[Senate Hearing 111-1000]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 111-1000
 
  EMERGING RISK? AN OVERVIEW OF THE FEDERAL INVESTMENT IN FOR-PROFIT 
                               EDUCATION

=======================================================================

                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                                   ON

EXAMINING AN OVERVIEW OF THE FEDERAL INVESTMENT IN FOR-PROFIT EDUCATION

                               __________

                             JUNE 24, 2010

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions


      Available via the World Wide Web: http://www.gpo.gov/fdsys/



                  U.S. GOVERNMENT PRINTING OFFICE
57-222                    WASHINGTON : 2011
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  


          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                       TOM HARKIN, Iowa, Chairman
CHRISTOPHER J. DODD, Connecticut     MICHAEL B. ENZI, Wyoming
BARBARA A. MIKULSKI, Maryland        JUDD GREGG, New Hampshire
JEFF BINGAMAN, New Mexico            LAMAR ALEXANDER, Tennessee
PATTY MURRAY, Washington             RICHARD BURR, North Carolina
JACK REED, Rhode Island              JOHNNY ISAKSON, Georgia
BERNARD SANDERS (I), Vermont         JOHN McCAIN, Arizona
SHERROD BROWN, Ohio                  ORRIN G. HATCH, Utah
ROBERT P. CASEY, JR., Pennsylvania   LISA MURKOWSKI, Alaska
KAY R. HAGAN, North Carolina         TOM COBURN, M.D., Oklahoma
JEFF MERKLEY, Oregon                 PAT ROBERTS, Kansas          
AL FRANKEN, Minnesota                
MICHAEL F. BENNET, Colorado          

                                       
                      Daniel Smith, Staff Director
     Frank Macchiarola, Republican Staff Director and Chief Counsel

                                  (ii)

  
?

                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                        THURSDAY, JUNE 24, 2010

                                                                   Page
Harkin, Hon. Tom, Chairman, Committee on Health, Education, 
  Labor, and Pensions, opening statement.........................     1
Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming, 
  opening statement..............................................    32
Tighe, Kathleen S., Inspector General, Office of the Inspector 
  General, U.S. Department of Education, Washington, DC..........    34
    Prepared statement...........................................    36
Franken, Hon. Al, a U.S. Senator from the State of Minnesota.....    45
Alexander, Hon. Lamar, a U.S. Senator from the State of Tennessee    47
Brown, Hon. Sherrod, a U.S. Senator from the State of Ohio.......    48
    Prepared statement...........................................    49
Merkley, Hon. Jeff, a U.S. Senator from the State of Oregon......    52
Bennet, Hon. Michael F., a U.S. Senator from the State of 
  Colorado.......................................................    53
Hagan, Hon. Kay R., a U.S. Senator from the State of North 
  Carolina.......................................................    55
Issa, Yasmine, Former Sanford-Brown Institute Student, Yonkers, 
  NY.............................................................    56
Reiter, Margaret, Former Supervising Deputy Attorney General, 
  Office of the Attorney General, California Department of 
  Justice, San Francisco, CA.....................................    58
    Prepared statement...........................................    61
Parrott, Sharon Thomas, Senior Vice President, Government and 
  Regulatory Affairs and Chief Compliance Officer, DeVry, Inc., 
  Chicago, IL....................................................    70
    Prepared statement...........................................    71
Eisman, Steven, Portfolio Manager, FrontPoint Financial Services 
  Fund, LP, New York, NY.........................................    83
    Prepared statement...........................................    85
Murray, Hon. Patty, a U.S. Senator from the State of Washington..   111
    Prepared statement...........................................   112
Sanders, Hon. Bernard, a U.S. Senator from the State of Vermont..   113

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Emerging Risk?: An Overview of Growth, Spending, Student Debt 
      and Unanswered Questions in For-Profit Higher Education, 
      report by 
      Senator Harkin.............................................     4
    Bloomberg News articles (by Daniel Golden):
        Marine Can't Recall His Lessons at For-Profit College 
          (Update 2), December 15, 2009..........................    16
        Apollo Suffers New York Snub as SEC Probes Phoenix 
          (Update 3), January 19, 2010...........................    22
        Homeless High School Dropouts Lured by For-Profit 
          Colleges, April 30, 2010...............................    28
    Senator Casey, prepared statement............................   132
    Letters from:
        Kathleen Tighe...........................................   132
        Margaret Reiter..........................................   140
        Sharon Thomas Parrott....................................   178

                                 (iii)
  
    Response to questions of Senator Harkin
        Sharon Thomas Parrott....................................   178
        Steven Eisman............................................   229
    Response to questions of Senator Enzi
        Kathleen Tighe...........................................   132
        Margaret Reiter..........................................   148
        Sharon Thomas Parrott....................................   184
        Steven Eisman............................................   230
    Response to questions of Senator Dodd
        Kathleen Tighe...........................................   133
        Sharon Thomas Parrott....................................   185
        Steven Eisman............................................   231
    Response to questions of Senator Brown
        Kathleen Tighe...........................................   133
        Margaret Reiter..........................................   150
        Steven Eisman............................................   235
    Response to questions of Senator Casey
        Kathleen Tighe...........................................   134
        Yasmine Issa.............................................   139
        Margaret Reiter..........................................   158
        Sharon Thomas Parrott....................................   187
        Steven Eisman............................................   232
    Response to questions of Senator Hagan
        Kathleen Tighe...........................................   135
        Yasmine Issa.............................................   139
        Margaret Reiter..........................................   167
        Sharon Thomas Parrott....................................   189
        Steven Eisman............................................   233
    Response to questions of Senator Alexander
        Kathleen Tighe...........................................   136
        Sharon Thomas Parrott....................................   194
    Response to questions of Senator Coburn
        Kathleen Tighe...........................................   137
        Margaret Reiter..........................................   175
        Sharon Thomas Parrott....................................   195
        Steven Eisman............................................   235



  


  EMERGING RISK? AN OVERVIEW OF THE FEDERAL INVESTMENT IN FOR-PROFIT 
                               EDUCATION

                              ----------                              


                        THURSDAY, JUNE 24, 2010

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:07 a.m. in 
Room SD-124, Dirksen Senate Office Building, Hon. Tom Harkin, 
chairman of the committee, presiding.
    Present: Senators Harkin, Murray, Sanders, Brown, Hagan, 
Merkley, Franken, Bennet, Enzi, and Alexander.

                  Opening Statement of Senator Harkin

    The Chairman. The Senate Committee on Health, Education, 
Labor, and Pensions will come to order.
    For more than 50 years, the Federal Government has provided 
students with grants and loans to help pay for college. That is 
a public/private partnership between the government and 
students. It is an investment premised on the idea that a 
higher education will improve life for the borrower but will 
also strengthen our society by giving more Americans the 
knowledge and skills to get good jobs and to give back to their 
communities.
    In 2008, we significantly increased the amount of Stafford 
loans that undergraduates could borrow. The American Recovery 
and Reinvestment Act of 2009 provided another $17 billion to 
the Pell program, and the recent reconciliation law added 
another $36 billion over the next 10 years to the Pell Grant 
program.
    Both the authorizing and appropriations committees which I 
chair have made hard choices and decisions to secure increases 
for the Pell Grant program, and I am proud of the $17.5 billion 
that we appropriated for the program last year. Those Pell 
dollars are an investment by Congress in our Nation's students 
and, as I said, in our country's future. For that investment to 
pay off, we must ensure that students are being well-educated 
and that schools are using Federal dollars, taxpayer dollars, 
responsibly.
    There are growing questions about whether all students and 
taxpayers by extension are receiving value for their 
educational dollar. Today, I released a report titled 
``Emerging Risk'' which takes a close look at what we know 
about how for-profit schools are operating today. I want to 
take a few minutes to highlight some of the key findings from 
that report.
    Over the past 20 years, the for-profit higher education 
industry has grown and evolved, bringing innovation to post-
secondary education and expanding the number of students it 
enrolls. This year, nearly 2 million students were enrolled in 
for-profit institutions to pursue everything from technical 
certificates to graduate degrees. That is a 225-percent 
increase over the last 10 years, and I might also add that now 
the online educational aspect of those institutions has had an 
explosive growth over the last several years.
    There is a chart that I will show and put up on the screens 
for everyone to see to indicate what I mean by the growth in 
the student population of for-profit schools. If you look from 
1998 to 2008, that is the 225 percent increase that I am 
speaking about.
    Nearly every student who attends a for-profit school 
borrows money to pay tuition. That is the second chart to show 
the amount of debt that these kids are incurring. While only 38 
percent of the 2008 community college students took out loans, 
98 percent of for-profit students graduated with debt. As you 
will see from the chart, for-profit students were also eight 
times more likely to graduate with a loan larger than $20,000. 
So not only are the kids in private for-profit schools 
borrowing more money, they are borrowing more money at higher 
levels, above $20,000 for example, in their debts.
    Not surprisingly, for-profit college students are more 
likely to default on their loans than their nonprofit peers, 
and that you will see in the next chart where you can see the 
default rates are much higher. According to one recent analysis 
by the U.S. Department of Education, for-profit colleges 
accounted for about 10 percent of enrolled students but 44 
percent of defaults.
    The growth of for-profit colleges has been dependent on 
Federal subsidies, including Pell Grants, Federal student 
loans, military and veterans benefits, and while the for-profit 
share of enrollment has grown significantly, the sector share 
of Federal student aid dollars has grown even larger.
    The next chart again illustrates this trend. As you will 
see, in higher education, about 9.2 percent of the students go 
to the for-profit schools, but in the second chart over, you 
will see they received almost 23 percent of all Federal Pell 
Grants and student loans in 2008. That amounts to more than $20 
billion--$20 billion--of taxpayers' money. So 9.2 percent of 
the students go to the for-profit schools, but they receive 23 
percent of all Federal Pell Grants.
    Now, for all our investment in this sector, we know 
surprisingly little about whether students are completing 
degrees, transferring to other schools, or just dropping out. 
What information is available suggests that very large numbers 
of students are leaving for-profit schools each year. Exactly 
why we do not know. What enrollments we do have show huge 
student turnover, and that is the next chart.
    It is a rather confusing chart, but here is what it says. 
For the four publicly traded schools that disclose detailed 
enrollment numbers, more students left over the course of 1 
year than were at the school at the beginning of the semester. 
Experts describe this as school churn. I think about it this 
way. The churn rate in these for-profit colleges that are up 
here on the chart is the equivalent of my alma mater, Iowa 
State University, turning over its entire student body every 
year rather than every 3 or 4 years.
    The chart is a little confusing and, quite frankly, it is 
somewhat perplexing because if you look at school No. 4, which 
is the third one down, you see that they started the school 
year with 96,211 students. They ended up with 116,800 students. 
They had about a 20,000 student growth in 1 year, but the two 
middle bars show that they added 118,500 students and lost 
98,300 students.
    What does all this mean? I do not know what it means. I do 
not really know how to interpret all this. That is one of the 
reasons we are having these hearings because we need to find 
out what does that mean. It is very, very perplexing.
    I think it is highly unlikely that all of these for-profit 
students are graduating with degrees. I think the better bet is 
that many of them are dropping out. They are being replaced by 
new students with new loans and new Pell Grants to boost the 
school's revenues.
    Given the number of students enrolled in for-profit 
colleges, the billions of dollars in Federal aid that these 
institutions receive, and the lack--the lack--of clear evidence 
of positive student outcomes, is why I think Congress must 
devote more attention to this sector and its impact on our 
post-secondary education system.
    Today marks the first in a series of hearings to look at 
the for-profit education sector, to examine its growth, and to 
answer these questions of what is happening to students and 
what is happening to taxpayers' money. We have a responsibility 
to ensure that the taxpayers' dollars are being spent wisely 
and that for-profit colleges are serving students, not just the 
shareholders.
    Now, while our data is incomplete, there are very 
disturbing statistics and information coming forward on these 
for-profit colleges. I have invited several individuals with 
expertise in this field to help us begin our oversight of this 
sector, and that is what I look upon these hearings as--as an 
oversight. My hope is that they will help the committee 
understand what has happened in this sector over the last few 
years.
    The committee's report that I released makes clear that 
there is much we do not know. We do not know how many students 
graduate, how many get jobs, how schools that are not publicly 
traded spend their title IV dollars, how many for-profit 
students default over the long-term. We know some information 
about the short term, but we do not know much about the long-
term.
    More broadly, we do not know exactly what risks we are 
taking. We do not know what risks we are taking by investing an 
increasing share of our Federal financial aid dollars in this 
sector. I repeat that, we do not know exactly what risks we are 
taking by investing an increasing share of our Federal 
financial aid dollars in this sector.
    Let me conclude by talking about the students who attend 
these schools. They are, after all, what matters most. For some 
students, the for-profit higher education system has worked 
well. The flexible schedules, convenient locations, online 
offerings allow working adults to finish their degrees while 
also meeting family and job responsibilities. Many for-profit 
schools offer students an excellent education that prepares 
them for good-paying jobs that will allow them to pay off their 
student loans. In short, for many students, attending a for-
profit college is a great decision, and when those students 
succeed, they not only pay off their own loans, they also make 
good on the Federal investment in their future.
    Unfortunately, many students have had a very different 
experience at for-profit schools. They have left without a 
certificate or degree but saddled with very large debts. Many 
students were misled about the value of the education they 
would receive. In just the past week, my office has received 
hundreds of stories from students who believed they were 
exploited by a for-profit institution. You can also find them 
in the reporting of Bloomberg News which has brought to light 
some of the most compelling stories, and I ask consent to 
insert at this point in the record three of those Bloomberg 
articles that just came out.
    [The information referred to follows:]
Report.--Emerging Risk?: An Overview of Growth, Spending, Student Debt 
        and Unanswered Questions in For-Profit Higher Education*

                        (By Senator Tom Harkin)

                              INTRODUCTION

    Postsecondary education is a gateway to the middle class for 
millions of Americans. It equips people with the knowledge and skills 
they need to perform professional work and compete in the global 
economy. To increase access to post-secondary education, the Federal 
Government has provided grants and loans to students for more than half 
a century, steadily increasing its investment nearly every year. In 
fiscal year 2010, Federal funding for financial aid to post-secondary 
students is expected to total $145 billion.\1\
---------------------------------------------------------------------------
    * Scope And Methodology.--This report is based largely on publicly 
available information from the U.S. Department of Education and the 10-
k filings of the 14 publicly traded companies that operate for-profit 
schools. It is not meant to suggest that any one company or school is 
the focus of this report or that similar results would not be found 
among for-profit schools that are not publicly traded. In order to 
avoid any suggestion that a particular school is a focus, whenever 
possible schools have not been identified by name, and the largest 
schools have been averaged together to provide a more accurate cross-
section of the industry. The Chairman will provide further information 
underlying the charts and statistics in this report upon request.
    \1\ U.S. Department of Education. Budget Service. Fiscal Year 2011 
Budget Summary. http://www2.ed.gov/about/overview/budget/budget11/
summary/edlite-section3d.html#tables.
---------------------------------------------------------------------------
    The Federal investment in higher education is a solid investment in 
our future. Post-Secondary education results in benefits to the 
individual, including greater wealth and better health, and also to the 
Nation in the form of a more engaged citizenry and a more skilled 
workforce.
    However, the United States is playing catch-up. Once first in the 
world in post-secondary attainment, the United States now ranks 10th in 
the percentage of people with a college degree.\2\ President Obama has 
set the goal of making the United States, once again, first in the 
world in the proportion of college graduates by 2020. To this end, over 
the last 3 years Congress has taken steps to make college more 
accessible and affordable by substantially increasing student borrowing 
limits, recently committing $36 billion in mandatory Pell grant funding 
over the next 10 years included in the Health Care and Education 
Reconciliation Act of 2010, through $17 billion in discretionary 
funding through the American Recovery and Reinvestment Act of 2009 and 
annual discretionary funding, which in fiscal year 2010 was $17.56 
billion.
---------------------------------------------------------------------------
    \2\ Organization for Economic Co-Operation and Development, 
Education at a Glance 2009: OECD Indicators, September 2009. http://
www.oecd.org/edu/eag2009.
---------------------------------------------------------------------------
    For-profit schools are an important part of the mix of post-
secondary institutions. They increase access to higher education by 
providing needed capacity as well as innovative options that can make 
it easier for students to complete their post-secondary education while 
managing work and family obligations. Enrollment in for-profit schools 
has grown dramatically over the past decade and, each year has seen a 
larger share of Federal student aid dollars flowing to these schools. 
Congress and the U.S. Department of Education have a duty to ensure 
that for-profit schools spend these Federal dollars efficiently and 
effectively.
    Evidence suggests that for-profit schools charge higher tuition 
than comparable public schools, spend a large share of revenues on 
expenses unrelated to teaching, experience high dropout rates, and, in 
some cases, employ abusive recruiting and debt-management practices. 
What distinguishes for-profit schools from public and non-profit 
private institutions is that they have an obligation to maximize 
profits for their shareholders. Indeed, securities law sanctifies the 
notion that each corporation must act in the interest of its 
shareholders. However, this imperative could conflict with the 
objective of Federal student aid programs, which is to increase access 
to a quality higher education. This evidence, and the potential 
conflicts underlying it, points to the need for rigorous government 
oversight and prudent regulation to safeguard the investments of 
taxpayers and students.
    This report draws on publicly available information to shed light 
on the scope of the Federal investment in for-profit schools and how 
these schools are using those taxpayer dollars. It also seeks to 
identify gaps in available information about enrollment, student 
performance, and loan debt and repayment--gaps that impede effective 
oversight.

                    GROWTH AND CHANGE IN ENROLLMENT

    Over the last 10 years, there has been steady growth in student 
enrollment across all types of post-secondary education institutions. 
Between 1998 and 2008, enrollment at institutions of higher education 
increased 31 percent, from 14.9 million students to 19.6 million 
students. For-profit schools have expanded much faster, increasing 
enrollment 225 percent over the same period.\3\
---------------------------------------------------------------------------
    \3\ Majority staff analysis of U.S. Department of Education data.
---------------------------------------------------------------------------
    Much of this growth has been concentrated in schools run by 
publicly traded companies. Currently, the 14 publicly traded companies 
in this field have combined enrollment of 1.4 million students, up from 
8 companies that enrolled 199,584 students in 1998.\4\ The largest for-
profit school reports current enrollment of 458,600, more than the 
undergraduate enrollment of the entire Big Ten conference.\5\
---------------------------------------------------------------------------
    \4\ Majority staff calculation of fiscal year 2010 quarterly 
filings with the U.S. Securities and Exchange Commission; Majority 
staff calculation of fiscal year 1998 quarterly and annual filings with 
the U.S. Securities and Exchange Commission.
    \5\ School #1 fiscal year 2010 quarterly filings with the U.S. 
Securities and Exchange Commission; Majority staff compilation of Fall 
2009 undergraduate enrollment from Big Ten school Web sites.




    The trend toward educating students predominantly online is 
transforming for-profit schools. This change was facilitated by the 
2005 Congressional repeal of the ``50 percent rule'' which previously 
required that schools furnish no more than half their courses online 
and have no more than half their students enrolled in distance-learning 
courses.\6\ Of the 14 publicly traded schools, at least 7 currently 
have more than 50 percent of their students in exclusively online 
curriculum.\7\ Since that repeal, some for-profit companies have 
purchased small regionally accredited bricks-and-mortar schools and 
transformed them into huge entities with primarily virtual curricula, 
while also avoiding the time and cost of earning regional 
accreditation. For example, in 2005 one company purchased a small, 
regionally-accredited, religious school with an enrollment of 332 
students on campus. Five years later, with the same accreditation, that 
same company has more than 65,000 students, 99 percent of whom attend 
class solely online.\8\
---------------------------------------------------------------------------
    \6\ The Deficit Reduction Act of 2005 (P.L. 109-171). Enacted, 
February 8, 2006.
    \7\ Four of the fourteen schools have more than 98 percent of 
students online, while three schools have more than 50 percent of 
students in online courses. See fiscal year 2009 Form 10k filings with 
the U.S. Securities and Exchange Commission for schools ranked 3, 7, 8, 
9, 10, 11 and 12 by enrollment.
    \8\ School 8 fiscal year 2009 annual filing with the U.S. 
Securities and Exchange Commission; School 8 fiscal year 2010 quarterly 
filing with the U.S. Securities and Exchange Commission.
---------------------------------------------------------------------------
         GROWTH IN FEDERAL STUDENT AID TO THE FOR-PROFIT SECTOR

    The share of Federal aid flowing to for-profit schools is growing 
rapidly, and is actually outpacing growth in enrollment, meaning not 
just that there are more students enrolling in the schools but that the 
schools are receiving more Federal money per student.
    The Federal Government offers loans to all students regardless of 
their income. For students with financial need, it helps pay for higher 
education using two key tools authorized by title IV of the Higher 
Education Act: Pell grants in an amount up to $5,350 per year for 
fiscal year 2010, and Stafford loans of up to $12,500 per year, which 
students repay after leaving school. This financial aid is intended for 
the benefit of the student. But, as a practical matter, aside from 
education-related expenses, student aid disbursements go directly to 
the student's school.
    According to U.S. Department of Education data, $4.3 billion in 
Pell grants and $19.6 billion in Federal loans flowed to for-profit 
schools in 2008-2009, approximately double the share in 1999-2000.\9\
---------------------------------------------------------------------------
    \9\ Staff calculation of data provided by U.S. Department of 
Education.
---------------------------------------------------------------------------
    Pell grants in particular warrant careful management. Over the last 
several years Congress has made hard choices to devote greater Federal 
resources to the Pell program over other domestic priorities. Between 
1999 and 2009, Congressional allocations for Pell enabled the program 
to grow significantly from $7.2 billion in 1999 to $18.3 billion in 
2009. During that same period, the Pell Grant maximum award increased 
by 51 percent--increasing from $3,125 to $4,731 while the number of 
Pell recipients increased from 3.8 million to 6.2 million. While all 
sectors received higher levels of Pell funding as a result of these 
increases, the for-profit schools enjoyed a disproportionate share of 
the increase. In 2009, for profit colleges receive almost one quarter 
of all Pell Grants--up from just 13 percent in 1999.\10\
---------------------------------------------------------------------------
    \10\ U.S. Department of Education. Federal Pell Grant Program 2008-
2009 End of Year Report. http://www2.ed.gov/finaid/prof/resources/data/
pell-2008-09/pell-eoy-2008-09.html.




    Federal Pell grants and Stafford loans, together with aid from 
smaller title IV programs, make up the lion's share of for-profit 
schools' revenues, and the share continues to grow. According to 
company financial reports, in 2002, title IV government dollars 
accounted for on average 62.9 percent of revenues at the five largest 
for-profit schools. By 2009, the same companies reported that title IV 
dollars made up an average of 77.4 percent of their revenue.\11\
---------------------------------------------------------------------------
    \11\ In 2009, the top 5 publicly traded schools by enrollment had 
revenues that consisted of the following percentages of title IV 
dollars, excluding the Stafford loan increases: School 1: 86 percent; 
School 2: 70 percent; School 4: 80 percent; School 5: 81 percent; 
School 6: 70 percent. If the Stafford loan increases were included the 
shares could be as high as 83 percent.




    However, the actual share of Federal dollars received by the 
schools is even higher. For purposes of revenue calculation, Federal 
law permits the schools to temporarily exclude the recent $2,000 annual 
increase in undergraduate Stafford loans for money disbursed after June 
2008 and before July 2011.\12\ One for-profit school reported that 
title IV dollars make up 86 percent of its revenues this year, but 
acknowledged that the excluded loan increases would add another one-
half to 3 percentage points.\13\ A second school told investors that, 
with the recent increase in Stafford loans, title IV dollars account 
for 88.9 percent of its revenues though the reported figure is 81.3 
percent.\14\ Further, other forms of government aid--including 
Department of Defense, Department of Veterans Affairs and State 
programs--add to the share of public funds that for-profit schools 
receive.
---------------------------------------------------------------------------
    \12\ The Ensuring Continued Access to Student Loans Act of 2008 
increased the amount of Stafford loans to undergraduates by $2,000, but 
allowed for-profit schools to exclude the increase from calculations of 
``the 90/10 rule'' through mid-2011. The 90/10 rule provides that in 
order to remain eligible for title IV aid, for-profit schools must have 
revenue of less than 90 percent from title IV.
    \13\ School 1 Q4 Earnings Conference Call, 10/27/09.
    \14\ School 5 fiscal year 2009 annual filing with the U.S. 
Securities and Exchange Commission.




    While for-profit schools enroll close to 10 percent of all higher 
education students, they receive approximately 23 percent of title IV 
funds.\15\ They can collect this outsized share of title IV dollars 
because they actively recruit primarily low-income students.
---------------------------------------------------------------------------
    \15\ Majority staff analysis of U.S. Department of Education data.
---------------------------------------------------------------------------
                            GROWING PROFITS

    As these schools have increased their percentage of revenue from 
Federal student aid, for-profit education companies have become 
increasingly profitable. The average operating profit in fiscal year 
2005 among publicly traded for-profit higher education companies was 
$127 million. The same number in fiscal year 2009 was $229 million, an 
increase of 81 percent.\16\
---------------------------------------------------------------------------
    \16\ Company fiscal year 2005 annual filings with the U.S. 
Securities and Exchange Commission; Company fiscal year 2009 annual 
filings with the U.S. Securities and Exchange Commission.
---------------------------------------------------------------------------
    For-profit schools have significant operating profit margins among 
companies listed on U.S. stock exchanges. For fiscal year 2009, one 
company reported an operating profit of $489 million on revenues of 
$1.3 billion, a 37 percent margin. By comparison, this margin was more 
than triple that of Raytheon, and double that of Apple.\17\
---------------------------------------------------------------------------
    \17\ School 6 fiscal year 2009 annual filing with the U.S. 
Securities and Exchange Commission; Raytheon fiscal year 2009 annual 
filing with the U.S. Securities and Exchange Commission; Apple fiscal 
year 2009 annual filing with the U.S. Securities and Exchange 
Commission.




    To satisfy shareholders, publicly traded schools must generate 
higher revenues while keeping down costs, including teaching costs. 
They do this by raising tuition and/or increasing the number of 
enrolled students, which in turn will increase the amount of Federal 
student aid dollars flowing to the schools. With for-profit schools 
receiving more title IV dollars every year, one area warranting inquiry 
is how they spend this extra Federal money, whether the increased 
revenue is used to bolster profits.

                   SPENDING BY THE FOR-PROFIT SECTOR

    Because title IV aid is technically provided to students, the 
Federal Government places no restrictions on how revenue from title IV 
student aid may be used by schools. There is no requirement that a 
school devote any portion of title IV dollars to education.
    To recruit new students, some schools spend heavily on television 
advertisements, billboards, phone solicitation, and web marketing. An 
analysis of the eight publicly traded schools that break out expense 
categories shows that, on average, they spend 50.2 percent of costs on 
expenses classified as education, 31 percent on recruiting and 
marketing, and 15.7 percent on undefined administrative expenses.\18\
---------------------------------------------------------------------------
    \18\ School 1, School 4, School 5, School 8, School 9, School 10, 
School 11, School 12 fiscal year 2009 annual filings with the U.S. 
Securities and Exchange Commission.
---------------------------------------------------------------------------
    Among publicly traded for-profit schools, spending on education 
ranges from 32 percent to 63 percent of costs.\19\ At exclusively on-
line schools, the percentage spent on education is even lower.
---------------------------------------------------------------------------
    \19\ School 2, School 5 and School 8 fiscal year 2009 annual 
filings with the U.S. Securities and Exchange Commission.




    Moreover, the amount that some for-profit schools spend on 
educating students is shrinking. One school reduced spending on 
education from 48 percent of costs in 2004 to 40 percent in 2009.\20\ A 
second school reduced spending on education from 37 percent of costs in 
2006 to 32 percent in 2009.\21\ At least one school spent more on 
marketing and recruiting than on education, and another spent just 1 
percent more on education than marketing and recruiting.\22\ At the 
same time numerous accounts detail marketing and recruiting practices 
that are sometimes overzealous or misleading.\23\
---------------------------------------------------------------------------
    \20\ School 11 fiscal year 2004 and fiscal year 2009 annual filings 
with the Securities and Exchange Commission.
    \21\ School 8 fiscal year 2009 annual filing with the Securities 
and Exchange Commission.
    \22\ School 8 and School 11 fiscal year 2009 annual filings with 
the Securities and Exchange Commission.
    \23\ See: National Association for College Admission Counseling, 
``Higher Education Act Fraud Alert,'' May 11, 2010.



    For-profit schools' expenditures on marketing and recruitment 
relative to the spending on education raise questions about whether 
sufficient resources are being devoted to ensuring that students 
receive a quality education that results in increased job opportunities 
or higher income.

                            STUDENT OUTCOMES

    Given the growing Federal investment in for-profit higher 
education, and considering their growing profitability, for-profit 
schools should be able to demonstrate significant positive outcomes for 
students. However, while publicly available information offers some 
transparency as to the revenue and expenditures of for-profit schools, 
it is more difficult to ascertain how students attending and graduating 
from these schools are faring.
    For-profit schools that receive Federal financial aid are required 
to report graduation rates to the U.S. Department of Education. By 
regulation, schools that advertise job placement rates as a means of 
attracting students are required to make available to prospective 
students the most recent job placement and graduation rates. However, 
there is wide variation in the quality of this information. All data is 
self-reported, with no auditing mechanism in place to validate accuracy 
outside of the opaque accreditation process.
    While for-profit schools report graduation rates (sometimes called 
``completion rates'' to encompass certificate programs) to the U.S. 
Department of Education, this data is self-reported and only captures 
first-time, full-time enrolled students. Considering the large number 
of for-profit college students who attend part-time, or who have 
previous college experience, a very significant share of enrolled 
students fall outside this reporting requirement.
    With regard to job placement data, there is no agreed-upon 
definition of how placement in a relevant field is calculated. For 
example, a restaurant dishwasher or even a janitor might be considered 
a ``placement'' by a culinary school. Additionally, while for-profit 
schools must report placement to accrediting agencies, the agencies are 
not required to disclose these standards or make placement data 
available to the public or the U.S. Department of Education, and do not 
use consistent standards.




    What scant information is available from company documents reveals 
a disturbing trend: large numbers of students are departing for-profit 
schools each year. For the four schools that disclose detailed 
enrollment numbers, an estimate of the number of students graduating or 
dropping out each year can be calculated by adding the number of new 
students to the number of continuing students and subtracting year-end 
enrollment. However, there is no way to tell what portion of these 
students graduated, transferred or dropped out.
    Using this methodology, it appears that 540,820 out of a total 
enrollment of 589,505 left the four schools in 2009. While an unknown 
number of these departing students completed degrees or certificates, 
it seems likely that a significant portion also dropped out of the 
schools.\24\
---------------------------------------------------------------------------
    \24\ All four schools offer Associates and Bachelors degree 
programs. Three also offer shorter duration certificate programs.
---------------------------------------------------------------------------
    Three of the four schools enrolled more new students over the 
course of the year than the total number of students at the beginning 
of the year. One school started the reporting period with 62,000 
students, enrolled 117,000 new students, but ended with just 86,000 
students enrolled.\25\ Understanding what portion of these students is 
succeeding or failing to complete their degrees is critical to 
assessing the value of the Federal investment.
---------------------------------------------------------------------------
    \25\ School 5 fiscal year 2009 annual filings with the Securities 
and Exchange Commission.
---------------------------------------------------------------------------
                     INCREASES IN DEBT AND DEFAULT

    One way to evaluate whether students at these schools are receiving 
an adequate education is to see if they are able to repay the money 
they borrow to attend school. As college costs continue to rise, more 
students are borrowing to pay for school, and they are taking out 
larger loans. This is true across all sectors of higher education, but 
students at for-profit institutions are more likely to borrow and 
borrow larger loan amounts than their peers at other types of 
institutions.\26\ On average, for-profit schools are more expensive to 
attend than community colleges or public 4-year schools, and they 
enroll many low-income students who rely almost entirely on loans and 
Pell Grants to pay tuition. Average annual tuition at a for-profit 
school was about $14,000 in 2009, while tuition at community college 
averaged about $2,500 and averaged $7,000 for in-state students at 4-
year public colleges.\27\
---------------------------------------------------------------------------
    \26\ College Board,  How Much Are College Students Borrowing?'' By 
Patricia Steele and Sandy Baum. http://professionals.collegeboard.com/
profdownload/cb-policy-brief-college-stu-borrowing-aug-2009.pdf; 
Project on Student Debt, ``Quick Facts about Student Debt,''January 
2010.
    \27\ College Board, Trends in College Pricing 2009.

    
    

    According to U.S. Department of Education data, 96 percent of for-
profit students who graduated in 2008 took out student loans. Twenty-
four percent of 2008 graduates took out Federal loans in excess of 
$40,000.\28\ These rates are higher than at private non-profit or 
public schools.
---------------------------------------------------------------------------
    \28\ Source: College Board, ``Who Borrows Most? Bachelor's Degree 
Recipients with High Levels of Student Debt.'' By Sandy Baum & Patricia 
Steele, http://advocacy.collegeboard.org/sites/default/files/Trends-
Who-Borrows-Most-Brief.pdf; College Board, How Much Are College 
Students Borrowing?'' By Patricia Steele and Sandy Baum. http://
professionals.collegeboard.com/profdownload/cb-policy-brief-college-
stu-borrowing-aug-2009.pdf.
---------------------------------------------------------------------------
    One of the consequences of increased student borrowing is an 
increase in the number of defaults. The available information on 
default rates paints a bleak picture. While macroeconomic conditions 
can affect student loan default rates, persistent high default rates 
raise the question of whether students are receiving educational value 
sufficient to allow them to afford the debt they incur. Students who 
cannot pay their loans face punitive fees and higher interest rates. 
Moreover, in most cases, bankruptcy law prohibits a student borrower 
from discharging a student loan; the loan follows a borrower for the 
rest of his or her life.




    In December 2009, the U.S. Department of Education released a 
report on ``Three-Year Cohort Default Rates'' that examined the 
percentage of students who defaulted on their Federal student loans 
within 3 years of leaving school. The chart below depicts the 
percentage of students who default on their Federal student loans 
within 3 years of leaving school. It divides students up by sector and 
the highest degree offered at their institution. The U.S. Department of 
Education data clearly shows higher default rates for students who 
attend for-profit schools compared with those attending public or non-
profit schools.
    Most of the data and analysis on student loan debt and defaults 
measure the borrowing and repayment levels of students enrolled at 
least 5 years ago. For example, the most recent loan debt numbers for 
graduates come from the 2007-2008 National Post-Secondary Student Aid 
Survey. Bachelor's degree recipients measured in that study enrolled in 
2004. Similarly, cohort default rates measure students who entered 
repayment more than 3 years ago, but enrolled at least 2 years before 
that (in the case of A.A. recipients).
    The consequence of this data lag is that key indicators of debt, 
default and government risk do little to pick up rapid changes in 
student loan utilization by students or schools. In 2003-2004 the U.S. 
Department of Education made $45 billion in Stafford Loans. Just 6 
years later they made $63 billion in loans, a 40 percent increase.\29\ 
How schools are packaging those loans, and how students are borrowing 
will have a significant effect on the risk of the Federal Government's 
investment in student loans.
---------------------------------------------------------------------------
    \29\ Department of Education. ``Loan Volumes.'' http://www2.ed.gov/
about/overview/budget/studentloantables/09ffeldlnet-ay.pdf.
---------------------------------------------------------------------------
    The U.S. Department of Education's Inspector General raised 
questions about the accuracy of cohort default rates to measure the 
full scope of student debt repayment. In particular, the Inspector 
General was concerned that the short window (2 years at the time, now 3 
years) and the treatment of loan forbearances and deferments obscured 
the amount of Federal dollars at risk. In a 2003 report, the Inspector 
General recommended the U.S. Department of Education publish lifetime 
loan cohort default rates to ``better identify trends in cohorts' 
defaults after the 2-year cohort period has ended.'' \30\ Since the 
date of that report, both student borrowing and student debt have 
soared but the public information available on student loan performance 
has not substantially improved.
---------------------------------------------------------------------------
    \30\ Department of Education Inspector General. Audit to Determine 
if Cohort Default Rates Provide Sufficient Information on Defaults in 
the title IV Loan Programs. December 2003, page 2.
---------------------------------------------------------------------------
                          UNKNOWN INFORMATION

    This report has identified numerous gaps in available data on for-
profit colleges. Current publicly available information is limited to 
data reported to the U.S. Department of Education and, for the 14 
publicly traded schools, quarterly and annual financial filings made to 
the Securities and Exchange Commission. As noted, what data is 
collected by the U.S. Department of Education has several serious 
limitations.
    First, the U.S. Department of Education only tracks completion 
rates for first-time, full-time enrolled students, a metric that is not 
well-suited to the for-profit model where many students enter school 
with previous college credit or attend part time. As a result, these 
outcomes measures fail to capture many for-profit students and make it 
difficult to understand how many students are completing programs, 
transferring or dropping out.
    Second, job placement information is reported inconsistently and 
not subject to uniform standards. This data is self-reported and there 
is no audit or verification procedure outside the confidential periodic 
accreditation review to ensure accuracy or public access to that 
information.
    Third, many schools do not consistently publish tuition 
information, making it difficult for policymakers or consumers to 
compare schools and track tuition increases.
    Fourth, default rates that help to elucidate how students leaving 
for-profit schools are faring in the workplace are only tracked for 3 
years, and do not fully capture students who default outside that 
period. And because default data looks at a student population leaving 
school several years back, it may not adequately depict the current 
economic situation of recent graduates and dropouts, nor a significant 
shift in student borrowing.
    Finally, for privately held schools, no information is available 
about how they spend title IV dollars. Even for publicly traded 
schools, annual filings only provide a general understanding of how 
title IV dollars are divided between education, administration and 
marketing. As a result it is very difficult to make a comprehensive 
assessment, particularly of privately held for-profit schools, based on 
publicly available information.
    This list begins to outline some of the significant gaps in data on 
for-profit colleges. Congress should seek to fill those gaps to allow 
for an informed discussion and debate over the significant Federal 
investment in for-profit institutions.

                               CONCLUSION

    The Federal Government and taxpayers are making a large and rapidly 
growing investment in financial aid to for-profit schools, with few 
tools in place to gauge how well that money is being spent. Available 
data show that very few students enroll in for-profit schools without 
taking on debt, while a staggering number of students are leaving the 
schools, presumably many without completing a degree or certificate. To 
boost enrollment, some for-profit schools recruit large numbers of new 
students each year. In some cases, schools enroll more students over 
the course of the year than were enrolled at the beginning of the year. 
To ensure these enrollment increases, it is necessary for the schools 
to devote very large shares of title IV dollars and other Federal 
financial aid to marketing activities, not education.
    These schools are increasingly relying on Federal financial aid 
dollars for revenue. When all title IV, Department of Defense and 
Veteran's Administration funds are included, many of these schools are 
receiving nearly all of their funds from Federal sources. While 
increasing their reliance on Federal dollars as a source of revenue, 
for-profit schools are at best spending only slightly more than half of 
revenues actually educating students, and in several cases are 
shrinking the amount spent on instruction. Yet these same schools are 
reporting profit margins of 20 percent and higher to investors.
    Students at for-profit schools are also taking on higher amounts of 
debt than their peers at public and non-profit schools. Nearly half of 
student loan borrowers who entered repayment in 2007 and defaulted by 
2009 attended for-profit schools (44 percent), even though less than 10 
percent of students attend these schools.\31\
---------------------------------------------------------------------------
    \31\ TICAS analysis of U.S. Department of Education 3-year Cohort 
Default Rate data for fiscal year 2007.
---------------------------------------------------------------------------
    The publicly available data, in tandem with mounting reports of 
questionable practices and poor student outcome, yields a mixed 
portrait of the for-profit higher education sector that calls into 
question the tax payers return on their multi-billion-dollar 
investment, and leaves many unanswered questions with regard to whether 
a sufficient number of students receive an education that provides them 
with the knowledge and skills they need to obtain jobs to repay their 
student debt.
                                 ______
                                 

                          [December 15, 2009]

                           (By Daniel Golden)

    Marine Can't Recall His Lessons at For-Profit College (Update 2)
    Dec. 15 (Bloomberg)--Marine Corps Corporal James Long knows he's 
enrolled at Ashford University, one of at least a dozen for-profit 
colleges making money off active-duty military with subsidies from 
American taxpayers. He just can't remember what course he's taking.
    The 22-year-old from Dalton, GA, suffered a brain injury that 
impaired his ability to concentrate when artillery shells hit his 
Humvee in Iraq in 2006, he said. Long signed up for the online college, 
a unit of Bridgepoint Education Inc., after its recruiter gave a sales 
pitch this year at a barracks for wounded Marines at Camp Lejeune in 
North Carolina. Under base rules, the barracks are off-limits to 
college recruiters, said Robert Songer, director of lifelong learning 
at Lejeune.
    For-profit online colleges are taking over higher education of the 
U.S. military, lured by a Defense Department pledge of free schooling 
up to $4,500 a year for active members of the armed services, costing 
taxpayers more than $3 billion since 2000. The schools account for 29 
percent of college enrollments and 40 percent of the half-billion-
dollar annual tab in Federal tuition assistance for active-duty 
students, displacing public and private nonprofit colleges, according 
to Defense Department and military data.
    The shift is leading to educational shortcuts and over-zealous 
marketing, said Greg von Lehmen, chief academic officer of the 
University of Maryland University College in Adelphi, the adult-
education branch of the State system and one of the earliest and 
biggest providers of military education.

                             FASTER, EASIER

    ``In these schools, the rule is faster and easier,'' von Lehmen 
said. ``They're characterized by increasingly compressed course lengths 
and low academic expectations. One has to ask: Is the Department of 
Defense getting what it is seeking?''
    Some online schools offer free laptops or fast degrees. At Apollo 
Group Inc.'s University of Phoenix, the biggest for-profit college, 
active-duty military personnel can earn an associate's degree, which 
typically takes 2 years of study, in 5 weeks.
    Apollo fell $1.13, or 1.8 percent, to $60.93 at 4 p.m. in New York 
in Nasdaq composite trading. The company's shares are down 21 percent 
this year.
    Taxpayers picked up $474 million for college tuition for 400,000 
active-duty personnel in the year ended Sept. 30, 2008, more than 
triple the spending a decade earlier, Defense Department statistics 
show. Any college degree provides a boost toward military promotion, 
said James Pappas, vice president for outreach at the University of 
Oklahoma. Credentials from online, for-profit schools are less helpful 
in getting civilian jobs, especially in a tight labor market, Barmak 
Nassirian, associate executive director of the American Association of 
Collegiate Registrars and Admissions Officers in Washington, said in an 
e-mail.

                           DISAPPOINTED GRADS

    ``I'm afraid that the ease with which these outfits hand out 
diplomas is matched only by the disappointment of their graduates when 
they find out how little their degrees are actually worth,'' Nassirian 
said.
    Mike Shields, a retired Marine Corps colonel and human resources 
director for U.S. field operations at Schindler Elevator Corp., rejects 
about 50 military candidates each year for the company's management 
development program because their graduate degrees come from online 
for-profits, he said in an interview. Schindler Elevator is the North 
American operating entity of Schindler Holding AG in Hergiswil, 
Switzerland, the world's second-largest elevator maker.

                           BROADER EXPERIENCE

    ``We don't even consider them,'' Shields said. ``For the caliber of 
individuals and credentials we're looking for, we need what we feel is 
a more broadened and in-depth educational experience.'' He does hire 
service members with online degrees for jobs on non-leadership tracks, 
he said.
    Several online for-profit schools have become a concern on military 
bases because of practices that exploit soldiers and the Federal 
subsidies they are promised, said Songer at Camp Lejeune.
    ``Some of these schools prey on Marines,'' Songer said. ``Day and 
night, they call you, they e-mail you. These servicemen get caught in 
that. Nobody in their families ever went to college. They don't know 
about college.''
    Most online for-profits, such as American Public Education Inc.'s 
American Military University, ``do a very good job taking care of 
students,'' Songer said.
    Executives at for-profit colleges said they pay more attention to 
customer service than traditional schools do, and their online format 
suits military students who move frequently.

                          FLEXIBILITY, OPTIONS

    ``It's about flexibility and options,'' said Rick Cooper, vice 
president of military and corporate programs at Columbia Southern 
University in Orange Beach, AL. ``You can enroll any day of the week, 
any week of the year.''
    Columbia Southern grants transfer credits to soldiers for courses 
in which they earned grades as low as D. Grantham University in Kansas 
City, MO, has handed out free laptop computers and American Military in 
Charles Town, WV, gives free textbooks as recruitment inducements.
    Online schools such as American Military University have relocated 
their headquarters to obtain certification from regional boards with 
less demanding standards, according to interviews with for-profit 
college officials and accrediting agencies. Or they're approved by less 
established organizations, leaving students hard-pressed to transfer 
credits to other colleges or find jobs at major corporations.

                           SALARY COMPARISONS

    Holders of master's degrees in business administration from for-
profits Phoenix and American Intercontinental University earn less than 
graduates with the same degrees from Oklahoma or Maryland's University 
College, according to Payscale
.com, a provider of employee compensation data.
    Recent MBA graduates from University College and Oklahoma have 
median annual incomes of $78,600 and $68,400, respectively, compared 
with $60,200 from Phoenix and $54,600 from American Intercontinental, 
the data show. Recent bachelor's graduates from University College earn 
a higher median salary ($55,200) than their counterparts at Phoenix 
($50,500) and American Intercontinental ($43,100). Oklahoma, at 
$41,100, trails Maryland and the two for-profit schools.
    Travis Daun, a 33-year-old former Navy lieutenant commander who 
trained as a nuclear engineer on a submarine, left the service in 
August after receiving an online MBA from American Intercontinental, a 
unit of Career Education Corp., based in Hoffman Estates, Illinois.

                            RIGOR, CHALLENGE

    ``I was disappointed in the rigor and challenge of the courses,'' 
Daun said in an interview, adding that each course lasted 5 weeks, with 
at most 2 hours a week of class time. ``I don't think I had a 4.0 
effort, yet I had a 4.0 grade-point average.''
    Daun is unemployed. His college roommate, who also became a nuclear 
engineer in the Navy and earned an MBA from the University of 
Maryland's University College, did find work, Daun said. ``His MBA from 
Maryland definitely helped him a lot more than my AIU degree is helping 
me,'' he said.
    Daun is working with Lucas Group, an executive search firm that 
specializes in placing former military personnel.
    ``Does his master's from American Intercontinental open a lot of 
doors for him? No, it doesn't,'' said Lee Cohen, an Irvine, CA-based 
managing partner at Lucas.
    American Intercontinental provides a high-quality education for 
adult students, said Jeff Leshay, a spokesman for Career Education. 
Leshay said the company doesn't track where graduates find jobs.

                            ``NO PROBLEMS''

    While deployed in Iraq, Christopher Brotherton earned a bachelor's 
degree in homeland security from American Military in 2007. When the 
staff sergeant retired from the Army in June, his degree, which 
included courses in geography and history, helped him find a job 
teaching social studies in a middle school in Ardmore, OK.
    ``The State, when they saw my transcript from AMU, they had no 
problems with any of it,'' Brotherton, 42, said. ``It was a respected 
school to them.''
    Brian Kilgore's quest for a college degree was set back in 2007. 
Then a petty officer first class in the Navy, Kilgore needed two more 
courses to earn an associate's degree from Grantham when the online 
for-profit college eliminated the software engineering program he was 
taking, he said in an interview. Kilgore switched to computer science 
and soon left school, still four classes short of that degree. ``I was 
upset,'' said Kilgore, 38, who recently retired from the military and 
works in aviation maintenance. ``Gosh, I was almost there.'' The 
program was eliminated due to lack of interest, Grantham said.

                          CAREER DISADVANTAGE?

    When service members do earn degrees from online for-profits, human 
resources executives at Fortune 500 firms are often reluctant to hire 
them, said Cohen, citing three where he has placed candidates. ``There 
are some firms that are heavily credential-oriented,'' he said. 
``McKinsey & Co. is one of them. They might balk. Amazon might balk. 
Shell Oil is another one.'' McKinsey, Amazon.com and Shell declined to 
comment.
    Bradford Rand, chief executive of Techexpo Top Secret in New York, 
which runs job fairs for defense contractors recruiting recent 
veterans, said a degree from an online for-profit is a disadvantage. 
``You have two people of the same caliber, one has a degree from a real 
college, one has a degree from a computer, I'm going to favor the one 
from the live college,'' Rand said. ``It's more verifiable, more 
credible.''
    The Defense Department plans to subject online programs to review 
by the American Council on Education in Washington, which already 
monitors face-to-face classes on military bases, defense officials 
said. The new online standards, which the department began to develop 
in 2004, have taken longer than expected and are a year away from being 
implemented, Tommy Thomas, deputy undersecretary of defense for 
military community and family policy, said in an e-mail.

                         MAXIMUM REIMBURSEMENT

    Of the dozen colleges with the biggest active-duty enrollment, five 
are for-profits that conduct most or all of their courses online. 
Three--American Military University, Apollo's Phoenix, and closely held 
Grantham--charge $250 a credit, or $750 a course, which allows them to 
receive the maximum reimbursed by U.S. taxpayers without service 
members having to pay any out-of-pocket tuition. Publicly funded 
community colleges offer classes on military bases for as little as $50 
a credit, according to their Web sites.
    American Public Education fell 1 cent, or less than 1 percent, to 
$34.40 at 4 p.m.

                          GOVERNMENT INQUIRIES

    The expansion of online for-profit colleges into the military comes 
as the companies face U.S. Government inquiries into their tactics in 
recruiting and educating civilians. The Obama administration is 
tightening scrutiny of for-profits, from the content of their pitches 
to prospective students to their increasing reliance on Federal 
financial aid, Robert Shireman, deputy undersecretary of the U.S. 
Education Department, said in an interview.
    In addition, the Securities and Exchange Commission's Enforcement 
Division has begun an informal probe into how Apollo Group books 
revenue. Apollo intends to cooperate fully with the inquiry, the 
company said.
    By expanding its military business, Phoenix has been able to enroll 
more civilian students who are supported by grants and loans from the 
Education Department, without violating Federal law that dictates how 
much revenue the school can receive from the government. Phoenix 
derived 86 percent of its $3.77 billion in revenue in fiscal 2009 from 
the Education Department, according to its annual 10-K filing, up from 
48 percent in 2001 and approaching the limit of 90 percent set by a 
1992 law known as the 90/10 rule.

                            MILITARY MARKET

    Tuition payments to for-profit schools by the military don't count 
toward the 90 percent ceiling. One way that Phoenix plans to stay below 
the legal threshold is building its military business, Gregory 
Cappelli, co-chief executive of Apollo, which is based in Phoenix, said 
in a June 29 conference call with investors.
    When the law was enacted, for-profits hadn't yet moved into the 
military market, so the legislation's sponsors weren't focused on 
Defense Department tuition assistance, Sarah Flanagan, who helped draft 
the law as the Senate's specialist in Federal student aid, said in an 
interview. The law was intended to ensure that for-profit colleges 
offered an education good enough that some students were willing to pay 
for it, said Flanagan, now vice president of the National Association 
of Independent Colleges and Universities in Washington.
    ``Counting Defense Department funding for servicemen's education as 
part of the money that's supposed to come out of consumers' pockets 
violates the purpose of the original legislation,'' Flanagan said.

                          PHOENIX RECRUITMENT

    Apollo spokeswoman Sara Jones said in an e-mail that Phoenix began 
serving military students long before the advent of ``the misguided 90/
10 rule.''
    Phoenix ranks among the top five colleges serving military 
students, including about 5,000 in the Army and 2,700 in the Navy, 
according to the two services. While Phoenix offers campus-based 
graduate programs in education and management at Air Force bases in the 
Pacific, most of its active-duty students take classes online, school 
officials said. Phoenix has 452 recruiters in its military division, up 
from 91 in 2003, said Scott McLaurin, its executive enrollment 
counselor at Camp Lejeune, the largest Marine Corps base on the East 
Coast.

                          SOARING ENROLLMENTS

    Military enrollment at exclusively online for-profits is soaring. 
American Military has 36,772 active-duty students, up from 632 in 2000, 
it said. It has the most Air Force and Marine Corps students of any 
college. Closely held Columbia Southern has 9,582 service members, up 
from 649 in 2002, it said. Closely held TUI in Cypress, CA, has more 
than doubled active-duty enrollment to 7,665 in the first quarter of 
2009, from 3,661 in 2004, it said.
    While six public and private non-profit colleges hold face-to-face 
classes on Camp Lejeune, none has the highest active-duty enrollment 
there. That distinction belongs to American Military, with 1,623 
students, up from 11 in 1999. Phoenix's enrollment there has risen to 
296 from 15 over the same period.
    Active-duty enrollment at public and nonprofit schools has slumped. 
The University of Oklahoma, once the leading provider of graduate 
degrees to service members, has lost half of its military enrollment in 
a decade, said Pappas, the vice president for outreach.
    ``A decade from now, you may not find traditional national public 
and private universities in military education,'' Pappas said. ``That's 
one of the real dangers.''

