Omari Scott Simmons from Wake Forest University School of Law conference summary slides.

1. For-Profit Colleges &
Universities
ACCESS, COMPETITION & FOR-PROFIT
HIGHER EDUCATION CONFERENCE
SANFORD SCHOOL OF PUBLIC POLICY
DUKE UNIVERSITY
SEPTEMBER 21-22, 2012
OMARI SCOTT SIMMONS
WAKE FOREST UNIVERSITY SCHOOL OF LAW

2. Research Synthesis and Response

3. Themes

4. What is the public good?
 Is higher education a private or public good?
 What aspects: instruction, research, or both?
 Lack of a specific definition
 Narrow vs. broad. Short term vs. long term. Economic vs. non-economic.
Items associated with the public good:
 Individual
 Higher wages and personal happiness
 Societal
 Higher tax revenues
 Better health outcomes
 Democratic participation
 Reduced poverty and inequality
 Lower criminal justice costs
 Social cohesion

5. Should for-profits be treated differently than
nonprofits?
 Non-profits versus for-profits
 Competition among non-selective institutions
 Competition among specific types of degrees/certificate
programs
 Different treatment among types of for-profit institutions
 Publicly traded vs. privately held
 Two-year vs. four-year
 Bad apples vs. systemic narrative
 Non-profit and for-profit collaboration (e.g., online
degree programs like the Duke Fuqua MBA online)

6. Apollo Group
 Owns & Operates:
• University of Phoenix • The College for Financial Planning
• Western International University • The Institute for Professional Development
• Axia College • Insight Public Schools (Online Public H.S.)
 2011 Net Revenue for Apollo Group: $4.733 billion.
 2011 Gross Profit for Apollo Group: $2.544 billion
 2011 CEO Payment: $2.3 million, $7.3 million exercised
(2011 Apollo Group Annual Report)

7. Arguments for FPCUs & Status Quo
 Since FPCUs serve disproportionately “under-represented,”
“vulnerable” and “non-traditional” student
populations, regulations restricting enrollments harm these
populations. Meet demand for education that non-profits cannot
meet. Without for-profit participation there would be
undersupply.
 Education as a free market.
 Efficiency of new digital technology and online distribution
should be embraced.
 “Vocational” training is the “wave of the future” for a populace in
need of job skills.

8. For-Profit Business Model
 Publicly-traded for-profits and particularly on-line degrees account for growth
in the for-profit industry. Emphasis on volume and expanding capacity.
Separation of ownership & control.
 Attracting investor capital particularly institutional investors, e.g., mutual
funds, pension funds, private equity, etc.
 Potential short-termism and shareholder value maximization myopia. Focus on
quarterly earnings and reporting over long term business concerns such as
quality.
 Reliance on government aid and lack of diversified revenue streams. Is this
sustainable?
 Tension between investor concerns and broader public
 Greater ability to expand capacity than non-profit organizations

9. Non-Profit Model
 Public and private
 Public non-profits particularly impacted by declines in state
support
 Attract donations and do not redistribute earnings to
shareholders.
 Treated differently under Internal Revenue Code and
Higher Education Act.

10. Regulatory Environment

11. Corporate Governance
 Definition: systems by which companies are governed
includes laws, practices, and norms.
 Prevalent perspectives:
 Director Primacy
 Shareholder Primacy
 Stakeholder Theory (e.g., employees, communities, students, etc.)
 Prevailing governance regime does not necessarily
penalize anti-public behavior or harm to third parties.

12. Corporate Governance
 Federal Law
 The federal government, to a large extent through the Securities and
Exchange Commission (SEC), regulates the external trading of
securities and disclosure without addressing the internal affairs of
the corporations it regulates.
 Disclosure requirements, as a general matter, are less intrusive than
prescriptive rules and are consistent with market-based theories.
 Better information ostensibly contributes to healthier markets and
presupposes that the greater the disclosure, the lesser the need for
judicial and regulatory intervention.

13. Corporate Governance
 State Corporate Law:
 State corporate law addresses the internal affairs of the
corporation, primarily the relationship between shareholders
and managers.
 The content of state corporate law, especially Delaware law, is
schematically conservative, lacks a degree of contextual
specificity, and provides substantial managerial discretion.
 State corporate laws function like bookends, they do not
address a broad range of corporate activity and leave it to
managers, in most cases, to fill gaps.

14. Proposed Gainful Employment Rule
 Originally, 3 proposed measures.
 Each had a “in compliance” zone, a “warning” zone, and a
threshold for loss of Title IV eligibility.
 Each program within each FPCU must satisfy 1 of the 3
thresholds.
 Failure to meet 1 of 3 thresholds would result in loss of eligibility
for Title IV funds the next program year.

