amount possible to instruction and student support in order to maximize profits for the owner or investors. It would also counteract for-profit institutions’ incentive to raise tuition costs to the highest possible level and will help to keep tuition costs more in line with the costs of providing instruction and student support services. In addition, since allocation of tuition to instructional spending is linked to better outcomes, the instructional spending benchmark will also help improve program quality and student outcomes for New Jersey students.
New Jersey can also help strengthen protections for students at for-profit colleges by establishing a fund to reimburse students for tuition when for-profit schools close without warning or defraud students. This will help to remedy the harm that for-profit students experience when their school closes suddenly, disrupting their education, and will help to ensure that some of the burden of making students whole falls onto the schools, rather than onto taxpayers.
New Jersey can also help prevent for-profit schools from masquerading as nonprofit schools27 by requiring schools that have recently changed status to provide their Internal Revenue Service reports to New Jersey regulators, who can review to make sure that the schools are in fact operating in a manner consistent with their purported nonprofit status.
New Jersey can also help protect students and safeguard taxpayer funds by phasing out state tuition aid grants for students at for-profit colleges. Redirecting funding to public and nonprofit schools will help to ensure that taxpayer funds are not used to line the pockets of owners or investors, but rather, to support students’ education.
New Jersey is already a leader in higher education, and taking these additional common sense actions will provide much-needed protections for New Jersey students and taxpayers.
Notes
Tags: public college, for profit college, Student protections