                           CURRICULUM CONTROL

    Faculty members at online for-profit colleges, usually part-timers 
with practical experience in their fields, have less control over 
curriculum than in conventional academia, said Benjamin Bolger, who has 
taught at the University of Phoenix and the College of William & Mary 
in Williamsburg, VA. Professors assign reading and writing and 
discussion topics prescribed by the school. Students don't have to log 
on at a specific time. At their convenience, they complete weekly 
coursework and respond to classmates on discussion boards.
    While many colleges adopt what are known as ``military-friendly'' 
practices, the online for-profits go further than most. They accelerate 
course and degrees for service members, trimming requirements and 
granting abundant transfer credits.
    At Phoenix, members of the armed forces can earn an associate's 
degree by taking one 5-week online class, ``Written Communication.'' 
They can make up for the other 19 courses required for an associate's 
degree with credits for classes taken elsewhere, military experience 
including basic training, and passing grades on tests that gauge 
knowledge of a subject area.

                               FAST TRACK

    Civilians seeking the same degree must take at least 6 Phoenix 
courses and can use credits from outside sources for no more than 14. 
Traditionally, 2-year students must take 10 courses, or half of the 
required load, from the school that awards their degrees, so it can 
vouch for their training, Nassirian said.
    Only a handful of active-duty students choose Phoenix's one-course 
option, called the Associate of Arts Degree Through Credit Recognition, 
said Mike Bibbee, the university's director of military programs.
    At Columbia Southern, students can finish courses in 3 weeks and 
gain credit for as many as three classes taken at other colleges in 
which they received grades as low as D, according to its catalog. All 
exams are open-book.

                          ``QUITE UNORTHODOX''

    ``It would be quite unorthodox for traditional institutions to 
grant transfer credit to coursework completed below a grade of C,'' 
Nassirian said. Columbia Southern's academic quality is comparable to a 
State or nonprofit university, Cooper said. The University of Alabama, 
in Tuscaloosa, also accepts D's for transfer courses, according to its 
Web site.
    On Oct. 16, several Marines waited their turn on benches outside 
American Military's office in the education center at Camp Lejeune. 
Inside, AMU education coordinator Brian Miller made his pitch to Jyher 
Lazarre and Hyunwoo Kim. Lazarre, 19, of Orlando, Florida, and Kim, 20, 
of Leonia, NJ, joined the Marines in 2008 and are roommates at Lejeune, 
they said.
    Of 20 courses needed for a 2-year degree, they could satisfy eight 
through basic training and other military experience, Miller said. They 
could test out of seven more, leaving them to take five classes.
    ``I can cut the time of this degree literally in half,'' Miller 
told them. ``It's going to make you competitive toward promotion as 
well.''
    ``If we can cut it down, that's really good,'' Kim said.

                        ACCREDITATION CONFLICTS

    Conflicts with accrediting associations that certify academic 
quality have dogged several online for-profits. American Military, 
founded in Virginia in 1991 by a former Marine Corps officer, applied 
in 1998 for accreditation by the Commission on Colleges of the Decatur, 
GA-based Southern Association of Colleges and Schools. The southern 
association is one of six regional bodies that approve public and 
nonprofit institutions and represent the gold standard in 
accreditation.
    In June 1999, the commission denied American Military a candidacy 
visit, an early step in the accreditation process, said Ann Chard, 
commission vice president. The university didn't meet the requirements 
of having full-time professors and a library, instead relying on part-
time faculty and a lending library network, said James Herhusky, a 
trustee.
    American Military then shifted its headquarters to West Virginia to 
seek regional accreditation by the Higher Learning Commission of the 
North Central Association, according to the minutes of a July 2002 
meeting of the Virginia Council of Higher Education, based in Richmond. 
In 2006, North Central approved American Military, which offers degrees 
in fields including homeland security, counter-terrorism studies and 
weapons-of-mass-destruction preparedness.

                         ``MORE ACCOMMODATING''

    ``At the time, North Central was the only region we knew that was 
accrediting totally online institutions,'' Herhusky said. ``We found 
their criteria to be less prescriptive and more accommodating.''
    American Military now has 160 full-time professors and an online 
library, Herhusky said. The school has almost quadrupled active-duty 
enrollment since 2005, when it hired James Sweizer, former head of 
education for the Air Force, to run its military programs.
    ``I came to AMU with the philosophy of relationship marketing,'' 
Sweizer said in an interview. ``You cater to the needs of key 
influencers.''
    Sweizer said he's seen ``dramatic improvement'' in how American 
Military manages courses and faculty.

                          PROBATIONARY PERIOD

    American Intercontinental, which ranked 20th in tuition assistance 
from the Marine Corps in fiscal 2009, also didn't meet the standards of 
the Southern Association of Colleges and Schools. It was placed on 
probation from 2005 to 2007 for academic and administrative 
shortcomings, including an inadequate number of full-time professors, 
according to accreditation records. The school addressed the 
association's concerns, and the improvements it made during those 2 
years have strengthened the university, Career Education spokesman 
Leshay said in an e-mail.
    American Intercontinental moved its headquarters this year from 
Atlanta to Chicago and was accredited by North Central. American 
Intercontinental relocated because its online campus is based there, 
Career Education spokesman Leshay said.
    Two other for-profits in the military market, Grantham and Columbia 
Southern, have a status known as national accreditation. Newer than the 
regional groups, the seven national bodies mostly approve for-profit 
colleges, including vocational and distance-education programs. Only 14 
percent of colleges accept credits transferred from nationally 
accredited institutions, according to a 2006 study by the University 
Continuing Education Association in Washington.

                            EXPANDING MARKET

    Three policy changes in the past decade opened the military market 
to for-profit colleges. The Defense Department, which had paid tuition 
assistance mainly to regionally accredited schools, began in 1999 to 
reimburse nationally accredited colleges as well. It increased funding 
in 2002 from 75 percent to 100 percent of tuition up to the $250-per-
credit ceiling. In 2006 and 2007, the Army cut 233 counselors who used 
to guide soldiers through college choices, replacing them with 
interactive Web sites that offer information, said Army spokesman Wayne 
V. Hall.
    These moves coincided with the rise of Internet courses. For-
profits were ahead of most traditional colleges in online education, 
which helps service members, deployed worldwide, keep up their studies. 
In fiscal 2008, the first year that the Defense Department collected 
such data, 64 percent of active-duty students took distance-education 
classes.

                               WAR ZONES

    Soldiers even take online classes in war zones. While in 
Afghanistan, Army sergeant Patrick Peake earned a bachelor's degree in 
criminal justice from American Military, enrolling in as many as four 
online courses at a time.
    Cavalry scouts ``set up a wireless connection at the mud-brick 
building we were at,'' Peake, 29, said in an interview. After studying 
counter-terrorism at AMU, Peake said, he told friends in Army 
intelligence about terrorist groups in the region. ``This dumb grunt 
helped them out a little,'' he said.
    Unlike most traditional schools, for-profits vie to offer 
inducements to students. American Military gives textbooks for free to 
undergraduates, who may resell them to the school's vendor after use 
for $30 to $50 per book, Miller said. Columbia Southern is considering 
a similar buyback program, according to Cooper.
    Grantham, the seventh-biggest recipient of undergraduate tuition 
money from the Army in fiscal 2008, gave new laptop computers made by 
Dell Inc., from March to July to active-duty students who had completed 
at least four courses with grades of C or better. The free laptops were 
part of a pilot research project on student retention, said Tim 
Arrington, Grantham director of military programs.

                            LAPTOP LARGESSE

    Michael Lambert, executive director of the Distance Education 
Training Council, which accredits Grantham, advised the school to stop 
the laptop largesse, he said.
    ``The concern is, schools will outdo each other and we'll have an 
arms race,'' he said. ``Free laptops, free Kindles, free iPods, all 
coming out of taxpayers' pockets.''
    Servicemembers Opportunity Colleges, a Defense Department 
Washington-based contractor that develops policies for 1,800 colleges 
involved in military education, is also considering guidelines to limit 
laptop giveaways and other inducements. ``I don't think it's out of 
hand, but the potential is there,'' said Kathy Snead, the group's 
director.

                             FORMER MARINES

    Career Blazers Learning Center, a New York-based vocational school, 
gave away laptops loaded with instructional software to Marines about 
to be deployed to combat zones, owner Paul Viboch said. It also hired 
former Marines as recruiters and paid referral fees to students for 
signing up other service members. Entire units enrolled, and Career 
Blazers received $4.5 million in tuition assistance from the Marine 
Corps in 2006, the most of any post-secondary provider.
    Career Blazers charged $4,500--the maximum that the military 
reimburses in a year--for self-paced lessons on how to perform basic 
computer applications or balance checkbooks. Much of the material was 
available for less expense at workshops or community college classes on 
bases, education specialists said.
    ``The military overpaid for laptops,'' said Johanna Rose, an 
education technician at Camp Lejeune.
    Relocated to Martinsburg, WV, and renamed Martinsburg Institute, 
Career Blazers stopped giving away laptops 3 months ago. Its tuition 
assistance from the Marine Corps slipped to $616,000 in fiscal 2009, as 
education officials on some Marine bases discouraged service members 
from enrolling, Viboch said. ``I was too successful, too quickly,'' he 
said.

                       ``UNDERHANDED'' TECHNIQUES

    Unauthorized marketing pitches by for-profit recruiters have become 
widespread on military bases.
    ``Some of these schools are a little underhanded,'' said Pat 
Jeffress, branch manager of lifelong learning at Camp Pendleton, a 
Marine Corps base in California, said. ``They try to backdoor me. They 
come onto the base when they don't have permission and they set up 
shop.''
    One recruiter for Ashford University recently ignored the anti-
solicitation rule at Camp Lejeune, said Songer, the base's lifelong 
learning director. Bridgepoint, based in San Diego, has climbed 57 
percent since the company went public on April 14. Bridgepoint fell 21 
cents, or 1.2 percent, to $17.37 at 4 p.m. today.
    Songer said he told the recruiter, whose husband is in the 
military, that she could only meet students at the base's education 
center. Instead, she pitched the online for-profit in the recreation 
room of a barracks for wounded Marines. About 30 Marines showed up, 
said Brad Drake, a corporal who attends Ashford.

                        ``ATTRACTIVE'' RECRUITER

    ``It helped that she was really attractive,'' said Drake, 23, who 
suffered a traumatic brain injury in Afghanistan when a rocket hit his 
truck. ``That got everyone's attention.''
    The recruiter spoke at the barracks with the approval of the unit's 
commanding officer, Bridgepoint spokeswoman Shari Rodriguez said in an 
e-mail. ``We keep our students' needs at the forefront of all we do.''
    Unit commanders are often unfamiliar with educational rules, Songer 
said. He told the recruiter, ``If you cross that line again, you'll 
never be allowed on this base,'' he said.

                          ASHFORD'S ENROLLMENT

    Ashford ranked sixth in Marine Corps enrollment in the year ended 
Sept. 30, 2009, with 1,018 students. At Camp Lejeune, Ashford had 119 
active-duty students, up from 25 in the previous year, and 6 in fiscal 
2007. About 8 to 10 wounded Marines signed up for Ashford after the 
recruiter's presentation, among them Corporal Long, the brain-injured 
soldier, who also walks with a cane.
    Long is pursuing a bachelor's degree in organizational management 
through Ashford. In his first class, students could retake the final 
test until they passed, he said.
    ``I took it 10 times,'' he said. ``I kept getting the same answers 
wrong.''
    Long, who aspires to be an occupational or physical therapist, said 
he wonders if he can graduate. He is married and says he needs to 
provide for his family.
    ``I got my doubts,'' he said. ``My family's more important than my 
doubts. That keeps me going.''

                           [January 19, 2010]

     Apollo Suffers New York Snub as SEC Probes Phoenix (Update 3)

                           (By Daniel Golden)

    Jan. 19 (Bloomberg)--Apollo Group Inc., whose for-profit University 
of Phoenix is among the largest colleges in the United States with 
campuses in 29 of the 30 most populous States, faces one long-standing 
obstacle to staking its claim as the future of higher education: New 
York.
    During Apollo's 12-year quest to enter the third-biggest State, 
founder John Sperling raised money for Eliot Spitzer's 2006 
gubernatorial campaign, and the company hired Mel Miller, former 
speaker of the New York Assembly, as a lobbyist.
    New York has blocked Phoenix's bid for a Manhattan campus, 
questioning its academic quality, its dropout rate, how it compensates 
recruiters, and even its right to call itself a university, according 
to interviews and documents obtained under a State Freedom of 
Information Law request. One State review said introductory algebra was 
less demanding than a high school course. Phoenix has 455,600 
undergraduate and graduate students, slightly less than the State 
University of New York's 464,981 enrollment.
    ``The last thing we need to do is open a college that's not 
successful,'' Joseph Frey, New York's deputy commissioner for higher 
education, said in a December 11 interview in his Albany office. ``I'm 
not bringing anything in front of the Board of Regents until I'm 
confident the university is playing by the rules of the U.S. Education 
Department and complies with our requirements.''

                           SEC INVESTIGATION

    Investors are beginning to share New York's skepticism. While the 
benchmark Standard & Poor's 500 Index of stocks has advanced 8.2 
percent, Apollo shares have fallen 17 percent since Oct. 27, when the 
company said the Securities and Exchange Commission opened an informal 
probe into its accounting practices. Apollo said its accounting is 
appropriate, and it intends to cooperate with the inquiry.
    Apollo's swoon partly reflects concern that Federal authorities may 
follow New York's lead and keep closer tabs on for-profit colleges, 
said Trace Urdan, an analyst at Signal Hill Capital Group in San 
Francisco.
    ``In the Obama administration, the pendulum has swung back closer 
to where New York State has been the whole time,'' Urdan said in a 
telephone interview.
    The absence of a New York campus hurts Phoenix's efforts to boost 
enrollment and revenue. Phoenix described New York in a June 2004 
planning document as having ``the highest number of potential 
students'' of any State.

                        GROWTH ``DECELERATION''

    ``A `deceleration of growth' in Phoenix's 2-year associate degree 
program, which accounts for 45 percent of enrollment, is worrying 
investors,'' said Ariel Sokol, an analyst at Wedbush Morgan Securities 
in New York. ``The slowing growth reflects the school's shift to 
higher-quality bachelor's degree candidates,'' he said. ``The U.S. 
Education Department also is prodding Phoenix to disclose more 
information about costs and course requirements to prospective 
students, which could deter some of them from enrolling,'' he said.
    While 39 for-profit colleges operate in the State, including ITT 
Educational Services Inc. and DeVry Inc., New Yorkers have to attend 
Phoenix online or cross the Hudson River to the university's Jersey 
City, NJ, campus. Phoenix, which generated 95 percent of Apollo's $3.97 
billion in revenue in the year ended August 31, enrolls students in 
face-to-face and online classes.
    More than 15,000 New Yorkers are enrolled at Phoenix online ``to 
take advantage of our innovative, accredited education to help their 
careers during these difficult economic times,'' Sara Jones, an Apollo 
spokeswoman, wrote in an e-mail.

                                NO VOTE

    Phoenix's application has never reached a formal vote by the New 
York regents, who oversee education in the State, Frey said. Phoenix 
students don't qualify for the State tuition assistance program, which 
provided $813 million of aid in the 2008-2009 academic year, he said.
    New York officials' questions are similar to those that the Obama 
administration is asking about the for-profit college industry 
generally. The U.S. Department of Education is considering restrictions 
on paying recruiters for enrollments and on giving misleading 
information to prospective students, and may require for-profit 
colleges to show how much their programs increase graduates' earnings, 
according to department documents.
    The department is examining institutions that increasingly rely on 
Federal financial aid, Robert Shireman, the U.S. deputy undersecretary 
of education, said in a Sept. 1 interview. Phoenix derived 86 percent 
of its $3.77 billion in revenue in fiscal 2009 from Education 
Department grants and loans to students, up from 48 percent in 2001, 
according to its Oct. 27 10-K filing with the Securities and Exchange 
Commission.

                              LATE REFUNDS

    Apollo was late in paying Federal financial aid refunds for 
dropouts, according to a government report the company disclosed in its 
10-Q on Jan. 7. The findings by the Education Department will cost 
about $1.5 million, Phoenix-based Apollo said.
    Apollo fell 11 cents, or less than 1 percent, to close at $60.26 in 
Nasdaq stock market composite trading at 4 p.m. today.
    Most education companies fell today after the Education Department 
released draft regulations that might restrict Federal student loans 
for schools whose graduates can't repay their debt. The agency released 
draft ``gainful employment'' provisions in its aid program that would 
require companies to show their students can earn enough to pay back 
their loans.
    Phoenix's failure to gain approval in New York is one of its few 
defeats since Apollo went public in 1994.
    Founded in 1976 by John Sperling, a faculty-union organizer and 
former San Jose State University history professor, Phoenix pioneered a 
model that used part-time faculty with practical experience to teach 5-
week courses to working adults. The university has expanded nationwide, 
aided by well-connected board members, campaign contributions and 
extensive lobbying.

                           EDUCATIONAL ACCESS

    The quality of Phoenix's educational offerings and its policy of 
admitting any applicant who has completed high school or earned an 
equivalency degree have driven the university's growth, said Jones, the 
Apollo spokeswoman. Phoenix ``provides access to those who otherwise 
might not have the opportunity to pursue higher education,'' she said.
    In Pennsylvania, Phoenix managed to overturn a ban on for-profit 
colleges. In Texas, with the support of then-Governor George W. Bush 
and his education adviser, Margaret Spellings, later U.S. Secretary of 
Education, it outlasted the State higher education commissioner who 
tried to block its entry. For-profits are freer than most nonprofit 
colleges to form political action committees and donate to candidates 
for State office, said Miriam Galston, a law professor at George 
Washington University in Washington.
    ``In all my time there, New York was the only State we didn't 
win,'' Charles Seigel, a former Apollo senior vice president for 
government affairs and now vice president for public policy at Cornell 
Companies Inc. in a telephone interview.

                              SAGA BEGINS

    The New York saga began in 1995, when Seigel got in touch with New 
York education officials. Phoenix applied for a license 2 years later, 
seeking to open a Manhattan campus for graduate and undergraduate 
students. Three years later, a State review team visited the 
university's campuses in Phoenix and Tucson, Arizona. The university 
``really wanted New York very badly,'' Miller, Apollo's New York 
lobbyist from 1999 to 2006, said in a telephone interview.
    By 2001, Phoenix was growing impatient.
    ``I am beginning to believe all of this is intentional delay,'' 
Seigel wrote to Gerald Patton, then New York's deputy commissioner for 
higher education. ``It is becoming my view that this process will never 
end.''
    In a January 2002 letter to a university official, Frey proposed a 
compromise--licensing Phoenix only for graduate programs, which had 
received better reviews than its undergraduate offerings. Against 
Miller's advice, Phoenix spurned the offer, Miller said.

                            ``WORST ENEMY''

    ``The university was its own worst enemy,'' he said.
    After a 2002 site visit to a Phoenix campus in Philadelphia, a 
State review team found fault with the college's newly designed 
general-education courses for undergraduates.
    First-year algebra ``is not a college-level mathematics course'' 
and ``does not demand as high a level of critical thinking as the high 
school curriculum'' in New York, according to a 2003 draft report.
    Courses in human nutrition and in environmental issues and ethics 
lacked basic science, and instructors were unqualified, according to 
the report.
    ``The reviewers continue to question that college-level content in 
the liberal arts and sciences, in particular in the math and science 
disciplines, can be covered in a 5-week session,'' the authors wrote.
    Phoenix's general-education courses ``are at the appropriate level 
and quality,'' Manny Rivera, an Apollo spokesman, wrote in an e-mail. 
The school continually evaluates and updates its curriculum and has won 
Arizona awards for course development, he said.

                            GRADUATE PROGRAM

    While New York criticized Phoenix's undergraduate quality, the 
State's graduate-only proposal remained on the table. ``We are ready to 
move forward'' with five proposed graduate programs in business, Frey 
wrote in April 2004 to Susan Mitchell, a Phoenix vice president who is 
now Apollo's senior vice president for government affairs.
    This time, Phoenix acquiesced. The school, which didn't offer 
enough doctoral programs in academic fields to describe itself as a 
university under State rules, would go by ``Phoenix.edu'' in New York, 
Mitchell wrote Frey in June 2004.
    The New York market had ``astounding'' potential, Phoenix said that 
month in a planning document submitted to State officials.
    ``In the past year, the university has been contacted by 20,000 
residents, many of them from the Manhattan area,'' according to the 
document. ``These numbers represent the highest number of potential 
students approaching the institution in any State.''

                             LOCAL COLLEGES

    The State then canvassed area colleges for their views on Phoenix 
opening a graduate campus. Fordham University in the Bronx, Pace 
University in Manhattan, Polytechnic University in Brooklyn, and the 
Association of Proprietary Colleges in Albany all opposed Phoenix and 
requested a public hearing.
    ``The MBA program is just a foot in the door for the initiation of 
additional programs in direct competition,'' wrote David Chang, then 
Polytechnic's president and now chancellor of Polytechnic Institute of 
New York University.
    In response, Mitchell wrote to Frey in November 2004 that Phoenix 
``fully understands the limitations on registration and approval in New 
York.''
    New York has barred Phoenix to protect local colleges, said Thomas 
Triscari Jr., an associate professor at Rensselaer Polytechnic 
Institute in Troy, NY, who served on the six-member State review team 
that visited Phoenix campuses in 2000.

                           VISION, FORESIGHT

    Phoenix's approach to education ``is well-structured, well thought-
out,'' Triscari said in a telephone interview. ``These guys have vision 
and foresight. Competition is in the fabric of our society. Why have we 
precluded that in academic circles?''
    Another member of that team also said the State should approve 
Phoenix.
    ``They're as good as any of those other for-profits operating in 
New York,'' said David Breneman, a professor at the University of 
Virginia in Charlottesville and former dean of its school of education. 
``I don't see any reason you'd single them out for retribution.''
    New York was about to schedule a hearing on the local colleges' 
objections when the news broke in September 2004 that Apollo had agreed 
to pay $9.8 million to the Education Department to settle alleged 
violations of a 1992 law banning incentive compensation for recruiters. 
The company didn't admit wrongdoing.
    State officials pulled back, complaining that Phoenix had failed to 
alert them to the Federal probe.

                            HEARING DELAYED

    ``We cannot proceed as planned to schedule a hearing,'' Barbara 
Meinert, coordinator for the State education department's Office of 
College and University Evaluation, wrote Mitchell in October 2004.
    Laura Palmer Noone, then Phoenix's president, apologized in a 
September 2005 letter to a New York official ``for any embarrassment or 
concern this delay in providing the information caused for the Board of 
Regents.''
    She defended the university's compensation policies.
    ``There is no correlation between the number of students recruited 
and the amount the enrollment counselors were paid,'' she wrote.
    ``We were set for the final hearing and then everything blew 
through the moon,'' Miller said. The hearing on Phoenix's application 
for a graduate campus was never scheduled, Frey said.

                              ANOTHER TACK

    Stymied, Sperling took another tack. After meeting Spitzer, then 
State attorney general and the frontrunner in the governor's race, 
through mutual friends at a dinner, Sperling suggested a fundraiser for 
him, said Kristie Stiles, the candidate's national finance director.
    ``I knew Phoenix wasn't operating in New York,'' she said in a 
telephone interview.
    At least 15 executives and board members of Phoenix and Apollo 
Group attended the 2006 fundraiser in Sperling's Arizona home, 
according to campaign finance filings. The event reaped at least 
$50,000, Stiles said.
    Sperling and Phoenix were accustomed to politics. In his 2000 
autobiography, ``Rebel With a Cause,'' Sperling described his skills as 
``primarily educational and political.''
    Before obtaining a license in Pennsylvania, Phoenix had to persuade 
the Legislature to overturn a century-old State law prohibiting a 
university from operating as a for-profit, according to Sperling's 
autobiography. Phoenix officials met with each member of the State's 
House and Senate education committees, and brought some of them to 
visit its campuses, Seigel said. The repeal was adopted in 1997 as an 
amendment to an elementary-school budget bill, he said.

                          ``BITTERLY OPPOSED''

    ``The private colleges were bitterly opposed to us, but by the time 
they found out'' about the maneuver, ``it was too late,'' Seigel said.
    When Phoenix sought entry into Texas in the mid-1990s, Kenneth 
Ashworth, then the State's higher education commissioner, was skeptical 
of the school's reliance on part-time faculty, he said in a phone 
interview.
    ``I stood in the breach and tried to keep the University of Phoenix 
out of Texas,'' Ashworth said.
    Phoenix hired Diane Allbaugh, wife of then-Governor Bush's chief of 
staff, Joseph Allbaugh, as a lobbyist, according to records of the 
Texas Ethics Commission, a State agency based in Austin. Bush's 
education adviser, Margaret La Montagne, later Margaret Spellings, 
prodded Ashworth to expedite the license, he said.

                           ``UNSHIRTED HELL''

    ``She called and gave me unshirted hell,'' Ashworth said. ``Why 
wasn't I letting Phoenix into Texas?' I said they couldn't meet our 
standards.''
    While Spellings doesn't recall specific discussions about Phoenix 
with Ashworth, she talked to him all the time on educational policy, 
Holly Kuzmich, Spellings's spokeswoman, said. Spellings and Bush 
supported ``new and innovative developments in higher education,'' 
including Phoenix, Kuzmich said. Diane Allbaugh declined to comment.
    Ashworth's retirement in 1997 cleared the university's path. 
Phoenix ``was offering better-quality degree programs than those 
offered at some public institutions in Texas,'' Ashworth's successor, 
Don Brown, said in a telephone interview. Phoenix's first Texas campus, 
in Dallas, was approved in February 2001.
    Apollo created a political action committee in 1994, and Sperling 
encouraged the company's top seven executives to contribute the maximum 
$5,000, he wrote in his autobiography. He soon persuaded the next two 
levels of executives to donate, and Apollo formed three more PACs.

                        POLITICAL CONTRIBUTIONS

    ``If we were to be in the `game,' it required contributions to 
Members of Congress and the Senate, not to mention presidential 
candidates--this, on top of a growing number of State legislators and 
governors,'' Sperling wrote.
    Phoenix studded its board with political insiders such as Richard 
Bond, former Republican National Committee chairman; John Burton, 
chairman of the California Democratic Party and former president of the 
California Senate; Alan Wheat, a former U.S. House member from 
Missouri; and William Goodling, former chairman of the House education 
committee. Board members were unavailable for interviews, Apollo's 
Rivera said.
    Sperling and Nancy Pelosi, speaker of the U.S. House of 
Representatives, are longtime friends, as well as neighbors in San 
Francisco, where Sperling owns a home, Jorge Klor de Alva, Phoenix 
senior vice president for academic excellence, said in a Sept. 9 
interview at the university's Arizona headquarters.

                          PELOSI'S ATTENDANCE

    Pelosi attended a Democratic Congressional Campaign Committee 
fundraiser that Sperling hosted in Arizona last May, according to two 
people familiar with the event. In 2003, Pelosi went to a small 
gathering at Sperling's home and discussed with him how to position the 
Democratic Party to retake the House and make her speaker, according to 
a Pelosi aide and to a person acquainted with both Pelosi and Sperling.
    Sperling co-wrote a 2004 book, ``The Great Divide,'' advising 
Democrats on how to win the ``red'' States and citing Pelosi's views. 
Sperling hasn't asked for the speaker's help on any legislation 
affecting the university, the Pelosi aide said. Sperling declined to 
comment.
    Phoenix experienced success with Congress. In 2008, for example, 
the university helped pass a provision expanding Federal financial aid 
to for-profit colleges beyond vocational programs to include liberal-
arts students, House aides said. Phoenix plans to offer more liberal-
arts courses for aspiring teachers who need degrees in academic fields, 
William Pepicello, the university's president, said in a Sept. 9 
interview at its Arizona headquarters.

                           SPITZER FUNDRAISER

    In New York, Sperling thought the Spitzer fundraiser ``would take 
care of everything. He thought he had positive signals from Eliot,'' 
Miller said. ``If I was Sperling, I would have been the same way. 
`We've done this the honorable way, we get no results, let me try 
another route.' ''
    Miller said he warned the university that the fundraiser would be 
futile because the regents are appointed by the Legislature, not the 
governor, and because he thought Spitzer wouldn't go out of his way to 
reward contributors.
    In July 2006, Spitzer returned $2,000 donations from Sperling and 
Hedy Govenar, the founder of Governmental Advocates Inc., a Sacramento, 
CA, lobbying firm that represents Apollo. Govenar has served on the 
boards of Phoenix and Apollo. The campaign refunded the money after 
learning about Apollo's 2004 incentive compensation settlement, Stiles 
said. Apollo said in December 2009 that it paid $78.5 million to settle 
a lawsuit over the same issue of recruiter compensation. The company 
did not admit wrongdoing.

                             ``NICE HOUSE''

    Spitzer remembers the fundraiser, not why it was held or why he 
gave back the money, he said in a telephone interview.
    ``I recall being in a nice house, chatting for about 15 minutes,'' 
he said. ``I raised $40 million around the Nation. People supported 
what we were doing.''
    Spitzer was elected governor in 2006 and served until his March 
2008 resignation.
    The fundraiser was Sperling's personal undertaking, ``separate and 
distinct from Apollo Group's political activism, which is expressed 
through the company's nonpartisan PAC,'' Apollo's Jones said.
    Apollo has donated $10,150 to New York State legislators and to 
State Democratic Assembly and Senate campaign committees since 2001, 
according to campaign finance documents. The company gave $1,000 in 
2006 to Ron Canestrari, then chairman of the Assembly's higher 
education committee and now majority leader; $400 in 2007 to Kenneth 
LaValle, now ranking Republican on the Senate's higher education 
committee; and $500 in 2007 to Kevin Parker, a member of that 
committee. The university currently doesn't have a lobbyist in New York 
and isn't engaging in political activity on behalf of its application, 
Rivera said.

                              DROPOUT RATE

    State officials remain concerned that Phoenix's dropout rate is too 
high, said Saul Cohen, a regent and a former president of Queens 
College in New York. Only 8.9 percent of first-time, full-time college 
students who enrolled at Phoenix in 2001 completed their degrees in 6 
years, according to the National Center for Education Statistics, in 
Washington.
    Including transfer students, 26 percent of candidates for associate 
degrees finish in 3 years, and 36 percent of students pursuing 
bachelor's degrees graduate in 6 years, according to Phoenix's 2009 
academic annual report.
    ``You bring in bodies that may not have much of a chance of 
completion,'' Cohen said in a telephone interview. ``That certainly is 
part of the issue.'' Apollo is introducing a 3-week orientation course 
for unprepared students, the company said, Jan. 7.

                           WATERFRONT CAMPUS

    Phoenix continues to seek approval in New York and is updating the 
information in its application at the State education department's 
request, Jones said.
    At the same time, ``we look forward to continuing to serve our New 
York students through our neighboring New Jersey campus,'' Jones said. 
At the campus on the Jersey City waterfront, which New Jersey approved 
in 2003, about a fourth of the students come from New York, according 
to a December 2004 letter from Mitchell to Frey.
    Phoenix student Maurice Murphy, a 32-year-old Bronx resident, takes 
a subway under the Hudson six days a week to school. If all goes 
smoothly, his commute takes half an hour, Murphy said as he headed to 
class December 17 in Jersey City. He is majoring in human services 
management and wants to become a social worker.
    ``Now we've got a resource center with TVs and computers,'' Murphy 
said. ``This is like I'm really going away to college.''

                            [April 30, 2010]

       Homeless High School Dropouts Lured by For-Profit Colleges

                          (By Daniel Golden)*

    Benson Rollins, 23, poses for a portrait near the Y Haven shelter 
in which he is currently living in Cleveland, earlier this week. 
Photographer: Ross Mantle/Getty Images for Bloomberg Business Week.
---------------------------------------------------------------------------
    * To contact the reporter on these stories: Daniel Golden in Boston 
at [email protected].
---------------------------------------------------------------------------
    Benson Rollins wants a college degree. The unemployed high school 
dropout who attends Alcoholics Anonymous and has been homeless for 10 
months is being courted by the University of Phoenix. Two of its 
recruiters got themselves invited to a Cleveland shelter last October 
and pitched the advantages of going to the country's largest for-profit 
college to 70 destitute men.
    Their visit spurred the 23-year-old Rollins to fill out an online 
form expressing interest. Phoenix salespeople then barraged him with 
phone calls and e-mails, urging a tour of its Cleveland campus. ``If 
higher education is important to you for professional growth, and to 
achieve your academic goals, why wait any longer? Classes start soon 
and space is limited,'' one Phoenix employee e-mailed him on April 15. 
``I'll be happy to walk you through the entire application process.''
    Rollins's experience is increasingly common. The boom in for-profit 
education, driven by a political consensus that all Americans need more 
than a high school diploma, has intensified efforts to recruit the 
homeless, Bloomberg Businessweek magazine reports in its May 3 issue. 
Such disadvantaged students are desirable because they qualify for 
Federal grants and loans, which are largely responsible for the 
prosperity of for-profit colleges. Federal aid to students at for-
profit colleges jumped to $26.5 billion in 2009 from $4.6 billion in 
2000. Publicly traded higher education companies derive three-fourths 
of their revenue from Federal funds, with Phoenix at 86 percent, up 
from just 48 percent in 2001 and approaching the 90 percent limit set 
by Federal law.

                           BI-WEEKLY STIPEND

    The privately held Drake College of Business, which trains people 
to be medical and dental assistants, relied on taxpayers for 87 percent 
of its revenue in 2007. Almost 5 percent of the student body at its 
Newark, NJ, branch is homeless, says Jean Aoun, director of admissions 
and student services there. Late in 2008, it began offering a $350 bi-
weekly stipend to students who show up for 80 percent of classes and 
maintain a ``C'' average.
    ``It's basically known in the community: If you're homeless, and 
you need some money, go to Drake,'' says Carmella Hutson, a case 
manager at the Goodwill Rescue Mission in Newark, where about 20 
clients have enrolled at Drake in the past 2 years. ``It would put 
money in my pocket, help me buy a car,'' adds Jerome Nickens, 45, who 
lived at the mission when he talked to a Drake representative but 
decided not to enroll.

                          FORMAL INVESTIGATION

    After Bloomberg Businessweek called the Accrediting Council for 
Independent Colleges & Schools to inquire about the stipends, the 
council opened an investigation into the college's recruitment 
practices. The inquiry could lead to revoking Drake's accreditation, 
leaving it ineligible for Federal aid.
    Chancellor University in Cleveland, which counts Jack Welch as an 
investor and features a weekly video for students by the former General 
Electric Co. chief executive, explicitly focused recruiting efforts on 
local shelters after it realized that Phoenix, owned by Apollo Group 
Inc., was doing so. Chancellor has stopped pursuing the homeless, and 
Phoenix says any recruiting by its employees in Cleveland shelters was 
unauthorized. Phoenix's business code prohibits recruiting at shelters, 
and any employee violating the ban could face termination, Apollo says.
    Phoenix wants to ensure that ``only students who have a reasonable 
chance to succeed enroll in our programs,'' Apollo spokesman Manny 
Rivera said in an e-mail.

                           WELFARE POPULATION

    Other schools see nothing wrong with reaching out to the 
disadvantaged. ``We don't exclusively target the homeless,'' says Ziad 
Fadel, chief executive of Drake, which also sends recruiters to welfare 
and employment agencies. ``We are in a community that is low-income and 
happens to have a lot of people on welfare.''
    The every-other-Friday payment encourages Drake students to stay in 
school and graduate, he says. The stipend, which about three-fourths of 
Drake's 1,200 students receive, is not ``a gimmick to just get students 
in the front door,'' Fadel says. He adds that a sample analysis of 30 
graduates placed by Drake's career services office found ``some very 
substantial improvements in income.''
    While many caseworkers for the homeless are gratified by the 
attention, some see only exploitation. The companies ``are preying upon 
people who are already vulnerable and can't make it through a 
university,'' says Sara Cohen, a case manager at Shelter Now in 
Meriden, CT. ``It's evil.''

                                DEJA-VU

    The current state of for-profit education has an element of deja-
vu. Twenty years ago the sector had grown wild and unruly, as fly-by-
night trade schools siphoned off students from welfare and unemployment 
lines, ostensibly to train them as truck drivers or hairdressers. Often 
these enterprises provided little or no schooling; their aim was the 
Federal student aid. Default rates on student loans skyrocketed to 22 
percent before Congress enacted tough regulations in 1992. Among them 
were limits on default rates for individual colleges as well as a cap 
on the percentage of their revenue that they could receive from the 
government. The schools were also forbidden to pay recruiters based on 
how many students they enrolled.
    The reforms injected discipline into the industry and brought down 
default rates. Then, a decade later, the Bush administration relaxed 
the ban on incentive compensation for recruiters, opening the door for 
the aggressive wooing of the homeless.
    ``Targeting vulnerable populations who are not likely to benefit is 
one example of overzealous recruiting that can be driven by paying 
based on enrollment numbers,'' says Robert Shireman, Deputy Under 
Secretary of the U.S. Education Department, which is pushing to tighten 
the rules.

                          UNLEASHING POTENTIAL

    The Bush administration also sought to unleash online education's 
potential. Phoenix now boasts 458,600 students, with more than 200,000 
in its 2-year online program. Enrollment in for-profit colleges grew to 
1.8 million in 2008 from 673,000 in 2000. Revenue rose to an estimated 
$29.2 billion this year from $9 billion in 2000, says Jeffrey Silber, 
an analyst for BMO Capital Markets in New York. Operating margins 
averaged 21 percent in 2009; schools typically charge $10,000 to 
$20,000 a year, well above comparable programs at community colleges.
    The industry is now fully mainstream. Goldman Sachs Group Inc. owns 
38 percent of the for-profit Education Management Corp. in Pittsburgh, 
which has 136,000 students in programs ranging from fashion to culinary 
arts, and former President Bill Clinton took a position as honorary 
chancellor of Laureate International Universities, owned by Baltimore-
based Laureate Education Inc. Investors are flocking to the industry, 
drawn by the stability of government funding and the profit potential 
of online classes. But some of the unsavory practices that spurred 
Congress to act are springing back to life, with a new wrinkle or two.

                            HOMELESS CIRCUIT

    In Cleveland, Chancellor and Phoenix were both hitting the homeless 
shelters last year. Byron Thompson, who joined Phoenix in 2009 as a 
recruiter, soon made presentations at Y Haven, Salvation Army Harbor 
Light and Transitional Housing, all of which serve the city's homeless.
    Thompson, 29, says the recruiting served a social purpose: ``I feel 
the homeless are a real population that can't be ignored.'' Borrowing 
by the homeless to pay tuition ``is no different from a middle-class 
student who has to take out a loan,'' he says. He also hoped to boost 
his pay. ``The month I signed up two or three women from Transitional 
Housing was a good month,'' he admits. (Phoenix recruiters in Cleveland 
had a quota of five students a month, according to a former employee.)

                            LEGAL SETTLEMENT

    Thompson, who left Phoenix in January, acknowledges that his bosses 
didn't endorse his efforts to recruit the homeless. Apollo Group agreed 
last December to pay $78.5 million to settle a Federal lawsuit in 
California alleging that compensation for Phoenix recruiters violated 
restrictions on incentive pay. The company, which admitted no 
wrongdoing, says it's changing its compensation model.
    While Thompson says he was ``welcomed with open arms'' at the 
shelters, some staff members were wary. ``The question in my mind about 
Phoenix was, ``Why are they doing this?' '' says Bruce Shagovac, a 
counselor at Y Haven. ``There's got to be some payoff for them.''
    One homeless woman whom Thompson steered to Phoenix was Marisol 
Lugo. Lugo ran away from her Chicago home at age 12, became a heroin 
addict, and lived on the streets for 22 years, eating out of restaurant 
trash bins and sleeping in parks and abandoned cars. After detox, she 
moved in 2008 to Transitional Housing, obtained a high school 
equivalency degree, and got to know Thompson. ``He gave me wonderful 
words of encouragement,'' says Lugo.
    With Federal grants and loans covering the $10,000-plus annual 
tuition, she began pursuing a 2-year business degree online at Phoenix 
last August. She soon ran into academic difficulties, failing a course 
in critical thinking.

                         RETAINING INFORMATION

    ``Sometimes, having used so much drugs, I have trouble retaining 
information,'' says Lugo, who now has her own apartment and a 
maintenance job at the shelter. According to Phoenix, she left the 
school in November. She says she is still registered and there is a 
payment dispute.
    Phoenix's forays into shelters were noted by a new Cleveland rival. 
In 2008, investors bought nonprofit Myers University, which was under 
court receivership, and renamed it Chancellor. A year later Welch 
acquired a stake in it; the university named its new master's degree 
program in business administration after him, and Welch helped develop 
the curriculum.
    At a faculty function last August, Darius Navran, dean of 
Chancellor's School of Professional Studies, sought out Jeffrey Perkins 
Jr., an adjunct professor of public administration, and asked how 
Chancellor could boost its enrollment of about 400.

                        NONTRADITIONAL STUDENTS

    ``If we don't tap into that population, Phoenix will,'' Perkins 
says he told Navran, meaning the homeless. The dean agreed.
    Chancellor's small classes and low student-to-faculty ratio are 
suited to nontraditional students such as the homeless, Perkins says. 
He e-mailed managers of Cleveland social service agencies in September, 
inviting them to a lunch at Chancellor to ``discuss our new plans to 
recruit the economically disadvantaged and at-risk groups. Many of them 
are targeted for on-site recruitment at local transitional housing, 
halfway houses, and other human service facilities.''
    Sixteen human services managers showed up for the lunch. Two days 
later, in a memo to Navran, Perkins predicted that the program would 
produce ``a minimum of at least 10 enrollees by spring term.''

                            ``HEAVY-HANDED''

    In the ensuing weeks, Perkins and other Chancellor officials gave 
presentations at a dozen social service programs. Their pitch was 
``very heavy-handed,'' says Phillip Hines, housing coordinator for the 
Community Women's Shelter. ``It was beating the drum, `Go to 
Chancellor. This is what we offer. Financial aid, financial aid, 
financial aid.' ''
    Afterward, Hines says, Chancellor hounded him with phone calls and 
e-mails to ``get these women rolling.'' Chancellor's initiative reaped 
only one or two students and was discontinued. It ``had all the best 
intentions,'' CEO Bob Barker said in an e-mail, ``but the time and 
effort generated very little interest.''
    In one view, the rise of for-profit colleges represents a laudable 
merger of public interest and the private sector. With public colleges 
beset by budget cuts, for-profit colleges offer an opportunity for 
people who are down and out to get ahead. Students with no assets or 
collateral can tap Federal grants and loans on the theory that degrees 
will lead to well-paying jobs that enable borrowers to repay.

                             TUITION HIKES

    The trouble is the cost. Education companies charge high prices 
that require students to take on debt. Chancellor charges $9,750 a 
year--about four times the $2,400 tab at nearby Cuyahoga Community 
College. Poor students can pay Cuyahoga's tuition with Federal grants 
and don't have to take out loans. Student advisers from Cuyahoga make 
the rounds at Cleveland area shelters, helping the homeless choose 
colleges and fill out applications.
    And for-profit tuition is rising fast. Drake hiked its tuition from 
$4,000 in 2007-2008 to $15,700 this year, which Fadel attributes to new 
equipment and additional staff. Borrowers who earned bachelor's degrees 
from for-profit colleges in 2007-2008 had a median debt of $32,653, 
well above the $22,375 and $17,700 for graduates of 4-year private 
nonprofit and public colleges, respectively.
    Such burdens can be difficult for homeless people who are more 
likely to suffer from mental illness and substance abuse than the 
general population. Bad credit doesn't go away easily. In the Cleveland 
shelters, you can still find people with trade school debts from 20 
years ago. Those who don't repay their student loans may forfeit their 
chances for public housing and are also ineligible for Federal 
financial aid to return to college.

                          DEFAULT CONSEQUENCES

    ``If the homeless have a bad student loan, they can't find a place 
to live, they can't go back to school, and in this economy there's not 
a lot of work,'' said Ardretta Jones, a case manager at Tacoma Rescue 
Mission in Tacoma, WA, ``That leaves a person with no options.''
    Because they don't have to repay their educational loans until they 
leave school, some homeless students spend beyond their means. Kim 
Rose, a recovering crack cocaine addict and ex-offender in Raleigh, NC, 
began pursuing an online bachelor's degree in business last November at 
Capella Education Co.'s Capella University, based in Minneapolis. At 
the time she was staying in a drug-free program with Internet access.

                              BIG SPLURGE

    Rose, 38, receives almost $4,000 each academic quarter in Federal 
grants and loans for tuition and living expenses. She splurged last 
Christmas, spending $700 of her financial aid on presents for her 7-
year-old son, who has lived with his grandmother. ``I got him 
everything he wanted,'' Rose said in a telephone interview. ``Games, 
toys. He's a guitar freak, I got him a guitar. To make up for me not 
being there.''
    In February, Rose moved into a shelter where the only computer was 
broken. As a result, she has struggled to keep up, dropping an English 
composition course. Rose isn't typical of Capella students, most of 
whom are mid-career professionals seeking graduate degrees, says 
university spokeswoman Irene Silber: ``We would not intentionally 
recruit someone who is in a life crisis, much less one as significant 
as homelessness.''
    Given the troubled pasts of some homeless students, even a college 
education hardly assures a well-paying job. Brenda Torchia, another 
recovering crack cocaine addict in Raleigh who has served several 
prison terms for drug offenses, was in a shelter and looking online for 
work when she saw an ad that asked if she wanted to further her 
education. She answered yes and was directed to the Web site of a for-
profit school called ECPI College of Technology based in Virginia 
Beach, VA.

                             PLACEMENT TEST

    Torchia applied, passed a placement test, and started ECPI's 
medical administration program on March 1. The 40-year-old mother of 
four is borrowing about half of the $23,000 tab from the Federal 
Government, with grants and scholarships paying the rest. ECPI 
officials are aware of her background and ``guarantee me a job in the 
field,'' Torchia says. ``My school is very, very supportive of me. I 
guess God opened up their hearts to receive me for whom I am.''
    Torchia's history would be a red flag for health-care employers 
because hospitals and clinics have drugs on site, says Susan Eget, 
communications director of the American Academy of Medical 
Administrators. While ECPI doesn't promise jobs, President Mark Dreyfus 
says, medical administration offers Torchia's best chance because not 
all employers check backgrounds and she could process records in a back 
office where drugs aren't accessible.
    In the end, Benson Rollins didn't succumb to Phoenix's hard sell. 
He is taking a class for his high school equivalency degree and hopes 
to study law enforcement in college. For now, he would like a job so he 
can pay child support for his 1-year-old daughter, whom he rarely sees. 
The Phoenix recruiters, he says, failed to mention a critical point: He 
would have to take out a government loan at 5 percent to 7 percent 
interest to pay the $10,000-plus annual tuition. ``I'm in a homeless 
shelter, and money is hard to come by,'' Rollins says. ``It's not worth 
going to school to end up in debt.''

    The Chairman. This morning we will hear from one of these 
students, Yasmine Issa. We will also hear from a former 
prosecutor who has extensive experience in the ways that some 
schools mislead students about their job prospects after 
graduation.
    In closing, I know firsthand how a student loan can 
transform the life of someone from a background of modest 
means. I was reading the article that was in Good Housekeeping. 
I will refer to this later as I introduce Yasmine Issa who was 
profiled in this article. Mr. Harris Miller of the Career 
College Association was quoted as saying that these kids who go 
to non-profit colleges and universities are ``the socially 
elite.'' Well, I went to Iowa State University. My mother was 
an immigrant. My father had a sixth grade education and was a 
coal miner. We did not have any money. I went to Iowa State and 
I never considered myself or any of my classmates part of the 
socially elite. I also took out student loans. I do not know 
what Mr. Miller is talking about there.
    Low-income students depend on the Federal Government to 
provide them with the opportunity to attend college. Congress 
has a responsibility to ensure that this opportunity is real 
and not just false hopes peddled on a billboard or a pop-up ad 
or an enticing phone call.
    With that, I will turn it over to our Ranking Member, 
Senator Enzi, for his opening statement before I introduce our 
witnesses.

                   Opening Statement of Senator Enzi

    Senator Enzi. Thank you, Mr. Chairman, and I appreciate the 
work and effort that you went to on this report. I hope that 
there is going to be a similar analysis for the traditional 2-
year and 4-year colleges and universities and fill in some of 
the gaps of the available data on this. I think it might be 
enlightening to us on a lot of the taxpayer dollars that are 
being spent and will help to answer more of the questions that 
are raised by those charts.
    Today's hearing on for-profit institutions of higher 
education does come at an important time. These schools are 
increasingly reaching more and more Americans who are not 
served by traditional higher education. They are an essential 
part of our efforts to provide every American with the skills 
necessary to be a valuable part of the workforce. As Secretary 
Duncan recently said,

          ``Let me be crystal clear. For-profit institutions 
        play a vital role in training young people and adults 
        for jobs. They are critical to helping America meet the 
        President's 2020 goal. They are helping us to meet an 
        ever-increasing demand for skills that public 
        institutions cannot always meet.''

    To understand the for-profit sector, we must first get a 
better understanding of the variety of institutions in it and 
the diversity of the students they serve. As our witnesses will 
demonstrate, many of the for-profit schools resemble the 
traditional 4- and 2-year colleges where students receive 
associates, bachelors, and masters degrees in fields such as 
business, nursing, and engineering.
    Many others are less familiar to us but provide the 
educated and skilled workforce that we rely on today. Among 
these are the auto mechanic, truck driving, and beauty schools. 
Many more provide courses online providing working adults and 
rural communities access to college credit they once did not 
have because of the time constraints or distances they would 
have had to travel.
    In general, the students at each of these schools tend to 
be older, lower-income, and more likely to be minorities. Many 
have already spent years in the workforce and returned to 
school in order to change careers. Others seek to improve their 
skills in order to advance in their current jobs, and as is 
often the case in today's economy, many have been laid off and 
are looking to gain skills that will make them more attractive 
to employers.
    Thousands of students have chosen for-profit schools 
because they offer the flexibility in scheduling and training 
not readily available at traditional institutions of higher 
education. Furthermore, these institutions provide thousands of 
students with a valuable education that will lead to productive 
and rewarding careers.
    Unfortunately, as in other industries, there are bad 
actors. As we have undoubtedly read and will hear about in the 
Inspector General's testimony, some for-profit schools have 
attempted to game the system in order to gain access to more 
Federal dollars. Other schools have recruited at homeless 
shelters, misrepresented the quality of the education their 
students receive, and made unrealistic promises of high-paying 
jobs upon completion. Such actions are simply unacceptable, and 
I applaud Secretary Duncan's commitment to ending this kind of 
behavior.
    However, in combating this behavior, it is essential that 
we use a scalpel and not a machete. Whatever protections are 
put in place must eliminate bad actors and ensure that we do 
not unintentionally harm students in legitimate programs.
    Finally, I want to express my disappointment that we did 
not have the opportunity to work together in preparing this 
hearing. Over the last several years, the HELP Committee has 
had a successful history of bipartisan cooperation that has 
made it one of the most productive committees in the Senate, 
despite the often divergent views of its members.
    Mr. Chairman, when Senator Alexander and I wrote to you 
asking for hearings on the Department of Education's proposed 
regulations, it was our sincere hope that we would work 
together in the spirit of bipartisan tradition. That is not the 
case with this hearing, and I am concerned that this hearing 
will not provide members with a full and objective 
understanding of the issues facing the for-profit sector. I am 
also concerned that it might set a precedent for future 
hearings on this issue and others before the committee.
    Therefore, I would like to request that you commit to 
working together on future hearings that you hold on this 
issue. Doing so will ensure that members of this committee have 
a full understanding of all the issues so that our Nation's 
students are well served and quality programs are available to 
meet their needs.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Enzi.
    Now we will go to our witnesses. We have two panels. Our 
first panel will be a singular witness and that is Ms. Kathleen 
Tighe. Did I pronounce that correctly? Kathleen Tighe, 
Inspector General at the U.S. Department of Education. Ms. 
Tighe was sworn in as the Inspector General on March 17, 2010. 
Prior to this she was the Deputy Inspector General at the U.S. 
Department of Agriculture, Counsel to the Inspector General at 
the General Services Administration, and a trial attorney with 
the Fraud Section of the Commercial Litigation Branch of the 
Department of Justice, a distinguished background.
    Ms. Tighe, thank you very much for your appearance here and 
for your work as the Inspector General. Your entire statement 
will be made a part of the record in its entirety, and if you 
could please proceed and summarize it for us, we would be most 
appreciative.