15. Student Loan Sanctions
Repayment Rate
Over 45% None.
35%-45% Warnings to prospective students about difficulty repaying loans &
limitations on Title IV-funded enrollments.
Under 35% Loss of Title IV eligibility for each failing program.
Annual Loan Payment: Sanctions
% of Annual Income
8% or below None.
8%-12% Warnings to prospective students about difficulty repaying
loans & limitations on Title IV-funded enrollments.
Over 12% Loss of Title IV eligibility for each failing program.
Annual Loan Payment: % of Sanctions
Discretionary Income
20% or below None.
20%-30% Warnings to prospective students about difficulty repaying
loans & limitations on Title IV-funded enrollments.
Over 30% Loss of Title IV eligibility for each failing program.

16. Industry Input & Lobbying
Over 90,000 Comments Later…

17. Final Gainful Employment Rule
 Student Loan Repayment Rate must be 35% or above.
 Annual loan payments (debt) for graduates must be 12%
or less of annual earnings income.
 Annual loan payments (debt) for graduates must be 30%
or less of annual discretionary income.
 Failure to meet all 3 of these measures for 3 of 4 years
results in program ineligibility for Title IV funding.
Source: 28 C.F.R. § 667.

18. GER takes a “Vacation”- APSCU v. Duncan
 The Association of Private Colleges & Universities
(APSCU) challenged the Gainful Employment Rule in
APSCU v. Duncan.
 APSCU argued that the DOE had exceeded its statutory mandate and
the Gainful Employment Rule was beyond the scope of its authority.
 The District Court of D.C. found DOE indeed had statutory authority
to enact the Gainful Employment rule.
 However, the court found the 35% debt repayment rate to be
“arbitrary and capricious” under the APA.
 Finding all 3 debt measures “inextricable,” the court vacated the
entire GER under the APA.

19. Post-APSCU v. Duncan
 The DOE has challenged the District Court’s ruling, but
does not expect an imminent victory.
 DOE’s main focus is reinstituting the debt measurement
requirements, without the consequences.
 The APSCU continues to vigorously oppose any
additional regulations.
 There has been no indication from DOE that it will begin
a new rulemaking process until the G.E.R. is fully
litigated.

20. The 90/10 Rule
34 C.F.R. § 668.18(b)(16)
 All FPCUs must derive at least 10% of their annual
revenue from non-Title IV, non-HEA sources.
 1 year failure to comply results in provisional
participatory status in HEA programs for 2 years.
 2 consecutive failures results in ineligibility for HEA &
Title IV funding.
 However, this excludes G.I. Bill funds from the 90%.

21. Accreditation Issues
 20 U.S.C. 1001(a)(5) requires all postsecondary educational
institutions to be accredited by “a nationally recognized accrediting
agency.”
 The U.S. Government accredits these agencies by maintaining a list
of “reliable” accrediting authorities.
 Variable accrediting standards allow FPCUs to shop for the most
lenient agency.
 “Accreditation Shopping”- FPCUs purchase struggling non-profit
colleges to retain the accreditation status, convert the school into a
for-profit without re-accreditation.
Sources: Amanda Harmon Cooley, The Need for Legal Reform of the For-Profit Educational
Industry, 79 Tenn. L. Rev. 515.

22. Consumer Protection Model?
 Target abusive
practices, fraud, misrepresentations, and predatory
aspects.
 Contract law
 Consumer protection statutes
 Education as commodity indistinguishable from
other products and services.
 Who should enforce?

23. Nature of Higher Education
 Information asymetries
 Experience goods
 Associative goods
 Giffen goods
 Conspicuous consumption

24. Higher Education Stratification
 Education not a “great leveler” but a sorter along class and racial
lines.
 Do we have two higher education systems: one for the affluent and
another for the vulnerable
 Are for-profits made necessary by non-profit practices that exclude
certain student populations? (e.g., class bias and associative goods)
 Vocational versus liberal arts; on-line versus traditional instruction;
selective versus non-selective
 Does existing portable financial aid system contribute to
stratification (e.g., demand side subsidies/vouchers).
 Types of market failure, e.g., information asymetries

25. Higher Education Stratification
 Impact of social capital:
 college choice
 persistence toward degree
 career outcomes

26. Linkages between for-profits and non-profits
 Existing competition between for-profits and non-
profits. (e.g., HBCU’s, community colleges).
 Future competition?
 Non-profit and for-profit collaboration (e.g., online
degree programs)

27. Finance and Structural Issues
 Structural issues may dictate institutional behavior
 Impact of economic conditions on for-profit growth
 Counter-cyclical
 State budget shortfalls

28. Developing Better Metrics and Methodologies
 Institutional level data to provide micro and macro
picture. For-profits have proprietary information on
student populations that could inform research.
 Enrollments and completions perhaps insufficient
without seeing downstream outcomes (e.g., loan
defaults, wage growth, career opportunities).
 QUALITY. Is education simply sharing knowledge?
How do we measure quality?

29. Potential Solutions and Policy Formation?
 For profits are here to stay.
 What does research tell us about potential solutions and fixing
problems? Descriptive and normative.
 Timing constraints. Looking forward rather than backward.
 Interdisciplinary dialogue including industry representatives.
 A continuum of approaches and presenting alternatives. Not
an all or nothing zero-sum outcome.

30. Additional Themes?

31. Open Discussion