In the early 2000s, the for-profit college industry experienced explosive growth, fueled by Wall Street investment and aggressive recruiting tactics. What began as small vocational schools offering certificates in trades like cosmetology ballooned into a multi-billion dollar industry dominated by large publicly-traded companies and private equity firms.
As Ryann Liebenthal writes in her book "BURDENED: Student Debt and the Making of an American Crisis":
"In 2003, there were just 18 for-profits owned by private equity firms; less than a decade later, that number had more than tripled, to 61. For-profit enrollments were also exploding, from a little more than 425,000 in 2000 to 1.7 million in 2012 — an increase of more than 300%."
This rapid expansion was driven by several factors:
- Easy access to federal student aid dollars
- Lax regulation of the for-profit education sector
- Aggressive marketing and recruiting practices
- The promise of career-focused education and job placement
For investors, for-profit colleges represented a lucrative opportunity to tap into the billions of dollars in federal student aid flowing to higher education. Private equity firms saw the potential to acquire small schools, rapidly scale up enrollment, and generate enormous profits.
Private Equity's Playbook
The private equity playbook for gobbling up higher education followed a familiar pattern:
- Acquire small, struggling non-profit or family-owned colleges
- Obtain valuable accreditation and access to federal student aid
- Aggressively expand enrollment through marketing and recruiting
- Cut costs by reducing faculty and educational quality
Maximize profits and prepare for exit through IPO or sale
This model allowed private equity firms to quickly scale up operations and generate huge returns. As Liebenthal notes:
"The profits in this new world were beyond belief. One study found that the for-profit industry netted 55% profit margins between 2000 and 2012. In other words, for every dollar they took from students, 55 cents went to shareholders, with overall profits peaking in 2011 at $5 billion."
Aggressive Recruiting Tactics
To fuel rapid enrollment growth, for-profit colleges employed aggressive and often deceptive recruiting tactics. Admissions staff were incentivized to enroll as many students as possible, regardless of their qualifications or likelihood of success.
Liebenthal describes the high-pressure sales environment at Ashford University, owned by private equity-backed Bridgepoint Education:
"The sales floor had a true boiler room atmosphere," said the supervisor, not unlike that "portrayed in the movie The Wolf of Wall Street. And if they all misled some naive fools in the process, say, a few hundred a month, well, that was just the cost of doing business."
Recruiters targeted vulnerable populations like veterans, low-income students, and working adults with promises of flexible online degrees and lucrative career prospects. Many students were misled about program costs, job placement rates, and the transferability of credits.
Maximizing Federal Aid, Minimizing Education
For-profit colleges became experts at maximizing their capture of federal student aid dollars while minimizing spending on actual education. As Liebenthal explains:
"A simple equation summed up the for-profit ethos at this time: charge as much as federal student aid will supply, and cut costs to the bone. Everything in the middle could be harvested as profit."
Many for-profit schools received over 80% of their revenue from federal aid sources. To stay under the 90% federal funding cap, they aggressively recruited military veterans whose GI Bill benefits didn't count toward the limit.
Meanwhile, educational quality suffered as schools slashed faculty and support services. Bridgepoint Education infamously had just seven full-time faculty members for nearly 74,000 students at one point.
Poor Outcomes for Students
While investors reaped enormous profits, students at for-profit colleges often ended up worse off. Graduation rates were abysmal, with only about 25% of students completing their programs at many for-profit schools.
Those who did graduate faced poor job prospects and crushing student loan debt. Liebenthal cites research showing:
"When for-profit grads did find employment, Cellini found, they earned about a 10th less than the public program certificate holders. In fact, these for-profit students were actually worse off than if they hadn't gone to school at all. When taking into account their debt loads, for-profit graduates were projected to lose about $1,200 on their educational 'investments' over the course of their careers."
Regulatory Scrutiny and Industry Decline
As evidence of poor student outcomes and predatory practices mounted, for-profit colleges faced increasing regulatory scrutiny in the 2010s. A two-year Senate investigation led by Tom Harkin in 2012 revealed widespread problems in the industry.
Harkin's report found that federal money flowing to for-profit schools accounted for 25% of all federal student aid, but 47% of loan defaults. For-profits enrolled just 10% of students but consumed a hugely disproportionate share of federal education funding.
As regulations tightened and public scrutiny increased, many large for-profit college chains faced declining enrollment and eventual collapse:
- Corinthian Colleges shut down in 2015 amid fraud allegations
- ITT Technical Institute closed in 2016 after losing access to federal aid
- Education Corporation of America abruptly closed in 2018
The Legacy of For-Profit Higher Education
The rise and fall of for-profit colleges driven by private equity investment left a mixed legacy:
Pros:
- Expanded access to higher education for non-traditional students
- Pioneered online and flexible degree programs
- Focused on career-oriented training and job placement
Cons:
- Saddled millions of students with debt and worthless degrees
- Wasted billions in taxpayer dollars on poor quality education
- Damaged the reputation of online and for-profit education
While some for-profit colleges continue to operate today, the industry has contracted significantly from its peak. However, the broader trend of financialization in higher education continues, with private equity firms now targeting areas like student housing, online program management, and education technology.
The Future of Higher Education Investment
As traditional for-profit colleges have declined, private equity firms have shifted their focus to other areas of the education sector:
- Online Program Management (OPM) companies that help non-profit universities deliver online degrees
- Education technology platforms for K-12 and higher education
- Coding bootcamps and alternative credential providers
- International and study abroad programs
These new models aim to partner with traditional non-profit institutions rather than competing directly. However, concerns remain about the profit incentives of private equity potentially conflicting with educational quality and student outcomes.
Moving forward, policymakers face the challenge of fostering innovation in higher education while protecting students and taxpayers from predatory practices. Stronger oversight of private equity investment in education and improved accountability measures for student outcomes will be crucial to prevent a repeat of the for-profit college debacle.
As the higher education landscape continues to evolve, striking the right balance between market forces and the public good remains an ongoing challenge. The lessons of the for-profit college boom serve as a cautionary tale about the risks of unchecked profit-seeking in education.
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