      STATEMENT OF KATHLEEN S. TIGHE, INSPECTOR GENERAL, 
OFFICE OF THE INSPECTOR GENERAL, U.S. DEPARTMENT OF EDUCATION, 
                         WASHINGTON, DC

    Ms. Tighe. Thank you very much, Chairman Harkin, Ranking 
Member Enzi and members of the committee. Thank you for 
inviting me here today to discuss the U.S. Department of 
Education Office of Inspector General's work involving for-
profit post-secondary institutions, known as proprietary 
schools.
    This is my first opportunity to testify before this 
committee since it approved my nomination as the Inspector 
General earlier this year. It is an honor to have received your 
support to lead this organization and I look forward to working 
with you to improve Federal education programs and operations 
so they meet the needs of America's students and families.
    As members of this committee know, the Federal student aid 
programs have long been a focus of our audit, inspection, and 
investigation work as they have been considered highly 
susceptible to fraud and abuse. This includes extensive work 
involving proprietary institutions.
    My written testimony provides more detailed information on 
our work, oversight challenges, and recommendations for 
strengthening statutes impacting Federal student aid programs. 
For purposes of this statement, I will focus on the types of 
fraud and abuse our work has identified involving proprietary 
schools.
    According to the Department, Federal student aid funding 
for proprietary institutions grew by over 109 percent from 2004 
and 2005 to 2008 and 2009, while funding for public and 
nonprofit institutions grew by approximately 40 percent for the 
same time period.
    In 2005, we testified before Congress on the topic of 
waste, fraud, and abuse in the proprietary sector. At that 
time, we reported that the majority of our post-secondary 
institutional audits and investigations involved proprietary 
schools. More than 5 years later, this continues to be the 
case.
    Since 2005, we issued 37 reports on post-secondary 
institutions, 21 of which involved proprietary schools. 
Seventy-percent of our current investigations involving post-
secondary institutions are proprietary school-related.
    Proprietary institutions have been eligible to participate 
in the Federal student aid program since 1972. The sector has 
evolved from being predominantly vocational trade institutions 
to not including degree-granting institutions. Proprietary 
schools have also evolved into two classes of institutions. 
Some are privately held and others are parts of much larger 
publicly traded corporations. Both are driven by profit and can 
also be driven by the need for growth.
    The volume of Federal student aid dollars going to the 
publicly traded sector has seen tremendous growth in recent 
years, as already noted. According to the Department, the title 
IV funding going to publicly traded corporations grew from $5.9 
billion in 2003 and 2004 to $15.6 billion in 2008 and 2009.
    There are several recurring issues of fraud and abuse 
involving proprietary institutions that our work has 
identified. We have seen a number of instances in which schools 
have falsified student eligibility, including enrollment, 
attendance, and high school diplomas and GEDs in order to 
qualify students to obtain or continue to maintain Federal 
student aid.
    Refund violations have been a longstanding problem in 
proprietary institutions also. When a student ceases to attend 
a school, the school must determine if a refund is owed, 
calculate the amount of the unearned Federal student aid, and 
then return those funds to the appropriate party. Failing to 
pay refunds is a criminal offense under the Higher Education 
Act. We have seen institutions fail to pay timely refunds, 
miscalculate refunds, and fail to pay refunds at all.
    In Federal student aid programs, a proprietary school must 
derive at least 10 percent of its income from sources other 
than title IV. Schools sometimes miscalculate and devise other 
creative accounting schemes to make sure that they comply with 
what is known as the 90/10 rule.
    In the area of distance education, determining whether a 
student has enrolled in an online program and is in attendance 
for purpose of Federal student aid is difficult and subject to 
abuse. We have found proprietary schools have improperly 
disbursed and retained Federal student aid funds based on 
undocumented or even fictitious enrollment and attendance 
status of students.
    Although we discuss cohort defaults in our written 
testimony in the context of being an oversight challenge, I 
also note we have seen the fraudulent manipulation of cohort 
default rates by proprietary schools for the purposes of 
ensuring that they remain low.
    Last week, the Department issued its notice of proposed 
rulemaking proposing new regulations for the Federal student 
aid program, a number of which address program integrity issues 
related to proprietary schools. These include a proposed 
definition of a credit hour and changes to rules governing 
incentive compensation by eliminating the regulatory safe 
harbors. Other changes proposed include the improvement to the 
rules protecting students from misrepresentation, governing 
ability to benefit testing, and satisfactory academic progress, 
and establishing a process to check whether a high school 
diploma is valid for student eligibility purposes.
    We will comment on the proposed final rules and monitor the 
implementation of those rules.
    We are committed at the Office of Inspector General to 
promoting accountability, efficiency, and effectiveness in all 
Federal education operations and programs and will continue to 
assist the Department in its efforts to identify and reduce 
fraud and abuse to safeguard Federal student aid dollars and 
help ensure these funds reach the right recipients.
    This concludes my statement and I am happy to answer any 
questions.
    [The prepared statement of Ms. Tighe follows:]

                Prepared Statement of Kathleen S. Tighe

    Chairman Harkin, Ranking Member Enzi and members of the committee, 
thank you for inviting me here today to discuss the U.S. Department of 
Education (Department) Office of Inspector General's work involving 
for-profit post-secondary institutions, referred to herein as 
proprietary institutions. This is my first opportunity to testify 
before this committee since it approved my nomination as the Inspector 
General earlier this year. It is an honor to have received your support 
to lead this organization, and I look forward to working with you to 
improve Federal education programs and operations so they meet the 
needs of America's students and families.
    Before I begin my testimony, I would like to take this opportunity 
to recognize the Department for the release of its Notice of Proposed 
Rulemaking last week. I would also like to acknowledge the higher 
education community, whose discussions with the Department throughout 
the 2009-2010 negotiated rulemaking sessions contributed to the 
development of the Department's proposed rules--a number of which 
address program integrity issues related to proprietary institutions 
that I will talk about today. We will comment on the proposed rules and 
monitor the implementation of the final rules, and do what we can to 
ensure that they assist in protecting our Nation's students, parents 
and taxpayers.
    I would also like to take a moment to address the significant 
change coming to the Federal student aid programs on July 1, 2010. The 
Health Care and Education Reconciliation Act of 2010, Public Law 111-
152, mandated there will be no new Federal Family Education Loan (FFEL) 
originations as of July 1, 2010. As a result, in a very short period of 
time, the Department must assist schools in transitioning to process 
all new loans under the William D. Ford Direct Loan program (Direct 
Loan), oversee the wind down of the FFEL program and its billions in 
Federal assets and improve its oversight of additional contractors, 
while managing the risks presented by post-secondary institutions and 
the vulnerabilities that exist with distance education. Ensuring that 
the Department's infrastructure, processes, oversight, and monitoring 
are effectively operating in order to guarantee that every eligible 
American student receives the aid to which he or she is entitled is of 
vital concern to this committee as well as to my office and will 
continue to be a major focus of our efforts.

         BACKGROUND ON THE OIG AND FEDERAL STUDENT AID PROGRAMS

    As members of this committee know, the Federal student aid programs 
have long been a major focus of our audit, inspection, and 
investigative work, as they have been considered highly susceptible to 
fraud and abuse. The programs are large, complex, and inherently risky 
due to their design, reliance on numerous entities, and the nature of 
the student population. The Department provided $129 billion in aid to 
students and parents during fiscal year 2009 and has an outstanding 
student loan portfolio of more than $600 billion.
    OIG has produced volumes of significant work involving the Federal 
student aid programs, leading to statutory changes to the Higher 
Education Act of 1965, as amended (HEA), as well as regulatory and 
Departmental changes. This includes extensive work involving 
proprietary institutions. According to the Department, Federal student 
aid funding for proprietary institutions has grown by 109.4 percent 
from 2004-2005 to 2008-2009, while funding for public and non-profit 
institutions grew by approximately 40 percent for the same time period.
    The HEA provides eligibility criteria that an institution must meet 
in order to participate in the Federal student aid programs. State 
educational agencies, accrediting agencies, and the Department all have 
responsibility for program integrity to ensure that institutions meet, 
and continue to meet, requirements for participation in the Federal 
student aid programs. For example:

     States provide licensing or other authorization necessary 
for an institution of higher education to operate within a state;
     Accrediting agencies, recognized by the Secretary of 
Education (Secretary) as reliable authorities on the quality of 
education or training offered, must establish, consistently apply, and 
enforce standards for eligibility; and
     The Department assesses and certifies that an institution 
meets the HEA's eligibility criteria for administrative and financial 
responsibility. It must also conduct program reviews, on a systemic 
basis, designed to include all institutions of higher education 
participating in the Federal student aid programs.

    Institutional eligibility, certification, and oversight 
requirements in the HEA are the same for all types opposite 
institutions except for two requirements. One of these requirements 
applies only to proprietary institutions, and the second applies to 
both proprietary and post-secondary vocational institutions.

Statutory Revenue Provision for the Proprietary Sector
    The HEA provides a criterion that is unique to proprietary 
institutions of higher education. Known as the ``90/10 Rule,'' the 
provision requires a proprietary institution to have at least 10 
percent of the institution's revenues from sources that are not derived 
from funds provided under the student financial assistance programs, as 
determined in accordance with regulations prescribed by the Secretary. 
Compliance with the 90/10 Rule must be calculated annually, based on 
the institution's fiscal year. The Higher Education Opportunity Act of 
2008 changed the 90/10 Rule from an institution eligibility criterion 
to a condition of program participation, and provided additional 
resources to be included as institutional revenue. These amendments 
were a significant change that made it easier for institutions to meet 
the 90/10 Rule, and institutions that fail to comply with the Rule are 
now allowed to continue participation in the Federal student programs 
for 2 years while they attempt to meet the Rule. The institution must 
report the calculation as a footnote to the institution's annual 
audited financial statements. The institution's independent certified 
public accountant is expected to test the accuracy of the institution's 
assertion as part of the audit of the financial statements.

Statutory Provision for Training Programs
    The HEA provides an eligibility criterion that is unique to 
proprietary institutions and post-secondary vocational institutions 
regarding programs of training. These institutions must provide an 
eligible program of training to prepare students for gainful employment 
in a recognized occupation. This requirement does not apply to 
nonprofit and public sector institutions' associate, bachelors, or 
postgraduate degree-granting programs.

                  ROLE OF THE OIG IN PROGRAM OVERSIGHT

     In 2005, OIG testified before Congress on the topic of waste, 
fraud, and abuse in the proprietary sector. At that time, we reported 
that, historically, the majority of our post-secondary institutional 
audits and investigations involved proprietary schools. More than 5 
years later, this continues to be the case.
    OIG generally opens an investigation as a result of credible 
evidence developed from complaints and other sources that may indicate 
fraud. Audits or inspections are generally initiated to assess specific 
areas of compliance but may also be initiated as the result of a 
complaint. Since our 2005 testimony, OIG has issued 37 reports on post-
secondary institutions, 21 of which involved proprietary schools. In 
2005, we reported that looking at the previous 6 years of data, 74 
percent of our post-secondary institutional investigations involved 
proprietary institutions. Today, that number is very similar--70 
percent of our current investigations involving post-secondary 
institutions are proprietary school-related.

               FRAUD AND ABUSE IN THE PROPRIETARY SECTOR

    Proprietary institutions have been eligible to participate in the 
Federal student aid programs since 1972. This sector has evolved from 
being predominately vocational trade institutions and now includes 
degree-granting institutions. Proprietary institutions have also 
evolved into two classes of institutions: some are privately held and 
others are parts of much larger publicly traded corporations. Both are 
driven by profit and can also be driven by the need for growth. The 
volume of Federal student aid dollars going to the publicly traded 
sector has seen tremendous growth in recent years. Over the years, we 
have come to identify a relationship between rapid growth and failure 
to maintain administrative capability. The following are several 
examples of the types of fraud and abuse our work has identified 
involving proprietary institutions.

Falsification of Eligibility
    Our audits and investigations have identified proprietary schools 
that falsify student enrollment, attendance, high-school diplomas, 
General Educational Development certificates, ability-to-benefit exam 
results, and satisfactory academic progress in order to qualify the 
students to obtain or continue to maintain Federal student aid. Schools 
also improperly received Federal student aid funds because they failed 
to perform or falsified the verification required under the 
Department's regulations for students. We have found schools that 
enrolled students in programs that do not meet the minimum program 
eligibility requirement and institutional locations that do not meet 
basic eligibility requirements.

Refund Violations
    Refund violations have been a longstanding problem in proprietary 
institutions. We continue to identify this problem in our audits and 
investigations. Refunds, which are referred to as ``Return of Title IV 
Funds'' under the HEA, are triggered when a student ceases to attend an 
institution. The institution must determine if a refund is owed, 
calculate the amount of the unearned Federal student aid, and then 
return those funds to the Department, the FFEL loan holder, or to 
another applicable participant in Federal student aid programs within a 
specified number of days. Violations of this requirement occur when 
refunds are not timely paid, when incorrect calculations result in 
returning insufficient funds, and when institutions fail to pay refunds 
at all. Failure to pay refunds is a criminal offense under the HEA. We 
have found all three types of refund violations in our audits, and 
these violations are the frequent subject of our investigations.
90/10 Rule
    Defined previously in this testimony, proprietary institutions must 
meet the 90/10 Rule every fiscal year to continue participation in 
Federal student aid programs. We have identified proprietary 
institutions that miscalculate or devise other creative accounting 
schemes (e.g., fake institutional scholarships and loans) to make it 
appear they met this rule. When this occurs, ineligible institutions 
have continued to participate in the Federal student aid programs.

Incentive Compensation
    We receive and review complaints of aggressive recruiting and 
violations of the HEA's ban on incentive compensation by proprietary 
institutions. We have reviewed compensation plans that are clearly 
providing direct financial incentives for recruiters to increase 
enrollment. However, due to the safe harbors included in the 
Department's current regulations, in many cases, schools are shielded 
from administrative, civil, and criminal liability. Proprietary 
institutions are making full use of the safe harbors in the 
Department's regulations to provide financial incentives to drive 
enrollment. In 2002, when the Department originally promulgated the 
safe harbor rules, we advised the Department that provisions of those 
regulations were contrary to the requirements of the HEA and reported 
our disagreement to Congress. In its Notice of Proposed Rulemaking 
issued last week, the Department proposes to eliminate all safe harbors 
and return to the clear ban on incentive compensation stated in the 
HEA. This is a significant step to eliminate aggressive recruiting 
practices.

Distance Education
    Distance education--both at proprietary and non-profit 
institutions--is an area that is placing increased demands on our 
investigative and audit resources and highlights the need for greater 
oversight and statutory or regulatory change. The issue is determining 
whether students in distance education are ``regular students, as 
defined by the HEA, and actually in attendance for Federal student aid 
purposes. Institutions are obligated to return any Federal student aid 
received if a student does not begin attendance during the period for 
which aid was awarded. Institutions must be able to document attendance 
in at least one class during a payment period. Determining what 
constitutes a class and class attendance in the on-line environment is 
a challenge in the absence of defined class times or delivery of 
instruction by instructors. On-line instruction typically consists of 
posted reading materials and assignments, chat-room and e-mail 
exchanges, and posting of completed student work. The point at which a 
student progresses from on-line registration to actual on-line academic 
engagement or class attendance is often not defined by institutions and 
is not defined by Federal statute or regulations. Without such 
definition, or adequate controls at the institutions themselves, we 
believe Federal student aid funds are at significant risk of being 
disbursed to ineligible students in on-line programs, and that 
inadequate refunds will be made for students who cease attendance in 
these programs.

                     EVOLVING OVERSIGHT CHALLENGES

    As we noted earlier, the Federal student aid programs are complex 
and inherently present risk. Following are several examples of what we 
consider evolving oversight challenges that impact both proprietary and 
non-profit institutions.

Accrediting Agencies Lack Meaningful Standards for Program Length
    In 2009 and 2010, we evaluated regional accrediting agency 
standards for program length and the definition of a credit hour. We 
examined three of the seven regional accrediting agencies to determine 
what guidance regarding program length and credit hours they provided 
to institutions and peer reviewers, and the documentation they 
maintained to demonstrate how they evaluated institutions' program 
length and credit hours. The three accrediting agencies reviewed 
represent one-third of the institutions participating in Federal 
student aid programs: 2,222 post-secondary institutions with more than 
$60 billion in Federal student aid funding. We found that none of the 
accrediting agencies defined a credit hour and none of the accrediting 
agencies provided guidance on the minimum requirements for the 
assignment of credit hours. At two of the accrediting agencies, we were 
told that student learning outcomes were more important than the 
assignment of credit hours; however, these two accrediting agencies 
provided no guidance to institutions or peer reviewers on acceptable 
minimum student learning outcomes at the post-secondary level.
    While conducting our inspection at one of the agencies, we 
identified a serious issue that we brought to the Department's 
attention through an Alert Memorandum: the Higher Learning Commission 
of the North Central Association of Colleges and Schools (HLC) 
evaluated American InterContinental University (AIU)--a proprietary 
institution owned by Career Education Corporation (CEC)--for initial 
accreditation and identified issues related to the school's assignment 
of credit hours to certain undergraduate and graduate programs. HLC 
found the school to have an ``egregious'' credit policy that was not in 
the best interest of students, but nonetheless accredited AIU. HLC's 
accreditation of AIU calls into question whether it is a reliable 
authority regarding the quality of education or training provided by 
the institution. Since HLC determined that the practices at AIU meet 
its standards for quality, without limitation, the Department should be 
concerned about the quality of education or training at other 
institutions accredited by HLC. Based on this finding, our Alert 
Memorandum recommended that the Department determine whether HLC is in 
compliance with the regulatory requirements for accrediting agencies 
and, if not, take appropriate action under the regulations to limit, 
suspend, or terminate HLC's recognition by the Secretary. The 
Department initiated a review of HLC and determined that the issue 
identified was not an isolated incident. As a result, the Department 
gave HLC two options for coming into compliance: (1) to accept a set of 
corrective actions determined by the Department; or (2) the Department 
would initiate a limitation, suspension, or termination action. In May 
2010, HLC accepted the Department's corrective action plan.
    In addition, in its Notice of Proposed Rulemaking issued last week, 
the Department proposed a definition of a credit hour and procedures 
for accrediting agencies to determine whether an institution's 
assignment of a credit hour is acceptable.

Borrower Defaults
    Considering the economic downturn over the last several years, 
combined with escalating student loan debts, a significant concern is 
the potential for increased loan defaults as we have seen the national 
cohort default rate increase recently. As an example, last year, the 
Department announced that the fiscal year 2007 national student loan 
cohort default rate increased to 6.7 percent, up from the fiscal year 
2006 rate of 5.2 percent. The 2007 cohort default rate for schools 
participating in the FFEL Program was 7.2 percent, a 36 percent 
increase over the 2006 rate of 5.3 percent. The 2007 cohort default 
rate for schools participating in the Direct Loan Program was 4.8 
percent, a 2 percent increase over the 2006 rate of 4.7 percent. The 
FFEL portfolio has a larger percentage of proprietary schools, which 
have higher default rates, and a lower percentage of public and private 
4-year schools, which have lower default rates. Fiscal year 2007 
national cohort default rate was 6.7 percent, while the proprietary 
school default rate was 11 percent.
    In a 2003 audit report we concluded that cohort default rates do 
not appear to provide decisionmakers with sufficient information about 
the rate of default in the student assistance programs. Currently, to 
identify defaults, cohort default rates track the cohort of borrowers 
entering repayment in a fiscal year, through the following fiscal year. 
After the second fiscal year, subsequent defaults by the borrowers in 
the base-year cohort are not included in cohort default rate 
calculations. While the Higher Education Opportunity Act of 2008 
changed this calculation to track borrowers over 3 years, this change 
will still not adequately reflect all defaults.
    Not addressed by this change were two issues noted in our earlier 
report. In that report, we identified that cohort default rates were 
not a true representation, as they were reduced by: (1) a statutory 
change to the HEA's definition of default from 180 days of delinquency 
to 270 days of delinquency; this 90-day delay excludes a significant 
number of defaulters from the cohort default rate calculation; and (2) 
an increase in the use of deferments and forbearances. Deferment 
entitles a borrower to have periodic installment payments of principal 
deferred during authorized periods; forbearance permits the temporary 
cessation of payments. We found that deferments and forbearances had 
more than doubled in the period we examined. Borrowers in deferment or 
forbearance do not make payments on their loans, so they are not 
counted as defaulters, but they continue to be counted with other 
students in the cohort, thus reducing the cohort rate. While we 
recognize that the Congress has provided additional repayment 
flexibilities, when borrowers reach the limits on deferments and begin 
repayment they may still lack the income and eventually default and are 
not accounted for in the cohort default rate.
    Estimating future loan defaults is a very difficult process. As 
part of the requirements related to the Federal Credit Reform Act of 
1990, as amended, the Department must annually estimate loan volumes 
and the attendant costs, and in doing so, factor in economic 
conditions. Our financial statement auditor has raised concerns about 
the Department's estimation process, including its failure to take into 
account recessionary conditions, and has made a number of 
recommendations for improvements. The Department's credit reform 
estimates continue to be reported in our audit of the financial 
statements as a significant internal control deficiency.

Direct Loan Program
    Guaranty agencies have always had a responsibility to enforce the 
requirements for school participation in the FFEL program and have 
served as an important source of possible waste, fraud, or abuse 
referrals for our office. As guaranty agencies move away from 
guaranteeing and performing oversight of loans for currently enrolled 
students, they will no longer serve as a source of oversight and 
information on school participation in the loan programs.
    In the transition to the Direct Loan program, the Department will 
have to itself perform the school loan oversight function previously 
performed by guaranty agencies. Loan origination and servicing 
functions previously performed by lenders and guaranty agencies in the 
FFEL program are now the responsibility of the Department. The 
Department relies on contractors to perform these functions in the 
Direct Loan program. The Department had to modify its loan origination 
system, assure all institutions are capable of using the system, and 
contract with four new loan servicers last year to service the loans it 
purchased from lenders and handle the increased volume in the Direct 
Loan program.
    Because the Direct Loan program will become the largest lending 
program within the Federal Government, we are examining the 
applicability of Federal banking statutes to determine if similar 
statutory provisions for enhanced program integrity should be 
recommended for the Department, as they have been for other Federal 
lending programs.

         OIG RECOMMENDATIONS FOR STRENGTHENING LAWS/REGULATIONS

    In your invitation for me to testify today, you asked me provide an 
assessment of whether current laws are sufficient to protect students 
and taxpayers. Congress could address two areas that would increase 
accountability in post-secondary education and the Federal student aid 
programs, as well as provide additional oversight tools and assist in 
reducing fraud and abuse in the programs: amending the Internal Revenue 
Code to permit an Internal Revenue Service (IRS) income match for 
student loan applicants and reconsider the cost of attendance for 
individuals engaged in on-line education courses.

IRS Match
    Since 1997, we have recommended implementation of an IRS income 
data match, which would allow the Department to match the information 
provided on student's application for Federal student aid with the 
income data that is maintained by the IRS. While the HEA has been 
amended to permit this match, a corresponding amendment to the Internal 
Revenue Code has not been enacted. This action would go a very long way 
to identifying income inconsistencies and eliminating an area of fraud 
and abuse within the student financial assistance programs.
    While the Department began a pilot project this January to allow 
applicants the choice to have the Department obtain income data 
directly from the IRS, we do not believe it likely that those 
individuals intent on defrauding the program by providing false income 
information would select the IRS option. Leaving this area unaddressed 
creates additional burdens for institutions to verify an applicant's 
income and victimizes unsuspecting students and parents who are advised 
by unscrupulous financial aid consultants to commit this type of fraud. 
Our investigations have found that some officials at proprietary 
institutions have encouraged students to falsify their income and 
dependents to qualify for Federal student aid.

Cost of Attendance Calculations for Distance Education Programs
    Since 2001, OIG has recommended that the HEA be amended to address 
cost of attendance (COA) calculations for on-line learners. Currently, 
students in on-line programs and residential programs can be eligible 
for the same amount of Federal student aid based on the same COA. The 
COA as defined by the HEA primarily includes:

     Tuition and fees normally assessed a student, including 
the costs for rental or purchase of any equipment, materials, or 
supplies;
     An allowance for books, supplies, transportation, and 
reasonable miscellaneous personal expenses, including a reasonable 
allowance for the documented rental or purchase of a personal computer;
     An allowance for room and board costs incurred by the 
student which shall be an allowance for (a) students without dependents 
residing at home with parents, (b) students without dependents residing 
in institutionally owned or operated housing, and (c) for all other 
students an allowance based on the expense reasonably incurred for room 
and board; and
     An allowance for dependent care for students with 
dependents.

    The HEA limits the COA for students engaged in correspondence 
courses to tuition and fees, and, if required, books, supplies, and 
travel. There is no similar limitation for on-line students. With the 
explosion of on-line education in recent years and the number of full-
time working individuals that take these courses, a COA budget that 
includes an allowance for room and board for on-line learners may not 
be in the best interest of American taxpayers and may allow students to 
borrow more than is needed. We also note that under the Post-9/11 GI 
Bill, Congress has already determined that active duty personnel and 
veterans enrolled exclusively in on-line programs should receive 
reimbursement only for tuition and fees and not receive a housing 
allowance. Congress should reconsider the COA calculation for distance 
education programs under the HEA, which could reduce loan borrowing, 
decrease loan debt, and reduce the amount of funds available above 
tuition and thus obtainable by individuals who seek to defraud the 
Federal student aid programs through on-line fraud schemes.

                            CLOSING REMARKS

    In closing, I would like to once again mention the Department's 
recently proposed regulations governing the Federal student aid 
programs, many of which we have previously identified and recommended 
to the Department through our audit, inspection, and investigative 
work. The Department has proposed a definition of a credit hour and 
changes to the rules governing incentive compensation by eliminating 
regulatory safe harbors. Other changes proposed include improvements to 
the rules (1) protecting students from misrepresentation, (2) governing 
ability-to-benefit testing and satisfactory academic progress, and (3) 
establishing a process to check whether a high school diploma is valid 
for student eligibility purposes. Again, we will comment on the 
proposed rules and monitor the implementation of the final rules. We 
believe changes in all these areas will improve protections for 
students and taxpayers. In the meantime, let me reiterate that OIG is 
committed to promoting accountability, efficiency, and effectiveness in 
all Federal education operations and programs. We will continue to 
assist the Department in its efforts to identify and reduce fraud and 
abuse, to safeguard Federal student aid dollars, and to help ensure 
that these funds reach the intended recipients.
    On behalf of the OIG, I want to thank you for the support this 
committee has given to this office over the years. We look forward to 
continuing to work with Congress in furthering our goals and achieving 
our mission.
    This concludes my written statement. I am happy to answer any of 
your questions.

    The Chairman. Well, Ms. Tighe, thank you very much. I think 
that correctly sums up your more extensive statement which I 
read last evening.
    In the course of your office's audit work, can you describe 
how for-profit schools use deferments and forbearances to lower 
their cohort default rate? Explain that, please.
    Ms. Tighe. Yes. I would like to explain it in two different 
ways. One is not fraudulent and one is fraudulent.
    Often schools will look at students who have withdrawn and 
contact those students and work with them to give them 
information on deferment and forbearance options, and they will 
continue to work with those students until the students have 
reached the point where they would not be included in the 
cohort default rate. Now, that can be sometimes a benefit to 
the student because it is nice to know options. It is nice to 
have those put before you, but it will also benefit the school 
because the students may not default until after the cohort 
period has ended.
    The Chairman. What is a cohort period? Is that 3 years?
    Ms. Tighe. Well it has been changed to be 3 years. 
Currently it is 2 years, but beginning for fiscal year 2009--it 
will not be calculated for the first time until fiscal year 
2012 as a 3-year period.
    The Chairman. Are you telling me in plain English that I 
can understand that if a school can get a student who is 
nearing default to put off their default status for 2 years or 
3 years, then when that student defaults, it does not show up 
on the student's records?
    Ms. Tighe. That is correct.
    The Chairman. I understand that now.
    And you say this is being done.
    Ms. Tighe. That is being done.
    Now, where we see problems that have led to criminal 
investigations is where essentially the schools--we had a 
school, one involving a school called TCI where the school 
repaid the students' accounts, students who withdrew from 
school. The school went in, repaid the school accounts to avoid 
having them considered in the cohort default numbers. Then they 
turned around and charged the students for the tuition costs. 
They gave the students a very short time period to pay the 
school back and subsequently referred them to collection 
agencies. All of that effort to avoid the cohort default rate.
    We have also seen schools that have literally forged the 
students' names to deferment notices and sent them in on behalf 
of the students without the students' knowledge.
    The Chairman. In my time, let me ask you to elaborate a bit 
on your findings regarding refund violations. Now, we know that 
schools have to refund depending on how long the student is 
there at a certain prorated amount.
    Can you explain the requirements Congress has put into 
place to try and ensure title IV is returned to the Federal 
Government when a student withdraws? And what specific 
practices have your audits shown that violate these 
requirements?
    Ms. Tighe. There are a number of rules related to the 
return of title IV funds. There is a calculation that is 
predetermined. There are time periods the schools have to do it 
by, and that is audited annually by outside auditors.
    However, what we have seen in the course of looking at 
different schools is essentially either miscalculation errors--
I mean, that is not a really significant problem. They are 
trying to do it. They are just not doing it correctly. We have 
also seen them fail to pay it timely. I think it is a 45-day 
limit. We have seen schools that had paid it longer than the 45 
days.
    Where we see the really big problems is when they just do 
not return the money at all, and we have had a number of 
criminal cases based on that problem.
    The Chairman. Last, let me just ask you about the 
accrediting agencies' definition of a credit hour. You 
mentioned that and you found that none of the accreditors you 
looked at actually define a credit hour. Yet, my understanding 
is that many for-profit schools set tuition based on a credit 
hour charge. Do you have an understanding of how credit hours 
might compare from one for-profit school to another?
    Ms. Tighe. Well, I think the problem--because there is no 
definition of a credit hour, it would be difficult to compare 
school to school. I think in the traditional 4-year institution 
where it may be the former Carnegie method which is 1 hour of 
seat time and 2 hours of homework, you could compare some 
schools. Other schools, even though they use a definition of 
credit hour or they may say credit hour, it is not really 
defined in any meaningful sense. That is what our audit work in 
looking at the accrediting agencies ended up--we looked at them 
to see whether they were requiring that and their failure to do 
so we believe is a problem.
    The Chairman. Well, if you cannot define a credit hour, how 
can you set tuition based upon a credit hour? That is the 
question I have.
    Ms. Tighe. Well, I think it is a problem. What we have 
found is that credit hours can, in fact, be inflated.
    The Chairman. Inflated.
    Ms. Tighe. Inflated. In other words, the tuition may be 
higher than is needed for what the student is getting out of 
it. Then if they are taking our student loans, those loans may 
be higher than is needed for the value the student is getting 
out of it.
    The Chairman. I see. My time has expired. Thank you, Ms. 
Tighe.
    Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman.
    It reminds me. I went to a GED graduation at Casper 
College. They put out a tremendous number of GEDs at Casper 
College, and they told me that our requirement for seat time on 
hours was too long, that that discourages a lot of kids from 
getting their GED. This credit-hour discussion I think should 
be pursued and we should find out more about it.
    Ms. Tighe, you mentioned that 70 percent of your 
investigations are in the for-profit area. Are those all 
criminal investigations?
    Ms. Tighe. Yes, they are criminal investigations.
    Senator Enzi. What percentage of the for-profits make up 
that 70 percent of your investigation work? Is it all of them?
    Ms. Tighe. Well, yes, all of them are for-profit. Of the 70 
percent of the institutional investigations we have, 70 percent 
are for-profit.
    Senator Enzi. Yes, I understand that. But of all the for-
profits, are they all in that category of being investigated or 
is it 10 percent, 20 percent, 50 percent?
    Ms. Tighe. Well, they are all in that category, and what we 
say is they are proprietary school-related because what we get 
sometimes are bad actors associated with the school, and in 
fact, the proprietary school can be a victim. They may have a 
bad actor within the school taking advantage, and maybe their 
problem is that they do not have the controls in place to have 
caught it. Or maybe they do. We do actually get referrals from 
some proprietary schools.
    Senator Enzi. So you are investigating all proprietary 
schools then.
    Ms. Tighe. We are not investigating all the schools that 
exist. We just have--of our caseload related to post-secondary 
institutions, 70 percent are proprietary schools. We have other 
investigations involving nonproprietary schools. That is 30 
percent of the other part of our caseload. We also have other 
cases that do not involve schools of higher education. I am 
sorry.
    Senator Enzi. I am more confused than when I started.
    Ms. Tighe. I am probably not----
    Senator Enzi. So 70 percent of all of the schools are for-
profit schools, so that you are investigating 70 percent of 
your caseload. It is about an equal number of people that are 
violating things in both sectors.
    Ms. Tighe. Taken apart from our caseload, I do not know how 
many, just in general, schools are proprietary and whether we 
match up evenly in terms of our numbers. We do know we have a 
large number of proprietary schools in our----
    Senator Enzi. You have just given me the impression, 
though, that you are investigating 100 percent of the for-
profits.
    Ms. Tighe. No, if I gave that impression, I am sorry.
    Senator Enzi. What I was trying to get at is what 
percentage of them are you investigating.
    Ms. Tighe. I don't know if we have an answer to that. No, 
we do not know the answer to that. I am sorry for confusing 
you.
    Senator Enzi. Do you have widespread evidence of abuses 
throughout the for-profit sector?
    Ms. Tighe. Well, yes. I have given you a flavor of the 
kinds of cases we see. We certainly get more--our work comes in 
through referrals, and so we see--the reason our cases 
involving proprietary schools--we have more of them because we 
tend to get more referrals on those cases. Now, whether they 
cross the gamut of all the different kinds of proprietary 
schools there, I do not know if we can say. I do not think we 
have studied it quite that way.
    Senator Enzi. Well, thank you.
    Congress did take a number of steps to address for-profits 
in the Higher Education Opportunity Act, and we are now working 
on the reauthorization of the Elementary and Secondary 
Education Act. Do you have any recommendations for policy 
changes that we should make particularly with regard to the 
high school diplomas?
    Ms. Tighe. Well, I think the high school diplomas--I know 
that the recent proposed rules, at least as something to 
tighten up the problem of the diploma mills, at least requires 
school procedures for checking the validity of those diplomas.
    One thing we have recommended in the context of the ESEA 
reauthorization is a recommendation for reporting fraud issues 
to the Inspector General's office. There is something in the 
Higher Education Act. Something similar in ESEA we think would 
make sense, and we carry it down to the level where we think we 
need to be in terms of having schools know they have somebody 
they can come to if they see problems.
    Senator Enzi. Thank you. My time is about to expire.
    The Chairman. Thank you, Senator Enzi.
    In order, I have Senator Franken, Senator Alexander, and 
then Senator Brown, Senator Merkley, Senator Bennet, and 
Senator Hagan.
    Senator Franken.

                      Statement of Senator Franken

    Senator Franken. Thank you, Mr. Chairman, and thank you for 
your report and thank you for this very, very important 
hearing.
    It just is shocking to me how much of you give Pell Grants. 
You want to give Pell Grants to kids. My wife's dad died young 
and there were five kids in the family and they used Pell 
Grants and they went to public or not-for-profit schools.
    Seventy percent of the schools you are investigating are 
proprietary. What percentage of schools are proprietary as 
opposed to not proprietary? In other words, how many 
proprietary schools are there versus not-for-profit?
    Ms. Tighe. In total number? Off the top of my head, I do 
not know the answer to that.
    Senator Franken. Are there more proprietary schools----
    Ms. Tighe. Schools than there are----
    Senator Franken. I would very much doubt that.
    Ms. Tighe. There are more public and nonprofits, I 
understand, than there are numbers of proprietary--
    Senator Franken. And I would think by quite a factor, 
right? These proprietary schools are much, much, much, much 
more likely to be investigated.
    Ms. Tighe. Yes, they are, at least looking at our workload, 
yes.
    Senator Franken. Now, you in your testimony just now said--
you used words like ``fictitious enrollment,'' ``forging 
names,'' ``credit hours inflated.'' This is all fraud.
    Ms. Tighe. Yes, it is. I think one of the areas that we are 
particularly seeing problems in is the online environment. A 
lot of the schemes we see where you are really able to get by 
with fictitious enrollment is when you are enrolling students 
for online courses. We had one case where it combined diploma 
mill and the fictitious enrollment and student aid 
applications, which is somebody ran a student to get a high 
school diploma. Students came in for 2 weeks of self-study, got 
a diploma that obviously meant nothing, a high school diploma, 
and then they used the application information from the 
students to apply to online schools on their behalf and apply 
for student aid. You know, I agree with you that it is 
shocking.
    Senator Franken. My staff gave me this. Less than 10 
percent of students attend for-profit schools, and yet 70 
percent of the fraud cases are for-profit schools. There is a 
real problem here.
    Now, I agree with the chairman. I agree with the Ranking 
Member. These schools serve a purpose, and some of them do a 
good job. But there is obviously an incredible number of bad 
actors. I would like to shut them down.
    We went through this to get the health care bill done. We 
increased the amount of Pell Grants. Well, if they are going to 
use fraud--what are the salaries? What is the salary of the top 
for-profit school CEO?
    Ms. Tighe. I am not sure.
    Senator Franken. I think it is somewhere in the range of 
like what--$40 million? It is ridiculous.
    What is the salary of the President of Harvard? It is like 
a factor of 100 or something.
    What is the graduation rate at Harvard? What is the 
graduation rate of a typical one of these schools?
    What kind of laws do we need to shut down the bad actors?
    Again, I am saying that a lot of these schools or a number 
of these schools are absolutely necessary. They do a great job, 
but the bad actors who are doing fictitious enrollment, forging 
names, inflating credit hours, should be shut down. What kind 
of laws do we need to pass to shut them down? You are 
prosecuting them, I guess.
    Ms. Tighe. Yes, and we are able to get them. I think some 
of the changes--actually the proposed rule that just came out 
will help some of the practices we have seen. For example, they 
have expanded the definition of misrepresentation. I think that 
is a good thing for students because if the schools are 
required to accurately market themselves, the students will get 
good information. I think to the extent that they have to 
publish placement rates, I think that is a good thing for 
students too because I think accurate information can allow 
students to make good judgments. I think we will certainly 
continue to make this a priority in our workload and make sure 
we get the bad guys.
    I do think also another thing to mention is the incentive 
compensation. We have never been able to really successfully 
prosecute a case, even though we got a lot of complaints in the 
area of incentive compensation because of the safe harbor 
rules.
    Senator Franken. Now, incentive compensation is like----
    Ms. Tighe. It is when recruiters get paid based on 
enrollment.
    It is very easy under the safe harbors in order to show 
that there is some factor other than enrollment that allows the 
recruiters to get paid and get salary increases. I think that 
it is an area that we have received a number of complaints, and 
never been able to really do anything about. A lot of qui tam 
cases have been filed under the False Claims Act. They have 
never been really successfully pursued.
    Senator Franken. Well, my time is done. We talk about 
waste, fraud, and abuse around here, and I am thinking we are 
hearing it today.
    The Chairman. Thank you, Senator Franken.
    Senator Alexander.

                     Statement of Senator Alexander

    Senator Alexander. Thanks, Mr. Chairman, and thank you for 
having the hearings. I think the hearings are important and I 
think we should be doing it. Oversight is a big part of our 
responsibility.
    Mr. Chairman, I remember when I was Education Secretary in 
the early 1990s, we were just completing what was a very 
bipartisan effort by this committee. Well, maybe it was another 
committee, Senator Nunn's committee, Permanent Investigations 
Committee, at the time. It did a lot of good and made a big 
difference. The bill passed in 1992 to change things, and I 
spent my time and then Dick Reilly after me. This could be very 
productive. I would be glad to work with you on this in the 
same way we are working on the Elementary and Secondary 
Education Act, if you would like.
    Right after World War II, 1944, the GI Bill gave veterans a 
voucher that they could spend anywhere to complete their 
education. Some went to high school. Some went to Catholic 
school. Some went to Jewish schools. Some went to Europe. Some 
went to the University of Tennessee. Some went to Iowa State. 
From that has come the current system of grants and loans that 
allow American college students to choose among about 6,000 
autonomous institutions which most people think is the best 
system of higher education in the world.
    I believe that keeping that choice, keeping that autonomy, 
and keeping the generous grants and loans are an essential part 
of it. I think that our 6,000 institutions are overregulated by 
grants and loans, and they usually are overregulated by 
concerns like this because we have bad actors who are stealing 
money and performing fraud. So we rush in with a new set of 
rules and pile up loans that stack up--I mean regulations that 
stack up this high.
    My goal is that we find ways in this hearing to get rid of 
the bad actors, whether in for-profit or nonprofit, but not 
diminish the quality and the choices that come from 
overregulation.
    I appreciate Secretary Duncan's effort on this. I thought 
his first efforts on dealing with it would have been like 
shooting quail with a cannon. You would miss the target and 
probably hit some innocent people, and I think he has come up 
with some pretty good suggestions.
    We have 6,000, as I said, autonomous institutions in the 
country. 3,000 are for-profit; 3,000 are not. About 10 percent 
of the students go to for-profit institutions, and the 
graduation rates are much higher in the nonprofit institutions, 
the 6-year graduation rates, but in the 2-year programs, the 
for-profit sector has about a 60 percent graduation rate. The 
community colleges, the to-profit public universities or public 
universities are about a third of that, about 22 percent.
    I am anxious to get into this, and I do not want the bad 
actors to be discrediting a good program, which is what we 
have. I welcome the Inspector General's work.
    Is the 70 percent--you said you are investigating 
nonprofits--for-profits are 70 percent of your investigation. 
Since they are only a small part of the students, 10 percent, 
why are you not investigating more of the nonprofits? Because 
it seems to me that there is likely to be abuse there, or if 
there is not, we need to know there is not.
    Ms. Tighe. No, I understand that. We investigate based on 
complaints, by and large, that come to our hotline or come to 
us in some other ways through referral. Better or for worse, 
most of the complaints have come in the proprietary sector. 
Now, it may be--and one can speculate as to why that is--that 
students are paying large tuitions and want value for their 
money and get upset. That is where most of the complaints have 
come in. We do not traditionally sort of reach out to schools 
without a reason to do so.
    Senator Alexander. The Department of Education is about to 
become the sixth largest bank in the country based upon volume 
of student loans. It is going to be making $100 billion of 
loans a year because of changes in the law that I thought were 
ill-advised, but it is the law now. What is that going to do to 
the ability of the Department of Education to check on the 
integrity of those loans? Because formerly you had lots of 
other entities around the country who were responsible for 
that. Are you concerned that the Department of Education may 
not be prepared to do that, making whatever problem exists 
worse?
    Ms. Tighe. Well, I think it is something we are keeping a 
close eye on. You are right that the Department has a 
significant responsibility now. The guarantee agencies were a 
source of information for us and some level of oversight in 
some ways. That responsibility now rests with the Department. 
We are doing some audit work related to just the mechanics of 
the transition to the direct loan program, looking at contract 
issues and the systems capacity issues.
    I think our one big area, if I were to label the biggest 
area of concern right now, is on whether they are going to be 
able to provide sufficient oversight over the contractors, the 
four new service providers. FSA has not had a good history of 
contract oversight, and I think that it is an area we are 
watching carefully.
    Senator Alexander. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Alexander.
    Senator Brown.

                       Statement of Senator Brown

    Senator Brown. Thank you, Mr. Chairman. Senator Enzi and 
Chairman Harkin, thank you for the really very important 
hearing.
    I think that examining so many of these proprietary 
schools, especially those that are growing so rapidly, is the 
right thing to do. As Senator Franken's question suggests, the 
rapid growth of these for-profit institutions, compared to 
other institutions, is a particularly great concern and 
particularly sort of a risky proposition for taxpayers and for 
those students.
    I would point out--and I know that others have done this--
that the good proprietary schools that we all have in our 
States are so important. In my State, there is a 40-year-old 
institution called the Ohio Technical College that trained 
diesel mechanics. In its first year, it was called the Ohio 
Diesel Technical Institute at that time--and good-paying jobs 
and all of them found jobs when they graduated. DeVry Institute 
in Ohio is a different kind of institution but generally many 
of the same good graduation rates and good training of students 
and doing things generally the right way.
    I want to go to comments in your written testimony, and I 
want to sort of explore where you are going with these when you 
see the especially rapid growth in some of these schools, again 
contrasted to other either for-profits or community colleges or 
whatever.
    You wrote,

          The volume of Federal student aid dollars going to 
        the publicly traded sector has seen tremendous growth 
        in recent years. Over the years we have come to 
        identify a relationship between rapid growth and 
        failure to maintain administrative capability.

    Talk that through. Administrative capability in terms, I 
assume, of accountability, in terms of maintaining coursework, 
all the kinds of things that that rapid growth would suggest in 
terms of administrative ability to manage it.
    [The prepared statement of Senator Brown follows:]

                  Prepared Statement of Senator Brown

    Today's hearing comes at a critical time.
    The President has challenged the Nation to reach the goal 
of once again having the highest proportion of college 
graduates in the world by 2020.
    With the American Recovery and Reinvestment Act and Health 
and Education Reconciliation Act, this Congress has made 
unprecedented investments in education and job training to 
revitalize our economy and make the 2020 goal a reality.
    Americans have heeded the call. During this Great 
recession, they have gone back to school in record numbers.
    While we need all hands on deck to create the educational 
capacity to meet our 2020 goal, we cannot lose sight of our 
obligation to protect students.
    This is not about painting one sector of the higher 
education community with a broad brush. Career colleges have 
played an important role in expanding access to post-secondary 
education and training.
    We have plenty of examples in Ohio.
    Ohio Technical College, family-owned and operated for over 
40 years, has provided high quality education in diesel engine 
repair in the Cleveland community. DeVry University has been a 
real partner to our public schools, offering dual enrollment 
opportunities to students in Columbus city schools. Graduates 
from career colleges across the State have offered testimonials 
as to how their career college education has helped them build 
better lives for themselves and their families.
    For institutions whose primary mission is education, 
whether they are public, non-profit or for-profit, it is in 
their interest to safeguard the integrity of higher education 
and student financial aid programs.
    We have received some warning signs.
    Last year, the General Accountability Office reported that 
some institutions were falsifying ability to benefit tests and 
enrolling ineligible students. The Department of Education's 
Inspector General has pointed to concerns about the 
relationship between rapid growth and the failure to maintain 
administrative capability. Since 2004-2005, Federal student aid 
funding to the proprietary sector has grown by more than 109 
percent--more than twice the rate for the other sectors.
    There have been a series of reports in the national media 
about the for-profit higher education sector.
    In April, Bloomberg reported on recruiting practices of 
some for-profit institutions at homeless shelters in Cleveland. 
In a push to boost their enrollment, some institutions marketed 
to our most vulnerable citizens. In the article one recruiter 
was quoted saying that borrowing by the homeless to pay tuition 
``is no different from a middle-class student who has to take 
out a loan.''
    Students in the for-profit sector borrow more than other 
students. They also default on their loans at much higher 
rates. Although students in the for-profit sector are only 9 
percent of the overall student population, they account for 44 
percent of the student loan defaults.
    Unfortunately, students at for-profit institutions often 
borrow private loans in addition to Federal student loans. Some 
publicly traded companies have reported that they will write-
off more than 50 percent of the private loans made to their 
students.
    Students' inability to repay their student loan seems to 
have no negative impact on the bottom line of these higher 
education companies. Yet, for the student, the debt cannot even 
be discharged in bankruptcy. Once again, Wall Street profits, 
and Main Street pays the debt.
    Our legislative and regulatory tools must be up to the task 
of protecting students and taxpayers in a rapidly growing and 
changing higher education environment. We do not want to stifle 
innovation or create barriers to access. But we cannot create a 
system where the incentives put enrollment growth and expansion 
of student aid revenues ahead of the educational quality and 
outcomes for students.
    I would like to applaud the Department of Education's 
efforts to update its regulations regarding program integrity. 
But this committee has an important role to play too. Thank you 
Chairman Harkin for your leadership in launching this series of 
hearings.
    I would like to thank the witnesses for joining us today. I 
am eager to hear your views about how we can strengthen our 
oversight in this area.

    Ms. Tighe. Yes. No, that is exactly right. A good example 
in our fairly recent work was a school called TUI, which is a 
very rapid-growth school. We went in and did essentially a 
review to look at how they were managing the title IV fund 
process in general. So we look at different aspects of it. The 
school, unfortunately was a--forget the issue of returning the 
title fund. They had not even gotten to the point of figuring 
out if students were still enrolled or not and were dispensing 
title IV money to students that were not even there. They were 
not really administrative-capable. They really were not doing 
anything very well. It is really sort of across-the-board 
issues that we find.
    Senator Brown. Were some of these students accumulating--
these were typically grants. These were loans. Were students 
accumulating debt and not even still enrolled in the school?
    Ms. Tighe. Well, they were kids who had withdrawn from 
school I think in part, and the school had not figured out that 
they were not there. Or, in fact, I think there were some who 
had not enrolled to begin with, that had maybe quit before 
there was any coursework being done, and still they were 
getting money.
    Senator Brown. Were most of these grants or loans?
    Ms. Tighe. I think they were loans. I can check. Both 
grants and loans.
    Senator Brown. So what happens? Have you been able to trace 
what happens?
    I go back to this. My wife was first in her family to go to 
college, graduated from Kent State University in Ohio, and had 
debt of less than $2,000. That was in the late 1970s. It was a 
different era and Government played a more significant role in 
many ways. She had no family money. It was all grants and 
loans, mostly grants and scholarships and all that, but more 
typical in those days of not accumulating that kind of debt.
    To me the most tragic part--I do not know the most tragic 
part, whether it is all the dollars taxpayers put into this 
without the return that the GI Bill--for instance, one of 
America's great programs--had, or whether it is that these kids 
end up no longer in school without a diploma and have huge 
debt.
    Have you examined the students at TUI or other places that 
have either not enrolled or not enrolled very long that have 
left that are still accumulating debt and what happens to them? 
Are you able to do that?
    Ms. Tighe. We have not looked--what we recommend when we 
find that situation is that--well, we recommend the loans be 
returned. To the extent they have gotten money and they are not 
in school, they should not be using the money. So they return 
the loans. That is, in the end, better for them. They are not 
going to be in the position of having to pay them back.
    Senator Brown. Are there examples where these students have 
left, they are continuing to--what happens with their debt? Is 
the school paying it back? Are they trying to pay it back?
    Ms. Tighe. If the student withdraws, if a student has a 
student loan and he withdraws and he is not in school any 
longer and has no deferment or forbearance, they are paying the 
loans back if they are no longer in school and do not have a 
reason like being in school or unemployment or whatever that 
would give them a deferment. So they are going to have to be 
paying the loans back.
    TUI's problem was it just was not managing the title IV 
funds very well. I think we also recommended they pay the money 
back. They just were not doing what they needed to.
    Senator Brown. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Brown.
    Senator Merkley.

                      Statement of Senator Merkley

    Senator Merkley. Thank you very much, Mr. Chair, and thank 
you for your testimony.
    I wanted to start with your written testimony, and you have 
made reference to this earlier. It notes that HEA has a ban on 
incentive compensation to recruiters, but due to safe harbors 
included in the current regulations, schools are shielded from 
administrative, civil, and criminal liability. Proprietary 
institutions are making full use of the safe harbors to provide 
financial incentives to drive enrollment.
    I understand that when in 2002 the safe harbor was extended 
in this fashion, some folks warned that this would lead to 
abuses. You are finding those abuses. Can you describe an 
example of how that abuse manifests itself in the field?
    Ms. Tighe. Well, yes. I think what you see are some of the 
things I think that have been in the news of aggressive 
recruiting because that is what the incentive compensation 
rules were intended to--it is the homeless. I do not think we 
have personally gone out and seen schools recruiting the 
homeless, but that has certainly been in the news.
    We do see aggressive recruiting, and when you are paid 
based on the number of students you bring in, then it leads to, 
I think, all sorts of abuses like that. You want to have 
students coming to schools that want to be there, that they 
know what they are getting in terms of an education, that they 
understand what the cost is going to be and they understand 
what they are going to get when they get out of it. To the 
extent that none of that information is being provided to 
students, which is certainly something we have seen, I think 
you are seeing a problem.
    Senator Merkley. Thank you.
    Let me turn next to the distance learning issues. Also in 
your written testimony, you note that institutions must be able 
to document attendance in at least one class during a payment 
period. Well, that seems like a pretty low standard: One class.
    Then you go on to note:

          ``The point at which a student progresses from on-
        line registration to actual on-line academic engagement 
        or class attendance is not defined by institutions and 
        is not defined by Federal statute or regulations.''

