Diane Leef worked for 20 years at a dry cleaners in Robbinsdale before a back injury took her off the floor. In her early 40s, she realized she'd never be able to do physical work again. If she was going to support herself, she was going to need more than her high school degree.
Leef started looking into places where she could get her bachelor's degree. She ended up settling on National American University, which has a campus in Brooklyn Center, an easy bus ride from her home. Like every Minnesotan with a television, Leef was already familiar with National American from its ubiquitous commercials: "Get your degree/Set yourself free/National American University!"
It was an attractive promise to Leef, not least because the financial aid officer she spoke to at the university promised to sign her up for a host of student loans that would make it possible to afford her college education.
But it wasn't long before Leef's experience with National American started to go south.
For one thing, although Leef's loans entitled her to a living stipend, the financial aid office wouldn't pass that money along to Leef.
"I'm disabled, I wasn't working, and they weren't giving me any money to live on," Leef says. "I was looking at being homeless."
Leef took the issue up with the financial aid office, but found that the workers seemed more interested in bringing in new enrollment than helping her.
"I'd go in there to try to sort this out, and they would be in the middle of a contest to see who could sign up the most new students," Leef says. "It was like a boiler room."
When she finally worked her way up to talking with the regional district manager, Leef says, she was treated rudely.
"She told me to go out and get a job if I was so unhappy with the school," Leef says. "I couldn't believe it."
Leef eventually got her stipend, but in subsequent semesters found that the university often hung onto money longer than it ought to, collecting interest on it. Talking to other students, she learned that many of them had similar experiences. Many discovered they were paying more for their education than they'd originally been led to believe. Some were dropping out without degrees, already thousands of dollars in debt.
"It seemed like once they had you enrolled and signed up for the loans, they didn't really care about whether you succeeded or failed," Leef said. "We're just dollars to them."
In Minnesota and across the country, for-profit universities like National American University are booming. Unlike public schools such as the University of Minnesota, National American University and other "proprietary institutions" exist to make money. Many, like National American, are publicly traded companies, answerable to shareholders and a board of directors.
In recent years, for-profits have seen business surge, financed largely by state and federal student loans. There are more than 2,000 for-profit universities across the country receiving federal loans totaling $24 billion.
For-profit schools are cheaper on average than private colleges, which can cost up to $50,000 a year. But they're far more expensive than the public education at state universities and community colleges. According to a report by the Department of Education, the average tuition last year at a four-year for-profit school was $15,661, more than twice the in-state tuition at the University of Minnesota.
The for-profit schools serve non-traditional students. As National American's "One day, one night, Saturday's all right" jingle promises, the schools offer flexible scheduling for working adults, as well as programs online, letting students get a degree without ever setting foot on a campus.
But there's been little government oversight of the for-profits. With so much money to be made from student loans—the schools get paid even if students default—critics say it's a system ripe for abuse.
"This is an industry that has gotten fat on public money while largely escaping any kind of public oversight," says Barmak Nassirian, associate director at the American Association of Collegiate Registrars and Admissions Officers. "There's a rush to seize excessive profits that is hurting the students who need help the most."
National American University had its origins in South Dakota in 1941, as a small two-year business school called the National School of Business. Over the next 30 years, the school slowly grew to become a four-year college. It wasn't until 1974 that the school—by then called National College—began setting up satellite campuses in Sioux Falls, Minneapolis, and St. Paul, as well as out west in Denver and Colorado Springs.Today, National American University has 18 locations across seven states, from South Dakota to Texas. In the Twin Cities area, the University has branches in Brooklyn Center, Roseville, Minnetonka, and even the Mall of America.
National American's growth has gone into overdrive in the last few years, increasing the number of its students by 35 percent, from about 6,500 students in 2009 to nearly 9,000 students this year. The school merged with another company last year, forming a new corporation registered in tax-friendly Delaware.
Last year, National American University cleared $10 million in profits. And how it got there is telling: The company pulled in $82 million in academic revenue—most of it in the form of state and federal student loans. On its Minnesota campuses alone, National American's students received $9.2 million in public loans last year.
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."
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.
Student loans are unlike virtually any other kind of debt in that they are almost impossible to erase. Even personal bankruptcy, which wipes the slate clean of other kinds of debt, can't put a dent in unpaid student loans. And if borrowers fail to pay, the government has the power to garnish wages, veteran's benefits, and social security payments.
"Student debt is one of the hardest things to come out from under," says Anne Hansen, a consumer rights attorney in St. Paul. "If you're not careful, it can ruin you."
As a congressional aide, Brittny McCarthy saw firsthand the way the for-profit industry worked the levers of power to escape oversight. Now she's writing a dissertation about it.
"A big part of the problem is that the patchwork of regulation is spotty," says McCarthy, a doctoral student at the University of Minnesota. "At the state level, some states have been aggressive about overseeing the for-profits. Many have not."
For decades, private and state schools used their control of the recognized accrediting bodies to keep the for-profits at bay. But the for-profits did an end-run around the problem, creating their own accrediting bodies and lobbying the federal government to recognize them. It worked. Now, for-profits can keep their accreditation for 10 years between evaluations by a friendly group of their peers.
Of course, the federal government still has some say—after all, it's shelling out $24 billion a year to this industry. But regulators' efforts to tighten the rules have been met with stiff resistance every step of the way.
In 1992, the government tried to institute a limit on just how much of a school's revenue could come from federal funding. Called the 85-15 rule, it required schools to get at least 15 percent of their money from somewhere besides federal coffers.
"The idea was that if you're really providing a service worth paying for, someone other than the government ought to be willing to pay for it," Nassirian says.
But the tighter leash was short-lived; today it is known as the 90-10 rule. National American gets 76 percent of its revenue from government loans, but other for-profits keep their toes right on the 90 percent line. And the industry has been pushing for more than a decade to abolish the rule altogether.
Last year, the senate finally opened hearings on the for-profit education industry. But the for-profit lobby launched a forceful counterattack, mobilizing demonstrations in Washington and delaying the Department of Education's efforts to stiffen requirements.
After two years of repaying their loans, National American's students default rate is 9.8 percent—five times worse than the public university average and significantly worse than community colleges too.
Things only get worse for graduates as time goes on: After three years of trying to pay back loans, National American's student default rates jump to nearly 16 percent. Many of the for-profit degree schools in Minnesota—including Brown College and Rasmussen College—have three-year default rates near or above 15 percent. At Duluth Business University, more than a third of students are in default on their loans after three years.
The rise of the for-profits is of particular concern to defenders of public higher education, because in a time of tightening budgets, education funding is often a zero-sum game.
"There are two main ways the public supports education: through public education and through loans," McCarthy explains. "As we spend more money on loans for students at for-profits, we're spending less on our state school systems, which makes their tuition go up, which drives more students to the for-profits. It's a vicious cycle. But from the perspective of the for-profit industry, it's a bonanza."