National American University gets rich from federal loans

Meanwhile 15.7 percent of graduates default

But National American only spent a quarter of that $82 million actually educating its students. The company spent nearly four times as much on selling, administration, and other expenses. It put $6.5 million—again, most of it brought in through student loans—toward expanding the business in new locations. Another $7.6 million in government money went to advertising. After all, to keep growing and making its shareholders millions of dollars, the university needs to keep new students coming in the doors and signing them up for student loans.

It's not just the stockholders who are making a bundle off of government education money. The company's executives are doing quite well themselves. Last year, CEO Ronald Shape made almost $1 million. Company president Jerry Gallentine made $1.1 million. Chairman of the Board Robert Buckingham made $3.1 million.

"This is a very profitable industry," says David Hawkins, the public policy director for the National Association of College Admissions Counseling. "People are getting rich here."

National American University's campuses at Bloomington (top) and Roseville. The company made $10 million last year, while many of its students can't even repay their loans.
City Pages
National American University's campuses at Bloomington (top) and Roseville. The company made $10 million last year, while many of its students can't even repay their loans.
City Pages

The best way to measure whether a school is really giving students something for their money is to see how many of those students are employed after graduating, and how much money they're making. For more than a year, the Department of Education has been trying to impose the "gainful employment" standard on for-profits, but the for-profit lobby has been pushing back hard in Congress, and the Department of Education has been forced several times to delay the new standards.

In the absence of reliable information about how a degree from a school helps with employment, the next best way to determine if students and the taxpayers are getting their money's worth is to consider how many graduates are defaulting on their student loans.

By that measurement, for-profits are performing dismally compared to public and nonprofit private colleges. Four years into repaying their loans, nearly a quarter of students from for-profit schools have defaulted. That's more than twice the rate of students from public schools.

"You have to look at the student population that we're serving," says John Slama, the chair of the Minnesota Career College Association, a trade group and lobbying organization for for-profit schools. "Our students tend to be further along in their lives, so they may have a different set of costs on top of their student loans—a mortgage, they're raising kids, etc."

Moreover, Slama says, students at for-profit schools tend to start with fewer advantages than traditional college students.

"We're serving a group of people who need this the most," Slama says. "It doesn't make sense to blame or penalize the schools that are doing this work just because our students are more at risk."

It's an argument eerily reminiscent of the early days of the housing crisis, when lenders defended their mortgage default rates by arguing that it was the inevitable consequence of bringing a riskier population into the ownership society.

And as in the mortgage meltdown, there's evidence that schools are skirting the rules.

In order to be eligible for government loans, students need a high school degree or its equivalent, or to pass something called the Ability to Benefit Test. But according to a recent report by the Government Accountability Office, when government investigators went undercover to apply to several for-profit institutions, they found that school officials were fudging the ABT results. Test administrators were giving out answers to questions during the test, and afterward were erasing wrong answers and writing in correct ones.

Other schools were found to be coaching their students through how to get fake high school degrees from online diploma mills in order to fraudulently qualify for federal aid.

And that's just the tip of the iceberg. A second GAO report this summer revealed a whole other aspect of the scam.

Once again undercover agents posed as prospective students. What they found was an industry that regularly misled its customers from first contact.

Officials at schools across the country lied to the undercover agents about their accreditation. They lied about their graduation rates and employment prospects. They lied about the duration of their programs and how much they would cost. Several schools wouldn't let the student talk to a financial aid officer until they signed enrollment forms. One official told an undercover agent not to worry about defaulting on student loans because "no one will come after you if you don't pay."

The investigation also uncovered the hard-sell marketing for-profits use to get students in the door. Minutes after signing up with websites that purported to help match prospective students with colleges, investigators were bombarded with aggressive phone calls, as many as 24 a day—182 a month.

"For these schools, federal loans are the cash cow," says Nassirian of the American Association of Collegiate Registrars and Admissions Officers. "They're doing everything they can to get warm bodies into seats."

It may not make a difference to the bottom line of the for-profits when a student defaults on their loans, but it's a big deal for taxpayers, who wind up picking up the unpaid balance.

For those who default, it leaves them worse off than if they had never enrolled. The default will show up on their credit report for years into the future, making it harder to rent a home, buy a car, and get a job. They also won't be eligible for any more public loans if they want to go back to another school.

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