    There is a standard for which there is no definition and 
therefore you are basically unable to enforce it, even though 
it is such a tiny standard, one attendance.
    Ms. Tighe. Yes. It leads into some gray areas. We had a 
fairly recent audit involving Capella University where we went 
in and looked. They were essentially counting--it was an online 
environment, distance education environment, where they were 
essentially counting students' questions about the course as 
academic engagement. We disagree with that.
    Senator Merkley. Inquiring about the course.
    Ms. Tighe. Yes.
    Senator Merkley. Essentially we have aggressive recruiting, 
which may be any warm body, to get their name signed up. We 
will get you the aid, and so there is kind of no action. And 
then whether they ever attend or not is something hard to 
enforce as well.
    OK, let me go on. As you look at different States, do you 
find that the rules that some States have, the laws that they 
have passed, result in lower levels of abuse, and if so, what 
insights are there for us at a Federal level?
    Ms. Tighe. Yes, I think States have passed laws. I do not 
know--we have not really done audit work to assess the State 
laws in this area. I think to the extent they have passed laws, 
it would be instructive to look at it, but we have not done 
work in that area.
    Senator Merkley. Mr. Chair, that is something that I think 
would be very helpful. Oregon requires all schools that receive 
title IV money to enroll students only term by term, and that 
has resulted in a significant drop in abuse. I think strategies 
like that, that different States have employed, can be the 
State laboratories. I think it would be very helpful to bring 
those to bear on this discussion.
    My time is wrapping up here, but when I think about the 
fact that you are pursuing these investigations and they are 
criminal investigations, how is it that some schools can be so 
comfortable with so many types of abuse? Do you have 
insufficient investigators? Is the safe harbor just too broad? 
Why are schools not doing what they should be doing, given that 
they are subject to potential investigations?
    Ms. Tighe. Well, you would like to think that our work 
should provide some deterrence value. That is one of the points 
of doing criminal investigations. Yes, you put the bad guys 
away, but it should provide a deterrence to other people. We 
hope it does, but we do not have anywhere near the resources to 
cover every school or even every proprietary institution. So we 
do what we can.
    We are happy when the U.S. Attorney's Office publicizes the 
results of cases because I think that is a shot across the bow 
of other schools. We have to sort of rely on that mechanism, I 
think, to fully cover it because I do not think we will ever 
have the resources to do every case that comes our way.
    Senator Merkley. Thank you.
    The Chairman. Thank you, Senator Merkley.
    Senator Bennet.

                      Statement of Senator Bennet

    Senator Bennet. Thank you, Mr. Chairman. Thank you so much 
for holding this important hearing.
    I believe the abiding concern of everybody on this 
committee and every committee of this Congress ought to be that 
we are at risk of being the first generation of Americans to 
leave less opportunity, not more, to our kids and our 
grandkids. I think that increasing affordable access to 
college, especially for low-income students, is one of the most 
critical investments we can make in our future, and we need to 
do it.
    Between 1992 and 2002, we created 6 million new jobs that 
require a college degree and lost a half million jobs for 
people that have no high school diploma. Twenty-two of the 
thirty fastest-growing occupations will require a college 
degree between now and 2016, and just about 10 or 15 years ago, 
we led the world in the production of college graduates. Today 
we are about 15th in the world in the production of college 
graduates.
    For-profit universities can play a constructive role in 
increasing access but we need to make sure that we are 
delivering on our promises to our students.
    Ms. Tighe, I appreciate your testimony very much and the 
work that you have been doing.
    I have looked at the proposed rules as well and think they 
are going to help with many of the concerns that I have heard 
in my State, while not limiting access for students. But this 
is not just about access. It is also about the quality of the 
education people are getting.
    In your testimony, you described some of the problems you 
have identified in the accreditation process. I wonder what 
else we can do to ensure that accreditation is something that 
can drive quality or reassure us that students are actually 
receiving a quality education?
    One issue I am aware of is when a proprietary school takes 
over a school with a regional accreditation, that accreditation 
applies to the new school. Can you talk about accreditation a 
little bit?
    Ms. Tighe. Well, yes. It is, I think, a very important 
process since really the Department of Education itself cannot 
get into quality of education. It is really up to the 
accrediting agencies to do their jobs well because they are the 
people who have to determine that in some fashion.
    I think from our audit work and inspection work, it is 
clear that some accrediting agencies do better jobs than 
others.
    Senator Bennet. Is there a means of giving that feedback 
back to the accrediting----
    Ms. Tighe. Yes, we have. In our latest round of reviews, we 
looked at three of the seven regional accrediting agencies, and 
they were the three who had the most title IV funding. That was 
how we picked them. For each of those, we actually gave them a 
report back with our recommendations for improvement or 
suggestions, I guess, because we do not know how much authority 
we have to make them listen to anything we have to say. But we 
did give them suggestions for improvement.
    I will say we did another round of this in 2002. Actually 
one or two of those accrediting agencies we looked at back then 
and made some suggestions. They actually took a number of our 
suggestions and did make some improvements.
    We found additional issues when we went back just last 
fall, but I think that we saw them take some steps in the right 
direction.
    Senator Bennet. I had the experience working for the Denver 
public schools. The first round of online environment that 
charters and others provided turned out to be a disaster for 
everybody. The second round I think has been very effective 
because we were able to put some things in place to make sure 
that people were really getting quality. I think going forward 
both for K-12 and higher ed, online is going to be a very 
important part of the delivery system, a hugely important part.
    Can you talk a little bit about how you think about the 
regulation of that environment in a way that does not stifle 
the very important online part of this universe?
    Ms. Tighe. Yes. I would not want to stifle it either. I 
think it is very useful.
    I do think one of the big areas is one we talked about 
earlier, which is how can you show academic engagement. There 
are clearly some proprietary schools who do a much better job, 
for their online units or online schools, of tracking that 
students are actually academically engaged. They post homework. 
They take tests online. They do all the things that you do when 
you are actually going to school. Some do not do such a good 
job of that. Our efforts have been to sort of make 
recommendations for improvements in those areas.
    Senator Bennet. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Bennet.
    Senator Hagan.

                       Statement of Senator Hagan

    Senator Hagan. Thank you, Mr. Chairman, and thank you for 
holding this hearing today and for all of the witnesses that 
are here to discuss this important topic.
    An investment in higher education is an investment in our 
future, and as the for-profit education industry continues to 
rapidly grow and as the Federal Government continues to invest 
Federal dollars through title IV and the Department of Defense 
and VA, it is critical that we take a look at the practices of 
these institutions.
    One of the things that I am concerned about--and I am not 
sure if you have the answer to this or not--is how much money 
is in default of these loans right now? Do we actually age 
these receivables and how much do we actually collect? Do you 
have any of that information?
    Ms. Tighe. Well, I think the default rate is an interesting 
question. I think that the Department needs to do a better job 
of figuring that out. Right now, the most publicized default 
rate is the cohort default rate we talked about earlier, which 
is a very limited perspective on defaults because all it does 
is take a base year of, say, 2003 and then calculate the next 
year. When the amendments go into effect fully, it will 
calculate the next 2 years.
    In our audit work a few years ago, we actually recommended 
that they do a lifetime cohort default rate, which is, say, for 
a cohort base year of 2003, you go back each year and calculate 
all the defaults that resulted from people who went into 
repayment in that year. And I think you get a better view.
    As part of the financial statements and a part of the 
credit reform process, the Department has to estimate defaults 
and they have to do some long-term estimating in order to 
calculate subsidy costs.
    Our financial statement auditor has made, I think, some 
very good recommendations to the Department about how to factor 
in better information, since we are in a recession--
recessionary information. You know, you do not just look at 
employment rate. Look at availability of credit. Look at the 
housing market. Look at some other things to factor in. Get a 
better picture of what default rates are.
    Senator Hagan. I am not really talking about the future 
default rates. I am talking about right now.
    Ms. Tighe. Right now? Yes. I do not know if I have that 
figure.
    Senator Hagan. If you could get that information for us.
    Ms. Tighe. Absolutely.
    Senator Hagan. OK, thank you.
    That is all, Mr. Chairman. Thank you.
    The Chairman. Thank you, Senator Hagan.
    I am told that neither Senator Murray or Senator Sanders 
wish to ask any questions at this time. Ms. Tighe, thank you 
very much for being here, for your excellent testimony, and 
thank you for the work that the Inspector General's Office is 
doing.
    Ms. Tighe. Thank you very much, Mr. Chairman, Ranking 
Member Enzi.
    The Chairman. Now we will call our second panel.
    On the second panel we have Yasmine Issa, who completed a 
certificate program in ultrasound technology at Sanford-Brown 
Institute in White Plains, NY. I held up the Good Housekeeping 
magazine earlier. This is how we found Yasmine Issa because 
there is an article in the June 2010 Good Housekeeping magazine 
about Ms. Issa and about the for-profit schools.
    After Yasmine, we will hear from Margaret Reiter, who 
worked for 20 years as a consumer prosecutor with the 
California Attorney General's Consumer Law Section. Ms. Reiter 
served as the supervising California Deputy Attorney General 
during the agency's suit against Corinthian Colleges, 
Incorporated.
    The next witness is Sharon Thomas Parrott, Senior Vice 
President, Government and Regulatory Affairs and Chief 
Compliance Officer at DeVry, Incorporated. Ms. Parrott came to 
DeVry in 1982 and previously worked at the U.S. Department of 
Education in student financial aid and as a training 
specialist.
    Last we have Mr. Steve Eisman, Senior Portfolio Manager, 
FrontPoint Financial Services Funds in New York City. Mr. 
Eisman was featured in Michael Lewis' best seller, The Big 
Short, which I read, for his foresight into problems in the 
subprime mortgage industry. He has extensive experience 
analyzing companies over the last 2 decades.
    Again, we welcome you all here. As I said earlier, your 
statements will be made a part of the record in their entirety. 
We will just go from left to right. If you could sum up in 5, 
6, 7, 8 minutes--I will not be hard and fast on 5 minutes, but 
if you can sum up your testimonies, we would certainly 
appreciate it.
    Ms. Issa, we will start with you. I briefly introduced you 
as the featured person in this Good Housekeeping magazine 
article. I understand you are from Yonkers, NY, the mother of 
twin daughters, and your story is a very compelling one that I 
read about in the magazine. Welcome to the committee and please 
tell us your story.

   STATEMENT OF YASMINE ISSA, FORMER SANFORD-BROWN INSTITUTE 
                      STUDENT, YONKERS, NY

    Ms. Issa. Thank you for inviting me today. My name is 
Yasmine Issa.
    I thought that going to school to learn a marketable skill 
would allow me to provide for my family. Instead, it has left 
me more than $20,000 in debt and unable to be hired in the 
field I trained for.
    In 2005, I was 24 years old and recently divorced with 3-
year-old twin girls. I needed a good job in order to support 
myself and the twins, but I had been a stay-at-home mom up to 
the point and I did not have a college degree or any 
professional training. My aunt works in the radiology 
department at a hospital and told me that was a promising and 
rewarding path. So I started looking online for ultrasound 
schools.
    I found a Sanford-Brown Institute in White Plains near my 
home in Yonkers, NY, and went to the campus and spoke with a 
school representative. The first day I went to visit, I was 
told to take an entrance exam, which I passed. They said I 
needed at least 32 college credits to enter the program and I 
already had 59 credits from when I attended Manhattanville 
College for 2 years. That was not a problem.
    The program was 12 months of accelerated classes plus a 6-
month internship in a doctor's office and/or hospital. The 
recruiters explained that I could sit for the certification 
exam by either having a bachelor's degree or working full-time 
for 1 year as an ultrasound sonographer. They made it sound so 
easy, and they assured me I would have no problem finding a job 
to meet this requirement as soon as I completed the program. 
They said that career services at the school would not stop 
until I had a position. Their job placement services sounded 
really helpful, so it seemed like a sure thing.
    The recruiters kept calling me and pressuring me to sign up 
for the program. They said that the seats were filling fast and 
the registration deadline was just days away. With a family to 
take care of, I did not have time to waste being unemployed and 
I needed skills. I decided to enroll and I was very excited 
about my new career.
    The program cost me a little over $32,000. I paid for a lot 
of the costs with savings and child support, but I also had to 
take out $15,000 in Federal student loans through Sallie Mae. 
Using some of the child support money that I received for my 
daughters was the only way I could pay for school, but I 
believed going back to school and getting trained would yield a 
good return on my investment.
    After a lot of hard work, I completed the program in June 
2008. I began looking for a job aggressively, applying for 
every ultrasound job in the tri-state area. I posted my resume 
on Monster.com and other job-hunting Web sites. In the 
beginning, I would call to check in with Michelle Rawlins, the 
lady in charge of job placement at Sanford-Brown. I told her 
where I applied and asked her if there was anything else I 
should do. She told me to keep looking and check in with her 
every week. She said she would fax my resume to any job 
openings she was aware of. She sent one or two e-mails to my 
entire class with job openings, and I applied for those as 
well. Overall, career services did not end up being very 
helpful at all.
    After a few months, I was getting the same answers 
everywhere I went. The hospitals and doctors' offices all 
wanted one of two requirements: either for the ultrasound tech 
to be certified by the American Registry for Diagnostic Medical 
Sonographers or to have 2 to 5 years of experience working as 
an ultrasound tech. I could not sit for the registry's exam 
until I had experience, and I could not get real experience 
without being certified.
    The more I did not use my ultrasound skills, the more I was 
losing the skills. I asked Michelle Rawlins if I could get 
another internship in a hospital to keep up my skills and 
better my chances of being hired there. She transferred me to 
the dean of the school who sounded sympathetic but never 
followed up or returned my calls. I tried in all kinds of ways 
to get help from Sanford-Brown, but they avoided me and had 
nothing to offer.
    When I visited a hospital in New Jersey, the supervising 
ultrasound tech informed me that if I had attended an 
accredited school, I would have been able to sit for the 
registry exam immediately after graduating. This was how I 
found out that Sanford-Brown Institute's ultrasound program was 
not accredited. The school as a whole is accredited but their 
ultrasound program is not. I could not believe it.
    I looked on the ARDMS Web site and found that Bergen 
Community College in New Jersey offers an accredited ultrasound 
program for about half what I paid Sanford-Brown. I called to 
see if I could take a few more ultrasound courses through 
Bergen so I could qualify to sit for the registry exam. I was 
told no because my credits would not transfer.
    I never felt so alone in my life. Five months after 
finishing the program, I had no prospects for employment but 
still had a family to take care of, rent, bills, and now the 
outstanding student loans. I was depressed. I felt like I 
wasted my time and money on a phony school and fell for their 
false promises.
    I went online to see if there were any complaints about 
Sanford-Brown and found several from students in New York and 
across the United States. Their stories were, if not exactly 
the same, very similar to mine. They all felt like victims of a 
scam, just like I did.
    It has now been 2 years since I completed the program and 
the interest on my unpaid loans is growing. I currently owe a 
little over $21,000, including about $4,000 from my 2 years of 
college. The closest I have come to a real ultrasound job was 
the 2 months when I worked as a temp for a private doctor while 
his ultrasound tech was on vacation. It is hard to find any 
work without a marketable skill, but going to Sanford-Brown to 
get one has left my family and me worse off than if I had never 
gone back to school.
    Thank you.
    The Chairman. Ms. Issa, thank you very much for being here 
and for telling us your story. I think this is what we have got 
to hear, what is happening to young people like you.
    Now we will turn to Margaret Reiter. Ms. Reiter, again, 
please proceed.

    STATEMENT OF MARGARET REITER, FORMER SUPERVISING DEPUTY 
 ATTORNEY GENERAL, OFFICE OF THE ATTORNEY GENERAL, CALIFORNIA 
            DEPARTMENT OF JUSTICE, SAN FRANCISCO, CA

    Ms. Reiter. Thank you, Chairman Harkin, Ranking Member 
Enzi, and distinguished members of the committee.
    As the Chairman mentioned, I worked as a prosecutor in the 
Consumer Law Section at the California Attorney General's 
Office for 20 years. Before that, I was an investigator in 
consumer matters for 4 years, and I recently served as the 
primary negotiator in the department's negotiated rulemaking on 
program integrity as the negotiator for consumer interests.
    Among the many types of consumer fraud cases I have 
prosecuted or supervised others in prosecuting, a number of 
them have been against proprietary schools. Based on my 
knowledge of investigations and cases against proprietary 
schools over the years, including the ones I have been involved 
in and others that I am aware of, and based on my experience in 
investigating different types of consumer fraud, in my opinion 
the consumer abuses in the proprietary school industry are 
among the most persistent, egregious, and widespread of any I 
have seen. The schools now are larger, richer, more likely to 
be publicly traded, and the students likely to wind up with 
much larger debts than when I first prosecuted proprietary 
schools in the late 1980s, but the abuses are strikingly 
similar.
    I just want to give a few highlights from my written 
testimony about the case that we settled in 2007 against one of 
the largest publicly traded, for-profit schools. I think the 
case is representative of some of the problems in the industry 
today. Although it settled, so there was no judgment, the 
information I am providing is based entirely on either the 
company's own statements, public statements, or sworn testimony 
or sworn declarations of its former employees, of students, and 
of hundreds, literally hundreds, of declarations we got from 
employers where the school claimed that their students had 
found employment after graduation and that they had found that 
employment within 6 months of leaving school, had been employed 
for at least 60 days for at least 32 hours a week, which was 
the standard definition of employment in California at that 
time.
    Our investigation focused almost entirely on the oral 
representations and the written required disclosures about job 
placement and salaries of the school's graduates. The evidence 
showed that whichever way we looked and whatever we looked at, 
the evidence was the same, that the claimed placement rates and 
the claimed salaries were inflated.
    The school's advertising primarily reached people through 
TV, radio ads, ads in the unemployment offices, and touted the 
life-changing career training that was being offered that is 
highly valued by employers. The school's statements said that 
they were committed to helping students find a job. Many of 
them are students who are women. About half of them were 
minorities according to the students. In fact, a regional 
director was telling her staff that she should target low-
income Hispanic students and even telling people to talk to the 
employees when they went through drive-in fast food places to 
try to recruit students.
    When the students contacted schools, the admissions 
counselors used inflated job and salary claims. We checked in 
this way with nine secret shoppers who went to the schools 
asking about enrolling in the school. These undercover or 
secret shopper investigations went on over a 2-year period and 
we went to six different locations of this school across 
California.
    In one instance, as an example, the secret shopper was told 
that about 85 percent of the students who graduate in the 
medical administrative assistant program get jobs. However, the 
school's written disclosures, which were required at that time 
to prepare under California law, showed that only 50 percent of 
them in the 2 years preceding and only 60 percent in the year 
before had actually gotten jobs instead of the 85 percent 
claimed.
    There are other examples--I could go on with that--of the 
oral disclosures.
    There were also oral disclosures about salaries that were 
inflated. One of our secret shoppers, for example, was told 
that the starting salary for medical billers was about $18 an 
hour, around $37,000 a year, but the school's own written 
disclosure form showed that of the 19 graduates in that program 
from the year before, 16 of them earned between approximately 
$14,000 and $26,000, not $37,000.
    As I mentioned, the schools at that time were required to 
provide both oral and written statements to consumers about 
what the job placement rates were. We found that either they 
did not give them, or they denigrated them. They said they were 
out of date, and so in many instances, they did not get either 
the oral or the written disclosures that were accurate 
according to the school's own records.
    Most surprising I think--maybe not so much surprising, but 
astounding to us was that when we then looked at the school's 
written records that they used to declare these are our 
accurate placement and salary information, we then went out and 
got declarations from the employers and we found that in fact 
their employment and their salary disclosures were inflated 
even in the school's prepared written statements and 
disclosures of what their placements were.
    For example, in the sonographer program, in the written 
disclosure the school had said their placement rate was 80 
percent. We found it was really 43 percent or lower.
    In the dental assistant, they said 73 percent. We found it 
was really 51 percent or lower.
    In the business office assistant program, they said 72 
percent. We found it was really 57 percent.
    In most courses, only 30 percent to 52 percent of the 
graduates obtained employment, according to the evidence that 
we gathered.
    While we concentrated on employment and salaries, we also 
stumbled across other information of wrongdoing, the school 
referring students who needed to have a high school diploma to 
a place where they could buy one. Also some of our secret 
shoppers were encouraged to lie about their income so they 
could qualify for financial aid. This kind of thing was also 
corroborated by declarations or testimony from former employees 
as well.
    The massive evidence we gathered I think shows that the 
problems were systemic, that this is a problem where the school 
is exploiting people's need and desire for well-paid and secure 
jobs, and routinely lying to students in order to get as many 
students to enroll as possible.
    I am happy to take questions. Thank you for this 
opportunity.
    [The prepared statement of Ms. Reiter follows:]

                 Prepared Statement of Margaret Reiter

    I worked as a Deputy Attorney General, then a Supervising Deputy 
Attorney General in the Consumer Law Section of the California Attorney 
General's Office for 20 years, until I retired at the end of 2008. The 
first cases I prosecuted in the late 1980s and early 1990s and one of 
the last prosecutions I supervised before I left were against post-
secondary proprietary schools for unfair, unlawful, and fraudulent 
business practices and untrue and misleading advertising. The main 
difference between the 1990s and now is that for-profit schools now are 
more likely to be publicly traded, be larger and richer, and have much 
greater political clout, and the students wind up with much larger 
debts, including high cost private loans. In contrast, the abuses 
remain strikingly similar.
    By the mid-1990s, I thought, naively it turns out, that we had 
turned the corner on fraud and abuse in the proprietary school 
industry. The AG had brought several successful cases against 
proprietary schools, California had established a strong State law 
(which required, among other provisions, a 100 percent pro-rata refund 
policy, and completion by 60 percent of students and job placement of 
at least 70 percent of graduates), the newly established independent 
California agency to oversee proprietary schools moved aggressively to 
police the area (putting 159 schools out of business by 1995 
[California Post-Secondary Education Commission, Effectiveness of 
California's oversight of Private Post-Secondary and Vocational 
Education, 10/1995]) the Federal student loan provisions had been 
tightened up (including by requiring at least 15 percent of a school's 
revenues to come from other than Federal student aid and instituting 
cohort default rate criteria), and the Inspector General's Office of 
the Department of Education had become more active in enforcement. So 
for a number of years, the Consumer Law Section, which handles all 
types of consumer fraud cases, switched focus from proprietary schools 
to other types of the businesses.
    By the late 1990s reports of abuse in the proprietary school sector 
again began to rise By the mid-2000s, continuing reports of rising 
amounts of fraud and abuse among proprietary schools again focused our 
attention on this area. By then, the strong independent California 
oversight agency had been eliminated. Federal safeguards had been 
watered down (including the requirement for 15 percent of revenues to 
come from other than Federal aid was reduced to 10 percent, the cohort 
default provisions were weakened, and the prohibition on incentive 
compensation for recruitment had been regulated into a number of large 
loopholes. Meanwhile, many more proprietary schools had become large, 
publicly traded entities with dozens of locations around the State. 
Once again the California Attorney General's Office, under Attorney 
General Lockyer began an investigation into proprietary schools.
    My testimony primarily summarizes the case developed against one 
large publicly traded proprietary college that resulted in entry of a 
stipulated judgment in 2007. A stipulated judgment means the matter did 
not come to trial, there was no judicial determination of liability, 
and the school did not admit any wrongdoing, but did agree to the terms 
of the judgment. The following is a summary of the allegations of the 
complaint, evidence that was to have been used to obtain a preliminary 
order enjoining certain unlawful conduct if there had not been a 
settlement, and the terms of the judgment.

                SUMMARY OF ALLEGATIONS IN THE COMPLAINT

    The complaint alleged Corinthian Schools, Inc., a subsidiary of 
Corinthian Colleges, Inc. (and a related corporation) offers vocational 
programs at approximately 14 schools--in California. It alleged the 
programs offered typically last from 6 to 13 months, for which the 
school typically charges $7,000 to $15,000, with some longer courses 
costing as much as $27,000. The complaint alleged that the vast 
majority of students enrolled pay for those high cost courses through 
financing that the school offers or arranges via government grants, 
government-subsidized loans, high-cost private loans and the school's 
own credit programs. The complaint also alleged students who are unable 
to obtain a good-paying job in the field they studied may be saddled 
with the debt and the negative consequences of that debt for years to 
come, because, with a few limited exceptions, student loan debt is not 
dischargeable in bankruptcy.
    The complaint alleged the school engages in a persistent pattern of 
unlawful conduct; that the school's own records for many courses show 
that a substantial percentage of students do not complete the programs 
and, of those who complete the program, a large majority do not 
successfully obtain employment within 6 months after completing the 
course; and that the percentages of former students the school's 
documents claim successfully obtained employment are inflated. The 
complaint also alleged that in some instances, the school's records 
even list non-existent businesses as the students' places of 
employment; and the salaries the school's records claim its former 
students earn are also often incorrect and inflated. The complaint also 
alleged the school places intense pressure on its staff, particularly 
on those who recruit students and those who supervise them, to meet a 
pre-set quota of ''starts.'' The complaint alleged that means the 
employees are to enroll at least a certain number of students who stay 
in school beyond the 5-day period during which students may withdraw 
from school and obtain a full refund under the California Education 
Code in effect at the time. The complaint alleged the school uses 
various untrue and misleading statements to induce students to enroll 
and not cancel, despite the poor chances of success, and engages in 
other unfair, unlawful or fraudulent business acts and practices.

    SUMMARY OF EVIDENCE RE: REPRESENTATIONS ABOUT JOB PLACEMENT AND 
                                SALARIES

    The Attorney General's Office gathered evidence to support the 
allegations in the complaint and to support an application for a 
temporary restraining order and preliminary injunction against the 
school. Any evidence gathered to support the allegations of the 
complaint, but not needed to support the request to enjoin certain 
conduct during the pendency of the action is not included in the 
summary that follows. The evidence summarized here includes statements 
from the school's own records or its public statements, and oral 
testimony and written declarations given under oath. The evidence 
consists primarily of hundreds of sworn written declarations from 
employers where the school claimed its graduates obtained employment, 
but also includes declarations or testimony from former students, 
former employees and secret shoppers. This section summarizes that 
evidence:

Students Solicited With Ads About Job Training and Careers
    In 2005, the school enrolled at least 11,350 students in its 
schools in California in various vocational programs. The school admits 
its students are not the typical college-bound high school students who 
spend months and years choosing their college and carefully planning 
their future careers.\1\ Instead, its students, the majority of whom 
are women, over 21 years of age, and minorities, enroll after seeing or 
hearing an advertisement on television, radio, or posted in an 
unemployment office, that promises quick and easy job training for 
lucrative careers.\2\ The school's students typically invest in an 
expensive education at this school for one primary reason--to obtain 
skills that will lead to a job that pays more than minimum wage and 
therefore leads to a better life for themselves and their families.\3\
---------------------------------------------------------------------------
    \1\ See Statement of David. G. Moore, CEO, Corinthian Colleges, 
Inc., before the Committee on Education and the Workforce, U.S. House 
of Representatives, Serial No. 108-63 (June 16, 2004) (``Moore 
Statement'') at p. 33.
    \2\ Id. at p. 36 [``Of our 66,000 students, approximately 73 
percent are female, 70 percent are over 21 years of age, and about one-
half are minorities''] and p. 39 [60 percent of students at Bryman 
College, San Bernadino, are Hispanic and African-American; ``about half 
'' of the students at Bryman College, Anaheim, are Hispanic or ``other 
minorities'']; see also transcript of the telephonic deposition of 
[Former employee] at PP. 34-35 [one of Corinthian's regional directors 
of admissions told a new director of admissions for the Reseda campus 
that her admissions representatives should ``[t]arget [recruitment 
efforts] towards low-end Hispanic students,'' including by talking to 
McDonald's employees while using the drive-thru window]; Declarations 
of Students (``Student Decls.'') TMB [student enrolled after seeing 
Defendants' ad in unemployment office].
    \3\ See, e.g., Declaration of EH at  7; Student Declarations TMB, 
SG, MB and BC.
---------------------------------------------------------------------------
    The school's advertisements focus on students' employment-related 
motivation. The school's printed advertisements promise ``[l]ife 
changing career training,'' ``education and training you'll need to 
accomplish your career goals,'' and the ``education you need to build a 
successful career for years to come.''\4\ Similar statements include:
---------------------------------------------------------------------------
    \4\ Declaration of RH Ex. 2; Declaration of SR Ex. 5.

     Our education is recognized and valued by employers, and 
so are our graduates. We are dedicated to helping people change their 
careers and their lives.
     [Our] College has helped thousands of students train for a 
new career and build a better life. We are dedicated to helping you 
succeed. This means that in addition to providing you with career 
education and training, we're also committed to helping you find a job 
that's right for you.\5\
---------------------------------------------------------------------------
    \5\ Declaration of IS Exs. 9, 29.
---------------------------------------------------------------------------
Written Employment Disclosures Then Required by California Law Inflated 
        or Falsified
    Under the then-current law, schools could count a student as having 
obtained employment if they could document that the student was 
employed: (1) within 6 months after completing the program; (2) for at 
least 32 hours per week for a period of at least 60 days; (3) ``in the 
occupations or job titles to which the program was represented to 
lead,'' and a student who worked less than 32 hours per week if the 
student completed a handwritten statement ``at the beginning of the 
program and at the end of the program which states that the student's 
educational objective is part-time employment.''
    The Attorney General compared the school's records for certain 
courses offered in Alhambra, West Los Angeles (``West L.A.''), and San 
Jose schools for 2003 and 2004. Hundreds of declarations by former 
students and employers listed in those records,\6\ contradicted the 
information contained in the school's records.\7\
---------------------------------------------------------------------------
    \6\ Declarations of Employers (``Employer Decls.''); Student Decls.
    \7\ For the purposes of comparing the employment percentages based 
on this evidence to the employment percentages disclosed by the school, 
the AG counted only two groups of students who completed their programs 
as not having obtained employment: (1) students the school stated did 
not meet one or more of the criteria of Education Code sections; and 
(2) students or employers from whom the Attorney General obtained a 
declaration showing that the students' employment did not meet one or 
more of the required criteria. If the AG was unable to locate the 
student and/or employer to verify the information the school reported, 
for purposes of comparison, the AG assumed that the student had been 
employed as the school reported.
    The school excluded from its calculations students who decided not 
to obtain employment and within 6 months of completing the program 
enrolled in a program to continue their education. Although the school 
should not have used that exclusion for its calculation under the 
applicable California law, the AG did not add those students back in 
for purposes of this comparison. If he had, the percentages would have 
been even lower.
---------------------------------------------------------------------------
    The discrepancies between the school's records and the evidence the 
AG obtained is calculated in the following charts, showing the school 
inflated the percentage of its students who obtained employment by at 
least 2 to 37 percentage points. The chart also shows that for many 
programs, the school did not meet the then-mandated State placement 
rate of 70 percent.


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                      Defs.'                                         Defs.'                                         Defs.'
                                     Reps. to    People's                           Reps. to    People's                           Reps. to    People's
           Alhambra 2003             Students    Evidence       San Jose 2003       Students    Evidence       West L.A. 2003      Students    Evidence
                                        [In         [In                                [In         [In                                [In         [In
                                     percent]    percent]                           percent]    percent]                           percent]    percent]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Business Office Asst..............         72          57   Dental Asst..........         68          59   Bus. Mgmt. Asst......         79          60
Business Office Mgmt..............         72          65   Med. Asst............         50          44   Dental Asst..........         73          51
Dental Asst.......................         73          53     ...................                          Diagnostic Med.               80          43
                                                                                                            Sonographer.
Medical Admin. Asst...............         56          51     ...................                          Echocardiographer....         63          40
Medical Asst......................         60          52     ...................                          Medical Asst.........         45          39
Medical Billing & Coding..........         66          51     ...................                          Medical Billing &             38          36
                                                                                                            Coding.
                                                                                                           X-Ray Tech...........         46          43
--------------------------------------------------------------------------------------------------------------------------------------------------------



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                      Defs.'                                         Defs.'                                         Defs.'
                                     Reps. to    People's                           Reps. to    People's                           Reps. to    People's
           Alhambra 2004             Students    Evidence       San Jose 2004       Students    Evidence       West L.A. 2004      Students    Evidence
                                        [In         [In                                [In         [In                                [In         [In
                                     percent]    percent]                           percent]    percent]                           percent]    percent]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Medical Asst......................         53          48   Med. Asst............         36          30   Med. Asst............         47          40
Medical Billing & Coding..........         42          34
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Under the law in existence then, different reporting criteria 
applied to some courses, such as massage. Schools could count students 
who ``secure employment in the field for which they were trained.''
    As with the above programs, students and employers listed in the 
school's records for the massage therapy courses provided declarations 
that contradicted information in the school's records.\8\ For purposes 
of comparing the school's records with student and employer 
declarations showing whether massage therapy students obtained 
employment, the Attorney General counted as not having obtained 
employment (1) students that the school admitted did not work as 
massage therapists; (2) students that the school admitted worked fewer 
than 10 hours per week or 40 days total; (3) students who the school 
showed started employment more than 6 months after finishing their 
courses; and (4) students for whom declarations from the students or 
employers the school identified that showed the students never worked 
as massage therapists, were employed fewer than 10 hours per week or 40 
days total, or who did not start their employment within 6 months of 
completing their massage therapy programs. Those the AG was unable to 
locate to verify employment, were assumed, for comparison purposes, to 
have secured employment.
---------------------------------------------------------------------------
    \8\ Employers Decls.; Student Decls.
---------------------------------------------------------------------------
    For all three massage therapy programs, the school consistently 
reported students as being employed at non-existent, fake businesses 
that the students invented as part of a class assignment in order to 
learn how to make business cards.\9\ The school's required disclosures 
gave an inflated count of the employment percentages for all three 
programs checked, the difference ranging from at least 14 to 28 
percentage points.
---------------------------------------------------------------------------
    \9\ See, e.g., Student Decls., nos. 2600, 2608; nos. 2874, 2891, 
2907, 2919, 2930, 2938, 2943.


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                      Defs.'                                         Defs.'                                         Defs.'
                                     Reps. to    People's                           Reps. to    People's                           Reps. to    People's
           San Jose 2004             Students    Evidence       West L.A. 2003      Students    Evidence       West L.A. 2004      Students    Evidence
                                        [In         [In                                [In         [In                                [In         [In
                                     percent]    percent]                           percent]    percent]                           percent]    percent]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Massage Therapy...................         68          40   Massage Therapy......         89          66   Massage Therapy......         57          43
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In summary, for every single program for which the AG contacted 
students and/or employers, the employment percentages that the school 
reported on the written disclosures required by California law were 
inflated, by up to 37 percent. In most courses, only 30 percent to 52 
percent of graduates obtained employment. Ten of nineteen programs had 
placements rates of less than 50 percent; 15 had placement rates of 
less than 55 percent.

Required Disclosures About Salaries Graduates May Earn Are Inflated or 
        False
    The school also makes both express and implied claims regarding the 
salaries of their graduates. The school's brochures are laced with 
statements like, ``Top Ten Reasons for an Education . . . 1. To make 
more money;'' and

          Why pursue an education beyond high school? Return on 
        investment . . . The time and money you invest in your 
        education can deliver benefits once you graduate. In many 
        cases, the increased earnings after only 1 year will justify 
        the cost of a student's education. A $5.00 wage increase per 
        hour equals an extra $10,000 per year.\10\
---------------------------------------------------------------------------
    \10\ Declaration of JT, Ex. 16; IS Decl., Ex. 8; and Declaration CT 
Ex. 6.

    The school tells potential students how much they can expect to 
earn after graduating.\11\ In addition, the school makes implied claims 
regarding the future salary potential of enrolling students. For 
example, while discussing financial aid, the school told RF that she 
would make ``way more than $9,000 [tuition cost]'' in her job as a 
medical biller and that she would earn ``more than triple'' that 
amount.\12\
---------------------------------------------------------------------------
    \11\  See, e.g., ML Decl. at  21-24 [Defendants stated that 
potential student could earn between $11 and $18 per hour after 
completing medical assisting program].
    \12\ Declaration of RF at  18.
---------------------------------------------------------------------------
    Because the school makes such claims, it was required under 
California law to disclose its students' starting salaries. Because its 
salary disclosures are based on the same records provided as to 
students who completed the programs and many of those students did not 
meet the employment criteria or were not employed as the school 
reported, its statements about the salaries earned were also inflated 
or untrue.

Oral Job Placement Claims Falsely Higher Than Even the School's Own 
        Inflated or False Written Job Placement Disclosures
    Over the course of 2 years, nine secret shoppers, posing as 
potential students at six different school locations received false or 
misleading information that concealed or contradicted the school's 
written disclosures about employment success, as well as the salaries, 
of their students. Those experiences are corroborated by declarations 
from former employees and students.
    In May 2006, for example, at the school's San Jose campus, the 
school told PW that the employment percentage for massage therapy 
``right now'' is ``closer to 80 percent'' for its graduates.\13\ 
According to the written disclosures provided, however, only 68 percent 
of San Jose massage therapy students scheduled to graduate in 2004 
found employment (compared to a worse rate of 63 percent in 2005). 
Similarly,
---------------------------------------------------------------------------
    \13\ PW Decl. at  10.

     In October 2006, the school told CT that ``about 85 
percent'' of students who graduate from the medical administrative 
assistant program get jobs.\14\ The school's written disclosures 
stated, however, that only 50 percent of medical administrative 
assistant graduates in 2004, and 60 percent in 2005, had obtained 
employment.
---------------------------------------------------------------------------
    \14\ CT Decl. at  20.
---------------------------------------------------------------------------
     In October 2006, the school told ML that the Reseda campus 
graduates had achieved an employment rate of 90.1 percent.\15\ The 
school's written disclosures for the program in which ML had indicated 
an interest, medical assisting, stated that only 54 percent of medical 
assisting graduates in 2004, and 63 percent in 2005, had found 
employment. According to the school's disclosures, the aggregate 
employment rate for all Reseda graduates was 62 percent in 2004 and 65 
percent in 2005, not 90.1 percent.
---------------------------------------------------------------------------
    \15\  ML Decl. at  18.
---------------------------------------------------------------------------
     In January 2006, the school told RF that 51 percent of the 
medical billing program graduates at the West L.A. campus found 
employment, while the written disclosures stated that 33 percent of 
2004 medical billing graduates found employment.\16\
---------------------------------------------------------------------------
    \16\ RF Decl. at  31.
---------------------------------------------------------------------------
     In August 2005, the school told JT that their accrediting 
agency ``holds us to certain guidelines for our students'' including 
``placing at least 69 percent of the students in the position that they 
went to school for.'' \17\ The school's written disclosures for the 
program in which he stated an interest in medical assisting, stated 
that only 60 percent of medical assisting graduates in 2003, and 54 
percent in 2004, had found employment.\18\
---------------------------------------------------------------------------
    \17\ JT Decl. at  7.
    \18\ PW Decl., Ex. 4.
---------------------------------------------------------------------------
    A former director of admissions at the Reseda campus who supervised 
the admissions representatives reported that, in every single interview 
that she witnessed, admissions representatives told potential students 
that the Reseda campus had ``an extremely high placement rate'' of 
between ``85 and 90 percent . . . in qualified jobs,'' regardless of 
the program the potential students were interested in, or enrolling 
in.\19\ Even as a supervisor of these admissions representatives, she 
never witnessed any of them orally disclose the actual employment 
percentages for the program in which the student was enrolling.\20\
---------------------------------------------------------------------------
    \19\* Decl., Ex. 27 at p. 110.
    \20\ Id. at p. 118.
---------------------------------------------------------------------------
    The school also tells potential students to disregard disclosures 
because they are purportedly outdated and the ``current'' employment 
percentages of graduates are higher. In October 2006, for example, the 
school told IS that the 2004 employment percentage for pharmacy 
technician program graduates at the San Francisco campus, the 
disclosure the school was required by law to make, was outdated. The 
school told her that the more accurate rate was 54 percent for that 
year to date.\21\ The school's written disclosures for this pharmacy 
technician program, however, stated that only 40 percent of pharmacy 
technician graduates in 2004, and 43 percent of pharmacy technician 
graduates in 2005, had found employment. A former director of education 
reported seeing the same practice at the San Jose campus.\22\
---------------------------------------------------------------------------
    \21\ IS Decl. at  25, 26.
    \22\ Declaration of MJ at  18.
---------------------------------------------------------------------------
    The school also provided older, outdated employment disclosures, 
rather than more recent disclosures stating lower employment 
percentages. In September 2006, for example, the school gave RH written 
employment disclosures for 2001 graduates and orally stated that the 
form was correct that ``80 percent'' of ``medical dental billing'' 
graduates at the Alhambra campus found jobs.\23\ The school's more 
recent disclosures, however, stated that only 53 percent of medical 
assisting graduates in 2004 had found employment.
---------------------------------------------------------------------------
    \23\ RH Decl. at  13, Ex. 3.
---------------------------------------------------------------------------
    The school also overstated the likelihood that a potential student 
would obtain a job, in light of the employment percentages of the 
school's graduates. The school told JT that there's ``no way that you 
can't'' get a job unless you ``just bombed at school'' and that this 
happened to less than 5 percent of the school's students.\24\ Yet, as 
set forth above, the employment rate for 2004 graduates of the program 
in which JT was interested was 54 percent. Similarly, the school's 
admission representative told SR that the school is ``like the UCLA of 
vocational schools'' and that, although he could not guarantee it, as 
long as she did well at school she would not have ``any problem getting 
a job.'' \25\ According to the school's written disclosures, however, 
the employment rate for 2004 West L.A. graduates from the medical 
assistant program was only 47 percent.
---------------------------------------------------------------------------
    \24\ JT Decl. at  19.
    \25\ SR Decl. at  10, 11.
---------------------------------------------------------------------------
Required Job Placement Disclosures Not Made
    The school either did not provide, or denigrated the employment 
disclosures then required by California law. In seven of eight secret 
shopper visits in which an oral disclosure was then required by 
California law, the school failed to disclose orally the employment 
statistics stated on their written disclosures.\26\ In the one 
remaining visit, although the school orally disclosed the employment 
rate reflected on the disclosure, this disclosure was undermined by a 
statement that the rates were ``out-of-date'' and that the potential 
student would be enrolling in a program with a higher employment 
rate.\27\
---------------------------------------------------------------------------
    \26\ See RF Decl.; RH Decl.; ML Decl.; Declaration KM; JT Decl.; SR 
Decl.; and CT Decl.
    \27\ IS Decl. at  25, 26.
---------------------------------------------------------------------------
    The school did not provide the required written disclosures in the 
three visits of CT, ML and even KM, who actually enrolled.\28\ With 
respect to the other six secret shopper visits, the written disclosures 
were undermined and/or contradicted in various ways. The school did not 
provide the disclosures to PW, SR, or RH until they enrolled during 
their second visits and only after the school had orally represented 
false and inflated employment rates.\29\ Similarly, although the school 
provided the written employment disclosure to IT on his first visit, it 
did so only after it had orally represented false and inflated 
employment statistics.\30\ In none of these cases did the school point 
out the disclosures to correct the false information previously 
provided. Finally, with respect to IS and RF, although the school may 
have asked them to sign the written disclosure on the second visit, it 
did not provide them with a copy.\31\
---------------------------------------------------------------------------
    \28\ See CT Decl.; ML Decl.; KM Decl.
    \29\ PW Decl. at  10, 36; SR Decl. at  11, 25; RH Decl. at  
13, 45.
    \30\ JT Decl. at  7, 15
    \31\ IS Decl. at  25, 26; RF Decl. at  14, 29, 31.
---------------------------------------------------------------------------
    And, each time one of the secret shoppers enrolled, the school 
rushed them through the signing of the employment disclosures, without 
affording them time to review them as required by law. A former 
director of admissions routinely saw a similar practice at the Reseda 
campus, where the admissions representative downplayed or concealed the 
significance of the employment disclosure by including it in a large 
stack of documents and saying, ``just go ahead and sign this.'' \32\ 
She never witnessed a single admissions representative actually explain 
the employment disclosure.\33\
---------------------------------------------------------------------------
    \32\ *Decl., Ex. 27 at p. 114.
    \33\ Ibid.
---------------------------------------------------------------------------
Oral Misrepresentations About Salaries That Can Be Earned; Concealment 
        of Salary Information About Graduates
    The school told JT and RH, who visited the Alhambra campus in 2005 
and indicated an interest in the medical assisting program, that they 
could earn salaries that were higher than the salaries the school's 
written records showed its graduates earning. Referring to 
www.salary.com, the school told JT that he could earn an average salary 
of $31,000 per year and told RH that he could earn $29,000 per year and 
even had the potential to earn $72,000 per year.\34\ The school gave JT 
a print-out from the Web site containing this information, yet never 
provided him with or showed him a copy of its own salary 
disclosures.\35\ According to the school's own written disclosures, the 
vast majority (34 out of 47) of 2003 Alhambra medical assisting 
graduates who obtained employment earned between $14,412 and $22,200 
per year.\36\ Only 2 of the school's graduates were reported as earning 
$29,000 or more per year.\37\ In addition, the school reported only one 
2004 graduate as earning $28,800 or more per year, while it reported 
176 out of 188 medical assisting graduates from 2004 earning between 
$12,012 and $21,600 per year.\38\
---------------------------------------------------------------------------
    \34\ JT Decl. at  13, 18; RH Decl. at  18-21.
    \35\ JT Decl., Ex. 5.
    \36\ * Decl.; RH Decl., Ex. 34.
    \37\ * Decl.
    \38\ * Decl., Ex. 16.
---------------------------------------------------------------------------
    The school engaged in similar tactics in the 6 other secret shopper 
visits:

     When, in September 2006, IS asked what salary she could 
expect to earn on graduation, the school told her to check 
www.salary.com; although the school asked her to sign a number of 
documents on her second visit, which included a written salary 
disclosure, the school did not give her a copy of the written 
disclosure.\39\
---------------------------------------------------------------------------
    \39\ IS Decl. at  10, 27.
---------------------------------------------------------------------------
     In July 2006, the school showed KM a Web site regarding 
salaries and stated that she could earn a salary of $35,000 a year as a 
medical assistant, and that there were even some graduates making 
$38,000 a year; the school never provided her with a written or oral 
salary disclosure for that program for the campus she visited, the San 
Jose campus.\40\
---------------------------------------------------------------------------
    \40\ RF Decl. at  11, 31, 37.
---------------------------------------------------------------------------
     In January 2006, the school told RF that the Web site 
``monster.com'' lists starting pay for medical billers as $18.00 per 
hour (approximately $37,000 per year); although the school had her sign 
a written salary disclosure, the school did not give her a copy of it 
and never orally disclosed the information on it.\40\ According to 
written salary disclosures for the West L.A. campus, 16 of 19 medical 
billing graduates from 2004 earned between $14,412 and $26,400 per 
year, while only 3 earned more than $28,812 per year.\41\
---------------------------------------------------------------------------
    \41\ * Decl., Ex. 18.
---------------------------------------------------------------------------
     In October 2006, the school told ML that she could earn 
between $11.00 and $18.00 per hour (approximately $22,800 to $37,000 
per year) after completing the medical assisting program at the Reseda 
campus. The school also stated that she could earn her tuition of 
$13,000 back in 4 to 5 months (total earnings of $52,000 to $65,000). 
The school did not provide her with the required oral or written salary 
disclosures.\42\
---------------------------------------------------------------------------
    \42\ ML Decl. at  21-24, 30.
---------------------------------------------------------------------------
     In May 2006, although the school showed PW a ``fact 
sheet'' with information about salaries on his second visit, they did 
not provide him with a copy.\43\
---------------------------------------------------------------------------
    \43\ PW Decl. at  35.
---------------------------------------------------------------------------
     Finally, although the school implied that CT could 
increase his earnings by enrolling, the school never provided him with 
any salary disclosures, oral or written.\44\
---------------------------------------------------------------------------
    \44\ CT Decl. at  22, Ex. 6.

    These practices are corroborated by the testimony of two former 
employees. A former director of education at the San Jose campus 
witnessed admissions representatives quoting salary ranges to potential 
students, even though these ranges were not paid to the school's 
graduates according to its own data.\45\ A former director of 
admissions from the Reseda campus witnessed admissions representatives 
engage in a practice of providing the salary disclosures in a large 
packet of documents to be signed, with statements like, ``You know how 
all this paperwork is. Just sign all these. And, you know, they're not 
for money or anything, so don't worry about it.'' \46\
---------------------------------------------------------------------------
    \45\ MJ Decl. at  19.
    \46\ * Decl., Ex. 27, at p. 120.
---------------------------------------------------------------------------
Other Unlawful Business Practices
    The school also has referred students who do not have high school 
diplomas to a business that provides fake diplomas for a fee. When ML, 
for example, indicated an interest in enrolling in a program for which 
the school required a high school diploma, the school told her that 
they could refer her to a business where she could get a high school 
diploma by paying $250.00 and attending only one day of class.\47\ A 
former director of admissions for this same campus similarly testified 
that the school referred potential students who did not have high 
school diplomas to a business called ``Victory,'' where they could get 
a diploma in 1 week by paying $400.00, a practice about which the 
regional director of admissions and other corporate-level employees 
were aware.\48\
---------------------------------------------------------------------------
    \47\ ML Decl. at  35.
    \48\ * Decl., Ex. 27 at PP. 83-85.
---------------------------------------------------------------------------
    With three different secret shoppers at two different campuses, the 
school encouraged JT, RH and SR to lie about their incomes, or told 
them how much income they should report on their applications.\49\ In 
addition, the former director of admissions at the Reseda campus 
routinely witnessed the regional director of admissions and other 
employees from the corporate offices telling potential students what 
income amount to write into their financial aid applications and 
encouraging them to (1) have a parent co-sign the loan documents while 
they were drunk; (2) forge their parents' signatures on the loan 
documents; (3) steal and use the social security number of a parent or 
relative; and (4) make up or guess their incomes.\50\
---------------------------------------------------------------------------
    \49\ JT Decl. at  23; RH Decl. at  27-29; SR Decl. at  17.
    \50\ * Decl., Ex. 27 at PP. 18-21, 87-89, 94.
---------------------------------------------------------------------------
                    SUMMARY OF THE TERMS OF JUDGMENT

    The Judgment required the school to provide $5,800,000 in 
restitution to students in the form of cash and cancellations of 
contracts, pay up to $100,000 for administration of the restitution 
program, pay $500,000 into the unfair competition law fund (a State-
mandated fund in which civil penalties are deposited) and $200,000 in 
expenses to the AG, for a total monetary amount of $6.6 million. It 
enjoined the school from unfair, misleading and unlawful conduct 
alleged in the complaint and required the school to stop offering nine 
of its lowest performing programs for at least 18 months.

                              CONCLUSIONS

    I believe the evidence summarized here has importance beyond the 
particular school in question.
The Current System Allows the Kind of Poor Outcomes Described Above
    The primary lobbying group for proprietary schools describes itself 
as an organization of private post-secondary schools that ``provide 
career-specific educational programs.'' \51\ You don't have to watch 
much TV to know proprietary schools hold themselves out as great places 
to get career education. Under the law, proprietary schools' programs 
are only eligible for Federal student aid if the program prepares 
students for gainful employment. But despite the focus on employment/
career education, the truth is, for decades, Federal student aid has 
been provided to virtually any school that is accredited, or can buy an 
accredited school, without regard to whether the programs can prepare a 
student for employment, whether there is any need for such employment, 
or whether the remuneration from the employment would be adequate to 
pay the student's loans and other living expenses.
---------------------------------------------------------------------------
    \51\ CCA press release 6/9/2010.
---------------------------------------------------------------------------
    The student aid program applies no uniform standards to determine 
whether schools required to prepare students for gainful employment 
actually do so. There is no uniform standard definition of what 
constitutes employment, much less, what is the minimum level of 
employment success a school must meet, what data must be collected and 
maintained to support statements of employment success or how such data 
must be verified to ensure it is accurate.
Accreditation Does Not Prevent Poor Outcomes, Fraud or Abuse
    Virtually every school the California AG has sued since the late 
1980s, including the school described here, was accredited; 
accreditation did not stop the harmful practices. Even after the AG 
accumulated the evidence described here, the school's accreditors or 
potential future accreditors showed no interest in examining the 
evidence. Private accrediting agencies do not have uniform or specific 
standards as to what constitutes a job placement. In any event, they 
are simply not equipped or designed to police the conduct that harms 
students and saddles taxpayers to pay this massive, but little 
understood Wall Street subsidy.
    Numerous IG, GAO and other reports and studies over the years 
affirm that accreditation is inadequate to the task. (See e.g., IG 
Report, Accrediting Agency Recognition Process Does Not Serve as an 
Effective Control in Determining the Reliability of Agencies that 
Accredit Numerous Problem Schools, 1991; IG Report, Managing for 
Results, Review of Performance-Based Systems at Selected Accrediting 
Agencies, 1995.) In 2003 the Inspector General found that:

          ``[T]here is no assurance that the [U.S. Department of 
        Education unit charged with recognizing accrediting agencies] 
        evaluated accrediting agency standards and procedures in a 
        consistent and effective matter.''

Current Means of Redress for Students Are Inadequate to Effectuate 
        Change
    Although the president of the Career College Association recently 
stated on Frontline that if students are misled, the government could 
wipe out their loans, that is not the state of the law. The Department 
does not just refund students their loan money if the school misled 
them or did not prepare them for gainful employment. The circumstances 
in which the Department of Education can ``discharge'' a student's loan 
debt due to a school's conduct are currently limited to a few 
circumstances, such as if the school falsely certified the student was 
eligible for student aid, or the school closed before the student 
completed the program. In any event, the current limited after-the-fact 
method of relieving students from liability, while providing much 
needed relief in limited circumstances, does nothing to change the 
system, primarily because the chances that the school and lender will 
be held liable for discharged amounts are small.
    Similarly, schools, lenders and investors are insulated from 
students defaulting on their loans. Students cannot discharge student 
loans (even loans made by private companies) in bankruptcy, except in a 
few very limited circumstances. That is a unique benefit for private 
lenders not available to other types of private creditors.

Prosecutions or Private Litigation Are Not the Whole Answer
    Prosecutions, while helpful, are expensive and time consuming. 
Government agencies' resources are dwarfed by those of the industry. 
There would never be enough resources to adequately police conduct. 
Without specific requirements, such as we had in California, for the 
job placement rate a school must meet, cases are much more amorphous. 
It is much more difficult to discover and prove that a school misleads 
its students as a general practice if there is no required standard or 
disclosure to test the representations against. In any event, lawsuits 
are after the fact, often years after harm has occurred.
    Private litigants and State and local prosecutors alike are barred 
from enforcing the student aid provisions directly. Private litigation 
is sometimes initiated by former employee whistle blowers who know the 
ways a school received student aid for students based on false 
information. Few attorneys have the expertise or the tremendous 
resources needed to bring a case on behalf of former employees or to 
represent impoverished former students in cases brought under State 
laws.

The Problem is Not Just a Few Bad Apples
    Because proprietary schools are not required to demonstrate they 
really can prepare students for careers that pay adequately to support 
student loan payments, we have no data to support the often stated 
notion that most are doing an adequate job. What we do know is that 
despite the difficulties and expense of litigation, there has been a 
rising tide of administrative actions, prosecutions and lawsuits. These 
actions are not limited to fringe operators. Many of these actions are 
against some of the largest, most visible proprietary schools for their 
recruitment practices, including their misrepresentations about 
accreditation, transfer of credits or their graduates' success in job 
placement and obtaining good salaries. That rising tide, however, is 
likely the tip of the iceberg. Many private cases are settled, often 
with confidentiality provisions, so there is no public document 
identifying the lawsuit or the amount of the settlement, much less the 
evidence obtained in the course of the litigation. Confidential 
settlements may explicitly or implicitly prevent students from 
contacting public agencies about the alleged wrongful conduct.

Simply Adding More Disclosure Is Not the Answer
    As demonstrated by the evidence discussed above, disclosures can 
easily be avoided or manipulated to prevent their impact by: providing 
them in a stack of documents; denigrating them as out-of-date or not 
anything important as they are not about money; or requiring students 
to sign them, but not giving them a copy. Of course, even if 
disclosures were given, because there is currently no standard 
definition of what constitutes a job placement, such disclosures would 
also be largely meaningless. More fundamentally, we know the task of 
enforcement is difficult and expensive for government agencies. We 
cannot expect that students would be able to police the expenditure of 
billions of dollars in taxpayer funds, especially since they have no 
ability to sue directly for violations of the Higher Education Act.

The Current System Fuels a Race to the Bottom
    Since proprietary schools were included in the GI Bill after World 
War II, commentators and legislators have repeatedly recognized that 
these schools disproportionately account for poor outcomes, fraud and 
abuse. Yet the current system continues to fuel a race to the bottom. 
The kinds of conduct described are the natural outcome of a system that 
allows a 90 percent Federal subsidy for private sector, for-profit 
schools, but doesn't measure employment success or require any minimal 
level of success. Consequently, the schools are measured by Wall Street 
on their ``starts,'' not their finishes.
    Based on my knowledge of other investigations and cases against 
proprietary schools over the years and my experience in investigating 
and prosecuting all types of consumer fraud cases, in my opinion, the 
consumer abuses in the proprietary school industry are among the most 
persistent, egregious and widespread of any industry.
    The Department of Education has proposed some much-needed 
regulations to attempt to fix the problem. That is a good start, but 
fixing this problem will require stronger, tougher regulations than the 
Department of Education has yet proposed. It will also require 
legislative measures that finally get to the heart of the problem.

    The Chairman. Ms. Reiter, thank you very, very much for 
that statement.
    Now we turn to Ms. Parrott. Ms. Parrott, welcome. Please 
proceed.

  STATEMENT OF SHARON THOMAS PARROTT, SENIOR VICE PRESIDENT, 
    GOVERNMENT AND REGULATORY AFFAIRS, AND CHIEF COMPLIANCE 
               OFFICER, DeVRY, INC., CHICAGO, IL

    Ms. Parrott. Thank you. Chairman Harkin, Ranking Member 
Enzi, and members of the committee, thank you for inviting me 
to testify this morning and thank you for the investment that 
you make in educating America's students.
    I am really happy to be here today to represent the 
colleges and universities in the DeVry family and the over 
100,000 students, 17,000 faculty and staff at over 100 campuses 
and online.
    First, I would like to tell you a little bit about myself 
and why this is so important to me.
    I was born and raised and still live on the south side of 
Chicago. There were and continue to be enormous institutional 
barriers for young African-Americans who want to go to college. 
With the help of wonderful parents and awesome teachers, I 
graduated from the Chicago public schools. My first job was 
teaching at my high school.
    After a number of years as a college professor and 
administrator, I went to work for the U.S. Department of 
Education in the student financial assistance area, both in 
compliance and training, before coming to DeVry over 28 years 
ago.
    I see myself in the students DeVry serves. Our mission is 
very simple. We seek to empower our students to achieve their 
educational and career goals. We achieve that mission by 
offering high quality certificates and degree programs in 
allied health, business, technology, nursing, and medicine 
taught by dedicated and experienced faculty that love to teach 
and share their own real-world experience with their students.
    Empowering our students means putting their needs front and 
center. Their success is our success. It means offering classes 
at times and at locations that meet their schedules. We go 
where our students need us to be, or if we cannot be there, we 
give them online tools to come to us.
    We have a long history. Our flagship institution, DeVry 
University, was founded in Chicago in 1931. After World War II, 
we helped many a returning veteran transition to new careers. 
Today we are a comprehensive university offering associate, 
baccalaureate, and graduate degrees. Since 1975, over 200,000 
men and women have earned those degrees. The top five employers 
of our alums are AT&T, Verizon, General Electric, Intel, and 
IBM. They hire our graduates because they see the quality and 
value of a DeVry education.
    As you know, the bulk of our country's higher education 
capacity is still filled by public State-supported schools, but 
institutions like ours grow for a reason. There is an enormous 
unmet need, especially among the so-called nontraditional 
students. We grow capacity. In fact, our oldest college founded 
in 1889, Chamberlain College of Nursing, is opening two new 
campuses in July, one just across the river in Arlington, VA, 
and a second at the request of Mayor Daly in Chicago.
    The reality is that nearly 75 percent of students today are 
defined as nontraditional but are really the new majority. They 
are first in their family to go to college--minorities, recent 
immigrants, and career changers. Many of them work full-time 
and have children. In the past, they could support themselves 
and their families with only a high school education. This is 
no longer the case.
    President Obama's college attainment goal means that we 
will need to produce an additional 8.2 million post-secondary 
graduates by 2020. Secretary Arne Duncan, at our policy forum 
held this past May, said that DeVry is a vital partner in the 
education field, which is what we need to meet the President's 
goal of having the most educated, the most competitive 
workforce by 2020.
    That will require innovative approaches like the DeVry 
University Advantage Academy, a dual enrollment program we 
started with Secretary Duncan when he headed up the Chicago 
public schools and have now taken to Columbus, OH. It gives CPS 
students, both Columbus public schools and Chicago public 
schools, the opportunity to graduate from high school and earn 
an associate degree by the end of their high school years at no 
cost to the student using no financial aid dollars. It works 
with a dual degree graduation rate of 92 percent over 6 years.
    In America, the shortage of nurses is projected to be 1 
million by 2020. Yet we are turning away 99,000 qualified 
applicants every year because of a lack of capacity in our 
nursing schools. This is where nursing programs like ours are 
part of the solution.
    Issues like student debt and graduation rates are a serious 
concern for all sectors of higher education, but I am not 
interested in drawing false distinctions between what motivates 
a private sector school and what motivates a State-funded 
public school. At the end of the day, if we are student-
centric, the ties that bind will be greater than the lines that 
divide. No matter what kind of institution it is, it needs to 
serve students well or it will not and it should not survive. 
At the end of the day, our country needs to produce an educated 
workforce that can thrive in a rapidly changing global economy. 
It is in the best interest of all of us to work together to 
solve these issues.
    I thank the committee for holding these hearings and look 
forward to working with my colleagues in higher education to 
serve our Nation's students. Thank you.
    [The prepared statement of Ms. Parrott follows:]

              Prepared Statement of Sharon Thomas Parrott

    On behalf of the students, faculty and staff of the DeVry family of 
U.S.-based post-secondary institutions including Apollo College, 
Chamberlain College of Nursing, DeVry University and Western Career 
College, thank you for the opportunity to submit written testimony to 
the Senate Committee on Health, Education, Labor, and Pensions. It is 
an honor to represent our students and, on their behalf, thank the 
Congress for the investment made toward their educational pursuits and 
career success.
    I have devoted my adult life to this effort because each student we 
empower and each graduate success matters. My passion for this field is 
embodied in Harvard's Sara Lawrence Lightfoot's comment, ``You have to 
feel deeply about wanting your students to succeed, in some sense you 
have to see yourselves in the eyes of those you serve or at least see 
your destiny reflected in them.'' In 1982 I joined DeVry after working 
for the U.S. Department of Education in the area of student financial 
aid. Prior to that, I was director of academic support programs at 
Loyola University of Chicago and held faculty and administrative 
positions at Harlan High School in Chicago, Dominican University, 
Northeastern Illinois University and George Williams College in 
Illinois. I have had the privilege to serve on the National Research 
Council's Panel on Quality Improvement in Student Financial Aid 
Programs and The College Board's National Committee on Standards of 
Ability to Pay; as well as on numerous student financial assistance 
committees and the board of directors of the National Association of 
Student Financial Aid Administrators (NASFAA). Since graduating from 
Harlan High School, a public school on the south side of Chicago, 
education has been my vocation and aspiration and is what brought me to 
DeVry. My parents knew that a college education was an imperative and 
kept me focused and on track until I completed my undergraduate and 
graduate education at the University of Illinois. Unfortunately, much 
like then, there continues to be enormous institutional barriers for 
young African-Americans and other traditionally underrepresented and 
underserved populations who want to go to college. It is by no accident 
that my journey brought me to DeVry.
    DeVry is a global educational provider serving students in 
secondary through professional education as well as the accounting and 
finance professions. Although my written testimony primarily focuses on 
our U.S.-based, post-secondary undergraduate serving institutions, our 
overarching purpose is unchanged; empowering our students to achieve 
their educational and career goals. We work to democratize education. 
We achieve our mission by providing high-quality educational programs 
across a wide spectrum of disciplines including but not limited to 
allied health, electrical engineering, network systems design, health 
information technology, nursing, medical and veterinary studies. Our 
institutions serve more than 100,000 students at 120 campuses across 
the country. Our programs are taught by academically qualified, 
practitioner-oriented faculty who are passionate about teaching and 
choose to share what they have learned in both an academic setting and 
after years of professional experience. Apollo College, Chamberlain 
College of Nursing, DeVry University and Western Career College offer 
more than 75 undergraduate and graduate degree and certificate programs 
onsite, online and through blended delivery.
    Our colleges and universities are not new to the higher education 
arena. Chamberlain College of Nursing was established in 1889. DeVry 
University was founded in 1931, Western Career College in 1967 and 
Apollo College in 1975. Our institutions are accredited by regional and 
national accrediting bodies including the Higher Learning Commission of 
the North Central Association of Colleges and Schools (HLC), the 
Accrediting Commission for Community and Junior Colleges of the Western 
Association of Schools and Colleges (WASC) and the Accrediting Council 
for Independent Colleges and Schools (ACICS). In addition, many of our 
programs are programmatically accredited by specialized accrediting 
bodies (Appendix A, Table 1). These bodies are recognized by the U.S. 
Department of Education.
    We partner with the greater higher education community to regain 
our Nation's prominence as the world's higher education leader. We can 
achieve this goal only by working together and focusing our collective 
attention on enrolling and graduating students, especially those deemed 
``non-traditional'' but who have quickly become the new majority: 
working adults looking to switch or broaden their career paths, single 
parents balancing work and life responsibilities, returnees to higher 
education with a renewed focus on obtaining the skills and education to 
succeed in a career of their choosing and recent high school graduates 
looking for career-
focused educational opportunities that will enable them to enter the 
workforce with both a strong theoretical foundation and hands-on 
experience (Appendix B).
    From admissions to graduation, we are focused on developing world-
class customer service--all with the singular focus to empower our 
students to achieve their career ambition. We offer students high-
quality educational opportunities, the support and resources necessary 
to complete their education and, once they have earned a certificate or 
degree, lifelong, first-class career services.
    The financial aid process is integrated into the enrollment 
process. Prospective students are introduced to the financial aid 
office on their initial visit. They are given information tailored to 
their status (dependent/independent), assistance with financial aid and 
scholarship applications if needed and information regarding their 
financial aid eligibility. Our goal is to deliver a complete disclosure 
covering the first year's costs, financial aid and financial 
obligations prior to a student commencing their enrollment. The 
disclosure consists of a personalized financial plan with expected 
costs for their first year of studies and the method by which they will 
pay for those costs. Loan obligations, including repayment terms and 
timing, are explained either in the financial advising session or 
through Web-based counseling. All students must successfully complete a 
loan ``quiz'' prior to the disbursement of loan funds.
    We have expanded our student services function to include more 
academic advisors and success coaches whose role is to help students 
overcome obstacles that have historically prevented many from 
completing their education. We continuously monitor attendance and 
academic performance to identify potential issues. We offer extensive 
academic support through onsite advisors and telephone contact centers. 
We have online resources available to help students with questions 
ranging from where they can send payment to updating their personal 
computer applications to planning their course of study. We measure 
student satisfaction with each course.
    Our 200-plus career services professionals support new graduates by 
connecting students with internship opportunities and facilitating 
student, graduate and employer interaction at career fairs and 
networking opportunities. Our career services professionals provide 
group and individual career advising sessions, career development 
courses, interview preparation and practice and resume and cover letter 
guidance. Our graduates have lifetime access to these services.
    Student debt burden is often attributed to private sector tuition 
costs. Critics allege that private sector school costs are 
significantly higher than public not-for-profit schools. It is true 
that private sector tuition rates are typically higher than in-state 
public tuition rates, but this is due to the lack of taxpayer subsidies 
rather than an actual cost differential. Private sector institutions 
actively contain unnecessary and unproductive costs to control student 
debt. When considering actual revenue based on full-time equivalency, 
private sector schools show much greater cost efficiencies than either 
the public or independent sectors. According to the National Center for 
Education Statistics, the revenue received per full-time equivalency 
for private sector schools in 2006-2007 was $14,815 versus $29,306 
received for public schools and $61,586 for independent schools. 
DeVry's net income margin for Fiscal Year 2009 was 11 percent. 
Substantially all of these profits were retained to re-
invest in the future. Our retained earnings are our students' 
endowment. During this past fiscal year, more than $100 million has 
been re-invested into new equipment and facilities, upgraded 
classrooms, redevelopment of curricula, expanded academic offerings and 
additional staff serving to meet our students' goals.
    At DeVry, we are focused on doing well by doing good. DeVry offered 
over $90 million this year alone in tuition scholarships and waivers. 
We contribute to our communities through educational programs and 
partnerships including Passport to College, a tuition-free summer 
program where high school students earn college credit and HerWorld, an 
event designed to encourage young women to pursue careers in science 
and technology. Our students and staff participate in world-wide relief 
and service projects, contributing the knowledge and skills they have 
developed in their studies. As part of their curriculum, some of our 
Chamberlain College of Nursing students participate in the Brazil 
International Nursing Service Project, donating their time and skills 
to offer critical nursing care in that country. DeVry University 
students in Colorado spent hundreds of hours this past year rebuilding 
computers for student use in Africa. To improve high school graduation 
and college-going rates in Chicago, we developed the DeVry University 
Advantage Academy with then-CEO of the Chicago Public Schools, Arne 
Duncan. The DeVry University Advantage Academy is a dual enrollment 
program currently operating in Chicago and Columbus, OH. This program 
allows public school students to take their junior and senior year 
courses from certified high school teachers while simultaneously taking 
college courses from DeVry professors. At the end of those 2 years, 
including one summer, students graduate with both a high school diploma 
and an associate degree at no cost to them or their families, and 
without using Federal or State student financial aid. Since its 
inception, Chicago students have graduated and earned an associate 
degree at 92 percent and Columbus has been perfect at 100 percent. As 
you all know, urban school districts graduate only about 50 percent of 
their students.
    Given the impossible budget choices State legislatures have had to 
and will continue to have to make, public sector schools alone do not 
have the capacity to meet President Obama's goal to educate 8.2 million 
additional post-secondary graduates and close educational gaps by 2020. 
Capacity is being cut at the precise time that it needs to be 
increased. Achieving the President's 2020 goal will not and cannot 
happen without the private sector. The President's goal requires adding 
capacity--quickly, with quality and integrity.
    With an overall student population of 2.8 million students and 
capacity to grow without taxpayer subsidy, private sector schools can 
help achieve that goal. We will need every single part of our higher 
education system to deliver high-quality opportunities to an 
exponentially growing student population. Institutions like Chamberlain 
College of Nursing are a crucial part of meeting our country's future 
nursing workforce needs. With nearly 99,000 applicants turned away from 
nursing schools each year, not due to lack of qualifications but 
because existing nursing programs are at capacity, our ability to meet 
practical challenges including new demands on health care hang in the 
balance (Association of Colleges of Nursing). Private-sector schools 
like those within our system have the capacity to help meet this 
national imperative and are very much a part of higher education's 
future. Secretary Duncan, in remarks made at our policy forum held in 
May 2010, stated,

          ``For-profit institutions play a vital role in training young 
        people and adults for jobs and for-profits will continue to 
        help families secure a better future for themselves. They are 
        helping America meet the President's 2020 goal and helping us 
        meet the growing demand for skills that our public institutions 
        cannot begin to meet alone, especially in these economically 
        challenging times.''

    Georgetown University's Center on Education and the Workforce 
recently released a study on jobs and education requirements through 
2018 substantiating very daunting numbers. They project that ``by 2018, 
America will need 22 million new college degrees, but will fall short 
of that number by at least 3 million post-secondary degrees, 
Associate's or better'' and that ``. . . America's colleges and 
universities would need to increase the number of degrees they confer 
by 10 percent annually, a tall order.'' The study very clearly 
demonstrates how difficult it will be for those with only a high school 
diploma and how post-secondary education has ``become the gatekeeper to 
the middle class and the upper class.'' Their study shows that between 
1970 and 2007, the percentage of high school graduates defined as 
middle class dropped from 60 percent to 45 percent. These trends have 
significant economic and workforce development implications and impact 
our democratic foundations. A healthy democracy depends on a large, 
educated middle class for its very survival. The Georgetown study shows 
an erosion of our middle class foundation--a worrying trend that seems 
likely to continue.
    Private-sector educators are an integral part of today's higher 
education landscape. Even so, there is a wealth of misinformation 
concerning our institutions and sector. For years, private-sector 
education was a fairly small part of higher education. And although the 
private sector is not ``the'' solution to all of the challenges we face 
in education, about 10 percent of all higher education enrollments are 
attributed to our sector. Institutions like ours are growing for a 
reason--there is an enormous unmet need for higher education, 
especially among traditionally underserved populations. And to our 
credit, institutions like DeVry recognized the needs of these students 
and adapted providing prudent, reasoned growth. To paraphrase Secretary 
Duncan, students vote with their feet. Federal student aid goes to the 
student and the student chooses which college is the right fit for 
them. This indicates a healthy and adapting but still competitive 
system of higher education. Alternatives generate competition which 
drives accountability to the customer, whether a student, an employer 
or the taxpayer. A system without alternative opportunities for access 
to education is a system geared toward only educating the economic and 
social elite. We have moved beyond that type of system, much to our 
country's benefit, and the benefit of our citizens.
    There has been much debate concerning the role that private sector 
institutions play within the greater higher education arena especially 
in terms of ``good actors'' and ``bad actors.'' Please make no mistake, 
when an institution does something wrong and in conflict with the best 
interest of students, they must be held accountable. However, I submit 
that rather than limiting oversight to one sector over another or one 
``actor'' over the ``other,'' policymakers consider that there are 
``good acts'' and ``bad acts'' of which no sector is immune. And just 
as acts of impropriety must be addressed, institutions must also remain 
capable and emboldened to act nimbly and with quality to address 
society's education needs. This includes allowing for innovation like 
blended online and onsite learning and year-round study. The problems 
of the few should not erase the continuous service and work of the 
many.
    The post-secondary education community must ensure public and 
congressional confidence in our institutions. We must protect and 
preserve the integrity of our programs. Consistent guidelines are 
required for the sound administration of educational and financial aid 
programs. Performance rather than sector should be the basis of any 
unique requirement. Not only is the promulgation of separate 
regulations for different post-secondary sectors unequal treatment, it 
would be redundant and costly, putting an additional cost burden on the 
American taxpayer. Preventative measures based on the quality of 
educational outcomes are more effective and less costly than punishment 
after the fact.
    The institutions that perform well should continue to participate 
fully in the programs. Institutions that are poor performers should be 
required to improve and adhere to more regulatory requirements. Abusers 
should have their eligibility suspended or terminated.
    Our colleges and universities are responsible for meeting Federal 
and State statutory and regulatory requirements. At DeVry, we adhere to 
these requirements, including title IV compliance and State 
authorization, through a centralize approach involving a staff with 
over 200 years of experience. We must ensure that our institutions 
obtain and maintain authorization to operate and confer degrees or 
other recognized credentials, have the appropriate authorization to 
recruit students through compliance with statutes, regulations and 
policies. This is achieved through clear internal operating procedures, 
internal quality controls, regular and standardized professional staff 
development, seasoned outside auditors and internal quality assurances. 
We also maintain strong communications with governmental entities and 
professional associations including the College Board, American Council 
on Education (ACE) and National Association of Student Financial Aid 
Administrators (NASFAA).
    The dilemma facing higher education and the Congress is how to 
ensure quality and accountability, and to prevent abuse without 
creating overly burdensome regulations that could have the unintended 
consequence of precluding students from receiving the education 
required for a sustainable, thriving global economy.
    The biggest challenge facing most students is having the 
appropriate school information to make good decisions. All students 
should have information available to them regarding their total cost of 
education, an understanding of how they will pay for those costs and 
reasonable expectations for employment or graduate school following 
completion of their studies. Their second biggest challenge is having 
the right financing in place to assist with paying for their education. 
The Higher Education Opportunity Act (HEOA) of 2008 addressed both of 
these issues with expansion of consumer disclosures, requirement of 
school certification of private loans (allowing schools to intercede 
where students were choosing more expensive loans over Federal loans) 
and increasing the maximum Pell Grant award as well as extending Pell 
Grant coverage for year-round students. This last provision addressed 
an inequity borne by many year-round nontraditional students and will 
help lower the overall debt burden for these students. Despite the 
increased disclosure requirements, there still is no assurance that 
prospective students will have an understanding of their total 
financial commitment, nor their postgraduation opportunities. In 
response to the Secretary's proposed rules (during Negotiated 
Rulemaking) regarding the requirement that certain programs of study 
prepare students for gainful employment in a recognized occupation, we 
proposed a robust disclosure process to assure students have the 
appropriate information needed to make informed educational decisions. 
We are pleased that the Secretary has adopted this suggestion with the 
issuance of his Notice of Proposed Rulemaking (NPRM), but are 
disappointed that it is limited only to enrollments in certain programs 
of study. This is a protection that should be assured all prospective 
students.
    Congress is once again revisiting regulations around higher 
education. We welcome this and will continue to engage the Congress, 
Department of Education and educational stakeholders on behalf of our 
students to assure that they are fairly and well-served. Issues 
including institutional quality, student indebtedness, time-to-
degree, persistence and graduation rates are a serious concern for all 
sectors of higher education. We are ill-served by drawing false 
distinctions between what motivates a private-sector school like DeVry 
and what motivates a State-funded public or eleemosynary institution. 
All institutions must serve students well or they will not survive. Our 
country needs to produce an educated workforce that can thrive in a 
rapidly changing global economy, or we will not maintain our leadership 
position. It is in the best interest of all of us in higher education 
to work together to solve these issues. The future of this Nation 
depends on an educated workforce for as H.G. Wells' asserted, ``Human 
history becomes more and more a race between education and 
catastrophe.''
                                 ______
                                 
                               Appendix A

                                 Table 1
------------------------------------------------------------------------
           Institution             Accrediting Body    Program/Locations
------------------------------------------------------------------------
Apollo College..................  Accrediting         All Apollo College
                                   Council for         locations.
                                   Independent
                                   Colleges and
                                   Schools (ACICS).
Apollo College..................  Joint Review        Medical
                                   Committee on        Radiography.
                                   Education in
                                   Radiologic
                                   Technology
                                   (JRCERT).
Apollo College..................  Committee on        Respiratory
                                   Accreditation for   Therapy.
                                   Respiratory Care.
Apollo College..................  Commission on       Dental Hygiene.
                                   Dental
                                   Accreditation.
Apollo College..................  Accrediting Bureau  Medical Assisting.
                                   of Health
                                   Education Schools
                                   (ABHES).
Chamberlain College of Nursing..  Commission on       Bachelor of
                                   Colligate Nursing   Science in
                                   Education (CCNE).   Nursing (Addison,
                                                       IL, Columbus, OH,
                                                       Phoenix, AZ, St.
                                                       Louis, MO).
Chamberlain College of Nursing..  National League     Bachelor of
                                   for Nursing         Science in
                                   Accreditation       Nursing
                                   Commission          (Columbus, OH,
                                   (NLNAC).            St. Louis, MO).
Chamberlain College of Nursing..  Higher Learning     All Chamberlain
                                   Commission of the   locations.
                                   North Central
                                   Association of
                                   Colleges and
                                   Schools.
DeVry University................  Higher Learning     All DeVry
                                   Commission of the   University U.S.
                                   North Central       locations.
                                   Association of
                                   Colleges and
                                   Schools.
DeVry University................  Technology          Bachelor of
                                   Accreditation       Science in
                                   Commission of       Biomedical
                                   ABET.               Engineering
                                                       Technology
                                                       (Columbus, OH,
                                                       Decatur/
                                                       Alpharetta, GA,
                                                       Federal Way, WA,
                                                       Ft. Washington,
                                                       PA, Irving, TX,
                                                       Kansas City, MO,
                                                       Fremont, CA,
                                                       Phoenix, AZ).
DeVry University................  Technology          Bachelor of
                                   Accreditation       Science in
                                   Commission of       Computer
                                   ABET.               Engineering
                                                       Technology
                                                       (Addison, IL,
                                                       Arlington, VA,
                                                       Chicago, IL,
                                                       Columbus, OH,
                                                       Decatur/
                                                       Alpharetta, GA,
                                                       Federal Way, WA,
                                                       Ft. Washington,
                                                       PA, Houston, TX,
                                                       Irving, TX,
                                                       Kansas City, MO,
                                                       Long Island City,
                                                       NY, Fremont, CA,
                                                       Orlando, FL,
                                                       Phoenix, AZ,
                                                       Miramar, FL, Long
                                                       Beach, CA,
                                                       Pomona, CA,
                                                       Sherman Oaks, CA,
                                                       Westminster, CO).
DeVry University................  Technology          Bachelor of
                                   Accreditation       Science in
                                   Commission of       Electronics
                                   ABET.               Engineering
                                                       Technology
                                                       (Addison, IL,
                                                       Arlington, VA,
                                                       Chicago, IL,
                                                       Columbus, OH,
                                                       Decatur/
                                                       Alpharetta, GA,
                                                       Federal Way, WA,
                                                       Ft. Washington,
                                                       PA, Houston, TX,
                                                       Irving, TX,
                                                       Kansas City, MO,
                                                       Long Island City,
                                                       NY, North
                                                       Brunswick, NJ,
                                                       Paramus, NJ,
                                                       Fremont, CA,
                                                       Sacramento, CA,
                                                       Orlando, FL,
                                                       Phoenix, AZ,
                                                       Miramar, FL, Long
                                                       Beach, CA,
                                                       Pomona, CA,
                                                       Sherman Oaks, CA,
                                                       Westminster, CO).
Western Career College..........  Accrediting         All Western Career
                                   Commission for      College
                                   Community and       locations.
                                   Junior Colleges
                                   of the Western
                                   Association of
                                   Schools and
                                   Colleges (WASC).
Western Career College..........  Commission on       Dental Hygiene.
                                   Dental
                                   Accreditation.
Western Career College..........  American            Medical Assisting.
                                   Association of
                                   Medical
                                   Assistance.
Western Career College..........  Committee on        Respiratory
                                   Accreditation for   Therapy.
                                   Respiratory Care.
Western Career College..........  Accreditation       Surgical
                                   Review Committee--  Technology.
                                   Surgical Tech
                                   (ARC-ST).
Western Career College..........  American            Veterinary
                                   Veterinary          Technology.
                                   Medical
                                   Association.
Western Career College..........  American Society    Pharmacy
                                   of Health-System    Technician.
                                   Pharmacist
                                   Pharmacy
                                   Technician.
------------------------------------------------------------------------

                                 ______
                                 
                     Appendix B.--DeVry University

    About DeVry Inc. DeVry's purpose is to empower our students to 
achieve their educational and career goals. Our colleges and 
universities offer 75 certificates through graduate and professional 
degree programs serving undergraduate and graduate students in 
business, healthcare technology and medicine. DeVry serves students in 
secondary through post-secondary education as well as accounting and 
finance professions. DeVry is a global provider of educational services 
and is the parent organization of Advanced Academics, Apollo College, 
Becker Professional Education, Chamberlain College of Nursing, DeVry 
Brasil, DeVry University, Western Career College and Ross University 
Schools of Medicine and Veterinary Medicine.
    About DeVry University. DeVry University helped pioneer accessible 
post-secondary education to populations too often underserved by higher 
education. DeVry was one of the first institutions to fully integrate 
online courses with onsite program delivery, further expanding the 
flexibility in course offerings needed by today's learners.
    Since 1975, nearly 238,000 undergraduate students systemwide have 
graduated from DeVry University. Over 90 percent of graduates active in 
the job market were employed in career-related positions within 6 
months of graduation.

     Founded in 1931;
     Over 76,000 students nationwide;
     Year-round on-site and online classes allow flexibility; 
and
     Over 90 campus locations in 26 States offering 26 
programs.

    About DeVry University Advantage Academy. Since 2004, DeVry 
University Advantage Academy has partnered with the Chicago Public 
Schools offering dual enrollment opportunities to area high school 
students. Since its inception, Chicago high school participants have 
achieved a 92 percent high school graduation rate and earned an 
associate degree in Network Systems Administration.
    DeVry graduate employers include: AT&T Boeing; Department of 
Defense; General Electric; Intel; IBM; JP Morgan Chase; Kaiser 
Permanente; Kelly Engineering Resources; Northrop Grumman; Sprint 
Nextel; and Verizon.

                    DeVry University Student Profile*
------------------------------------------------------------------------

------------------------------------------------------------------------
Fall 2009 Undergraduate Enrollment........................        59,518
                                                                  (U.S.)
Fall 2009 Graduate Enrollment.............................        16,958
Male......................................................           54%
Female....................................................           46%
------------------------------------------------------------------------



------------------------------------------------------------------------
                                             Undergraduate  Graduate [In
                                              [In percent]    percent]
------------------------------------------------------------------------
Percent African-American...................             26            36
Percent Hispanic...........................             16             9
Percent White..............................             42            35
Percent Asian..............................              5             7
Percent Alaskan Native/American Indian.....              1             1
------------------------------------------------------------------------
Note: 72% of DeVry's students are adult learners.
*Fall 2009 IPEDs.



------------------------------------------------------------------------
                                                              Graduate
------------------------------------------------------------------------
2008-2009 Total Degrees Conferred.........................        12,924
2008 Graduation Rate for First-time, Full-time............         31%**
2008 Full-time New Transfer Students......................           56%
------------------------------------------------------------------------
**As a frame of reference, the median graduation rate of public 4-year
  institutions, including highly selective institutions, in the States
  in which DeVry University operates, is 44 percent. The first-time,
  full-time metric applies to less than 60 percent of fall 2002 entering
  students.



------------------------------------------------------------------------
                                               Associate   Baccalaureate
                                                Degree         Degree
------------------------------------------------------------------------
Median Loan Debt (2009)....................       $30,970        $32,184
Cohort Default Rate (2007): (7.9%).........
------------------------------------------------------------------------

                         most popular programs*
    Associate Degree: Electronics and Computer Technology; Health 
Information Technology; Network Systems Administrations.
---------------------------------------------------------------------------
    * Programs and delivery vary by location.
---------------------------------------------------------------------------
    Bachelor's Degree: Business Administration; Computer Information 
Systems; Electronics Engineering Technology; Game Simulation & 
Programming; Technical Management.
    Master's Degree: Accounting and Financial Management; Business 
Administration; Electrical Engineering; Information Systems Management.
                                 ______
                                 
    DeVry University provides rigorous, career-oriented associate, 
baccalaureate and graduate degree programs integrating technology, 
science, business and the arts. Students access these programs at 
campus locations and online, meeting the needs of a diverse and 
geographically dispersed student population.

                             ACCREDITATION

    DeVry University is accredited by The Higher Learning Commission of 
the North Central Association, one of six regional accrediting agencies 
for public and private colleges and universities in the United States 
that are recognized by the U.S. Department of Education. DeVry received 
a 10-year re-approval from the commission in 2002.

                         EMPLOYER TESTIMONIALS

    ``It is critical to our continued success in the high technology 
arena that we deliver to our customers systems that are sophisticated, 
exceed quality standards, delivered on time and within budget. From the 
beginning, DeVry graduates have exceeded our expectations with a 
terrific team attitude. Their ability to grasp new ideas, investigate 
technologies, and apply these concepts to projects has allowed PSI to 
continue our commitment to excellence.'' (As a result of their DeVry 
experience, they already possess the technical blocks needed for a 
smooth integration into the specific . . . systems we service.)--Walter 
Johnson, President of Precision Systems Inc., Horsham, PA.
    ``We have success with DeVry students for a very specific reason. 
As a result of their DeVry experience, they already possess the 
technical blocks needed for a smooth integration into the specific 
electrical/electronic systems we service. We will continue to rely 
heavily on DeVry for our future personnel need.''--Edward M. Rogers, 
Director of Operations, API, Inc., Washington D.C. Metro.

                    STUDENT AND ALUMNI TESTIMONIALS

    Armed with my [DeVry University] accounting degree, I took a CPA 
review course right out of college and, as a result of my DeVry 
education and the review course, I was able to successfully pass the 
exam the first time. In addition, the ``applied learning'' curriculum 
at DeVry and interactive format of the classes gave me the skills 
needed to start asking ``why'' from day one. This approach has been 
tremendously successful for me in my career advancement. (``. . . the 
applied learning curriculum at DeVry and interactive format of the 
classes gave me the skills needed to start asking `why' from day 
one.'')--Shawn McCracken, 1992 BS, Accounting, DeVry University 
(Columbus, OH), Director, Accounts Maintenance and Control (AM&C)--
Acquisition, Defense Finance and Accounting Service.
    ``Obtaining a bachelor's degree in Business Administration at DeVry 
allowed me to pursue opportunities in a variety of career fields. I was 
not limited to a technology job or an operations job . . . I was able 
to have a career that requires a fusion of both business and 
technology. The confidence and experience I've gained at DeVry has 
helped me achieve success.''--Shamsa Chaudhry, 2002 BSBA Graduate, 
DeVry University (Addison, IL), Marketing Dashboards Manager, OgilvyOne 
Worldwide.
    ``The instructors at DeVry are people who have worked in the 
industry and know what's going on. The instructors are there to help, 
and as a student you definitely see that. I was able to graduate with a 
Bachelor's degree from DeVry University in June 2009, which made me the 
first in the Messenger family to graduate from college.''--Andrew 
Messenger, 2009, BS, Game & Simulation Programming (Gainesville, FL), 
Production Assistant, Ignition Entertainment.
                                 ______
                                 
                    Chamberlain--College of Nursing

                            ABOUT DEVRY INC.

    DeVry's purpose is to empower our students to achieve their 
educational and career goals. Our colleges and universities offer 75 
certificate through graduate and professional degree programs serving 
undergraduate and graduate students in business, healthcare technology 
and medicine. DeVry serves students in secondary through post-secondary 
education as well as accounting and finance professions. DeVry is a 
global provider of educational services and is the parent organization 
of Advanced Academics, Apollo College, Becker Professional Education, 
Chamberlain College of Nursing, DeVry Brasil, DeVry University, Western 
Career College and Ross University Schools of Medicine and Veterinary 
Medicine.

                  ABOUT CHAMBERLAIN COLLEGE OF NURSING

    Since its founding in St. Louis, MO over 120 years ago, Chamberlain 
College of Nursing (formerly Deaconess College of Nursing) has 
continually provided quality and innovative nursing education programs 
to its students. The College offers programs with a strong historical 
foundation, broad general education background and an extensive 
clinical practice component that culminates in compassionate and 
clinically proficient graduates. As a result, Chamberlain graduates 
generally pass the NCLEX-RN licensure exam at rates on par or greater 
than the national average.
    Chamberlain features a diverse student body: registered nurses 
completing bachelor's and master's degrees, traditional high school 
graduates seeking a quality nursing education experience close to home 
and working adults looking to switch their career path and enter the 
nursing field.

                 CHAMBERLAIN COLLEGE OF NURSING PROFILE

    Founded in 1889; Year-round onsite and online classes allow 
flexibility; Campuses in Arizona, Florida, Illinois, Ohio, Missouri and 
Virginia; State-of-the-art nursing simulation labs and equipment; 
Experienced, highly skilled and dedicated faculty; 2009 NCLEX-RN Pass 
Rates: 90 percent--98.55 percent.

             Chamberlain College of Nursing Student Profile*
------------------------------------------------------------------------

------------------------------------------------------------------------
Fall 2009 Undergraduate Enrollment........................         5,108
Fall 2009 Graduate Enrollment.............................           119
Male......................................................            9%
Female....................................................           91%
------------------------------------------------------------------------



------------------------------------------------------------------------
                                             Undergraduate    Graduate
                                              [In percent]  [In percent]
------------------------------------------------------------------------
Percent African-American...................             14            13
Percent Hispanic...........................              4             3
Percent White..............................             69            62
Percent Asian..............................              5             1
Percent Alaskan Native/American Indian.....              1             1
------------------------------------------------------------------------
Note: 80 percent of Chamberlain's students are adult learners.
*Fall 2009 IPEDs.



------------------------------------------------------------------------
                                                              Graduate
------------------------------------------------------------------------
2008-2009 Total Degrees and Graduate Certificates                    945
 Conferred................................................
2008 Graduation Rate for First-time, Full-time Students...         35%**
2008 Graduation Rate for Full-time New Transfer Students..           42%
------------------------------------------------------------------------
**The first-time, full-time metric applies to only 16 percent of fall
  2002 entering students.



------------------------------------------------------------------------
                                               Associate   Baccalaureate
                                                Degree         Degree
------------------------------------------------------------------------
Median Loan Debt (2009)....................       $24,108        $18,562
Cohort Default Rate (2007): 2.9%...........
------------------------------------------------------------------------

            TYPICAL CHAMBERLAIN GRADUATE NURSING PROFESSIONS

    Clinical Informatics; Community Nurse; Clinical Products 
Specialist; Homecare; School Nurse; Staff Nurse; Supervisor/Manager 
Charge Nurse; Telephonic Advice Nurse.

                        UNDERGRADUATE PROGRAMS*

    Licensed Practical Nurse to Registered Nurse (onsite and online); 
Associate Degree in Nursing (onsite and online); Bachelor of Science in 
Nursing (onsite); Registered Nurse to Bachelor of Science in Nursing 
(online).

                           GRADUATE PROGRAMS*

    Master of Science in Nursing (online).
---------------------------------------------------------------------------
    * Programs and delivery vary by location.
---------------------------------------------------------------------------
                                 ______
                                 
                             ACCREDITATION

    Chamberlain College of Nursing is accredited by The Higher Learning 
Commission of the North Central Association of Colleges and Schools, 
one of the six regional agencies that accredit U.S. colleges and 
universities at the institutional level. The bachelor of science in 
nursing degree program at the St. Louis and Columbus campuses and the 
associate of science degree in nursing program at the Columbus campus 
are accredited by the National League for Nursing Accrediting 
Commission (NLNAC). The bachelor of science in nursing degree program 
at the Addison, Columbus, Phoenix and St. Louis campuses is accredited 
by the Commission on Collegiate Nursing Education (CCNE). Accreditation 
provides assurance to the public and to prospective students that 
standards of quality have been met.

                         EMPLOYER TESTIMONIALS

    ``Saint John's recruits from Chamberlain because they have highly 
qualified, highly competent, highly skilled graduates. They have the 
right combination for us. At Saint John's we look for graduates that 
are able to not only deliver quality care but deliver great service and 
Chamberlain has repeatedly delivered that for us.'' (``We look for 
graduates that are able to not only deliver quality care but deliver 
great service and Chamberlain has repeatedly delivered that for 
us.'')--Kimberly McGrath, Nurse Manager, Saint John's Mercy Medical 
Center, St. Louis, MO.
    ``The bridge programs that Chamberlain offers are very beneficial. 
We actually have an employee population here . . . who've often been 
here for a number of years and started their career as, say, a licensed 
practical nurse. Well, as the market changes and . . . as things 
develop, it is more beneficial for them to be a registered nurse 
because their scope is that much wider. And so we've had a number of 
our own LPNs go through the Chamberlain bridge program and they can 
become an RN in less than a year, particularly with their hands-on 
clinical experience, and the education that is provided through 
Chamberlain.''--Casey Cook, HR Generalist, Forest Park Hospital, St. 
Louis, MO.
    ``We're really looking forward to working the Chamberlain nursing 
students. The Chamberlain students will be getting an exceptional 
technical training, here at the campus. They have state-of-the-art 
facilities, but those technical skills can only take a student so far. 
So by coming to the Adventist Midwest Hospitals, they will have the 
opportunity to practice with patients, and work with mentors, and other 
seasoned, experienced registered nurses who can role model positive 
interactions with patients, and teach them some of the decisionmaking 
skills that are so important for nurses in this day and age.''--Jackie 
Conrad, Chief Nursing Officer & VP for Patient Care Services, Glen Oaks 
Adventist Hospital, Glendale Heights, IL.
    ``I personally hire a lot of new graduates and I wouldn't hesitate 
to hire a new graduate from Chamberlain College due to the fact that 
they're very well prepared when they are in the program and clinically 
knowledgeable and definitely willing to learn.'' (``I wouldn't hesitate 
to hire a new graduate from Chamberlain College due to the fact that 
they're very well prepared . . . and clinically knowledgeable . . 
.'')--Lisa Palmer, Director of Nursing, Palm Valley Rehab and Care 
Center, Goodyear, AZ.

                          STUDENT TESTIMONIALS

    ``What's it like being a student at Chamberlain? It's awesome 
because . . . for once, I'm able to get into a career that I've always 
loved. I'm able to become the nurse that I've always dreamed of 
becoming.--Towana Sullivan, Chamberlain student, Columbus, OH.
    ``I think the reason one should choose Chamberlain is the 
dedication of the staff. I think when you have them behind you, you can 
achieve what you want.''--Debra Reider, Chamberlain student, St. Louis, 
MO.

                             Apollo College

                            ABOUT DEVRY INC.

    DeVry's purpose is to empower our students to achieve their 
educational and career goals. Our colleges and universities offer 75 
certificates through graduate and professional degree programs serving 
undergraduate and graduate students in business, healthcare, technology 
and medicine. DeVry serves students in secondary through post-secondary 
education as well as accounting and finance professions. DeVry is a 
global provider of educational services and is the parent organization 
of Advanced Academics, Apollo College, Becker Professional Education, 
Chamberlain College of Nursing, DeVry Brasil, DeVry University, Western 
Career College and Ross University Schools of Medicine and Veterinary 
Medicine.

            ABOUT APOLLO COLLEGE AND WESTERN CAREER COLLEGE

    With over 15,000 students, Apollo College and Western Career 
College are leading providers of post-secondary healthcare education in 
the western region of the United States. The Colleges provide 45 high-
quality, career-oriented healthcare diploma, associate and bachelor's 
degree (July 2010) programs ranging from Medical Assisting, Dental 
Assisting, Pharmacy Technology, and Healthcare Administration, to 
advanced programs such as Nursing, Dental Hygiene, Surgical Technology, 
Medical Sonography and Respiratory Therapy.
    These program offerings capitalize on powerful demographic and 
secular trends that are driving the increasing demand for highly 
qualified healthcare professionals in the United States.

                        APPOLLO COLLEGE PROFILE

    Founded in 1975; Ten campuses in six States Arizona, Idaho, Nevada, 
New Mexico, Oregon and Washington.

                     WESTERN CAREER COLLEGE PROFILE

    Founded in 1967; Nine campuses across northern and southern 
California.


------------------------------------------------------------------------

------------------------------------------------------------------------
Apollo College Student Profile:
  Fall 2009 Enrollment.....................................      9,275*
  Male.....................................................         19%
  Female...................................................         81%
  African-American.........................................          5%
  Hispanic.................................................         25%
  White....................................................         46%
  Asian....................................................          3%
  Alaskan Native/American Indian...........................          5%
Western Career College Student Profile:
  Fall 2009 Enrollment.....................................      6,381*
  Male.....................................................         15%
  Female...................................................         85%
  African-American.........................................         16%
  Hispanic.................................................         21%
  White....................................................         32%
  Asian....................................................         13%
  Alaskan Native/American Indian...........................          1%
2008-2009 Total Degrees and Diplomas Conferred.............       7,325
  Apollo College...........................................       4,288
  Western Career College...................................       3,037
2008 First-time, Full-time Graduation Rate (combined)......         59%
  Apollo College...........................................         60%
  Western Career College...................................         58%
*Fall 2009 IPEDs.



------------------------------------------------------------------------
                                                               Associate
                   Apollo College                     Diploma    Degree
------------------------------------------------------------------------
Median Loan Debt (FY 2009).........................    $8,402    $20,850
Cohort Default Rate (2007) : 7.2%
------------------------------------------------------------------------



------------------------------------------------------------------------
                                                               Associate
               Western Career College                 Diploma    Degree
------------------------------------------------------------------------
Median Loan Debt (FY 2009).........................   $10,125    $14,975
Cohort Default Rate (2007) : 10.2%
------------------------------------------------------------------------

                      APOLLO COLLEGE ACCREDITATION

    Apollo College is accredited by the Accrediting Council for 
Independent Colleges and Schools (ACICS) to award Bachelor of Science, 
Associate of Science and Associate of Occupational Studies degrees. 
ACICS is recognized by the U.S. Department of Education and by the 
Council for Higher Education Accreditation.

                  WESTERN CAREER COLLEGE ACCREDITATION

    Western Career College is accredited by the Accrediting Commission 
for Community and Junior Colleges of the Western Association of Schools 
and Colleges (WASC), an institutional accrediting body recognized by 
the Council for Higher Education Accreditation and the U.S. Department 
of Education.

                         EMPLOYER TESTIMONIALS

    ``. . . Apollo students have been an integral part of our clinic . 
. . The faculty act as excellent role models and provide up-to-date 
clinical education . . .''--Dr. Kathy Lopez-Bushnell, RNC, EdD, MPH; 
The University of New Mexico Hospitals, Albuquerque, NM.
    ``. . . Apollo College provides us with knowledgeable Medical 
Assistant students to complete their externships . . . Our University 
Health Center has hired graduates with great success. We believe in 
Apollo College . . .''--Betsy Johnson, RN, BSN: Supervisor, Boise State 
University Health Services, Boise, ID.

                          ALUMNI TESTIMONIALS

    ``My life has changed significantly since graduating. I have more 
self-esteem and confidence.''--Karen Solari, 2006 Western Career 
College Pharmacy Technician graduate, Sacramento, CA.
    ``I have been working nonstop since receiving my nursing license--
and I love what I do! I finally got my dream job working at a major 
hospital.''--Theresa Morin, 2005 Western Career College Vocational 
Nursing graduate, Elk Grove, CA.
    ``My experience at Apollo has been amazing. The hands-on training 
makes learning easier and more enjoyable. My instructors were 100 
percent top-notch. The class sizes are small so you get a lot more 
help. I can't say enough great things about Apollo.''--Jamie Martinez, 
Apollo College Dental Assisting student, Mesa, AZ.

    The Chairman. Ms. Parrott, thank you very much for being 
here and for your excellent testimony.
    Now we turn to Mr. Steve Eisman. Mr. Eisman, welcome and 
please proceed.

   STATEMENT OF STEVEN EISMAN, PORTFOLIO MANAGER, FRONTPOINT 
           FINANCIAL SERVICES FUND, LP, NEW YORK, NY

    Mr. Eisman. Good morning, Chairman Harkin and Ranking 
Member Enzi, and members of the committee. Thank you for 
inviting me to testify this morning.
    My name is Steve Eisman and I am the Portfolio Manager of 
the FrontPoint Financial Services Fund. My firm has spent a 
great deal of time studying the for-profit education industry 
and understanding how it operates and derives its revenue. It 
has been an eye-opening experience.
    My testimony comes today largely from a recent presentation 
I gave at an investor conference entitled ``Subprime Goes to 
College.'' The for-profit industry has grown at an extreme and 
unusual rate driven by easy access to Government-sponsored debt 
in the form of title IV student loans, where the credit is 
guaranteed by the Government. Thus, the Government, the 
students, and the taxpayer bear all the risks and the for-
profit industry reaps all the rewards. This is similar to the 
subprime mortgage sector in that the subprime originators bore 
far less risk than the investors in their mortgage paper.
    The for-profit education industry accounts for 9 percent of 
the students, 25 percent of all title IV disbursements, and 44 
percent of all defaults. There is something wrong with this 
statistical progression.
    At many major for-profit institutions, Federal title IV 
loan and grant dollars now comprise nearly close to 90 percent 
of all revenues, and this growth has driven even more 
spectacular company profitability and wealth creation for 
industry executives.
    For example, ITT Educational Services, one of the larger 
companies in the industry, has a roughly 40 percent operating 
margin versus the 7 to 12 percent margins of other companies 
that receive major Government contracts. ITT is more profitable 
on a margin basis than even Apple. This growth is purely a 
function of Government largesse, as title IV has accounted for 
more than 100 percent of revenue growth.
    One major reason why the industry has taken an ever-
increasing share of Government dollars is that it seeks to 
recruit those with the greatest financial need and put them in 
high-cost institutions. This formula maximizes the amount of 
title IV loans and grants that these students receive. If the 
industry, in fact, educated its students and got them good jobs 
and enabled them to receive higher incomes and to pay off the 
student loans, everything I just said would be irrelevant.
    Let us first look at some dropout data. I have presented to 
the committee a very long PowerPoint presentation. If you look 
through it, you will see that we calculate dropout rates of 
most schools ranging anywhere from 50 percent to 100 percent 
per annum. How good could the product be if dropout rates are 
so stratospheric? These statistics are quite alarming, 
especially given the enormous amount of debt most for-profit 
students must borrow to attend these schools.
    We have every expectation that the industry's default rates 
are about to explode. Because of the growth in the industry and 
the increasing search for more students, we are now back to 
late 1980's levels of lending to for-profit students on a per-
student basis. Back then, defaults were off the charts and 
fraud was commonplace.
    How do schools such as this stay in business? The answer is 
to control the accreditation process. The scandal here is 
exactly akin to the rating agency role in subprime 
securitizations. Accreditation bodies are nongovernmental, 
nonprofit, peer reviewing groups. Schools must earn and 
maintain proper accreditation to remain eligible for title IV 
programs.
    The relationship of the for-profit education industry and 
the national accrediting boards is, in my view, similar to the 
relationship between the rating agencies and the investment 
banks. There, Wall Street paid the rating agencies handsomely 
for ratings on subprime securitizations that turned out to be 
euphemistically overly optimistic. Here, the industry, we 
believe, controls the national accrediting boards by actually 
sitting on the boards of those very same institutions. The 
lunatics are running the asylum.
    The core of the problem in both the subprime and the for-
profit education industry in my view is a problem of 
incentives. In subprime brokers were incentivized to make as 
many loans as possible because they were paid on volume. They 
faced no risk of loss due to bad decisionmaking because the 
loans were sold off to investors. In for-profit education, 
every segment of the institution is incentivized to enroll as 
many students as possible. Recruiters are paid on volume. 
Instructors are compensated based on completions, and 
executives and shareholders are paid based on growth and none 
bear the risk of losses should the students not get their 
money's worth or, even worse, default on their loans. The 
incentives to grow far outweigh the incentives to educate, and 
thus, like in subprime, rather than having a fundamentally 
sound industry with a few bad actors, it is my belief you have 
a fundamentally unsound industry but with a few good ones.
    Let me end by driving this subprime analogy to its ultimate 
conclusion. By late 2004, it was clear to me and my partners 
that the mortgage industry had lost its mind and a society-wide 
calamity was going to occur. It was like watching a train wreck 
with no ability to stop it.
    Are we going to do this all over again? We have just loaded 
up one generation of Americans with mortgage debt they cannot 
afford to pay back. Are we going to load up a new generation 
with student loan debt that they cannot afford to pay back?
    The industry is now 25 percent of title IV money, quickly 
on its way to 40 percent. If it is policed, the problem can be 
stopped. It is my hope that this Administration and the 
committee sees the nature of the problem and begins to act now.
    If nothing is done, then we are on the cusp of what I 
believe is a new social disaster. If present trends continue, 
over the next 10 years almost $500 billion of title IV loans 
will have been funneled to this industry. My team and I 
estimate total defaults of approximately $275 billion and 
because of fees associated with defaults, for-profit students 
will owe approximately $300 billion on defaulted loans over the 
next 10 years.
    Mr. Chairman and the committee, I would be happy to answer 
any questions that you have.
    [The prepared statement of Mr. Eisman follows:]

                  Prepared Statement of Steven Eisman

    Good morning. Chairman Harkin and members of the committee, thank 
you for inviting me to testify this morning. My name is Steven Eisman 
and I am the portfolio manager of the FrontPoint Financial Services 
Fund. My firm has spent a great deal of time studying the for-profit 
education industry and understanding how it operates and derives its 
revenue. It has been an eye opening experience. Until recently, I 
thought that there would never again be an opportunity to be involved 
with an industry as socially destructive as the subprime mortgage 
industry. I was wrong. The for-profit education industry has proven 
equal to the task.
    My testimony today comes largely from a recent presentation I gave 
at an investor conference entitled ``Subprime goes to College.'' The 
for-profit industry has grown at an extreme and unusual rate, driven by 
easy access to government-sponsored debt in the form of title IV 
student loans, where the credit is guaranteed by the government. Thus, 
the government, the students and the taxpayer bear all the risk and the 
for-profit industry reaps all the rewards. This is similar to the 
subprime mortgage sector in that the subprime originators bore far less 
risk than the investors in their mortgage paper.
    The for-profit education industry accounts for 9 percent of the 
students, 25 percent of all title IV disbursements but 44 percent of 
all defaults. And the President of the largest for-profit institution 
is paid nearly 25x the compensation level of the President of Harvard. 
There is something wrong with this statistical progression.
    In the past 10 years, the for-profit education industry has grown 
5-10 times the historical rate of traditional post-secondary education. 
From 1987 through 2000, the amount of total title IV dollars received 
by students of for-profit schools fluctuated between $2 and $4 billion 
per annum. But when the Bush administration took over the reigns of 
government, the DOE gutted many of the rules that governed the conduct 
of this industry. Once the floodgates were opened, the industry 
embarked on 10 years of unrestricted massive growth.
    Federal dollars flowing to the industry exploded to over $21 
billion, a 450 percent increase.
    At many major for-profit institutions, Federal title IV loan and 
grant dollars now comprise close to 90 percent of total revenues, up 
significantly vs. 2001. And this growth has driven even more 
spectacular company profitability and wealth creation for industry 
executives. For example, ITT Educational Services (ESI), one of the 
larger companies in the industry, has a roughly 40 percent operating 
margin vs. the 7 percent-12 percent margins of other companies that 
receive major government contracts. ESI is more profitable on a margin 
basis than even Apple.
    This growth is purely a function of government largesse, as title 
IV has accounted for more than 100 percent of revenue growth. Here is 
one of the more upsetting statistics. In fiscal 2009, Apollo, the 
largest company in the industry, grew total revenues by $833 million. 
Of that amount, $1.1 billion came from title IV federally funded 
student loans and grants. More than 100 percent of the revenue growth 
came from the Federal Government. But of this incremental $1.1 billion 
in Federal loan and grant dollars, the company spent only an 
incremental $99 million on faculty compensation and instructional 
costs--that's 9 cents on every dollar received from the government 
going towards actual education. The rest went to marketing and paying 
the executives.
    One major reason why the industry has taken an ever-increasing 
share of government dollars is that it has turned the typical education 
model on its head. And here is where the subprime analogy becomes very 
clear.
    There is a traditional relationship between matching means and cost 
in education. Typically, families of lesser financial means seek lower 
cost institutions in order to maximize the available title IV loans and 
grants--thereby getting the most out of every dollar and minimizing 
debt burdens. Families with greater financial resources often seek 
higher cost institutions because they can afford it more easily.
    The for-profit model seeks to recruit those with the greatest 
financial need and put them in high cost institutions. This formula 
maximizes the amount of title IV loans and grants that these students 
receive.
    With billboards lining the poorest neighborhoods in America and 
recruiters trolling casinos and homeless shelters (and I mean that 
literally), the for-profits have become increasingly adept at pitching 
the dream of a better life and higher earnings to the most vulnerable 
of society.
    But if the industry in fact educated its students and got them good 
jobs that enabled them to receive higher incomes and to pay off their 
student loans, everything I've just said would be irrelevant.
    So the key question to ask is--what do these students get for their 
education? In many cases, NOT much, not much at all.
    Here is an example of an education promised and never delivered. In 
the Powerpoint presentation before you, there is an article detailing a 
Corinthian Colleges-owned Everest College campus in California whose 
students paid $16,000 for an 8-month course in medical assisting. Upon 
nearing completion, the students learned that not only would their 
credits not transfer to any community or 4-year college, but also that 
their degree is not recognized by the American Association for Medical 
Assistants. Hospitals refuse to even interview graduates.
    But let's leave aside the anecdotal evidence of this poor quality 
of education. After all the industry constantly argues that there will 
always be a few bad apples. So let's put aside the anecdotes and just 
look at the statistics. If the industry provided the right services, 
drop out rates and default rates should be low.
    Let's first look at drop out rates. Companies don't fully disclose 
graduation rates, but using both DOE data, company-provided information 
and admittedly some of our own assumptions regarding the level of 
transfer students, we calculate drop out rates at most for-profit 
schools are 50 percent+ per year.
    How good could the product be if drop out rates are so 
stratospheric? These statistics are quite alarming, especially given 
the enormous amount of debt most for-profit students must borrow to 
attend school.
    We have every expectation that the industry's default rates are 
about to explode. Because of the growth in the industry and the 
increasing search for more students, we are now back to late 1980s 
levels of lending to for-profit students on a per student basis. Back 
then defaults were off the charts and fraud was commonplace.
    Default rates are already starting to skyrocket. It's just like 
subprime--which grew at any cost and kept weakening its underwriting 
standards to grow.
    By the way, the default rates the industry reports are artificially 
low. There are ways the industry can and does manipulate the data to 
make their default rates look better.
    But don't take my word for it. The industry is quite clear what it 
thinks the default rates truly are. ESI and COCO supplement title IV 
loans with their own private loans. And they provision 50 percent-60 
percent up front for those loans. Believe me, when a student defaults 
on his or her private loans, they are defaulting on their title IV 
loans too.
    There is no such thing as a profitable loan where the loan loss 
provision is 50 percent-60 percent. So why do these companies make 
unprofitable non-FFELP loans? The private loan is much smaller than the 
FFELP loan and the companies don't bear any losses on FFELP loans, only 
on private loans. As a result, the losses on the private loans are just 
loss leaders to get more students in the door.
    Let me just pause here for a second to discuss manipulation of 
statistics. There are two key statistics. No school can get more than 
90 percent of its revenue from the government and 2-year cohort default 
rates cannot exceed 25 percent for 3 consecutive years. Failure to 
comply with either of these rules and you lose title IV eligibility. 
Lose title IV eligibility and you're company's a zero.
    With respect to the default statistics, it is my belief that they 
are manipulated. Since the rule currently revolves around the 2-year 
default rate, the companies have every incentive to keep that statistic 
below 25 percent.
    Isn't it amazing that Apollo's percentage of revenue from title IV 
is 89 percent and not over 90 percent. How lucky can they be? We 
believe (and many recent lawsuits support) that schools actively 
manipulate the receipt, disbursement and especially the return of title 
IV dollars to their students to remain under the 90/10 threshold. And 
again, unprofitable private student loans is also a way to keep below 
the 90/10 threshold.
    The bottom line is that as long as the government continues to 
flood the for-profit education industry with loan dollars AND the risk 
for these loans is borne solely by the students and the government, 
THEN the industry has every incentive to grow at all costs, compensate 
employees based on enrollment, influence key regulatory bodies and 
manipulate reported statistics--ALL TO MAINTAIN ACCESS TO THE 
GOVERNMENT'S MONEY.
    In a sense, these companies are marketing machines masquerading as 
universities. And when the Bush administration eliminated almost all 
the restrictions on how the industry is allowed to market, the machine 
went into overdrive.
    How do such schools stay in business? The answer is to control the 
accreditation process. The scandal here is exactly akin to the rating 
agency role in subprime securitizations.
    There are two kinds of accreditation--national and regional. 
Accreditation bodies are non-governmental, non-profit peer-reviewing 
groups. Schools must earn and maintain proper accreditation to remain 
eligible for title IV programs. The relationship of the for-profit 
education industry and the national accrediting boards is, in my view, 
similar to the relationship between the rating agencies and investment 
banks. There, Wall Street paid the rating agencies handsomely for 
ratings on subprime securitizations that turned out to be overly 
optimistic. Here, the industry, we believe, controls the national 
accrediting bodies by actually sitting on the boards of those very same 
institutions. The lunatics are running the asylum.
    Historically, most for-profit schools are nationally accredited but 
national accreditation holds less value than regional accreditation. 
The latest trend of for-profit institutions is to acquire the dearly 
coveted Regional Accreditation through the outright purchase of small, 
financially distressed non-profit institutions and then put that school 
on-line. In March 2005, BPI acquired the regionally accredited 
Franciscan University of the Prairies and renamed it Ashford 
University. On the date of purchase, Franciscan (now Ashford) had 312 
students. BPI took that school online and at the end of 2009 it had 
54,000 students.
    When I was researching the subprime mortgage industry in 2005 and 
2006, I found that not every lender was bad--just most of them. A few 
subprime lenders actually used considerable discretion and really tried 
to make good loans to lower-income borrowers that made sense for them. 
In the for-profit industry, the same is probably true. There are 
probably a few good institutions that truly try to educate their 
students.
    The core of the problem in both the subprime and the for-profit 
education industries is a problem of incentives. In subprime, brokers 
were incentivized to make as many loans as possible because they were 
paid on volume. They faced no risk of loss due to bad decisionmaking 
because the loans were sold off to investors. In for-profit education, 
every segment of the institution is incentivized to enroll as many 
students as possible--recruiters are paid on volume, instructors are 
compensated based on completions, and executives and shareholders are 
paid based on growth. None bear the risk of loss should the students 
not get their money's worth or even worse, default on their loans. The 
incentives to grow far outweigh the incentives to educate. And thus, 
like in subprime lending, rather than having a fundamentally sound 
industry with a few bad actors, you have a fundamentally unsound 
industry with few good ones.
    Therefore, the best way to change this industry's conduct is to 
change the law and force it to bear some of the losses that it creates. 
In my power-point presentation, I show what would happen to several 
companies if they bore various loss percentages. The industry still 
stays very profitable. Just less profitable.
    Let me end by driving the subprime analogy to its ultimate 
conclusion. By late 2004, it was clear to me and my partners that the 
mortgage industry had lost its mind and a society-wide calamity was 
going to occur. It was like watching a train wreck with no ability to 
stop it. Who could you complain to, The rating agencies?--They were 
part of the machine; Alan Greenspan?--He was busy making speeches that 
every American should take out an ARM mortgage loan; or The OCC?--Its 
chairman, John Dugan, was busy suing State attorney generals, 
preventing them from even investigating the subprime mortgage industry.
    Are we going to do this all over again? We just loaded up one 
generation of Americans with mortgage debt they can't afford to pay 
back. Are we going to load up a new generation with student loan debt 
they can never afford to pay back. The industry is now 25 percent of 
title IV money on its way to 40 percent. If its growth is stopped now 
and it is policed, the problem can be stopped. It is my hope that this 
Administration sees the nature of the problem and begins to act now.
    But if nothing is done, then we are on the cusp of a new social 
disaster. If present trends continue, over the next 10 years almost 
$500 billion of title IV loans will have been funneled to this 
industry. We estimate total defaults of $275 billion, and because of 
fees associated with defaults, for-profit students will owe $330 
billion on defaulted loans over the next 10 years.
    Mr. Chairman and members of the committee, I will be happy to 
answer any questions that you have.
                                 ______
                                 

                            [June 24, 2010]

             HELP Oversight Hearings on For-Profit Colleges

          (Presentation by Steven Eisman--FrontPoint Partners)

                              Disclosures

    The information and opinions in this document are prepared by 
FrontPoint Partners LLC (``FrontPoint''). This information does not 
have regard to the specific investment objectives, financial situation 
and the particular needs of any individual who may receive this 
information. Any strategy discussed in this report may not be suitable 
for all persons, and recipients must make their own investment 
decisions using their own independent advisors as they believe 
necessary and based on their specific financial situation and 
investment objectives. This information contains statements of fact 
relating to economic and market conditions generally. Although these 
statements of fact have been obtained from and are based on sources 
that the author believes to be reliable, we do not guarantee their 
accuracy and any such information might be incomplete or condensed. 
There is no guarantee that the views and opinions expressed will prove 
to be accurate. Opinions, estimates and projections in this information 
constitute the judgment of the author as of the date of this document 
and are subject to change without notice. FrontPoint has no obligation 
to update, modify or amend this information or otherwise notify a 
recipient thereof in the event that any matter stated herein, or any 
opinion, projection, forecast or estimate set forth herein, changes or 
subsequently becomes inaccurate. Any trading strategies or investment 
ideas or positions discussed in this presentation may or may not be 
applied by FrontPoint or any of affiliates for their investment funds 
or accounts. Any estimates of future returns are not intended to 
predict performance of any investment. Income from investments may 
fluctuate. Past performance is not a guarantee of future results.
    Information regarding expected market returns and market outlooks 
is based on the research, analysis, and opinions of the author as of 
the date of this information. These conclusions are speculative in 
nature, are subject to change, may not come to pass, and are not 
intended to predict the future of any specific investment.
    Alternative investments are speculative, involve a high degree of 
risk, are highly illiquid, typically have higher fees than other 
investments, and may engage in the use of leverage, short sales, and 
derivatives, which may increase the risk of investment loss.
    FrontPoint does not offer or provide tax or legal advice and the 
topics discussed should not be taken as tax or legal advice. The 
recipient should not construe the contents of this Presentation as 
legal, tax, or financial advice and should consult its own professional 
advisors as to the legal, tax, financial, or other matters relevant to 
the suitability of an investment for the recipient before entering into 
transactions in which the tax or legal consequences may be a 
significant factor.
    The information contained herein has been prepared solely for 
informational purposes and is not an offer to buy or sell or a 
solicitation of an offer to buy or sell any limited partnership 
interests or to participate in any trading strategy. If any offer of 
limited partnership interests is made, it shall be pursuant to a 
definitive Offering Memorandum prepared by or on behalf of the Fund 
which would contain material information not contained herein and which 
shall supersede this information in its entirety.

            For Profit Education: Subprime goes to College*
                 before we begin, some statistics . . .
    1. Tuition and fees at private for-profit institutions averaged 
$14,174 in 2008-2009. This is more than twice the average in-state 
tuition and fees at public 4-yr institutions ($7,020/yr) and more than 
5 times the annual tuition and fees at public 2-yr colleges ($2,544/
yr). This implies that you could send 5 students through community 
college for every 1 student sent to a for-profit school.
---------------------------------------------------------------------------
    * Source: College Board, Trends in College Pricing and Trends in 
Student Aid 2009: U.S. Dept of Education trial 3-yr default data.
---------------------------------------------------------------------------
    2. In 2007-2008, 88 percent of students in the for-profit sector 
took out Stafford Loans, compared to 42 percent of public 4-year 
students, and only 10 percent of public 2-year college students. For 
every one community college student that borrows Federal Financial Aid, 
there are 9 for-profit students who borrow.
    3. Students at for-profit institutions received more than 20 
percent of all Pell Grant Aid in 2008-2009. Roughly 94 percent of all 
Pell Grants were awarded to households with less than $50,000 in annual 
income; 62 percent of all Pell awards went to families with less than 
$30,000 in annual income.
    4. Of bachelor degree recipients at for-profit schools, 57 percent 
graduate with $30,000 or more in debt, versus 12 percent of public 
school bachelor degree grads.
    5. For-profit institutions now account for almost 10 percent of all 
student enrollments, 25 percent of all Federal Financial Aid 
disbursements, and 44 percent of all student loan defaults.
            Background: Not your typical growth story . . .
























            The business model: Churn 'em and burn 'em . . .
    What results from this combination of profit-motive and lack of 
quality control is an expensive education that is highly questionable.

                    [East Bay News, March 19, 2010]

           Everest College Students Angry Over Certification

                            (By Tomas Roman)

    Hayward, CA (KGO)--Nearly three dozen Everest College students are 
furious they haven't received the medical certification they paid for. 
They refused to go to class until they get some answers.
    Whether they attend class or not, the students have to pay $100.
    Some of the students have been attending school for 8 months. Three 
weeks ago they found out that the college does not supply them with a 
certificate they were told they would get, in order to obtain the 
medical positions they want.
    The students are all studying medical assisting and they paid 
$16,000 for an 8-month course. They were told the credits earned at the 
school do not transfer to any community or 4-year college and that has 
many of them angry.

                          NEWS ARTICLE SUMMARY

     Students paid $16,000 for an 8-month course in medical 
assisting at an Everest College campus in Hayward, CA.
     Students recently learned that:

          Credits earned at the school do not transfer to any 
        community or 4-year college.
          Degrees granted at the school are not recognized by 
        the American Association for Medical Assistants (AAMA).
          Hospitals will not interview students for potential 
        jobs.

     ABC7 talked to the State Medical Assistant's Education 
Review Board and found the Hayward Campus is one of several Everest 
operates in California that the board say is not accredited to 
credential medical assistants.















         REPORTED STATISTICS . . . COHORT DEFAULT RATES (CDRS)

Cohort Default Rates (CDRs)
     CDRs are the percentage of a school's borrowers who enter 
repayment on a Federal Loan during a particular Federal fiscal year 
(Oct 1 to Sep 30), and default prior to the end of the next fiscal 
year.
     Effectively a 2-yr snapshot of the total students in 
default.
     CDRs are an important measure of quality--if default rates 
breach the federally mandated threshold of 25 percent (soon to be 30 
percent), schools can lose eligibility to title IV.
Can Easily Be Manipulated to Mask True Defaults
     Deferrals and forbearances used en mass to carry students 
over the 2-year reported timeframe.
     Schools used to partner with Sallie Mae and other lenders 
to delay or manage down defaults through the 2-year timeframe in 
exchange for guaranteed loan volumes.
     Schools pay down student government loans with internal 
money and collect directly from students.

                REPORTED STATISTICS . . . THE 90/10 RULE

The 90/10 rule
     90/10 says a for-profit may become ineligible to 
participate in title IV programs if it derives more than 90 percent of 
its cash basis revenue from title IV programs.
     Applies only to for-profit institutions, effectively a cap 
on total title IV dollars that can flow to a company as a percentage of 
revenues.
     Intended to create a structural boundary for growth from 
title IV dollars.
Can Also Be Manipulated
     Over-returning title IV dollars to the government when 
students drop out and then billing students directly.
    Pursue alternative government entitlement programs not counted 
under the title IV umbrella (military educational loans grants).
    When all else fails, raise tuition! Students will have to find 
alternative (non-title IV) funding sources to close the gap between 
tuition and the amount of total title IV loans.

          REPORTED STATISTICS . . . COMPLETIONS AND PLACEMENTS

Completions (Graduation Stats)
    Company-reported metric that measures the number of students who 
complete a program (graduate) in 150 percent of normal time (for 
example, 6 years of graduation data for a 4-year bachelors program).
     Non-traditional student body doesn't graduate together, 
and often takes much longer than normal to complete, so hard to 
understand actual graduation by class.
     No independent verification of graduates.
Placements (Employment Stats)
     Company-reported metric that measures the number of 
students who are placed in a job they were trained for (gainful 
employment).
     This is gainful employment?

          Trained nurses become janitors at hospitals.
          Homeland security degree grads become nighttime 
        security guards at shopping malls.

     And for those grads who cannot find employment . . . hire 
them! Most schools hire unemployed graduates internally to boost 
reported placement stats.

    As long as the government continues to flood the for-profit 
education industry with loan dollars,

          AND

    the risk for these loans is borne SOLELY BY students and the 
government . . .

          THEN

    the industry has every incentive to:

        : Grow at all costs
         Compensate employees based on enrollment
         Influence key regulatory bodies
         Manipulate reported statistics and other regulatory 
        measures

    ALL TO MAINTAIN ACCESS TO THE GOVERNMENT'S MONEY.

    
    

    
    
    
    

    The pace of the growth of the for-profit education industry and 
their growing claim to Federal monies will require greater scrutiny to 
protect students and the integrity of title IV lending.

     The primary revenue and profitability driver for the for-
profit companies is unrestricted access to the U.S. Government's title 
IV loans and grants.
     For-profit education companies are now among the most 
profitable businesses in the world due to government largesse.
     Regulations built around company-reported statistics are 
ineffective, and the Accreditation process for for-profit schools and 
programs is compromised.
     Disaggregation of risk from reward is the fundamental 
cause of all problems.
     Like sub-prime lending, this is an incentives problem--the 
incentives to grow far outweigh the incentives to educate.




                     Solutions: Gainful employment










    In summary, gainful employment has nothing to do with student 
access; it has everything to do with making money at for-profit 
institutions.

     Many for-profit education companies have raised tuition 
nearly 20 percent over the last 4 years, which has led to extraordinary 
profitability gains.
     Most schools were rapidly growing enrollments and opening 
campuses throughout the last 4 years, even though tuition levels were 
less than they are today.
     A 8 percent/10-year repayment gainful employment measure 
would force many schools to cut tuition back to 2006 levels to remain 
in compliance.
     Industry claims of gainful employment displacing students 
are an effort to avoid tuition cuts; the reality is that with proper 
tuition adjustments, very few programs would actually close.
     Industry proposed alternatives (12-15-percent ratio, 15-
20-year repayment) would allow most every school to raise tuition, and 
thus will increase student debt loads.

                        Solutions: Risk Sharing

    What would a risk-sharing agreement look like and what would be 
some likely outcomes?

     Make for-profit companies share in a portion of the losses 
on Federal loans.
     This will immediately change behavior at every level of 
the organization because companies will be punished for poor 
underwriting.
     Aggressive recruiting and tuition hikes slow, companies 
improve educational quality, and retention.
     Graduation and placements become more important than 
growth because companies are penalized financially when students fail.









                     Appendix and Supporting Pages




    The Chairman. Thank you all for your testimony. Very 
sobering.
    Mr. Eisman, I would like to start with you. I read your 
testimony last evening and it was also very eye-opening. There 
is one paragraph in your testimony that you did not read while 
you were testifying here, and I would like to read it.
    You said,

          ``One major reason why the industry has taken an 
        ever-increasing share of Government dollars is that it 
        has turned the typical education model on its head. 
        Here is where the subprime analogy becomes very clear. 
        There is a traditional relationship between matching 
        means and cost in education. Typically families of 
        lesser financial means seek lower-cost institutions in 
        order to maximize the available title IV loans and 
        grants, thereby getting the most out of every dollar 
        and minimizing debt burdens. Families with greater 
        financial resources often seek higher-cost institutions 
        because they can afford it more easily. The for-profit 
        model seeks to recruit those with the greatest 
        financial need and put them in the high-cost 
        institutions.''

    Is that what you mean by turning it on its head?
    Mr. Eisman. Yes, Mr. Chairman.
    The Chairman. Well, I can associate with that because I 
remember when I went to college, I knew where I wanted to go to 
college but I could not afford it. It was always my dream to go 
to Notre Dame. I could have gotten in. My grades were good 
enough. I had plenty of good grades, everything like that. But 
I could not afford it. I went to Iowa State University which I 
could afford. I understand what you mean about turning that 
model on its head. Now you go after lower-income students, but 
they go to the highest-cost students now.
    Mr. Eisman, let me get to a different point here. I read 
about you, of course, in the book, The Big Short. I have 
followed that. I had never met you personally until just now.
    Someone was questioning why you would be here, and some 
said, ``Well, you know, Mr. Eisman has a stake in this.'' I 
would like to ask you pointblank, do you have a financial stake 
in the success or failure of for-profit education companies?
    Mr. Eisman. Thank you for the question, Mr. Chairman.
    Yes, I do have a stake. I have been very transparent about 
my views on this industry and that I have investment positions 
in this industry.
    But let me just be clear. I am a money manager who has the 
ability to go long and to go short. My clients, my investors 
are universities, pension funds, and individuals who have given 
me their life savings and have asked me to give them a decent 
return with the appropriate amount of risk.
    I must tell you I take their charge as a sacred trust, and 
because I do that, we are fanatics about research because we 
feel that unless you do great research, you cannot make the 
appropriate investment decisions. That research process over 
the years leads us to conclude that sometimes individual 
companies are good longs and sometimes industries are good 
longs. Sometimes it leads us to conclude that individual 
companies are good shorts. Once in a very blue moon, it leads 
us to conclude that an entire industry is a short.
    In 2005 and in 2006, that research process led us to 
conclude that the entire mortgage sector was a short because it 
had become delusional and that the rating agencies and the 
investment banks were in cahoots with the whole process, and we 
shorted them too. That exact research process has led me to the 
similar type conclusions about the for-profit education 
industry.
    However, back then in 2006-2007, it never dawned on us that 
there would even be the possibility of us going to people in 
authority and saying, ``Look, this is what is going to 
happen.'' You really should do something about that because 
there was nobody to talk to. Who would you speak to? Alan 
Greenspan? He was making speeches telling everybody to take out 
an adjustable rate mortgage loan and speaking about how great 
the risk management processes of the investment banks were. 
John Dugan of the OCC? He was busy suing State Attorney 
Generals, preventing them from even investigating subprime 
mortgage companies.
    The reason why I am here today is that it is my hope that 
there is still time to do something, and that is why I am 
testifying here today.
    The Chairman. Well, I appreciate that. I wanted to get that 
on the record to find out if, in fact, you have an interest in 
them failing, why would you be here to try to save them.
    Mr. Eisman. Oh, I do not have an interest in them failing, 
Senator. I definitely do not want this industry to fail. I 
think there are very bad things going on in this industry. I 
think there are some very bad actors and things should be done 
with that. I do think there is a definite role for this 
industry, and so a lot of things have to change. I am not here 
to see the demise of this industry.
    The Chairman. The more that we have come to understand 
about the subprime mortgage mess, the more we have come to 
understand that the rating agencies did not do the job they 
were supposed to do. Now, you mentioned that. And you do see a 
parallel there? Can you elaborate on that just a little bit 
more?
    Mr. Eisman. Absolutely, Senator. The rating agencies were 
paid for their ratings on subprime securitizations. The amount 
that they were paid was approximately 5 to 10 times per rating 
than what they would do on normal straight debt. They were 
usually incentivized to see that the machine, the volume would 
continue to go on.
    With respect to this industry, there are two types of 
accreditation processes. There is the national accreditation 
process and there is the regional. As I said in my testimony, 
most of the for-profit industry is nationally accredited, and 
what I find problematic about it is that they actually sit on 
the boards of the national accreditation bodies and I think 
they control the process.
    The more recent innovation by the for-profit education 
industry is that they have always wanted the more dearly 
coveted regional accreditation. They have never really been 
able to get it. What they have done is they have bought--I will 
give you an example.
    There is a school that--BPI, one of the public companies, 
bought a very small school with 300 students in 2005. That 
school had, as I said, just 300 students at day of closing. 
They put it online and today that school has 60,000 students.
    The Chairman. I am very much aware of that school. It is 
located in my State of Iowa. I am very much aware of that.
    In closing, talking about accreditation, would it surprise 
you to learn that of the schools owned by publicly traded 
companies, of the 23 that are regionally or partially 
regionally accredited, 18 are accredited by an agency called 
the Higher Learning Commission? Eighteen of twenty-three by one 
accreditation agency. That seems to indicate something to me, 
that they would all go to that one agency to get accredited. 
Does that surprise you at all?
    Mr. Eisman. No. In the rating agency world in subprime, 
they used to call that ``forum shopping.'' If you could not get 
a good rating from Moody's, you would got to S&P and get the 
good rating from them.
    The Chairman. Thank you very much, Mr. Eisman.
    I have more questions. Ms. Issa I mean to engage you in 
some questions, Ms. Reiter and Ms. Parrott also, but we will do 
that in the second round.
    Thank you very much.
    Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman.
    I wish Senator Alexander were here because he was talking 
about how--in discussions that I have had with him--how when he 
was the Secretary of Education, one of his jobs was to accredit 
the rating agencies, and he actually had to fire a rating 
agency during the time that he was the Secretary. There seems 
to be some capability to do something about the rating 
agencies, that it is not quite the same way that the rating 
agencies work for businesses. We should look into that. I hope 
that that is not the case.
    I will start with Ms. Parrott. I got the impression from 
the first person to testify, the Inspector General, that 70 
percent of the for-profit firms are involved in criminal 
activity. Would you agree with that figure and would you 
exclude DeVry from that number?
    Ms. Parrott. Well, absolutely I would exclude DeVry from 
that number. I think the 70 percent is the percentage of cases, 
and I think that what we are really looking for is numerically 
how many cases are there and of those cases, how many are at 
the for-profit institutions that constitute 50 percent of the 
total number of institutions in post-secondary education and 
how many are at for-profits. I would encourage us to get that 
information.
    Clearly, I would not see DeVry as in that, and we have no 
investigation going on that I am aware of.
    Senator Enzi. I appreciate that.
    Can you tell me a little bit about your placement rate for 
graduates and how the placements are related to their field of 
study?
    Ms. Parrott. Yes, sir. Our students are in business and 
technology and related health care fields. At DeVry University, 
for example, our students that actively pursue employment 
opportunities using our career services get jobs in their 
educational field of study, on average since 1975, 90 percent 
of the time within 6 months of graduation.
    Senator Enzi. Thank you.
    Ms. Parrott. You are welcome.
    Senator Enzi. Since I am limited on time, I will move on to 
Mr. Eisman and Ms. Reiter. Secretary Duncan recently made the 
following remarks about for-profit schools.

          ``For-profit institutions play a vital role in 
        training young people and adults for jobs, and for-
        profits will continue to help families secure a better 
        future for themselves. They are helping America meet 
        the President's 2020 goal and helping us meet the 
        growing demand for skills that our public institutions 
        cannot begin to meet alone, especially in these 
        economically challenging times.''

    Given the need identified by the Secretary, how do we 
eliminate the bad actors while ensuring that the good actors 
can fulfill that needed role? How do you suggest that we 
separate those two out?
    Ms. Reiter. I think that what we have is a system that is 
lacking in standards so that we cannot even tell which ones are 
bad actors and which ones are the good actors. For example, 
placement records that are reported by some schools to their 
accrediting agency are not transparent. We do not know the data 
that those are based on.
    As we pointed out, there were some courses that were worse 
than others at the school we looked it. It may not be a 
question of bad actors and good actors, but bad programs and 
good programs. The schools, because they can get money for all 
of them and because it is to their benefit to show they have 
more and more students starting, have continued offering 
programs that even they themselves, if they took an honest 
look, would say this program just does not cut it.
    I think that there are a number of ways in which the 
regulations are just littered with loopholes that make it easy 
for schools that want to do bad to do it and make it hard for 
schools that want to do good to ignore what their competitors 
are doing.
    For example, the incentive compensation that we talked 
about earlier that people are being paid by the head to bring 
people in. Back in the late 1980s one of the schools we 
prosecuted called it ``bringing in the fishes.'' Recently in 
one Department of Education's administrative actions that I 
read, I think they called it, if you excuse the language, 
``putting asses in classes.''
    There is a way that you can deal with some of these things, 
and there have been some proposals by the Department in their 
proposed regs that would deal with it. We could go through an 
extreme list and I could talk about some of these things, but 
we do not have time for that here, but I am perfectly happy to 
work with people in the future. There are ways to segregate 
which are the bad, which are the good, but it will take a lot 
of work and a lot of tightening up and making clear what the 
regulations are that apply.
    Senator Enzi. Well, I appreciate the expertise that you 
have and the past experience that you have and would appreciate 
it if you would give us a more definitive list in writing. That 
would be very helpful, much more helpful than a hearing, in 
fact.
    Mr. Eisman.
    Mr. Eisman. Thank you, Senator.
    I am not an expert in education and I do not presume to be 
but I do think I have a good background in loan data and 
incentives. So I will just confine myself to that.
    With respect to defaults, the rule now is you have to 
maintain your 2-year cohort default rate below a certain level. 
I think it is 25 percent and then we are going to 3 years I 
think in a couple years. The data that is put out showing the 
default rates by the industry on a 2-year basis is without 
question in mind manipulated by the industry. The industry 
manages that data down so that they never get close to that 
threshold. I am quite convinced that that is the case because 
if you look at 2-year cohort default rates versus 3-year cohort 
default rates by vintage, you will see that they almost always 
double or more than double in 1 year. That is an unnatural 
progression of loan data and it means that the industry is 
manipulating the data downward in the 2-year rate and letting 
it go in the 3-year rate. If you move to a 3-year rate, they 
will manipulate the data to the 3-year rate.
    What I would recommend is changing rules so that you do not 
just look at a 2-year rate or a 3-year rate but a multiyear 
rate. That would be one recommendation.
    The other recommendation I would say is that the incentives 
of the industry are all messed up because it bears no risk, and 
I think something that should be looked at is risk-sharing. The 
industry should bear some of the losses that it creates.
    Senator Enzi. Thank you. Very helpful.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Enzi.
    I will first call on the Senators who have not been called 
on before. We will start with Senator Murray.

                      Statement of Senator Murray

    Senator Murray. Thank you very much, Mr. Chairman, and 
thank you for having this hearing.
    Ms. Issa, I want to start with you and thank you for 
sharing your story. Why did you choose to attend a for-profit 
school over a community college or a traditional 4-year school?
    Ms. Issa. Well, I just wanted to go straight to a career 
rather than figuring out what I wanted to do, what career path 
I wanted to take.
    Senator Murray. Did you know of any other options? Did you 
know it was a for-profit, or were you unaware of that?
    Ms. Issa. No. I was unaware.
    Senator Murray. Ms. Parrott, thank you. I wanted to ask you 
what type of services DeVry provides for students who 
traditionally struggle through college, are first-generation, 
or minority students, that you would think the traditional 
schools do not have available.
    Ms. Parrott. Well, let me first say that I believe that 
there are some traditional institutions who serve very similar 
populations to ours who do have those services. What we do is 
provide success coaches for each and every one of our students 
that work with them on a plethora of areas, including academic 
support, financial aid support, more traditional student 
services kinds of support, helping them find child care if that 
is what they need, monitoring their attendance and making sure 
that they come to class and if they do not come to class, 
checking to see where they were and making sure they get back 
because they are trying to do multiple things. They are 
multitasking. They are working. They have families. They have 
people in their communities who are not always impressed by the 
fact that they have chosen to go to school. We try to work with 
the whole student and not just the student in the classroom 
both through our faculty and staff but also with assigned 
student success coaches to work with their students.
    Senator Murray. One of the concerns I do have is the overly 
aggressive marketing that for-profit colleges have which 
targets individuals who are eligible for a high amount of 
Federal assistance. I am particularly concerned about heavy-
handed marketing targeted at the homeless and our veterans, two 
populations I have long been an advocate for.
    Ms. Parrott, I wanted to ask you how DeVry's advertising 
and marketing and admissions practices stack up compared to 
traditional institutions.
    Ms. Parrott. I think they stack up very well. I actually 
was an admissions counselor in an independent institution a 
number of years ago.
    We recruit students whether they are in the 18 to 24 
traditional student area or as working adults by talking with 
them and trying to match what they are interested in doing with 
what we have to offer, and if it does not match, we do not 
offer it to them. For example, we go into 8,000 high schools 
across the country and do college and career workshops that are 
not designed to get all the schools in those 8,000 high schools 
to come to DeVry but for students in those schools, many of 
them in urban areas, to have their students think about options 
after high school. Some of them end up coming to DeVry. I would 
say a very few of them end up coming to DeVry, but many of them 
use the output from those workshops to talk with their students 
about how they can find the right college for them. It is much 
more important----
    Senator Murray. Are you unique in the for-profit world?
    Ms. Parrott. I really have only worked at DeVry for the 
past 28 years. I really cannot answer for the rest of the 
industry. We are very committed to a more educated population 
in the United States, and I am personally very committed to 
that as well. I stay there because our missions match.
    Senator Murray. Ms. Reiter, what if any role did 
advertising and marketing play in some of the cases you 
prosecuted?
    Ms. Reiter. It plays a very big role. That is in my 
experience how people find out about the school. As the school 
itself says, I believe the students are not your typical high 
school student who spends months and years figuring out what 
college they want to go to. They are people who often are out, 
have graduated from high school or have not graduated from high 
school and they are out in the world, and they are without a 
job or stuck in a low-paying job. The advertisements and the 
solicitations and the brochures at the unemployment offices and 
on TV and on radio, which you cannot watch without seeing, are 
telling people, come to us. We will help you get a career. You 
will have the white lab coats or whatever that makes it look 
like this is wonderful. Then that is followed up when people do 
go in with the statements from the admissions recruiters along 
the same lines assuring people they are not going to have to 
worry about these student loan payments because they are going 
to earn so much money, they will be able to pay them back and 
they get some grant money besides. It is a whole string of 
representations from the broad public advertising through the 
admissions recruiters and then continued throughout the early-
enough part of the course so that they are there long enough--
the school with its front-loaded refund policies can collect 
all the money even if a student later drops out.
    Senator Murray. Well, thank you. Mr. Chairman, I am out of 
time, but I will have some questions to submit for the record 
as well. Thank you.
    [The prepared statement of Senator Murray follows:]

                  Prepared Statement of Senator Murray

    Thank you Chairman Harkin, Ranking Member Enzi, and members 
of the committee, for holding this hearing. The topic we are 
discussing today is one that I view as particularly important, 
and I welcome the opportunity to learn more from the witnesses 
we have here today.
    As a member of the Senate Budget and Appropriations 
Committees, in addition to the HELP Committee, I believe it is 
absolutely critical that we invest our Federal education 
funding carefully and wisely.
    At a time when State resources are scarce and college 
degrees are more important than ever, we must make sure that we 
are providing as many students as possible with the Federal 
financial aid they need to graduate and go on to a good-paying 
job.
    I know that in my home State of Washington and across the 
country, many private-sector colleges are doing great work 
preparing our students for career success. These schools serve 
a disproportionate amount of at-risk students including those 
living below the poverty line, veterans, and first generation 
college students who may require additional resources.
    I applaud any school that steps up to the plate to educate 
these vulnerable and oftentimes underserved populations. I 
believe we need to be careful not to paint all private-sector 
institutions with a broad brush as we move forward with these 
hearings.
    At the same time, in Washington State, 44 percent of post-
secondary institutions are for-profit, and in the 2008-2009 
school year, for-profits in Washington State received over $31 
million in Federal Pell grant funding.
    Clearly, there is a lot at stake here--for our schools and 
for our students. I'm looking forward to hearing from our 
panelists about how we can continue making sure our Federal 
investments are being directed properly to help our students 
get the education they need.

    The Chairman. Thank you, Senator Murray.
    Senator Sanders.

                      Statement of Senator Sanders

    Senator Sanders. Thank you, Mr. Chairman. Thank you all, 
panelists for being here.
    Mr. Eisman, you and your co-workers, as I understand, have 
done a lot of research on for-profit educational institutions. 
As I hear you, your fear is that large numbers of students 
lured into for-profit institutions by sophisticated marketing 
are misleading claims, billions in government grants, including 
Pell Grants, are creating a situation where a large number of 
these students will drop out of school for whatever reason, not 
earn the income that they were promised or led to believe they 
would earn, and eventually default on their loans.
    So my question to you is A, what happens to these 
individuals who went into these for-profit institutions with 
all kinds of high expectations, what kind of numbers are we 
talking about? And maybe more importantly, what are the 
implications for our entire economy?
    In other words, as you talked about, the subprime mortgage 
crisis led to the greatest recession since the 1930s. We're 
suffering that today. What kind of fears do you have if present 
trends continue will be the national implications for our 
economy of the for-profit educational institutions and what's 
going on?
    Mr. Eisman. Just in terms of numbers, Senator, like I said 
in my testimony, given the growth in the industry, we believe 
about $500 billion worth of title IV loans will be funneled to 
this industry pretty much over the next 10 years. Our estimates 
are roughly that slightly less than $300 billion will be 
default out of those loans.
    Those are big numbers. Unfortunately for all of us, we're 
now used to a lot of big numbers that sound very, very bad. The 
implications for the economy are not as broad as the subprime 
mortgage sector. Because while those numbers do sound big, the 
numbers from the mortgage sector dwarf those numbers.
    I would just point out that it's a tragedy for the people 
who will be suffering those defaults. I don't know if everyone 
here is aware, but student loans are not dischargeable in 
bankruptcy. So if you default on a student loan, the only thing 
that's going to separate you from your student loan is death.
    Senator Sanders. For the rest of their lives, in one way or 
another----
    Mr. Eisman. You're married, without potential for divorce, 
forever. And that debt, you cannot get rid of it.
    The Chairman. Would the Senator yield for a question?
    Senator Sanders. Sure.
    The Chairman. Mr. Eisman, isn't it true that in the 
subprime market, the people who took out these mortgages and 
who have these debts, they can discharge those in bankruptcy?
    Mr. Eisman. The mortgage actually is not dischargeable in 
bankruptcy, Senator, but you can walk away from your house.
    The Chairman. Well, that's what I mean. You can just----
    Mr. Eisman. You can walk away from your house and----
    The Chairman. House?
    Mr. Eisman [continuing]. Then the debt will just leave you.
    The Chairman. Definitely.
    Mr. Eisman. Here, you're stuck.
    The Chairman. But a student default, like Ms. Issa, her 
debt, she has until she pays it off or dies.
    Mr. Eisman. Or dies.
    The Chairman. She can't walk away from it?
    Mr. Eisman. Never.
    The Chairman. Thank you.
    Senator Sanders. In other words, picking up on Senator 
Harkin's point, for the rest of their lives, people are going 
to be carrying around tens and tens and tens of thousands of 
dollars in debt, which impacts their credit ratings, obviously, 
right? Their ability to get a home, ET cetera, ET cetera. Are 
you aware of what kind of number--you talked about $300 billion 
in defaults. How many individuals are we talking about?
    Mr. Eisman. I haven't calculated that off--I don't have 
that statistic offhand, Senator.
    Senator Sanders. All right, let me ask Ms. Issa, you heard 
what Mr. Eisman said. Are you one of those people in that 
situation? So you're carrying that debt right now on your back?
    Ms. Issa. Yes, I am.
    Senator Sanders. What does that mean if you may--you've 
been so kind to come here and share your experience. What does 
that mean to you as a young person, the mother of a couple of 
kids?
    Ms. Issa. It's very stressful. It's like bricks on my 
shoulders. I don't know what to do.
    Senator Sanders. OK. Ms. Reiter, you, I gather, are aware 
of many other people in Ms. Issa's position. Tell us about what 
you observe with what happens to these folks.
    Ms. Reiter. Absolutely. In addition to things that have 
already been mentioned, they don't qualify for other Federal 
programs. They can wind up turning 65 and having Social 
Security benefits taken to pay. They can have their income tax 
refunds diverted to pay. They can have their wage garnished 
without court procedure because the special procedures that the 
higher education act allows for collection. Their lives are 
basically ruined.
    Senator Sanders. No, what I'm--excuse me for interrupting 
you. Mr. Chairman, when we see on television where they 
advertise a drug, and they say here are the side effects, it 
may cause A, B, C, irritated bowel or whatever it may cause, 
I'm almost thinking that maybe these for-profit institutions 
might put the side effects that you're talking about?
    Ms. Reiter. If I could just add. There were some provisions 
in the last couple of years that allow for income-based 
repayment, extended payments and things like that, that are a 
help to some students.
    But it still doesn't help them, because they--it helps them 
with eventually after 25 years, getting rid of the debt. They 
still don't have the skills. They can't get new student loans 
to get a career, because they have the defaulted student loan 
already. So they're not eligible for a new student loan. They 
can't get a career. The rest of their lives is probably if 
you're thinking critically avoiding making money, because any 
money you make is going to go for that debt. And you have no 
way to really get----
    Senator Sanders. Let me ask anybody up on the panel, maybe 
Ms. Parrott or anybody else, or Ms. Reiter, do you think that 
most people who enter one of these schools are aware that if 
they don't pay off that government grant, the government loan, 
that they may get their Social Security cut when they reach 65? 
Do you think anyone knows that?
    Ms. Parrott. Well, I can tell you that for our students, we 
provide that kind of financial literacy counseling as part of 
their entrance into our institutions.
    Senator Sanders. Ms. Reiter, is it your understanding that 
most of the institutions provide that kind of financial 
information?
    Ms. Reiter. I think that most institutions are required to 
provide a number of disclosures. Students often receives a 
stack of documents, half an inch thick. In that stack of 
documents, there may very well be that kind of disclosure.
    Not to the extreme that I've explained it, but there are 
those disclosures. Most students are coming in and being told 
you're going to have grants. Don't worry, that'll be taken care 
of. And the loans, don't worry, you're going to get this high 
paying job. You'll easily be able to pay it back within X 
amount of short time.
    The focus, the whole focus is then I'm going to better my 
life. What they're really doing is taking away that student's 
life and their dreams of having a better life by saddling them 
with this debt.
    Senator Sanders. Mr. Chairman, thank you.
    The Chairman. Thank you, Senator Sanders. Now, Senator 
Franken.
    Senator Franken. I want to thank you all for your 
testimony. Ms. Parrott, thank you for yours. DeVry has a long 
history and a stellar reputation.
    Ms. Parrott. Thank you.
    Senator Franken. You said you don't know about the other 
for-profit schools, but you--what you're hearing must sound 
familiar. It must bother you that while my State, we have good 
for-profits and do a good job--doesn't it bother you that there 
are these bad actors?
    Ms. Parrott. Absolutely. It bothers me that when I see that 
happen in any institution to any student. Yes, it bothers me.
    Senator Franken. Yes. Ms. Reiter, you're very familiar with 
stories like Ms. Issa's, right? This is not unfamiliar to you?
    Ms. Reiter. That's right. In fact, I've heard stories that 
are virtually identical.
    Senator Franken. And it's the overpromising. It's the bad 
data. You pointed out to all this bad data about how they say 
what money you're going to make when you get out and what 
percentage of students we place. These are just lies, right?
    Ms. Reiter. Yes.
    Senator Franken. They're just lies.
    Ms. Reiter. Yes.
    Senator Franken. OK.
    Ms. Reiter. If I could just add to that, though. Part of 
the problem is, they are lies. Another part of the problem is 
that there is no standard definition of what is employment. How 
long you have to be on the job, how many hours of work a week 
you have to work, whether you have to go through the school's 
placement agency in order to even be considered in that pool. 
Because there is no standard, it is difficult if you don't have 
that kind of standard to prove that it is a lie.
    Senator Franken. It seems then that what we have to do is 
change the rules, right? And that's kind of our job. We're 
Senators, so we have to change our laws and our rules, so we 
can tell which schools are the good schools, and which schools 
are the bad schools. That's what we have to do. That's what our 
job is here. That's why we're having this oversight hearing. 
And that's what we're going to do.
    We need to have good information. We need to have data. We 
need to know who the good actors are and who the bad actors 
are. And we need to be able to have the kind of information 
where we can delineate one from the other and act against the 
bad actors.
    Because I think $300 billion is a lot of money. It's the 
taxpayers money. The result on what happens to Ms. Issa. I'm 
going to ask about accreditation. Mr. Eisman, you compared the 
credit rating agencies and the securitization subprime market 
with what's going on with for-profit colleges. And you 
explained that some for-profit colleges are essentially running 
the organizations responsible for accrediting them.
    It is my understanding that 11 of the 15 board members of 
the accrediting counsel for independent colleges and schools 
are currently executives at for-profit colleges. The parent 
companies of the for-profit colleges they're being accredited 
by the counsel, is that right?
    Mr. Eisman. One hundred percent, Senator.
    Senator Franken. One hundred percent right?
    Mr. Eisman. Correct.
    Senator Franken. OK, well, can't we do something to prevent 
this conflict of interest? Would you suggest that maybe that's 
our job?
    Mr. Eisman. Senator, I wasn't presuming to tell you what 
your job is, but I'm presenting the problem.
    Senator Franken. Presume away.
    Mr. Eisman. And I think----
    Senator Franken. Presume away.
    Mr. Eisman [continuing]. I think you should do something 
about it. Just like you tried to do something about the rating 
agencies.
    Senator Franken. Then, look, DeVry again, there--Secretary 
Duncan is right. There is a place for for-profit schools and 
where students can go. And the good actors are good actors and 
do a good job.
    We have a job here. Part of it is to look out for Ms. Issa, 
look out for the taxpayer. I'll be damned if I'm going to be a 
Senator and not do that job. Thank you.
    The Chairman. Thank you, Senator Franken. I will just 
intervene here with one thing. Ms. Parrott, before I turn to 
Senator Merkley next, if Senator Merkley would so let me 
proceed for just a couple of minutes now, I would appreciate 
that.
    Ms. Parrott.
    Ms. Parrott. Yes, sir.
    The Chairman. I was looking at the figures here on DeVry. 
DeVry increased their students in 1 year by 25.6 percent. 
Twenty-five point six percent. This is from your own data.
    Ms. Parrott. Yes.
    The Chairman. From spring of 2009 to 2010. You have a 
profit margin of 16.1 percent--16 percent profit margin. Yet, 
by your own data, DeVry reported that education accounted for 
only 54.6 percent of your total costs. Fifty-four cents out of 
every dollar you got went to education. I mentioned that to a 
college president the other day, and he said that's shocking. 
Only 50--half, 50 cents out of every dollar goes to education.
    Ms. Parrott, is it not true that on June 23, 2009, DeVry 
paid $4.9 million to settle a lawsuit with a former employee 
who worked as a recruiter at DeVry campus in Ohio. The lawsuit 
alleged violations of the ban on incentive compensation. That 
is paying recruiters based on the number of students they 
enroll.
    The Department of Justice declined to intervene in the 
lawsuit, but approved the $4.9 million settlement. Is that not 
true?
    Ms. Parrott. That is true.
    The Chairman. Thank you very much. And if you want to 
follow up on that.
    Ms. Parrott. I would like to follow up on that.
    The Chairman. Later on, when I get my turn back.
    Ms. Parrott. Yes, sir.
    The Chairman. Senator Merkley.
    Senator Merkley. Thank you very much for all of your 
testimony. And Ms. Issa, you used the word scam in your 
testimony. You said you looked at complaints from other 
students online. Their stories were very similar. They all felt 
like victims of a scam, just like I did.
    You feel you've been a victim of a scam. Why?
    Ms. Issa. Because the ultrasound program I was in was not 
accredited.
    Senator Merkley. Yes. Now Mr. Eisman, I believe you made a 
comment that accreditation is normally necessary for folks to 
access title IV funds. I'm wondering why--and you may not be in 
a position to know this specifically, but I'm wondering why a 
program that was unaccredited was able to be in a position of 
having its students have access to title IV funds. If anyone 
can answer that.
    Mr. Eisman. I think I can answer that, Senator. There are 
different types of accreditation. The accreditation that I was 
speaking about is national accreditation or regional 
accreditation of a school. You might have a program, let's say, 
medical assistant program, where the school is accredited by 
the accrediting bodies that I mentioned, but is not recognized 
by let's say the medical assistant organization of the United 
States of America. Or in Ms. Issa's case, was not recognized by 
the organization that oversees the specialty that she was 
trying to do.
    The school can advertise and say, ``Hey, come to our 
school, we are an accredited school.'' But they didn't tell her 
that this--the entities that need to recognize her specialty 
don't recognize the school. That happens unfortunately, I 
think, more often than not in this industry.
    Senator Merkley. We have a complicated system of 
accreditation in which a student, who's responding to an ad 
they might have seen on television or in the newspaper, they're 
being told you come and get this degree, there's a market 
waiting for you. It implies accreditation. And yet, when you 
went to get a job, you were told, what?
    Ms. Issa. That the program was not accredited.
    Senator Merkley. Yet, you found out there was a local 
community college that had an accredited program at half the 
cost. Well, to me, I think the use of the word scam is very 
appropriate. I hadn't really focused on the other piece of 
this. I'm glad you all brought it to our attention, that the 
loan incurred follow you throughout your entire life. And thus, 
we are allowing victims of scams to be haunted and punished 
throughout their entire life, affecting not just the victim, 
but the family. Because as you wrestle with your finances, it 
affects what you can do, whether or not you can afford to go 
get an accredited program, if you will. You've lost time. 
You've lost money. That affects opportunities you might be able 
to provide for your children. Is that a fair characterization?
    Ms. Issa. That's correct.
    Senator Merkley. OK. Thank you. I really appreciate your 
willingness to come and share your story to help us understand 
the challenge.
    Ms. Parrott, you own a school in Oregon. By all counts, a 
very solid program. As far as I've ever heard, do you use 
incentive payments in Oregon or in others for recruiting?
    Ms. Parrott. We do not.
    Senator Merkley. OK. Has that been a conscious decision and 
you see your competitors using those payments?
    Ms. Parrott. We use a merit-based system. We pay everyone 
in our organization based on the goals and objectives that are 
set for the amount in annual basis. That's what I know. I can 
say that I was around, someone mentioned to Senator Nunn in the 
hearing to the Permanent Committee on Investigations in the 
1990s. I was around then. There were a number of conversations 
around incentive compensation that had to do with independent 
contractors and people who were paid for the lack of the better 
way to put this, for piece work in the way that you pay people 
in the garment district. That is a 20-year-old view of what 
goes on from my understanding today. But again, I can only 
speak from where I sit.
    Senator Merkley. Thank you. My time is up. I'll just note, 
I'll be curious to follow up, Mr. Chair, as to whether the 
Sanford-Brown Institute is being investigated by anybody for 
the type of scam or fraud we've heard testimony about today, so 
that other folks are not victims down the road. Thank you.
    The Chairman. Senator Bennet.
    Senator Bennet. Thank you, Mr. Chairman. I'd like to thank 
the panel for your excellent testimony. Ms. Issa, I'd like to 
thank you in particular for being willing to come share your 
experience. In hearing your testimony and also Ms. Parrott's 
observation which I agree with completely that there is 
enormous unmet need out there. There are people that are 
working, who can't go to school during the day. There are 
people that can't get their degree in 4 years. There are places 
where there's a shortage of nursing training. All of that is 
true. The only thing I care about is that the deals that are 
made are kept, and that the quality of the education be high, 
whether it's public or whether it's private.
    I just wanted to ask you first, Ms. Parrott, what internal 
metrics, if any, does DeVry use to determine whether or not the 
program that it has is a quality program and whether the 
outcomes are quality outcomes?
    Ms. Parrott. We have internal controls in every aspect of 
our business. Specifically, with relation to quality outcomes, 
we look at our DeVry University at the numbers of students who 
graduate from our institutions and are then employed in 
education-related careers within 6 months of graduation.
    At our nursing colleges, we look at Enclicks (phonetic) 
pass rates. Our Chamberlin College of Nursing's pass rates are 
between 90 and 98 percent, depending on the location. That's 
over and above the national average of about 88 percent.
    We're looking at whether or not we have provided to the 
students that we educate the education that will allow them to 
pursue the careers that they are interested in going into. We 
look at that specifically related to whether or not it's 
educationally related as opposed to did you get a job anywhere?
    Senator Bennet. OK. And just a question for anybody in the 
panel that wants to answer it. Mr. Eisman might have an answer 
because you've been studying so closely or Ms. Parrott. Is 
there a difference in who the faculties are in these schools? 
Can you describe any difference between private schools and 
public or among private schools? Who are the people that are 
teaching?
    Ms. Parrott. The requirements for faculty are in the States 
where we operate--State-determined. They tell you in order to 
be a licensed college or university in our State, your faculty 
must meet this standard. That standard is not diluted for any 
sector of education.
    I will say that we probably have more practitioner-based 
faculty, people who in addition to----
    Senator Bennet. We, meaning DeVry?
    Ms. Parrott. We, meaning DeVry. I'm sorry. We, DeVry have 
more practitioner based faculty, meaning that in addition to 
meeting the academic credentials that they need to meet to 
teach in an associated baccalaureate or graduate degree 
program, they also have work experience in their fields.
    Senator Bennet. Ms. Reiter.
    Ms. Reiter. Some of the declarations that we got from 
students about the quality of the training from the faculty 
indicated that the instructors in one course, they had a new 
device for some kind of medical thing, brand new device which 
they touted. Neither the instructor nor anybody else knew how 
to use it.
    One instructor would bring in her friend to show the 
massage therapy techniques because the instructor herself 
didn't know them. When that instructor left, then they brought 
a chiropractor person in who didn't know massage techniques.
    In other words, there is quite a bit of problem in the 
schools that we've seen with the instruction not being quality 
instruction. I think some of the schools in the industry 
themselves indicate that a lot of their instructors are part-
time.
    There isn't the kind of faculty that you would expect in a 
public institution, that is there, that has a track record.
    [Interruption]
    Senator Bennet. No, I have 45 seconds left. I can't trick 
the Chairman. Mr. Eisman, I just want to end with you. I have 
spent much more time in K-12 education than I have higher ed, 
and came to believe that the alignment of our incentives and 
disincentives in public education are largely out of whack in 
terms of the outcomes that we really want for our kids.
    You talked in your testimony a little bit about realigning 
the incentives when it comes to private universities. I wonder 
if you could talk a little bit more about what that would look 
like, what would it look like to have investors or others with 
more skin in the game? How should we be thinking about that?
    Mr. Eisman. One thing that I suggest----
    Senator Bennet. Can I ask one other question? In your 
research, when you observe that there were some good actors in 
the space you thought, is there a reason that you could 
determine why those places are quality places versus places 
that weren't? Any of that I'd love to hear the answer to.
    Mr. Eisman. In the PowerPoint presentation that I presented 
to the committee, you'll see at the back I present a matrix for 
each company that shows what would happen if a company bore the 
first 5 percent of loss, the first 10, the first 15, the first 
20. What would happen to the earnings of each company? I would 
suggest you just look at that.
    In most cases, using what I would think would be a 
reasonable amount of what these companies should bear of 
losses, the companies are still quite profitable. They're just 
not as obscenely profitable as they are today. I also think 
that would have an impact on defaults because with skin in the 
game, you would be more careful in terms of your underwriting 
in terms of who got a student loan.
    Senator Bennet. Thank you Mr. Chairman.
    The Chairman. I think that's a good point, Mr. Eisman. It 
just seems to me that what we have here is that we have all 
these students with debt, but we have the companies with 
profit. I mean, huge profits. I'm not against profit. If 
someone makes something and they use their ingenuity to build 
something, they can beat the competition and they can make a 
lot of money. God bless them.
    In this case, we're talking about for-profit schools. 
Ninety percent or maybe more of their money comes from the 
taxpayers. This is not like Apple Computer building a new iPod 
or something like that. This is not the same situation. They 
build a better iPod or a something like that, and they can make 
good profits. Wonderful.
    But in this case, where the money comes basically from the 
taxpayers, we have to question that. So again, it seems to me 
that the students aren't the real beneficiaries here.
    It's not the students, it's the companies. As you said, a 
for-profit company, for-profit schools that provide some good 
services in the past, but I want to go back. I want to go to 
Ms. Parrott--let you respond to those points I made about 
DeVry. Twenty-five percent increase in 1 year. Profit margin, 
16 percent. Spending only 54 cents of every dollar on 
education.
    Ms. Parrott. OK.
    Senator Bennet. And settling a lawsuit just last year on an 
incentive compensation case. Bring us up to speed on it.
    Ms. Parrott. OK. Thank you. With respect to the 54 percent 
of our budget on education services, actually, we've looked at 
that against all sectors of education. That is slightly higher 
than the not for-profit and independent institutions when you 
take into account the tax subsidy. We'd certainly like for it 
to be more. We are working to do that.
    Our after tax----
    The Chairman. Let me get that straight.
    Ms. Parrott. Yes, sir.
    The Chairman. Let me just make sure I understand correctly 
what you just said.
    Ms. Parrott. Yes, sir.
    The Chairman. You said that your 54.6 percent that you 
spend on education is slightly higher----
    Ms. Parrott. Yes, sir.
    The Chairman [continuing] Than the amount of money per 
dollar of income coming in at private not-for-profit schools, 
colleges?
    Ms. Parrott. Yes, spent on instruction versus dollars that 
are spent doing other things. Yes, sir.
    The Chairman. Well, the information I have is that when you 
compare it on an apples to apples comparison of for-profit 
schools to nonprofit, that an institution like Harvard, for 
example, may spend less than 50 percent on instruction because 
they have all--they have the hospitals. They have the research 
institution that they spend money on research. If you take out 
that element, which basically DeVry doesn't have, and doesn't 
engage in, and compare it just on the basis of the student 
population and the education they receive, and the money that 
comes in, would you still maintain that you are spending more 
on education than the private, not for-profit?
    Ms. Parrott. I will go back and look at that. Where I 
pulled my numbers from were the National Center for Education 
Statistics.
    The Chairman. Because obviously, DeVry and other entities 
that we have, that I think the data I put up there earlier 
showed how much we're spending on advertising.
    Ms. Parrott. Our advertising spend is about 14 percent. 
That's transparent data that is in our annual report.
    The Chairman. And that's how much you spend on advertising?
    Ms. Parrott. Yes.
    The Chairman. How much?
    Ms. Parrott. Fourteen percent of our revenues.
    The Chairman. How much do you spend on recruiters and 
recruiting then?
    Ms. Parrott. Our recruiting costs average about $2,100 per 
enrollment versus about $2,300 in not-for-profit sectors 
according to the National Association of College Admission 
Counselors.
    The Chairman. Well, these are interesting figures. And you 
will provide those for the committee?
    Ms. Parrott. I absolutely will.
    The Chairman. You said, Ms. Parrott, that since the 1970's 
on average, DeVry has placement rates close to 90 percent.
    Ms. Parrott. Yes, students employed in an educationally 
related job. Yes, sir.
    The Chairman. I don't know that I understand what you just 
said.
    Ms. Parrott. OK, we don't actually place the student in a 
job.
    The Chairman. I understand that.
    Ms. Parrott. We educate students for careers.
    The Chairman. Right.
    Ms. Parrott. And then they look at them. We could use 
placement if that's a more comfortable term, but yes.
    The Chairman. You're saying that since the 1970s, on 
average----
    Ms. Parrott. Yes.
    The Chairman [continuing]. Placement rates for the students 
that you have educated are close to 90 percent?
    Ms. Parrott. Placement rates for graduates who have 
participated actively in a job search with us. Yes.
    The Chairman. Would you share with this committee your 
methodology on how you track, record, and report these?
    Ms. Parrott. I would absolutely be pleased to.
    The Chairman. And the placement results?
    Ms. Parrott. Yes, sir.
    The Chairman. I appreciate that very much.
    Ms. Parrott. I'd like to also answer the other question 
that we left hanging.
    The Chairman. Yes.
    Ms. Parrott. If you wouldn't mind. With respect to the 
incentive compensation case that you brought up, we actually 
won in the lower court. It was dismissed in the lower court. 
Then the plaintiffs went to appeal. We concluded that the cost 
of appeal was greater than any settlement we would come up 
with, and that we needed to get back to the business of 
educating students, not litigating. That was a decision that we 
made. But the lower court had ruled in our favor.
    The Chairman. Do you think that 16.1 percent is a fair 
profit?
    Ms. Parrott. Our after tax profit is about 11 percent, 
which is actually within the range that Mr. Eisman mentioned 
for most companies.
    The Chairman. Most education companies?
    Ms. Parrott. No, no, most--no actually I guess it's low for 
education companies, but for in general companies. He mentioned 
8 to 12 or something rate on return--on investment. Our after 
tax income is about 11 percent.
    The Chairman. Well, would you share with this committee the 
methodology?
    Ms. Parrott. Yes, sir. Absolutely.
    The Chairman. I appreciate that very much. Ms. Issa, I 
haven't had a chance to, again, to ask you a couple of 
questions. I guess you already talked about a lot of things. 
I'm interested in your debt that you say is about $21,000 now?
    Ms. Issa. That's correct.
    The Chairman. How much did you borrow?
    Ms. Issa. Well, to attend Sanford-Brown I borrowed $15,000.
    The Chairman. Yes.
    Ms. Issa. About.
    The Chairman. Then, the rest was leftover college debts?
    Ms. Issa. Yes, yes.
    The Chairman. We have about $21,000 right now. And your 
interest rate is?
    Ms. Issa. From Sanford-Brown was 6.8 percent.
    The Chairman. Six point eight percent. And you have to be 
making payments on that? Are you making payments on that?
    Ms. Issa. No, it was deferred.
    The Chairman. Deferred. I just want to ask my staff when a 
debt is deferred, the interest rates still accumulates?
    Ms. Issa. That's correct.
    The Chairman. So even though you got it deferred, the 
interest rate clock is running all the time?
    Ms. Issa. Yes.
    The Chairman. I asked my staff to tell me at 6.8 percent, 
at 7 percent--Mr. Eisman, when does a debt double? At 7 percent 
uncompounded, when you compound it, it doubles in about 10 
years if I'm not mistaken, if you didn't make any payments.
    So again, students get on this treadmill and it's very hard 
to get off. And the debt just keeps following you.
    I wanted to point out as it's been pointed out many times 
that you can't discharge that debt. You have to pay for it. And 
here you are, you can't even get a job to pay for it.
    Thinking of other young people like yourself who are out 
there, what advice would you give to them if they're looking at 
one of these proprietary schools? What advice would you give 
them?
    Ms. Issa. Not to go to them. Go to a traditional college.
    The Chairman. Did you have a community college available to 
you?
    Ms. Issa. At the time, I didn't know there was one, because 
of advertising. When I googled ultrasound schools, I saw 
Sanford-Brown.
    The Chairman. Yes.
    Ms. Issa. I didn't know that there was one near me.
    The Chairman. You mentioned in your testimony that you had 
repeated phone calls from the recruiter or from someone at 
Sanford-Brown, urging you to hurry up and sign up?
    Ms. Issa. That's correct.
    The Chairman. Tell me more about how that proceeded?
    Ms. Issa. Well, they just, like I said, they just kept on 
calling me, pressuring me to sign up because the seats were 
filling fast. The deadline was days away.
    The Chairman. Ms. Reiter, why do for-profit schools have so 
many women enrolled in the programs? That struck me as kind of 
odd also.
    Ms. Reiter. I'm not sure. I don't have data to say why that 
is. What I can say is that there are a number of programs, 
possibly, of the kind that would attract more women than men. 
If you look at the numbers of different kinds of programs, but 
I don't have any empirical evidence of that. What I do know is 
that they are designed to and do attract more low-income people 
as I had mentioned previously.
    The Chairman. In 2002, as it's been said before, and I want 
to repeat, the Department of Education put out some exceptions 
to the ban on paying recruiters according to the number of 
students they enroll. They put out exceptions to this. Do you 
think this change in the regulations allowed the types of 
abuses you saw in your investigation to happen?
    Ms. Reiter. It was one of the factors that certainly fueled 
that. I couldn't say it's the only thing, because there were 
some other changes that were also detrimental.
    As we've talked about before, the cohort default rate was 
changed so that a person had to be behind in their payments for 
a longer period of time and the 2 years limiting it. The 
requirement that proprietary schools had to get at least 15 
percent of the revenues from something other than student aid, 
which changed only 10 percent, and then even more recently, it 
was changed so that they could include other Federal moneys. 
There are a number of factors, but that's certainly one that 
fueled it.
    And from a prosecutor's viewpoint, it's the one that caused 
us, when we were looking at what the problems were, to not even 
try to prosecute--because of the loopholes, it would have spent 
all of our resources fighting about is this required or isn't 
it required? The loopholes were so big, that it just made 
prosecution unmanageable. I'm very impressed that there were 
some private litigants who are able to actually get 
multimillion dollar settlements on this issue, because the 
loopholes were so extraordinary.
    The Chairman.  Ms. Reiter, I've heard the trade 
associations say repeatedly that nationally accredited for-
profit schools have to report placement information to 
accreditors. Doesn't that mean that all of the schools 
accreditors at least have placement information?
    Ms. Reiter. There are two kinds of accreditors that can be 
used as been discussed. Regional and the nationals.
    Starting with the regional, the last time I looked at it in 
depth, none of them had placement requirements. That could have 
changed, but I don't believe so because I understand from the 
president of the Proprietary Schools Association, in his recent 
remarks, he emphasized nationally accredited, and didn't 
mention regionals.
    The IG has looked at this in the past and said the 
regionals really need to have outcomes placement. I don't 
believe they do. Or if they do, it's a few of them.
    Even if you look at the nationally accredited agencies and 
the schools they accredit, every school where you prosecuted, I 
believe in California, was nationally accredited.
    The school that I gave the details about was nationally 
accredited and had supposedly placement requirements of 70 
percent or so, according to what the school was telling the 
students. Obviously, they weren't accurate. They weren't being 
checked. Then, the accrediting agencies don't--that's not a 
standard amount. What is a job? Is it 1 week on the job? How 
many hours a week? Two hours a week?
    With some of them, the standards are so vague, I don't know 
how you could possibly enforce them. Then you have things as 
Ms. Parrott was mentioning from DeVry, when they're looking at 
that placement statistics, apparently, and I don't know whether 
that's because of the regional--their accreditor, whatever. 
They're only looking at students that actively use their 
placement services. So that leaves students out, we don't know 
what percentage of the graduates that includes. It's very 
difficult to say, ``Oh, these placement records show us 
something, because they're all over the map.'' We don't know 
what they show us.
    If I could just mention one other thing. That is, and I 
think Mr. Eisman has touched on this, the accrediting agencies 
are very small bodies. They are based on traditional 
educational sense that you're looking at people who want to 
give a good education. They're really not equipped in numbers 
or resources or in the way of having investigators to really 
look at this kind of thing, so that it makes it so that you 
can't rely on this information.
    The Chairman. I'm trying to get one of my graphs put back 
up on the screen that I'd like to ask you about.
    Mr. Eisman. Mr. Chairman, could I make a comment on that--
the placement issue?
    The Chairman. Yes. Yes, sir.
    Mr. Eisman. This may sound extreme, but I don't trust a 
single statistic that's generated by this industry, other than 
its audited financials. The audited financials I trust because 
they're so good. There's no reason to think that the industry 
lies about them.
    Statistics like placement, I don't believe a single number 
that I see. I'll give you an example. I spoke to a woman who 
worked at one of the for-profit colleges. Her job had been in 
the placement office, but she quit. The school that she was 
working for had grown extremely rapidly, and was having trouble 
making its placement numbers that it was required to make from 
the accrediting bodies.
    Two things that she told me was that the school had made 
monetary donations to companies in the neighborhood, who in 
exchange for which hired students for a day. That day 
employment was counted as a placement.
    The people in the placement office went through the files 
of all the students. If a student, let's say, was a working 
adult, and had a job when they came to the school, let's say 
graduated and still had the same exact job at exactly the same 
pay as when they started, that was also counted as a placement.
    You have a measurement program because other than--as I 
said, the audited financials, it's very difficult to trust any 
of these self generated statistics put out by this industry.
    Ms. Parrott. Mr. Chairman, if I might, I think that we have 
to inspect what we expect.
    The Chairman. We have to what?
    Ms. Parrott. Inspect what we expect. We do that at DeVry. 
You've asked me to provide you with the materials that show you 
what goes into our calculation, who's in, who's out, and why. 
I'm happy to do that and to share that with all members of the 
committee.
    The Chairman. Well, I appreciate that. I look forward to 
that. And as I said, this is the first in a series of hearings. 
We're going to be delving into this. What Mr. Eisman just 
brought up is one aspect that we want to look at.
    Ms. Parrott. Absolutely.
    The Chairman. Statistics and data can be very self-serving 
when they are produced by the entity that's getting the 
taxpayers' dollars. We want to look at how they're coming up 
with some of these figures.
    I've looked at some of them myself. I raise serious 
questions about these placement rates, and how they calculate 
them. Mr. Eisman just touched on a couple of them and how they 
distort what is really happening in the real world out there.
    We want to look into those. And to find out exactly how 
that data is being generated.
    I had this chart put back up on the screen. I'm trying to 
find my own packet of information here that I used earlier. See 
if I can find it here. Yes, this is the one I referred to in my 
opening statement.
    Ms. Parrott. Find it?
    The Chairman. Which I said was very perplexing. I just took 
school 4 and I said at the beginning of the enrollment, they 
had 96,211 students. At the end of that year, they had 116,800 
students. In 1 year, they went up 20,000 students.
    Well, OK, fine. They got 20,000 students. But in between 
that time, they added 118,500 new students and 98,300 departed. 
Well, I can understand the first figure. I can understand the 
last figure, but I don't know that I understand those two in 
between.
    Can anyone explain how they got 118,500 new students and 
98,300 departed? Did they graduate 98,300? Where did they go?
    Mr. Eisman. They dropped out, Senator. They evaporated.
    Ms. Parrott. Some dropped out.
    Mr. Eisman. This industry has exceptionally high dropout 
rates. And one statistic actually that you don't capture here, 
which nobody captures, but we suspect is happening is some of 
these schools is there is massive intra quarter churn.
    For example, the companies report quarterly.
    The Chairman. Right.
    Mr. Eisman. What they'll report is we had 100 students at 
the beginning of the quarter. We brought in 50 new students. We 
ended the quarter at let's say 125 new students. Simple math 
said 25 students either dropped out or graduated. Well, they 
don't really give the graduation rate so you would have to make 
assumptions about what those are.
    What they don't tell you is that intra quarter, there were 
people who showed up and left and dropped out. Those don't show 
up in anybody's statistics. We suspect, and again, this is just 
my opinion, that those numbers among these schools can amount 
to the hundreds of thousands of people.
    Ms. Parrott. Actually, the Department of Education requires 
as part of the external audit that institutions get that they 
look at a retention rate across an academic year. So, they look 
at the number of students that start--that are enrolled at the 
beginning of the year and how many of those students, those 
same students are still enrolled at the end of the year.
    There is a test that is about anything over a 33-percent 
attrition rate in that persistence over a year ends up putting 
you on a list to be looked at by the Department of Education. 
That data is available. I think it is actually now even 
available on the web--on the department's Web site by 
institution.
    The Chairman. I'm informed by my staff, Ms. Parrott, that 
those figures from the Department of Education are for first-
time, full-time students only.
    Ms. Parrott. That is the--no, no, no, not the college 
navigator student. College navigator program looks at first-
time full-time students, and looks at how they're doing against 
a cohort graduation rate.
    The retention rate data that is available, and if it's not 
available on the department's site, it's certainly in the 
department's records, and they have the ability to make it 
public at any point, is based on a look at how many students 
were enrolled at the beginning of the year, how many of those 
students withdrew during the year, and what your 1-year 
retention rate is going into the next academic year. That is 
available information. I'm happy to provide it.
    The Chairman. Well, could I go to the Department of 
Education, for school No. 4, and we know who school No. 4 is.
    Ms. Parrott. Of course you do.
    The Chairman. Could we go to the Department and find out 
exactly what happened to those 98,300 students?
    Ms. Parrott. You could go and find out whether they 
graduated or dropped out.
    Mr. Eisman. I don't think so.
    Ms. Parrott. Yes.
    The Chairman. I'm told that that is impossible to find out 
right now. That's what this committee is trying to figure out 
is how we find out--for example, we know 96,200 started. We 
know 116,800 ended. We don't know what happened in between. 
There's a churn going on, but we don't know what's happening in 
there.
    Ms. Parrott. In order for those numbers to roll up, they 
have to be able to roll back. You have to be able to go back 
and get to the number. It may not be pretty, it may not be 
easy, but you have to be able to go back to get to the number.
    That's why data, and not anecdote, is so important.
    The Chairman. Well, again, this is one of the reasons we're 
having these hearings, to try to figure it out and get to the 
bottom of it.
    Ms. Parrott. Absolutely. I'm happy to work with anyone that 
would like to do that.
    The Chairman. Because we have asked, this committee has 
asked, and I've asked my investigations team, but we will 
follow up, we've asked on graduation rates and dropout rates. 
And we can't get a handle on it. We cannot get a handle on how 
many students are being churned in there, that come in, and 
drop out, come in, and drop out.
    Again, we know the beginning. We know the end. We know 
that, but we don't know what's happening in between because we 
can't get the data for it. If you have some advice for us on 
how to get that data, please let us know.
    Ms. Parrott. I would be happy to.
    The Chairman. Because there's something happening in there 
that raises a lot of serious questions. It's true in all the 
schools that I have listed there. I believe these schools are 
listed with the SEC, and are accredited schools.
    Ms. Parrott. Yes.
    The Chairman. Because the University of Phoenix, one of the 
reasons I said about first-time, full-time, and we're going to 
get into that, reported in a 2004 brochure that the graduation 
rates for first-time full-time students captures about 3 
percent of their enrollment.
    Ms. Parrott. Right.
    The Chairman. Mr. Eisman, on the risk-sharing, I will at 
the end of this hearing, I will ask the record to remain open 
for 10 days for questions that other Senators want to submit. I 
might ask you if you talked about risk-sharing and getting 
these schools to do more risk-sharing. I looked at your 
PowerPoint presentation. My question is how? I don't know 
exactly how we get them to do risk-sharing?
    Mr. Eisman. Senators, to my knowledge, you have to pass 
legislation.
    The Chairman. Yes.
    Mr. Eisman. Excuse me, what I outline in my PowerPoint is, 
assuming for example that the--basically what you would do is 
you would pick a number of how much these schools should bear 
of the losses. They should be in first loss position.
    In other words, just pick out a random number. The school 
generates $100 million in losses over a period of time from 
student loans. They should be on the hook for the first 5, 10, 
15, or 20 percent of those losses. So they eat the first 
losses. Then, the taxpayer would eat the losses afterwards.
    That would obviously eat into their profit margins, but it 
might make them somewhat more selective on their recruiting.
    The Chairman. Yes.
    Mr. Eisman. That way, they would be incentivized, I think, 
to do the right thing.
    The Chairman. Well, that's what I want to look at--if we go 
down that road, I don't know, but how we get them to bear more 
of the risk-sharing, and we'll look at your suggestion.
    You pointed out in your written testimony, that in the 
fiscal year 2009 Apollo, the largest company in the industry, 
grew total revenues by $833 million. Of that amount, $1.1 
billion came from title IV. More than 100 percent of the 
revenue growth came from the Federal Government. You point out, 
of this $1.1 billion in Federal loan and grant dollars, the 
company spent only an incremental $99 million on faculty 
compensation and instructional costs. Nine cents on every 
dollar received from the government going towards the actual 
education of students. The rest went to marketing and paying 
the executives.
    Could you elaborate on that just a little bit? How did you 
get that figure?
    Mr. Eisman. These are probably audited financials of the 
companies. The reason why I chose to just mention Apollo in my 
written testimony is that it's difficult to get from some of 
the other public companies how much money they actually spend 
purely on education. We just chose Apollo because a disclosure 
was better. Just to repeat your statistics, in fiscal 2009, the 
company had a little bit more than $800 million incremental 
revenue. They had over $1 billion in incremental revenue from 
the government, which meant that more than 100 percent of the 
revenue growth came from the government. Of that $1.1 billion, 
they only spent $99 million on education.
    Now I don't know about you, but I find that pretty 
shocking.
    The Chairman. I do find that shocking. Ms. Reiter, does 
that kind of comport with anything that you might have looked 
at in your investigations in terms of how much is being spent 
of the growth in government money going to these institutions?
    Ms. Reiter. Our investigation really didn't get into that.
    The Chairman. OK.
    Ms. Reiter. I've seen certainly the statistics which I 
think you've already heard today as to the tremendous growth 
and how much of it is coming from that. I really don't have 
anything to add on that point.
    The Chairman. OK. Well, I have no more questions. Are there 
any other things that any one of you wanted to bring up, that 
you wanted this committee to know or that you want to put in 
the record right now? Ms. Issa, is there anything else that you 
wanted to impart to us at all? Ms. Reiter?
    Ms. Reiter. Well, there was one point that I just neglected 
to mention in my statement that I had intended to mention when 
I was talking about the school statistics on placement. Among 
other things we found were that the massage therapy students 
placement records included consistently fictitious businesses. 
We discovered in talking to former students that those names 
were business names they had come up with in a class that was 
to teach them how to make business cards. The school actually 
used those fictitious names to say that that's where the 
students were placed when there were no such businesses. I 
think it just gives a little flavor that perhaps the other 
examples might not have.
    The Chairman. Ms. Parrott.
    Ms. Parrott. No, sir. Just to let you know that we are 
happy to participate in the hearings. And we're happy to work 
with you in finding good solutions.
    The Chairman. I appreciate your forthrightness on it. Thank 
you.
    Ms. Parrott. Thank you.
    The Chairman. Mr. Eisman.
    Mr. Eisman. Nothing more, Senator, thank you.
    The Chairman. Well, I thank this panel very much. I thank 
all of our witnesses. We'll leave the record open for 10 days. 
I called this hearing for all of the members to gain a better 
understanding of the role of for-profit education. We've heard 
information that's very concerning. There's a lot we don't 
know. We will continue ahead with this.
    There's something happening out there, that compels us to 
look at this. The huge amount of taxpayer dollars that are 
going into Pell Grants and students loans, the number of Ms. 
Issa's that are out there, what's happening with the churning? 
Companies are increasing their revenues so much each year, but 
all of it's coming from government money. And they have huge 
profit margins. As I said, I don't mind profit. That's good if 
someone's making a new iPod or something like that. If this is 
education, and it's taxpayers' money, we really have to 
question seriously the profit margins of these companies, and 
where that money's going, how much is being used for 
recruiting? How much is being used in advertising and 
marketing? And how much is actually going into instruction?
    It also seems to me, in preparing for this, in reviewing 
this over the last couple of months, and reading as much as I 
can about it, it seems that we have a situation that has 
developed in the last several years. I won't put a deadline, a 
cutoff. Maybe 2002 with the changes in the Safe Harbor, maybe 
some other things that happened in that decade.
    It seems that we have a situation where the bad actors are 
pulling the good actors. Now what I mean by that is that a 
company that may be a good actor, maybe DeVry, who has a long 
history, and other companies like that are being pulled into 
this vortex, because their competitors are doing it. Their 
competitors are sucking up all of this Federal money. And 
they're making big profits. They're paying their executives 
extremely high salaries. And they're getting bigger. They're 
growing bigger. And so, a school that in the past has been a 
great school maybe, has done really good stuff, has abided by 
rules, says wait a minute, if we miss this train, we're out of 
luck. Maybe we got to get on that train, too.
    We find those that have known how to game the system in the 
last 10 years, to increase their profits, to increase their 
income, churn the students, and kind of then pull into this 
vortex a lot of good schools that otherwise would not be doing 
that.
    I think that also is something that appears to me to be 
happening. Again, it really compels us and this committee and 
this Congress to do something about it and to stop it before it 
goes too far.
    We'll continue these series of hearings next month and 
beyond to look at what we have to do legislatively, and what 
maybe the Department of Education has to do in its regulatory 
framework to get on top of this. I don't think anyone who is 
reasonably objective about this can say that there's nothing 
wrong, we don't have to do anything. Something's got to be 
done. I don't know exactly what. I might want to go all the 
way, but something needs to be done. I don't think any 
objective person involved in the industry or in any way in 
education or involved in the business sector, like you, Mr. 
Eisman, I don't think anyone objective can say we can just sit 
by and let nothing happen. And this committee, I can tell you, 
we're going to make something happen. We just cannot continue 
to let this go on like it is.
    With that, I thank the panel for coming here. I thank you 
for your testimony. The committee will stand adjourned.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

                  Prepared Statement of Senator Casey

    Thank you, Chairman Harkin, for holding this important 
hearing. The United States has a growing population of high 
school graduates seeking higher education to better themselves 
and lead to rewarding careers. Unfortunately, higher education 
today is an expensive endeavor that too many students struggle 
to afford, particularly in the current economic downturn.
    I've been proud to work with the Chairman and members of 
this committee to pass record increases in Federal financial 
aid to students. At the same time, it is critical that 
institutions receiving this Federal aid deliver quality 
educations to their students. As Pennsylvania's Auditor General 
and State Treasurer, I fought for a decade to stop waste, 
fraud, and abuse involving tax dollars. Allegations of fraud 
against certain career colleges should be fully investigated 
and those engaged in these practices should be severely 
sanctioned.
    Career colleges serve a growing population of non-
traditional students who are more likely to be working while 
attending school and may be the first in their families to 
attend college. These institutions should be held accountable, 
but we must be careful not to limit the choices available to 
students. It is my hope that these hearings will shine a light 
on how career colleges, and all institutions of higher 
education, are using Federal student aid to serve students.
                                ------                                

                      U.S. Department of Education,
                               Office of Inspector General,
                                                     July 15, 2010.
Hon. Tom Harkin, Chairman,
Committee on Health, Education, Labor, and Pensions,
U.S. Senate,
Washington, DC 20510.

Hon. Mike Enzi, Ranking Member,
Committee on Health, Education, Labor, and Pensions,
U.S. Senate,
Washington, DC 20510.
    Dear Chairman Harkin and Ranking Member Enzi: Thank you and all of 
the members of the Committee on Health, Education, Labor, and Pensions 
for the opportunity to follow up on my testimony before the committee 
on June 24, 2010. Attached are my answers to your questions.
    Should you have any additional questions or require further 
information, please do not hesitate to contact me directly at (202) 
245-6900, or our Congressional Liaison, Catherine Grant at (202) 245-
7023.
            Sincerely,
                                         Kathleen S. Tighe,
                                                 Inspector General.
                                 ______
                                 
  Response to Questions of Senator Enzi, Senator Dodd, Senator Brown, 
Senator Casey, Senator Hagan, Senator Alexander, and Senator Coburn by 
                           Kathleen S. Tighe

                       QUESTIONS OF SENATOR ENZI

    Question 1. In your testimony, you indicated that 70 percent of 
your investigations involving institutions of higher education involve 
for-profit institutions. How many schools does this represent? What 
percentage of all for-profit institutions has your office investigated 
over the past 5 years?
    Answer 1. The percentage reported in my testimony is based on 103 
open investigations involving post-secondary institutions. Seventy-two 
(70 percent) involve for-profit schools or their officials or 
employees. All schools certified to participate in the student aid 
programs receive a unique identification number, known as an OPEID 
number. Some schools operate multiple campuses and locations in 
multiple States under a single OPEID number. Other schools under common 
ownership are separately certified with separate OPEID numbers. There 
are over 2,000 for-profit schools with unique OPEID numbers certified 
to participate in the student aid programs. Counting the separate OPEID 
numbers as separate schools (as the Department of Education 
(Department) does when reporting the number of participating schools), 
our 72 investigations involve 108 for-profit schools separately 
certified by the Department to participate in the student aid programs. 
This figure represents approximately 5 percent of all currently 
certified for-profit schools.
    Since October 1, 2005, the Office of Inspector General (OIG) has 
conducted a total of 128 investigations related to for-profit schools. 
We cannot at this point readily determine the exact number of schools, 
or unique OPEID numbers, covered by these investigations so as to give 
an accurate percentage. Many of the investigations are now closed and 
OIG's investigations case tracking system identifies investigations by 
entity type rather than OPEID number.

    Question 2. You indicated that you have evidence of widespread 
abuses throughout the for-profit sector? Specifically, what is that 
evidence?
    In my written and supplemental oral testimony I slated that of our 
audits and investigations of abuses by post-secondary schools, there is 
a higher percentage of cases related to the for-profit sector than to 
the public and non-profit sectors. While the areas of abuse that I 
identified in my testimony are recurring and significant, we cannot 
conclude that the abuses are ``widespread,'' as we can only report on 
the abuses of which we are aware.

                       QUESTIONS OF SENATOR DODD

    Question 1. Ms. Tighe, can you elaborate on the Department's 
relationship with the accrediting agencies that are giving these 
schools their stamp of approval? What authority does the Department of 
Education have to direct these agencies to improve their standards of 
accreditation? Outside of this authority, how has the Department tried 
to work with these agencies to raise the standards, amidst the concerns 
you raised? With what response has this outreach been met?
    Answer 1. The Department has very little authority over the 
standards used by accrediting agencies. The General Education 
Provisions Act, 20 U.S.C.  1232a, and the Department of Education 
Organization Act, 20 U.S.C.  3403, prohibit the Department from making 
determinations on curriculum or programs of instruction or from 
supervising accrediting agencies. In the 2006-2007 higher education 
negotiated rulemaking session, the Department did attempt to develop 
criteria for the requirement in the Higher Education Act of 1965 (HEA) 
that accrediting agencies establish standards related to student 
achievement. At the end of 2007, Congress prohibited the Department 
from promulgating or enforcing any revision to the regulations 
governing accrediting agencies. Department of Education Appropriations 
Act, 2008,  305 enacted in Division G of the Consolidated 
Appropriations Act, 2008, Pub. L 110-161, 121 Stat. 1844, 2198 (2007). 
In the Higher Education Opportunity Act of 2008 (HEOA),  495(3), Pub. 
L. 110-315, 122 Stat. 3078, 3327, Congress prohibited the Department 
from promulgating any regulation with respect to standards of 
accreditation, including standards for student achievement. As a 
result, the Department can only determine if an accreditation agency 
has standards; it cannot direct an agency to improve or raise its 
standards.

    Question 2. To your knowledge, after discovering that many 
accrediting agencies lack credit hour definitions, did any of these 
agencies begin to define a credit hour? Do they now have these 
definitions in place voluntarily?
    Answer 2. We can speak only to the regional accrediting agencies we 
evaluated. At the time of our inspections, none of them had begun to 
develop a definition of a credit hour and none indicated plans to do 
so.

                       QUESTIONS OF SENATOR BROWN

    Question 1. Besides more meaningful standards for programs length, 
are there other areas that need strengthening in the accreditation 
process or in the Department of Education's process for recognizing 
accrediting agencies?
    Answer 1. As the Department is prohibited from developing criteria 
for an accrediting agency's standards for accreditation, the Department 
is very limited in its ability to require meaningful standards for 
accreditation. Removing the restrictions on the Department's authority 
to regulate the standards for accreditation could strengthen the 
recognition process and help ensure that accrediting agencies fulfill 
their obligation to serve as reliable authorities of the quality of 
education funded by Federal taxpayers.

    Question 2. In your testimony, you state that over the years, you 
have identified a relationship between rapid growth and failure to 
maintain administrative capability. Can you give us some examples from 
higher education?
    Answer 2. The student aid programs under title IV of the HEA are 
very complex and there are many requirements for the Financial Aid 
Administrator (FAA) at a school to account for the funds, assure all 
students are eligible for the awards, assure students are in 
attendance, disburse the funds, assure students are maintaining 
satisfactory academic progress, determine when students stop attending, 
and calculate and pay refunds of title IV funds. These are key factors 
in assessing the statutory requirement for a school to have 
administrative capability to manage the title IV programs. As 
enrollment of students increases at a rapid rate, the school has to 
assure it has sufficient knowledgeable and trained FAA staff to keep 
current with all the title IV requirements. For example, at TUI 
University, private investors purchased the school from Touro 
University and continued to increase enrollment in an all distance 
education environment. Our audit found that TUI did not have adequate 
policies and procedures in place as it grew for ensuring student 
eligibility for title IV funds at the time of disbursement and for 
identifying students who had withdrawn from the institution. Other 
examples include Capella University that could not assure students were 
attending or that it calculated refunds correctly and the University of 
Phoenix that has been cited several times for incorrectly calculating 
refunds.

                       QUESTIONS OF SENATOR CASEY

    Question 1. The President has set the goal of the United States 
leading the world in college graduates by the year 2020. In your 
opinion, what is the role of for-profit colleges in trying to achieve 
this goal?
    Answer 1. As required by the HEA, proprietary schools must offer 
programs of instruction that prepare students for gainful employment. 
It is critical that the programs they are offering lead to successful 
employment opportunities that provide the graduates the ability to 
repay their student loan debt. It also is critical that the proprietary 
schools do not use high-pressure recruiting tactics, do not overstate 
the future earnings potential for graduates, and provide programs with 
high graduation and placement rates. In this capacity, proprietary 
schools providing quality programs that result in skilled graduates for 
existing employment opportunities at reasonable earnings potential, can 
be an asset to achieving the President's goal.

    Question 2. What are for-profit schools currently required to 
report to the Department of Education around graduation rates and 
placement rates? How are placement rates tracked?
    Answer 2. The HEA requires all institutions to disclose graduation 
rates to students and to the Department through the Integrated Post-
Secondary Education Data System, known as IPEDS. These rates are posted 
on the Department's College Navigator Web site as consumer information. 
The graduation rates are not audited numbers, so they depend solely on 
the accuracy of school reporting. We are not aware of any requirement 
for the schools to report placement rates.

    Question 3. What, if any, statutory or regulatory changes should be 
made to strengthen the rules governing for-profit colleges? Are the 
penalties strong enough to hold these institutions accountable?
    Answer 3. The 90/10 rule applies only to proprietary schools and 
reflected a judgment by Congress that schools should be of sufficient 
quality to attract at least 10 percent of their funding from sources 
outside the HEA. The HEOA, however, weakened this rule by allowing 
additional revenues to count towards the institutional 10 percent. The 
90/10 rule was designed as a proxy for quality, but most schools have 
met this rule over the years. Congress could explore alternatives to 
the 90/10 rule, such as requiring minimum graduation and placement 
rates in occupations that allow students to repay student loan debt. 
Also, Congress could explore and consider limitations on the amount of 
title IV funds revenues received by the schools that can be used to pay 
for advertising, marketing and recruiter salaries, or other non-
instructional costs. Regarding available penalties, the HEA and the 
Department's regulations do contain effective remedies that would allow 
the Department to hold institutions accountable when violations are 
discovered.

    Question 4. What regulations are currently in place to prevent 
schools from misleading students about things like program 
accreditation?
    Answer 4. 34 CFR Part 668, Subpart F authorizes the Department to 
limit, suspend, terminate or fine an institution that misrepresents the 
nature of its education programs and financial charges or the 
employability of its graduates. Prohibited misrepresentations under 
these regulations are limited and difficult to prove. In its Notice of 
Proposed Rulemaking (NPRM) published June 18, 2010, 75 Fed. Reg. 34806, 
the Department has proposed significant changes to improve these 
regulations and expand the definition of prohibited misrepresentations.

                       QUESTIONS OF SENATOR HAGAN

    Question 1. Inspector Tighe, in your testimony you state that 
distance education both at proprietary and non-profit institutions is 
an area that is placing increased demands on your investigative and 
audit resources, and that there is need for greater oversight and for 
regulatory authorities to evolve with the industry. I believe that 
there is great value in distance learning and online education. Can you 
elaborate on the concerns surrounding online education and offer your 
recommendations for ensuring that students who are interested are able 
to receive a quality education online?
    Answer 1. We have found that distance education schools lack 
adequate internal controls to assure that students are enrolled and 
attending and thus are eligible for title IV funds. This issue needs to 
be addressed in law and/or regulation with a common definition of 
attendance and academic engagement in the distance education 
environment. Common definitions would provide for better oversight by 
regulatory authorities and help ensure students are provided a quality 
education at the post-secondary level. As we have separately reported, 
accrediting agencies have not established standards to determine credit 
hour and program length for either online or traditional programs. In 
addition, online programs are particularly vulnerable to fraud 
committed by would-be beneficiaries as there is no requirement for 
confirmation of the identity of student aid applicants. We have an 
extensive number of cases involving gangs that have defrauded 
institutions and the title IV programs by posing as regular students to 
obtain cash disbursement of title IV funds for non-institutional 
charges such as living expenses. Congress and the Department could 
explore practical options to confirm identity of applicants and reduce 
the opportunity for this type of fraud.

    Question 2. At the end of fiscal year 2010, there are estimated to 
be over $700 billion in outstanding, federally backed student loans. 
Taxpayers are backing almost all of those loans. I realize that this 
question can apply equally to non-profit institutions as well, but 
since we're talking about the for-profit industry today, could any of 
the witnesses tell me what specific, quantitative measurements we have 
across the industry to tell us what the taxpayers are getting for all 
that money? What sort of industry-wide performance measures are 
available to help us better understand the performance of institutions 
that survive on the largess of the taxpayer?
    Answer 2. Other than graduation rates, we are not aware of a 
quantitative measure applicable to all title IV participating 
institutions that is currently required and available to assess the 
investment of taxpayer dollars provided through the title IV programs. 
As I cautioned in a prior answer, graduation rates are not audited and 
depend solely on the accuracy of school reporting.

    Question 3. Some say that the for-profit sector is highly regulated 
with oversight from the U.S. Department of Education, State licensure 
agencies and accrediting bodies. Others may disagree, citing that much 
more needs to be done. That said, what are your thoughts on how can we 
better align the goals of each of these agencies so that everyone is 
demanding the highest quality outcomes for every institution?
    Answer 3. In our experience, we have seen very little oversight of 
the for-profit sector by State licensing agencies and accrediting 
agencies that identifies the types of abuses we continue to find in the 
for-profit sector. We believe that accrediting agencies need to be held 
accountable for developing and enforcing meaningful standards and that 
States need to have standards to assess the quality of institutions for 
which they provide authorization to operate in their State. Congress 
could consider statutory changes to ensure accrediting agencies have 
meaningful standards, and that accrediting agencies are required to 
share information with State licensing agencies.

    Question 4. Many of you in your testimony mention the ``90/10 
rule'', the provision that requires proprietary institutions of higher 
education to have at least 10 percent of the institution's revenues 
from sources that are not derived from funds provided through Federal 
financial aid. Is there a way to more accurately track the percentage 
of title IV dollars that schools receive?
    Answer 4. In our experience, determining the actual title IV 
dollars received has not proved an administrative difficulty in 
properly applying the 90/10 rule. The major difficulty has been 
determining whether schools have, in fact, received in excess of 10 
percent in non-title IV revenue. We have found that many institutions 
have not calculated the 90/10 rule percentage correctly. Despite errors 
in calculation, schools generally have not failed the rule. Congress 
could consider alternatives to the 90/10 rule, such as requiring 
minimum graduation and placement rates in occupations that allow 
students to repay student loan debt. If investment of taxpayer dollars 
was providing a reasonable return on investment by students benefiting 
from the programs and not being saddled with unmanageable loan debt, 
then providing more than 90 percent of institutional revenue from title 
IV should not be as great a concern.

    Question 5. As you know, the purpose of this hearing is for all of 
us to get a better sense of how well the for-profit education industry 
is serving students. We know that there are good actors as well as bad 
actors in the for-profit education industry. For those of us who want 
to ensure that anyone who has the drive and desire to get a high-
quality education is able to do so, how do you suggest we work together 
to better identify those schools that are getting the job done and 
those that aren't?
    Answer 5. We believe the Department's current effort to define 
``gainful employment'' and establish data metrics that would 
demonstrate that students, particularly student borrowers, have 
obtained ``gainful employment'' is worthwhile. The Department's 
proposal to eliminate all ``safe harbors'' from the incentive 
compensation rules should help reduce the financial incentives that 
lead to title IV violations. We have repeatedly recommended 
establishing requirements for completion and placement rates, which 
could also establish that students are benefiting from taxpayer-
supported education. Providing statutorily mandated minimum graduation 
and placement rates, requiring those rates to be substantiated through 
the annual audit process, and requiring the reporting of the rates to 
the Department and posting on its Web site would provide for reliable 
consumer information. Congress could also require that accrediting 
agencies provide publicly disclosed serious issues they identify with 
in the quality of education provided by member schools.

                     QUESTIONS OF SENATOR ALEXANDER

    Question 1. One of my concerns is that there does not seem to be a 
very adequate set of data tools to look at institutions of higher 
education and fairly distinguish between a ``good'' actor and a ``bad'' 
actor. What data would you recommend that we should start gathering so 
that we can make these distinctions fairly and accurately?
    Answer 1. We share your concern that using data to effectively 
identify and distinguish ``good'' and ``bad'' actors is a challenge. 
Working in conjunction with the Department, we have utilized and 
analyzed program data to identify possible high risk institutions. Much 
of this data though does not in and of itself allow a determination 
that a school is a ``bad'' actor. Additional audit, investigative, or 
program review is needed to determine actual violations of title IV 
requirements. While certain data, such as failure to pay refunds or 
excessive default rates, can allow an adverse judgment to be made, most 
data allow only a conclusion that some institutions are more high risk 
than others.
    We recommend pursuing data that allows Congress to conclude that 
Federal funds are being effectively spent and that students are 
benefiting from education received. In this regard, we believe the 
Department's current effort to define ``gainful employment'' and 
establish data metrics that would demonstrate that students, 
particularly student borrowers, have obtained ``gainful employment'' is 
worthwhile. We have repeatedly recommended establishing requirements 
for completion and placement rates which could also establish that 
students are benefiting from taxpayer-supported education.
    The June 24 hearing raised concerns that certain institutions may 
be devoting only a small fraction of title IV revenue to actual 
instruction. At some institutions, a disproportionate share of Pell 
Grant funds and loan indebtedness incurred by students may be 
effectively devoted to marketing, compensation of recruiters and other 
non-instructional costs, rather than to provision of education that 
could improve the employability of students.

    Question 2. Do you believe that the proposed regulations on credit 
hour still provide enough flexibility for institutions of higher 
education to develop new and innovative program offerings like a 3-year 
degree, delivery of instruction through new technology platforms, and 
other ways that we may not even be able to envision today?
    Answer 2. We believe the proposed regulation on credit hours will 
provide flexibility for institutions to develop new and innovative 
programs; however, the onus will be on accrediting agencies and the 
degree of rigor they bring to their reviews of the assignment of credit 
hours by institutions that do not use the 1 hour of instruction and 2 
hours of outside preparation as the standard for their credit hour 
assignment. Furthermore, even with the definition of a credit hour, 
there is concern over whether the instruction being offered by the 
institutions is actually at the post-secondary level. It is also worth 
noting that because of the cycle of accreditation, any definition of a 
credit hour finally adopted this year will not be fully evaluated at 
every institution participating in the Federal student aid programs 
until 10 years after July 1, 2011 (the earliest date that any new 
regulation finalized this year can take effect).

    Question 3. You cite the conversion to the Direct Loan program as a 
significant issue for you and your staff at the Inspector General, as 
well as the staff at the Department since the Department will now have 
to perform school loan oversight previously performed by guaranty 
agencies, like the Tennessee Student Assistance Corporation. What types 
of requirements do you think need to be added to ensure the smooth 
operation of the Direct Loan program? Now that the Department of 
Education is the 6th largest bank, do you think that there are any 
changes that need to be made to the Department's Federal Student Aid 
office to preserve the integrity of the program? What legislative 
changes do you recommend?
    Answer 3. Last year, the Department awarded new contracts to four 
of the largest loan servicers in the FFEL program to service FFEL loans 
purchased under the ECASLA programs and to service all the new Direct 
Loans along with its existing Direct Loan servicer. Providing adequate 
contract oversight of the servicers and other contractors by the 
Department will be critical. Regarding the oversight of schools, we are 
aware that the Department is in the process of hiring additional 
program reviewers with the technical skills to increase its oversight 
of compliance by schools, but we have not reviewed the adequacy of the 
Department's staffing plan. We are currently examining the 
applicability of Federal bank fraud statutes to determine if similar 
statutory provisions for enhanced program integrity should be 
recommended for the Department, as they have been for other Federal 
lending programs.

                      QUESTIONS OF SENATOR COBURN

    Question 1. What role do States play--above and beyond the role 
currently played by the Federal Government--in ensuring the quality and 
integrity of post-secondary degree programs? Are States best positioned 
to make qualitative judgments about post-secondary institutions and to 
police improper behavior?
    Answer 1. While we have not performed a comprehensive review of the 
oversight role performed by the States, in our experience States do not 
consistently provide effective oversight of proprietary schools or 
actively police improper behavior. The Department of Education 
described concerns that exist over inconsistent State oversight in its 
June 18, 2010 NPRM in connection with its proposal to define the State 
authorization required to establish eligibility to participate in the 
Federal student aid programs. 75 Fed. Reg. 34812-13. The Department 
noted that substandard institutions and diploma mills set up operation 
in States that provide very little oversight. The Department also 
stated its concern that some States are deferring all or nearly all of 
their oversight responsibilities to accrediting agencies.

    Question 2. How do the cohort default rates of for-profit colleges 
compare to 2-year colleges and minority serving institutions?
    Answer 2. On May 2, 2010, the Department released draft fiscal year 
2008 cohort default rates: http://www.ifap.ed.gov/eannouncemems/
043010FY08DraftStuLoan
CDR.html. The Department provided a comparison (attached) of the draft 
fiscal year 2008 cohort default rates with the final fiscal year 2006 
and fiscal year 2007 rates, broken down by school type. According to 
the draft rates, all proprietary schools had a fiscal year 2008 cohort 
default rate of 11.9 percent (106,019 borrowers in default); 2-3 year 
public institutions had a fiscal year 2008 cohort default rate of 10.3 
percent (50,379 borrowers in default). However, the cumulative lifetime 
default rates and budget lifetime default rates are significantly 
higher. For example, the 2007 budget lifetime default rate for 2-year 
proprietary schools is 47.0 percent.

           COMPARISON OF FY 2008 DRAFT COHORT DEFAULT RATES 
                   TO PRIOR TWO OFFICIAL CALCULATIONS
                       CALCULATED JANUARY 2, 2010



    The Department does not currently publish a report on the cohort 
default rates of minority serving institutions. The cohort default rate 
for individual schools is available at http://wdcrobcolp01.ed.gov/
CFAPPS/COHORT/search_cohort.cfm.

    Question 3. Under the new 3-year cohort default rules slated to 
take effect, what rewards accrue to a college or university with low 
cohort default rates? What sanctions do colleges or universities incur 
for high cohort default rates in the first, second and third year of 
high rates (over 30 percent)?
    Answer 3. Under the rules published October 28, 2009, 74 Fed. Reg. 
55,626, there are no new benefits or regulatory relief afforded to 
schools with a low cohort default rate. Institutions with a cohort 
default rate greater than 40 percent in a single year lose eligibility 
to participate in the Direct Loan program; schools with cohort default 
rates over 30 percent for 3 consecutive years lose eligibility to 
participate in both the Direct Loan and the Pell Grant programs. There 
are no sanctions for exceeding 30 percent in the first 2 years. The new 
cohort default rate calculation will be effective beginning with the 
fiscal year 2009 cohort, so the first official 3-year cohort default 
rate will not be issued until September 15, 2012. However, no 
institutional sanctions will be taken based on the new calculation 
until 3 consecutive cohort years of the new rates have been calculated. 
During the transition period, sanctions will be based on calculations 
made according to the pre-HEOA calculation.

    Question 4. In your testimony, you discuss the recent changes to 
the student loan program and the need for the ED-OIG to be vigilant in 
its oversight in the coming months and years. Please elaborate on this 
point. What is the ED-OIG's oversight plan for monitoring both the 
transition and long-term implementation of the Federal Direct Loan 
Program? For those of us who want to ensure that anyone who has the 
drive and desire to get a high-quality education is able to do so, how 
do you suggest we work together to better identify those schools that 
are getting the job done and those that aren't?
    Answer 4. We have conducted a preliminary assessment of the 
Department's plans regarding the Direct Loan program to assure it has 
the technical capacity to originate all Direct Loans at the peak 
processing period of mid-August. We are performing a separate quick 
assessment to determine if the Department has made adequate revisions 
to key contracts, if deliverables under contracts have been met, and if 
there is a contingency plan; we are also identifying how the Department 
is providing technical assistance to schools during the transition. 
This review should be issued in early August.
    During the next fiscal year, we are planning reviews of the new 
title IV servicers and additional reviews at the Department to assess 
its oversight of contractors, how it identifies risks that schools 
present to the title IV programs, and how it performs oversight of 
school compliance. As part of our annual audit of the Department's 
Financial Statements we will be evaluating how the Department is 
accounting for Direct Loan originations, the status of those loans, and 
subsidy costs. As part of our annual FISMA audit, we will be evaluating 
the IT security at selected Department contractors. As part of our 
long-term plan, we will continue to assess and identify any new 
emerging areas of risks in the Direct Loan program.

  Response to Questions of Senator Casey and Senator Hagan by Yasmine 
                                  Issa

                       QUESTIONS OF SENATOR CASEY

    Question 1. The President has set the goal of the United States 
leading the world in college graduates by the year 2020. In your 
opinion, what is the role of for-profit colleges in trying to achieve 
this goal?
    Answer 1. For-profit schools have a financial interest in 
attracting high enrollment to attain government funding and there is no 
evidence showing a corresponding high focus on instruction. 
Additionally, there is no evidence showing improvement in the quality 
of education afforded students and no assurance that outcomes promised 
to students upon enrollment are realized after graduation.

    Question 2. What are for-profit schools currently required to 
report to the Department of Education around graduation rates and 
placement rates? How are placement rates tracked?
    Answer 2. While I am not an education policy expert, my experience 
leads me to believe that government funding to for-profit colleges 
should include reasonable thresholds requiring minimum graduation 
percentage and acceptable levels of job placement.

    Question 3. What, if any, statutory or regulatory changes should be 
made to strengthen the rules governing for-profit colleges? Are the 
penalties strong enough to hold these institutions accountable?
    Answer 3. The penalties are clearly not strong enough because, in 
my view, there have been little or few repercussions when for-profit 
colleges have failed to meet promises to students or to the government, 
who funds them. The experience I described during my testimony is an 
example of false promises made and a placement that was never realized.

                       QUESTIONS OF SENATOR HAGAN

    Question 1. At the end of fiscal year 2010, there are estimated to 
be over $700 billion in outstanding, federally backed student loans. 
Taxpayers are backing almost all of those loans.
    I realize that this question can apply equally to non-profit 
institutions as well, but since we're talking about the for-profit 
industry today, could any of the witnesses tell me what specific, 
quantitative measurements we have across the industry to tell us what 
the taxpayers are getting for all that money? What sort of industry-
wide performance measures are available to help us better understand 
the performance of institutions that survive on the largess of the 
taxpayer?
    Answer 1. A major difference between not-for-profit and for-profit 
colleges is that many for-profit colleges make ``promises'' and 
``guarantees'' to students as a selling point to attract them to their 
institutions. Not-for-profit schools do not necessarily offer 
guarantees for placement yet, in my experience, they offered an 
accredited degree, which would have made all the difference in 
placement. Given those facts, students take on a higher risk for their 
loans at for-profit colleges.

    Question 2. Some say that the for-profit sector is highly regulated 
with oversight from the U.S. Department of Education, State licensure 
agencies and accrediting bodies. Others may disagree, citing that much 
more needs to be done.
    That said, what are your thoughts on how can we better align the 
goals of each of these agencies so that everyone is demanding the 
highest quality outcomes for every institution?
    Answer 2. No Response.

    Question 3. Many of you in your testimony mention the ``90/10 
rule,'' the provision that requires proprietary institutions of higher 
education to have at least 10 percent of the institution's revenues 
from sources that are not derived from funds provided through Federal 
financial aid.
    Is there a way to more accurately track the percentage of title IV 
dollars that schools receive?
    Answer 3. No Response.

    Question 4. As you know, the purpose of this hearing is for all of 
us to get a better sense of how well the for-profit education industry 
is serving students. We know that there are good actors as well as bad 
actors in the for-profit education industry.
    For those of us who want to ensure that anyone who has the drive 
and desire to get a high-quality education is able to do so, how do you 
suggest we work together to better identify those schools that are 
getting the job done and those that aren't?
    Answer 4. Government funding for for-profit schools should be 
linked to agreed upon standards, such as the demonstration of 
successful graduation and placement rates. Looking back on my 
experience, I would have been more wary had I known that students who 
attended my program faced challenges getting a job because of their 
accreditation status. I don't think what happened to me should 
continue.
                                 ______
                                 
                                                     July 12, 2010.
Hon. Michael B. Enzi, Ranking Minority Member,
Committee on Health, Education, Labor, and Pensions,
SD-428, Dirksen Senate Office Building,
Washington, DC 20510.

Re:  List of Suggestions for Eliminating the Bad Actors, While Ensuring 
the Good Actors Can Fulfill Their Role

    Dear Senator Enzi: During the hearing, ``Emerging Risk?: An 
Overview of Growth, Spending, Student Debt and Unanswered Questions in 
For-Profit Higher Education,'' held on June 24, 2010, you asked what 
could be done to eliminate the bad actors among post-secondary 
proprietary schools, while ensuring the good actors can fulfill their 
role. I indicated that there was not time to go into all of the things 
that could be done to eliminate the bad actors among post-secondary 
proprietary schools, while ensuring the good actors can fulfill their 
role. You asked me to supply a list after the hearing and I agreed.
    In making these suggestions, I am aware of the long reported 
history of fraud, abuse, and failure to adequately train students in 
the proprietary school sector. Past efforts at the Federal level and in 
some States to sort the good from the bad have at times made progress, 
but have often been insufficient. I believe that good schools can 
continue to flourish under the changes listed below. In general, most 
of the suggestions are remedies that have been used by California or 
other States or are revisions to laws that were enacted after the Nunn 
hearings, but have been weakened over time. Some remedies have been 
widely discussed, and I will only mention them briefly as you are 
undoubtedly already familiar with them. First, I list the suggestions. 
More detail about each suggestion is then included in the body of this 
letter:

    1. Define and Enforce the Longstanding Requirement that Proprietary 
Programs (and certain other programs) Prepare Students for Gainful 
Employment.
    2. Strictly Prohibit Quotas and Incentive Compensation for 
Recruiting and Financial Aid.
    3. Publish and Base Continued Eligibility on Life-time Cohort 
Default Rates.
    4. Require Real Standards for State Authorization Agencies.
    5. Reform Accrediting Agency Role and Requirements.
    6. Revise 90/10 Requirement.
    7. Change Incentives for Private Lenders and Schools by Ensuring 
the Existing FTC Holder Rule Is Enforced Against Lenders.
    8. Study and Establish Appropriate Standards for Distance 
Education.
    9. Require Cancellation Periods and Pro-rata Refunds, and Prohibit 
Contractual Obligation or Payment Beyond One Term or 4 Months.
    10. Require Ability to Benefit Testing, Either for All Students, or 
at Least for All Students Who Did Not Graduate From a Public High 
School; Eliminate 6 Unit Alternative Measure for Entrance Until 
Sufficient Study at Proprietary Schools Has Occurred.
    11. Expand Bases for Loan Discharge and Require Reimbursement from 
School or Lender or Allow Students to Seek Remedies Directly from 
School and Lender.
    12. Consider Establishing Tuition Recovery Fund.
    13. Require a Higher Ratio of Current Assets to Liabilities.
    14. Direct More Federal Funds to Community Colleges.

  1. DEFINE AND ENFORCE THE LONGSTANDING REQUIREMENT THAT PROPRIETARY 
  PROGRAMS (AND CERTAIN OTHER PROGRAMS) PREPARE STUDENTS FOR GAINFUL 
                               EMPLOYMENT

    Congress apparently first noted the widespread exploitation of 
students by proprietary schools after enactment of the GI bill after 
World War II. The House Select Committee to Investigate Educational, 
Training, and Loan Guaranty Programs under GI Bill, 2/14/1952 
describing the abuses in the GI Bill from 1944 to 1950 in connection 
with recommending safeguards for veterans of the Korean War noted, 
inter alia:

          ``Exploitation by private schools has been widespread.''
          ``There was a rapid uncontrolled expansion of private profit 
        schools . . .''
          ``Many schools have offered courses in fields where little or 
        no employment opportunity existed.''
          ``Training programs have been approved for unskilled or semi-
        skilled occupations where little or no training was required, 
        resulting in needless expenditure of funds and waste . . .''

    With reason, when Congress later added proprietary schools to the 
Higher Education Act, it specified that only schools that prepared 
students for gainful employment were eligible. However, the Department 
of Education has never defined, much less made much of any attempt to 
enforce this requirement. In the negotiated rulemaking on program 
integrity the Department initiated in 2009, the Department proposed a 
definition that is a modest step toward enforcement of this 
requirement. The proposal, which it has yet to officially propose, 
would set a flag to identify programs for which the students' median 
loan debt would be more than 8 percent of the projected salaries (at 
the 25th decile of salaries determined by the Bureau of Labor 
Statistics for the occupations for which the training is to prepare 
students). Programs that could not meet that standard would still be 
eligible if the school could demonstrate that the median debt load is 
less than 8 percent of the actual salaries graduates of those programs 
earn, or if 90 percent of the graduates of the program did not default 
(with ``default'' defined more accurately than under the current cohort 
default rate standards).
    Given that the 8 percent standard is usually used by lenders to 
determine the amount of all non-housing debt a borrower should 
reasonably carry, and that many students at proprietary schools are 
older and already have other debts such as auto loans and credit card 
debts, the 8 percent standard may be too high, especially for those 
whose salaries would be less than 150 percent of the poverty level. 
Nevertheless, it is a modest, reasonable first step. I believe the debt 
load of those who enroll, but do not complete also needs to be 
considered, so that there is no temptation for the bad actors to 
discourage those with the highest debt loads from completing the 
course, in order to lower the median debt load of students in a 
program.
    The Department's proposal, however, deals only with the ``gainful'' 
part of the phrase, not with the ``employment'' part. If a school does 
a poor job of training students, even if the program met the 8 percent 
or related criteria mentioned above, it might still have a minority of 
graduates who could actually obtain employment. Consequently, a 
requirement that proprietary school programs' graduates meet a certain 
level of employment is a necessary accompaniment. In California, for 
example, for 19 years, proprietary schools were required to have at 
least 70 percent of the graduates from a program obtain employment 
within 6 months, in a position that lasted at least 60 days, for at 
least 32 hours a week. (Part-time employment could also count if the 
student had specified in advance of the program and at the end that the 
student only wanted part-time employment.) As was obvious from my 
testimony, there needs to be some way to verify that claimed employment 
levels are true. One suggestion for accuracy in employment statistics 
is to require use of State unemployment insurance data, which some 
States already do for community colleges.
    A current provision under the Higher Education Act, which was 
enacted back when most programs were much shorter, applies only to 
short courses. The Department has now proposed to apply it more 
broadly, so far, as a reporting device only. Based on my experience, 
while accurate reporting would be helpful, the existing provision would 
not be useful. The provision is very flawed, inter alia, in that the 
documentation of employment allowed would not demonstrate that the 
employment really meets the standard.
    And, as noted above, completion rates also need to be tracked, and 
a standard set to insure schools are not manipulating the data by 
discouraging completion by students they consider least likely to be 
able to get a job. In California, for example, after certain 
exceptions--death, military service, those who canceled within the 100 
percent full refund cancellation period, etc.--authorized programs had 
to show 60 percent of those enrolled completed the program.
    I view such standards as critical to separating out the good from 
the bad actors. Good schools would continually evaluate their programs, 
eliminating or revising those that have high debt levels in comparison 
to salaries available or whose graduates are unable to find work in the 
field in which they trained. The proprietary schools' lobbying arm, 
CCA, has represented that more than 80 percent of the programs it 
surveyed would meet the 8 percent flag, and likely additional programs 
would meet one of the two alternatives, although CCA did not run the 
numbers for the alternatives. It is unclear how many programs would 
meet a 70 percent employment requirement, but most national accrediting 
agencies already claim to have that high, or a higher standard. In 
California, until 2008, that was the standard schools were required to 
meet. The requirement did not seem to have slowed the development of 
proprietary schools in California (although the State agency charged 
with enforcement apparently did little to enforce the law).
    Schools should also be required to report on their Web sites, if 
they have one, their statistics for each program offered, as well as to 
provide a fact sheet to every prospective student showing the 
information for the program in which the prospective student has 
expressed an interest. Currently, there is no competition among schools 
based on such quality factors because those factors are not 
transparent. Making them transparent, if they are verified/monitored 
for accuracy, would provide some possibility of competition arising 
based on these quality criteria. Such real competition would help the 
good schools.
    Of course there might need to be provisions related to an 
employment requirement to address extraordinary circumstances, such as 
limited employment available in a particular region after a major 
disruption, e.g., after hurricane Katrina, or to address the time lag 
for getting the results from licensing exams.

 2. STRICTLY PROHIBIT QUOTAS AND INCENTIVE COMPENSATION FOR RECRUITING 
                           AND FINANCIAL AID

    The recent Department of Education proposed regulation on incentive 
compensation goes a long way to restoring the full intent of the 
statute prohibiting incentive compensation. I am concerned however, 
that a few possible loopholes may still exist and will be working with 
others to comment on the proposed rule. In addition, I also recommend a 
statutory change to make very clear that the use of quotas in 
connection with compensation for such staff is prohibited. From the 
information I have seen, it appears schools may be trying to get around 
the prohibition on incentive compensation by setting quotas and 
punishing in some way or firing those who do not reach the quota. While 
this may well be covered under the current statute, additional clarity 
would be advisable.
    The payment of incentive compensation or the use of quotas for 
those involved in or supervisors over admissions or financial aid tasks 
is particularly pernicious. Prospective students are likely to trust 
the ``admissions advisor'' or ``financial aid advisor'' as a person 
there to assist them. Prospective students don't readily realize they 
are dealing with commissioned sales persons, as they would when, e.g., 
buying a car.
    Good schools can compete on the basis of quality, and need not 
compete on incentives. The natural result of incentives/quotas is to 
encourage some of the types of abuse noted at the hearing, including 
misrepresentations, enrolling students ill-suited to a particular 
training program, or providing training that does not qualify the 
graduates for employment.

 3. PUBLISH AND BASE CONTINUED ELIGIBILITY ON LIFE-TIME COHORT DEFAULT 
                                 RATES

    Proprietary schools first came fully into the Higher Education Act 
financial aid programs in 1972. By the mid-80s, stories of fraud and 
abuse and high default rates were accumulating. One of the provisions 
enacted after the 1992 hearings by the Senate Permanent Subcommittee on 
Investigations was to eliminate from eligibility schools with high 
default rates. Initially, that change had an impact, but the rule has 
been watered down over the years, and schools have learned how to 
manipulate the data to prevent defaults from showing up within the time 
(2, soon to be 3 years) in which defaults are measured. Both the 
Inspector General and the GAO have pointed out that the cohort rate is 
a misleading indicator. It is a mere snapshot in time that does not 
give a full picture of default trends.\1\
---------------------------------------------------------------------------
    \1\ See, e.g., U.S. Department of Education, Office of Inspector 
General, ``Final Audit Report: Audit to Determine if Cohort Default 
Rates Provide Sufficient Information on Defaults in the Title IV Loan 
Program'', ED-OIG/A03-C0017 (December 2003); General Accounting Office, 
``Student Loans: Default Rates Need to be Computed More 
Appropriately,'' GAO/HEHS-9-135 (July 1999).
---------------------------------------------------------------------------
    There are problems not only with the time period, but also with the 
cohort rate calculation method. In addition, the default measure does 
not include borrowers that are current, but struggling with overly 
burdensome debt or borrowers that are delinquent, but not yet in 
default. These problems are expected to grow as interest rates rise 
along with borrowing levels.
    Unless cohort default rates are tracked for life, schools will 
continue to be able to manipulate this limitation. Additionally, the 
default rate cut-off applied to each interval of time should be a 
reasonable measure of defaults in similar credit markets that are not 
skewed by an influx of Federal loans.

       4. REQUIRE REAL STANDARDS FOR STATE AUTHORIZATION AGENCIES

    Traditionally, the Higher Education Act has depended on the triad 
of oversight, requiring a school to be accredited by a recognized 
accrediting agency, to be ``legally authorized within [the State in 
which it operates] to provide a program of education beyond secondary 
education,'' and to submit to the provisions of a participation 
agreement with the Department of Education. Currently, however, 
proprietary schools and their allies, the accrediting agencies, have 
successfully lobbied many States to rely on accreditation for most, if 
not all of their State oversight responsibilities. The Department of 
Education recently proposed a regulation that would require States to 
undertake at least some of the responsibilities contemplated by law, 
but apparently under pressure from some schools and accrediting 
agencies, failed to fully address the statutory requirements for State 
oversight. Current law requires the State agency to notify the 
Department of Education promptly of any fraud or substantial violation 
of the Higher Education Act, but the proposed rule does not require the 
State to have any mechanism by which it would be likely to notice such 
conduct.
    The Department has never had sufficient resources to adequately 
police the fraud and abuse in the proprietary sector. In my experience, 
local or State agencies are in a much better position to learn about 
problems early. As discussed below, accrediting agencies are not 
designed to fulfill this role. The Department's proposed regulation 
needs to be strengthened or the law needs to be revised to make clear 
that schools are not eligible if the State agency in the State in which 
the school operates relies on accrediting agencies for its essential 
functions. State agencies must themselves approve schools, monitor 
their compliance with provisions of the Higher Education Act or with 
State provisions that are as strong, or stronger than the Higher 
Education Act, and act to revoke authorization of schools that are not 
in compliance.

           5. REFORM ACCREDITING AGENCY ROLE AND REQUIREMENTS

    As was pointed out at the hearing, the advisory commission that 
recommends to the Department of Education about accrediting agency 
recognition is heavily loaded with representatives or employees of 
schools that live or die by accreditation; there is an incestuous 
relationship between accrediting agency boards and the schools they 
accredit; and schools are using purchase of small, previously 
accredited schools to gain accreditation, then expanding the schools 
beyond all recognition of the school and programs originally 
accredited. As I pointed out, virtually every school I have prosecuted 
was accredited, but accreditation did not address the poor outcomes, 
nor stop abuse and fraud. Typically, among other limitations, 
accrediting agencies have very small staffs, rely on staff from members 
to evaluate other members, do not have trained investigators or 
prosecutors involved in designing their oversight activities, do not 
set specific enough ``standards'' so that one can tell if they have 
been violated, have non-transparent procedures, and keep information 
about problems gathered confidential.
    At a minimum, the advisory commission needs to be revised so that 
the majority represents consumer and student interests, not the 
interests of schools that depend on accreditation. To the extent the 
financial aid programs continue to rely on accrediting agencies, the 
Department needs to specify minimum uniform criteria, particularly 
outcome criteria which all recognized accrediting agencies will monitor 
for compliance. Criteria, such as how much work is required for a unit 
of credit should not be based on accrediting agency determinations, but 
should be set by the Department, and monitored by accrediting agencies.

                      6. REVISE 90/10 REQUIREMENT

    One of the requirements that came out of the 1992 hearings on 
proprietary school fraud and abuse was the requirement that at least 15 
percent of a school's revenues should come from other than Federal 
funds. This provision was derived from, but did not track the 
requirement for Veterans' programs. The rule for Veterans' programs was 
that at least 15 percent of the students must not use the GI benefit to 
pay for their schooling. This requirement was established because after 
the first GI bill, proprietary schools developed to capture the 
veterans benefits proliferated, and fraud and abuse were rampant (see 
above). Proprietary schools later successfully reduced the percentage 
not from Federal funds to 10 percent, and then got the law changed to 
allow non-title IV Federal funds to be included in that 10 percent. 
Nevertheless, proprietary schools continue to operate near the 90 
percent title IV subsidized margin. Some proprietary schools now offer 
school financing, on which they admit they expect to collect less than 
50 percent, apparently, in part, to come up with enough non-Federal 
funding to meet the watered down 10 percent. Apparently and perversely, 
some proprietary schools are increasing their fees above the amount 
available in title IV grants and loans so that at least 10 percent of 
the cost cannot be from title IV funds.
    Even if one looks at just independent students taking 4-year 
programs at public, nonprofit, and for-profit schools, the percentage 
of borrowers varies dramatically. In the publics and non-profits, 24 
percent to 31 percent of students have no Federal loans, but at the 
for-profits, only 4 percent do not have Federal loans. The concept of 
the Veterans' 85/15 limit is that in the marketplace, a good school 
could attract at least 15 percent of its students without reliance on 
the Veteran benefit. The 90/10 limit under title IV needs to be 
restructured to be 85/15 and to apply not to revenues, but to the 
numbers of students who take out loans. Proprietary schools will likely 
argue that because they attract a lower income student, such a 
restriction would not be possible for them. One has to wonder, however, 
if they are providing a good education, why they are not also 
attracting some higher income students. Some higher income students do 
want to become radiologists, vocational nurses, computer technicians or 
obtain Bachelors' or advanced degrees in career-focused fields. This 
change would incentivize proprietary schools not to raise tuition, but 
to lower it, as they would have to compete for students in the market 
generally, rather than just trying to maximize the financial aid the 
school can collect by selling dreams of a career to poor people.
    This change would have to be accompanied by a strict requirement 
that the school must first make known to the student all financial aid 
the student can qualify for, before offering information about private, 
non-Federal loans so that schools would not just push students into 
even higher interest, less favorable private loans. It would also have 
to be accompanied by some changes in private loans, as discussed below.

 7. CHANGE INCENTIVES FOR PRIVATE LENDERS AND SCHOOLS BY ENSURING THE 
          EXISTING FTC HOLDER RULE IS ENFORCED AGAINST LENDERS

    Under the Federal Trade Commission's rule, commonly referred to as 
the ``Holder Rule,'' sellers of consumer goods and services are 
required to include a provision in credit contracts they assign to a 
lender, or in loans if they refer the consumer to the lender or arrange 
the loan, that makes the creditor subject to the same claims and 
defenses the purchaser could assert against the seller. This standard 
rule prevents a seller from selling a defective product, but having the 
payments due to another party who claims the right to collect, even 
though the product is defective. Unfortunately, some courts have held 
that if the seller (in this case, the school) does not see to it that 
the provision is in the credit document, the creditor is not bound by 
the rule.
    The FTC does not regulate lenders, so it cannot require them to 
include the provision, and the agencies that do regulate lenders have 
failed to promulgate a parallel rule. This means that lenders need have 
little concern about whether the school is good or not. This 
inconsistency needs to be addressed so that lenders will have incentive 
to provide credit only for students at good schools, or to require 
schools to put up a deposit to cover potential future claims or 
defenses to payment.
    In connection with the ``holder'' issue, schools which regularly 
select lenders to offer loans to their students, should be required to 
certify that the student has exhausted all means of Federal financing, 
before the school may suggest or offer the more expensive private 
loans, which do not have the same relief measures as Federal loans. 
This would also insure that when schools are determining their 
students' loan debt, they are including any private loans the student 
may have.

  8. STUDY AND ESTABLISH APPROPRIATE STANDARDS FOR DISTANCE EDUCATION

    This is probably the fastest growing segment of proprietary schools 
and the area most susceptible to abuse. Before 2006, eligible schools 
were limited to providing distance education, including correspondence 
courses, for no more than 50 percent of their students and no more than 
50 percent of their courses. Despite caution from the GAO \2\ that 
removing this limitation without better controls would lead to 
increased fraud and abuse, the limit was lifted as to 
telecommunications courses (those offered by electronic means), but not 
as to correspondence courses. The only limit on telecommunications 
courses is that they must provide regular and substantive interaction 
between the student and teacher, but that interaction need not be 
synchronous. The only clarification of those terms states that the 
interaction must be at regular intervals and not be trivial.
---------------------------------------------------------------------------
    \2\ General Accounting Office, ``Distance Education: Improved Data 
on Program Costs and Guidelines on Quality Assessments Needed to Inform 
Federal Policy,'' GAO-04-279 (February 2004).
---------------------------------------------------------------------------
    This provision leaves the student financial aid programs wide open 
to fraud and abuse. Among other issues, for-profit schools may purchase 
a small, reputable school, then turn the school into a massive online 
college, with virtually no oversight. A further concern must be that 
schools that may have been providing good, needed hands-on programs at 
an on-site facility, will be tempted to reduce costs by going to all, 
or almost all on-line programs. Although telecommunications programs 
are required to be accredited, the GAO has found the same lack of 
accrediting agency standards here as noted above.
    In her testimony, the Inspector General also noted her concern 
about the lack of measures to insure Federal dollars are not being 
spent for little or no benefit because of the lack of oversight of 
distance education programs. The 50 percent limitation on on-line 
programs needs to be restored until the means to prevent abuse can be 
studied and implemented. There needs to be a study to establish what 
requirements and monitoring needs to be implemented to prevent the 
massive potential for problems in this burgeoning area.

  9. REQUIRE CANCELLATION PERIODS AND PRO-RATA REFUNDS, AND PROHIBIT 
    CONTRACTUAL OBLIGATION OR PAYMENT BEYOND ONE TERM OR FOUR MONTHS

    Each of these suggestions have in common that they offer a measure 
of self-help to students who may find themselves in one of the ``bad 
actor'' schools, and that they have been used in one or more States, to 
curb abuses, but without preventing good schools from flourishing.
    In California, the State law for 19 years required proprietary 
schools to provide a full refund (except for a modest registration fee) 
to any student who canceled the program within the first 5 class days. 
That way, there was a chance the student would discover if the 
equipment or facilities were lacking, or if teachers were untrained or 
had no practical experience before the student had spent thousands of 
dollars on a worthless education. Other States prevent the school from 
keeping even a registration fee if the student cancels on or before the 
first day of class. While bad actor schools become adept at giving a 
good first impression, some students may discover the problems in this 
initial period.
    For 19 years, California required proprietary schools to provide a 
full pro-rata refund throughout the program. That requirement reduced 
the churn from schools constantly admitting new students and ignoring 
students' needs once they passed an arbitrary 50 or 60 percent of the 
course. Oregon has used a similar concept, prohibiting schools from 
collecting from students or obligating students for more than one term 
or four months. Again, students under this system might lose some money 
on a bad school, but when they realize that things are not as 
represented, they are free to leave, without being obligated for many 
months more. Often students say that the school responds to their 
complaints by saying, the student already owes all the money, so there 
is no point to quitting out of dissatisfaction with the program.

10. REQUIRE ABILITY TO BENEFIT TESTING, EITHER FOR ALL STUDENTS, OR AT 
LEAST FOR ALL STUDENTS WHO DID NOT GRADUATE FROM A PUBLIC HIGH SCHOOL; 
  ELIMINATE 6 UNIT ALTERNATIVE MEASURE FOR ENTRANCE UNTIL SUFFICIENT 
               STUDY AT PROPRIETARY SCHOOLS HAS OCCURRED

    To be admitted, students are supposed to have a high school 
diploma, or pass a test demonstrating their ability to benefit from the 
program being offered. Needless to say, this has been a well-known area 
where fraud occurs. The Department has recently proposed much-needed 
changes, but I believe those are inadequate to clean up this problem 
area.
    There has been no definition of ``high school diploma,'' so that 
proprietary schools could turn a blind eye to bogus diplomas which 
could be obtained for a fee. The Department has proposed to require 
schools to have procedures to deal with suspect diplomas, but the 
proposed rule still leaves a lot of room for turning a blind eye. 
Additionally, a high school diploma may not be adequate to determine if 
a prospective student has the basic skills needed for the coursework 
for particular careers.
    Current rules require an ability-to-benefit test to be administered 
to non-high school graduates by an independent tester. This requirement 
has had limited impact, however, as testers are generally selected by 
the school, give the tests at the school, and rely on the school to 
maintain the tests and answer sheets. Apparently, the so-called 
``independent'' testers do not run a business in which they have the 
facilities to guard the tests themselves. Recently, the GAO found in 
undercover operations that tests were not administered properly, but 
instead were compromised to ensure the student could be admitted.
    Under the law, the Department is charged with determining 
appropriate test scores to allow eligibility. This is also problematic 
because the Department has not interpreted the law to require ability 
to benefit from the specific program for which a student is enrolling, 
but rather, to be simply the equivalent of having a high school 
diploma. Obviously, the beginning skills for, say, security guard, may 
be different from those required for a sonographer or radiologist or 
cosmetologist.
    In addition, recently, on the basis of a study carried out in 
community colleges, an alternative measure--the successful completion 
of 6 units--is now allowed to determine whether a student may be 
eligible for Federal financial aid. This provision has been enacted, 
but there are virtually no regulations to prevent abuse. Those schools 
that simply want more students can easily manipulate this provision to 
claim students have successfully completed some course that is 
available to complete some program.
    In short, the current ability-to-benefit process needs overhaul. 
Tests should be related to the skills that are needed to succeed in the 
particular program in which the student is enrolling. Tests should be 
administered at a location away from the school, by persons not 
recruited by the school, who have sufficient resources to guard tests 
and answer sheets from being compromised. If all students are required 
to be tested, unless they graduated from a public high school, the 
problem with bogus high school diplomas can be reduced, if not 
eliminated. Testing of all students, even if they have a public high 
school diploma, would help prevent students enrolling in programs for 
which they do not have the basic skills necessary. And the 6-unit 
alternative should be allowed in proprietary schools only after 
adequate study in proprietary schools to show it is comparable to 
testing.

  11. EXPAND BASES FOR LOAN DISCHARGE AND REQUIRE REIMBURSEMENT FROM 
   SCHOOL OR LENDER OR ALLOW STUDENTS TO SEEK REMEDIES DIRECTLY FROM 
                           SCHOOL AND LENDER

    Students could play a role in program integrity if they had tools 
to do so. Currently, however, students may only have their student 
loans canceled (discharged) by the Department of Education in very 
narrow circumstances, such as the school's false certification of the 
student's ability to benefit, the school's failure to properly return 
title IV money, or the school's closure. The student's burden to prove 
the false certification discharge is very difficult, given that the 
Department (in some cases) and the school have the needed records, 
which the student does not have. Additionally, the Department has been 
very limited in agreeing to cancellation for groups of students, even 
if there is a judgment finding the false certification applied to an 
entire group of students, or if the Department has similar claims from 
students in its files evidencing the alleged false certification by the 
same school. Additionally, to be effective in stopping bad actors, the 
Department needs to be aggressive in recovering money from schools that 
have falsely certified eligibility. Sometimes, of course, the 
Department's failure to collect is because the school has closed, 
without funds to repay the loan.
    The other traditional remedy for fraud and abuse, a civil action, 
is not readily available. It is not allowed under current Federal law. 
Employees who have witnessed false claims for Federal money by the 
school may sue and recover a share of the money paid in the judgment. 
Students, however, have no right to sue under the Higher Education Act. 
They may be able to assert claims under State law. But even there, they 
are often thwarted because the school requires arbitration in which the 
students' ability to discover needed facts is limited, rather than 
allowing a lawsuit.
    In addition to the limits on these means of redress by students, 
claims students do pursue successfully are generally not publicly 
known. Arbitration proceedings are generally private, not public, like 
courts. Schools often require students' confidentiality to settle a 
claim and often also prohibit the student from discussing their 
grievance with others. Sometimes such confidentiality provisions seem 
to prevent the student even from contacting government agencies about 
the issue. Typically, evidence of wrongdoing in private arbitrations or 
actions that settle is hidden away, not available to the Department, 
accrediting agencies or law enforcement agencies.
    These limits on redress and on public information about settlements 
of disputes both artificially depress Congress' and the public's 
awareness of problems, and prevent students from playing a larger role 
in program integrity. These limitations should be re-examined to 
increase the part students play in program integrity. In particular, 
notice of settlements should be provided to the Department and law 
enforcement agencies, and evidence developed that points to violations 
of the Higher Education Act should be required to be made available to 
the Department and law enforcement agencies.

            12. CONSIDER ESTABLISHING TUITION RECOVERY FUND

    One remedy that has been used in States, including in California, 
is the establishment of a tuition recovery fund, funded by fees on 
schools, based on numbers of students or amount of tuition. Students 
can collect from such a fund if they obtain a judgment against a school 
which they cannot collect, or if they were enrolled in programs which 
the school stopped offering before the student could complete it or if 
the school itself closed before the student could complete the program.

      13. REQUIRE A HIGHER RATIO OF CURRENT ASSETS TO LIABILITIES

    One recurring problem is when a school takes in tuition fees in the 
form of Federal aid, then closes before students can complete their 
programs. Because the proprietary schools' educational quality often 
does not measure up to non-profit or public schools, the credits the 
students have already received are not transferable. Sometimes so-
called ``teach-outs'' are offered at another school, but often they are 
inadequate or require additional expenditures to complete the program 
the student has already paid for. Currently, only a 1 to 1 ratio of 
current assets to liabilities is required under Federal law. A 1 to 1 
ratio is, in essence, a penny away from bankruptcy. The ratio is too 
low. In other businesses, ratios of 2 to 1 are considered appropriate. 
In California schools had to have at least a 1.25 to 1 ratio (excluding 
such intangible assets as good will). The requirement, if enforced, 
could reduce the number of such closures while still allowing stable 
schools to flourish.

          14. DIRECT MORE FEDERAL FUNDS TO COMMUNITY COLLEGES

    I believe there are sound grounds to direct funds to public 
community colleges which perform some functions similar to proprietary 
schools, but at a much lower cost to students and the government. 
Proprietary schools tend to concentrate their recruitment efforts in 
low-income, urban areas, which may skew the share of Federal student 
aid flowing to these areas. The increased Federal student aid flowing 
to those areas because of poor schools, however, does not provide a net 
benefit to those urban areas. Meanwhile, it may mean less Federal money 
is available to fund post-secondary education in less populated regions 
of the country. In contrast, State community college systems reach 
throughout the country. In many cases, State community college systems 
have the flexibility in schedules and in developing new programs that 
proprietary schools tout. Students who go to community colleges, 
however, borrow much less, wind up with less debt service after they 
finish, and, if they want to continue their education, generally can 
transfer credits to other public schools in the State. I think we need 
to seriously look at whether funds would be allocated more equitably, 
and whether we would be better able to serve the population if more 
funds were directed to community colleges, rather than continuing the 
massive increases in the dollar amount and proportion of Federal funds 
spent supporting proprietary schools.

                               CONCLUSION

    I have tried to list some of the most salient improvements I 
believe are needed, based on my experience as a prosecutor. Others with 
expertise in different aspects of the student financial aid programs 
may suggest other valuable provisions, so I don't contend the list is 
necessarily comprehensive. Also, to the extent some changes are made, 
others may be less (or more) necessary. As a former prosecutor, I find 
it very frustrating that the main way to address the fraud, abuse and 
waste currently seems to be by expensive, resource-intensive, time-
consuming litigation, including prosecutions. I recognize that 
implementation of these suggestions would require careful drafting. I 
am quite willing to cooperate with you and the other members of the 
committee in drafting provisions so that the incentives can be turned 
around to operate to reduce the waste in the use of Federal financial 
aid in the proprietary school sector. Please feel free to contact me 
about this letter or any other questions you may have.
            Sincerely,
                                           Margaret Reiter.
                                 ______
                                 
 Response to Questions of Senator Enzi, Senator Brown, Senator Casey, 
          Senator Hagan, and Senator Coburn by Margaret Reiter

                       QUESTIONS OF SENATOR ENZI

    Question 1. Congress enacted a number of changes in the Higher 
Education Opportunity Act to address many of these problems. What 
additional changes would you suggest to address problems like the ones 
you have detailed in your testimony?
    Answer 1. In the letter I sent to you on July 13, 2010, I responded 
to the question you asked at the hearing about what could be done to 
eliminate the bad actors among post-secondary proprietary schools, 
while ensuring the good actors can fulfill their role. I believe the 
detailed answers in that letter address this similar question. A copy 
is attached for your reference.

    Question 2.  We have heard a lot of individual instances of wrong 
doing within the for-profit sector. We are all in agreement that the 
behavior each of the witnesses has described is wrong and must be dealt 
with swiftly in order to protect students. However, before Congress or 
the Department acts, it is important that we do so with a full 
understanding of what is going on within the sector. Your experience is 
primarily in California. Do you have evidence of widespread abuses 
within the sector? Please explain that evidence?
    Answer 2. As you know, I was a prosecutor in California, so the 
cases in which I was directly involved are limited to California. I 
believe a number of other types of information, however, point to the 
abuses being nationally widespread within the sector.
    First, the kinds of perverse incentives I pointed out, that allow 
and encourage the abuses, are not unique to California, but rather, are 
systemic in Federal student aid programs. For example, there is no 
nationwide standard schools must meet to show they do prepare students 
for gainful employment; revenues are based on starts, not finishes; and 
the cohort default rate limits can easily be manipulated.
    Second many proprietary schools are nationally accredited. The 
national accrediting associations are active throughout the country. As 
I pointed out they are ineffectual at stopping the type of abuses I 
described (discussed in my prior letter to you).
    Third, the high and rising default rates of proprietary schools 
cannot be entirely explained just by the types of students they 
recruit. The proprietary schools' own lobbying arm's study showed that 
even accounting for those differences, proprietary schools' default 
rates are double those at non-profit and public schools. Such high 
default rates are an indicator that students are not able to get jobs 
adequate to pay off their student loans.
    Fourth, the activities I described were those of a large publicly 
traded company, not a local California company. The school certainly 
has never indicated that it operated in a worse way in California than 
elsewhere. I have seen no evidence to suggest that companies operate in 
a vastly different way in California than elsewhere.
    Fifth, I am aware of numerous and increasing public reports of 
abuses across the Nation, but even those reports are artificially 
depressed. The traditional remedy for fraud and abuse, a civil action, 
is not readily available to students. It is not allowed under current 
Federal law. Employees who have witnessed false claims for Federal 
money by the school may sue and recover a share of the money paid in 
the judgment. Students, however, have no right to sue under the Higher 
Education Act.
    Students may be able to assert claims under State law, but few 
attorneys have the expertise and the financial wherewithal to bring 
such private suits, which ordinarily would need to be done on a 
contingency basis. Those claims students do pursue successfully are 
generally not publicly known. Schools often require arbitration and 
prohibit access to court adjudication. Arbitration proceedings are 
generally private, not public, like court proceedings. Even court 
proceedings do not necessarily provide much public information. Schools 
often require students' confidentiality to settle a claim and often 
also prohibit the student from discussing their grievance with others. 
Sometimes such confidentiality provisions seem to prevent the student 
even from contacting government agencies about the issue. Generally, 
cases against schools do not reach judgment, or if they do, the 
judgment is likely to be mooted out by settlement during an appeal. 
Typically, evidence of wrongdoing in private arbitrations or actions 
that settle is hidden away, not available to the Department, 
accrediting agencies or law enforcement agencies.
    These limits on means of re-dress and on public information about 
settlements of disputes artificially depress the amount of public 
disclosure of abuses in this sector.
    Nevertheless, I am aware of a growing number of actions by the 
Department and private litigants, some of which have already resulted 
in major settlements against some of the largest, most prominent 
publicly traded schools in the industry. I have not prepared a complete 
list of these actions, nor have I seen a comprehensive list elsewhere, 
but I have seen partial lists others have prepared. See, e.g., http://
www . nacacnet.org/LegislativeAction/LegislativeNews/Documents/
HEAFraudAlert
051110.pdf, and http://www.studentloanborrowerassistance.org/blogs/wp-
content/www . studentloanborrowerassistance.org/uploads / File/
policy_briefs/FTCguides
1009.pdf.

    Question 3. To your knowledge, has the Department of Education 
initiated, or completed a broad based examination of the for-profit 
sector to determine if there is widespread abuse throughout the sector?
    Answer 3. Generally, the types of investigations I am aware of that 
the Department has undertaken seem to relate to specific schools at 
which wrongdoing has been brought to its attention, rather than a 
broad-based investigation of the entire sector. (My information is 
limited to publicly available information.) As I understand the 
Inspector General's testimony, like many investigative agencies, 
investigations at the Department are often triggered by complaints they 
receive. Consequently, the fact that 70 percent of their investigations 
involve proprietary schools, although only about 37 percent of the 
eligible schools are proprietary schools (78 Fed. Reg. 34863 [June 18, 
2010]), and proprietary schools have less than 10 percent of the 
students, suggests that the problems are more widespread in the 
proprietary school sector, as has been the case historically. Other 
more broadly-based types of investigations of the Department with which 
I am familiar are those done by the Inspector General that focus on an 
issue, then look at a variety of schools or accrediting agencies 
related to that issue, e.g., cohort default rates or institutional 
eligibility process.

    Question 4. Many of the traditional institutions of higher 
education have told us that they do not have the capacity to handle a 
higher volume of students. What other options are available to students 
who are now currently attending for-profit institutions of higher 
education?
    Answer 4. I am not quite sure I understand the assumption or reason 
underlying the question, and the answer depends on that assumption or 
reason. So I will offer several thoughts, which may be relevant to the 
intent of your question.
    If your question is directed to those students currently attending 
a for-profit school, who wish to transfer or to obtain a higher 
certificate or degree: Many students currently attending for-profit 
schools who wish to change schools have limited options, for a number 
of reasons, apart from whatever capacity limits there may be at public 
or non-profit schools. Constraints include the inability to transfer 
credits that are substandard, lack of basic skills needed to pass 
entrance exams at other schools, already high debt burdens which may 
make transfer attempts prohibitively expensive, and inability to find 
work in the field studied so students cannot work to support themselves 
through higher level studies. While I am familiar with public reports 
in which students offer these descriptions of problems enrolling at 
other schools, I am not familiar with any students explaining that they 
chose the for-profit school because of lack of availability at a non-
profit or public institution, or that lack of capacity kept them from 
transferring to another school when they left a for-profit school. 
Whatever capacity limits there may be do not seem to have a major 
impact in this context.
    If your question assumes that changing regulations or laws to 
reduce abuses, fraud, and unsuccessful programs among for-profit 
schools will result in massive numbers of students seeking education 
elsewhere: Two points are salient.
    First, based on my experience, changes over the years in 
requirements have sometimes eliminated numerous problem schools, but 
there has not been any problem with lack of capacity for students 
elsewhere. For example, in the few years in the early 1990s when 
California had a strong, independent oversight agency, it closed more 
than 150 schools. At the same time, several schools the Attorney 
General sued for fraud also closed, including at least one large, 
publicly traded school. I am aware of no reports of students being 
unable to get into college elsewhere in California. In part, this may 
be because some percentage of students those fraudulent schools would 
have otherwise induced to enroll did not have the ability to pass 
entrance exams at legitimate schools. (The GAO recently reported how 
some for-profit schools manipulated or falsified ``ability to benefit'' 
tests, which are required if a student does not have a high school 
diploma. Also, I am aware that some for-profit schools either steer 
prospective students to companies from which they could buy a high 
school diploma, or rely on such diplomas. This is known from 
investigations in which I was involved and from investigations about 
which I have read. At the negotiated rulemaking sessions, the 
representative of for-profit schools provided lists of bogus high 
schools her school had identified.) In part, other for-profit schools 
may have expanded to reach more students. In part, public and non-
profit schools were available to students.
    Second, concerns that massive numbers of students would be denied 
higher education if tighter rules were imposed on for-profits are 
overstated. As I explain in my prior letter, the various proposed 
changes would affect bad apples; good schools that do really prepare 
their students for gainful employment would continue to do well. The 
for-profit schools' lobbying arm's own study suggested that more than 
80 percent of programs surveyed would pass the Department's draft 8 
percent debt to salary initial flag. And additional schools would 
likely meet one of the draft alternative tests for gainful employment 
even if they did not meet the 8 percent flag. For-profit schools have 
also shown themselves time and again to be very adaptable to changed 
conditions. (Of course, some studies have indicated that that 
adaptability is sometimes manipulation of loopholes, allowing bad 
schools to continue to operate badly.) With improved regulation, 
schools may not be able to keep making extremely high profits because 
they would have to put more money into instruction, and they would 
probably need to do a better job of enrolling students who are likely 
to graduate and succeed. But these regulations will not disrupt the 
basic for-profit model or impact schools that do a good job educating 
students.
    Having said this, however, I agree that we need to focus on making 
sure that good, reasonably priced alternatives are available. As I 
indicated in my prior letter, one of the possibilities that must be 
considered is more direct use of funds to support public community 
colleges, and I would add, State colleges and universities. I grew up 
on a farm and worked to support myself, with help from my parents 
through college, and then on my own, with only $15,000 in student loans 
through law school. Even as late as the 1980s, the schools were 
affordable enough that I could do that. Now our great American public 
higher education system suffers from too little support. Personally, I 
think that the experiment of shifting an ever-
increasing portion of the higher education dollar to proprietary 
schools has shown itself time and again to be extremely costly, not 
just in money, but in the failure to prepare Americans in highly 
skilled jobs and in the damage to former students' working lives. These 
failures will drag down the economy as students without jobs and high 
student loan debts cannot support the consumer-based economy this 
Nation relies on. In this competitive world, we cannot continue to 
afford to waste money that we need for training our future generations. 
We have two ways to address the problem--set requirements to stop the 
abuses where they are most prevalent, in the for-profit sector, and 
insure stronger financial resources for the public State systems that 
generally are not fraught with fraud.

                       QUESTIONS OF SENATOR BROWN

    Question 1. What are the types of legislative measures that you 
would recommend to improve accountability to students and taxpayers in 
the current system?
    Answer 1. I have compiled a list of suggestions, some of which 
could be accomplished by regulations or by legislation, and others of 
which would require legislation. In general, most of the suggestions 
are remedies that have been used by California or other States or are 
revisions to laws that were enacted after the Nunn hearings, but have 
been weakened over time. Some remedies have been widely discussed, and 
I will only mention them briefly as you are undoubtedly already 
familiar with them. First, I list the suggestions. More detail about 
each suggestion then follows:

    1. Define and Enforce the Longstanding Requirement that Proprietary 
Programs (and certain other programs) Prepare Students for Gainful 
Employment.
    2. Strictly Prohibit Quotas and Incentive Compensation for 
Recruiting and Financial Aid.
    3. Publish and Base Continued Eligibility on Life-time Cohort 
Default Rates.
    4. Require Real Standards for State Authorization Agencies.
    5. Reform Accrediting Agency Role and Requirements.
    6. Revise 90/10 Requirement.
    7. Change Incentives for Private Lenders and Schools by Ensuring 
the Existing FTC Holder Rule Is Enforced Against Lenders.
    8. Study and Establish Appropriate Standards for Distance 
Education.
    9. Require Cancellation Periods and Pro-rata Refunds, and Prohibit 
Contractual Obligation or Payment Beyond One Term or 4 Months.
    10. Require Ability to Benefit Testing, Either for All Students, or 
at Least for All Students Who Did Not Graduate From a Public High 
School; Eliminate 6 Unit Alternative Measure for Entrance Until 
Sufficient Study at Proprietary Schools Has Occurred.
    11. Expand Bases for Loan Discharge and Require Reimbursement from 
School or Lender or Allow Students to Seek Remedies Directly from 
School and Lender.
    12. Consider Establishing Tuition Recovery Fund.
    13. Require a Higher Ratio of Current Assets to Liabilities.
    14. Direct More Federal Funds to Community Colleges.

  1. DEFINE AND ENFORCE THE LONGSTANDING REQUIREMENT THAT PROPRIETARY 
  PROGRAMS (AND CERTAIN OTHER PROGRAMS) PREPARE STUDENTS FOR GAINFUL 
                               EMPLOYMENT

    Congress apparently first noted the widespread exploitation of 
students by proprietary schools after enactment of the GI bill after 
World War II. The House Select Committee to Investigate Educational, 
Training, and Loan Guaranty Programs under GI bill, 2/14/1952 
describing the abuses in the GI bill from 1944 to 1950 in connection 
with recommending safeguards for veterans of the Korean War noted, 
inter alia:

          ``Exploitation by private schools has been widespread.''
          ``There was a rapid uncontrolled expansion of private profit 
        schools. . . .''
          ``Many schools have offered courses in fields where little or 
        no employment opportunity existed.''
          ``Training programs have been approved for unskilled or semi-
        skilled occupations where little or no training was required, 
        resulting in needless expenditure of funds and waste. . . .''

    With reason, when Congress later added proprietary schools to the 
Higher Education Act, it specified that only schools that prepared 
students for gainful employment were eligible. However, the Department 
of Education has never defined, much less made much of any attempt to 
enforce this requirement. In the negotiated rulemaking on program 
integrity the Department initiated in 2009, the Department proposed a 
definition that is a modest step toward enforcement of this 
requirement. The proposal, which it has yet to officially propose, 
would set a flag to identify programs for which the students' median 
loan debt would be more than 8 percent of the projected salaries (at 
the 25th decile of salaries determined by the Bureau of Labor 
Statistics for the occupations for which the training is to prepare 
students). Programs that could not meet that standard would still be 
eligible if the school could demonstrate that the median debt load is 
less than 8 percent of the actual salaries graduates of those programs 
earn, or if 90 percent of the graduates of the program did not default 
(with ``default'' defined more accurately than under the current cohort 
default rate standards).
    Given that the 8 percent standard is usually used by lenders to 
determine the amount of all non-housing debt a borrower should 
reasonably carry, and that many students at proprietary schools are 
older and already have other debts such as auto loans and credit card 
debts, the 8 percent standard may be too high, especially for those 
whose salaries would be less than 150 percent of the poverty level. 
Nevertheless, it is a modest, reasonable first step. I believe the debt 
load of those who enroll, but do not complete also needs to be 
considered, so that there is no temptation for the bad actors to 
discourage those with the highest debt loads from completing the 
course, in order to lower the median debt load of students in a 
program.
    The Department's proposal, however, deals only with the ``gainful'' 
part of the phrase, not with the ``employment'' part. If a school does 
a poor job of training students, even if the program met the 8 percent 
or related criteria mentioned above, it might still have a minority of 
graduates who could actually obtain employment. Consequently, a 
proprietary school programs should also have to meet certain levels of 
employment. In California, for example, for 19 years, proprietary 
schools were required to have at least 70 percent of the graduates from 
a program obtain employment within 6 months, in a position that lasted 
at least 60 days, for at least 32 hours a week. (Part time employment 
could also count if the student had specified in advance of the program 
and at the end that the student only wanted part-time employment.) As 
was obvious from my testimony, there needs to be some way to verify 
that claimed employment levels are true. One suggestion for accuracy in 
employment statistics is to require use of State unemployment insurance 
data, which some States already do for community colleges.
    A current provision under the Higher Education Act, which was 
enacted back when most programs were much shorter, applies only to 
short courses. The Department has now proposed to apply it more 
broadly, so far, as a reporting device only. Based on my experience, to 
be used more broadly, the existing provision needs to be strengthened 
and improved to prevent manipulation. For example, under the current 
provision, while accurate reporting would be helpful, the existing 
provision would not be useful. The documentation of employment allowed 
would not demonstrate that the employment really meets the standard. 
The current provision also relies on an ``attestation engagement'' by 
an accountant to verify the reported percentages, but the lack of 
specificity as to the sampling needed, and other details I believe, 
leaves this provision open to false or inflated reports.
    And, as noted above, completion rates also need to be tracked and 
verified, and a standard set to insure schools are not manipulating the 
data by discouraging completion by students they consider least likely 
to be able to get a job. In California, for example, after certain 
exceptions--death, military service, those who canceled within the 100 
percent full refund cancellation period, etc.--authorized programs had 
to show 60 percent of those enrolled completed the program.
    I view such standards as critical to separating out the good from 
the bad actors. Good schools would continually evaluate their programs, 
eliminating or revising those that have high debt levels in comparison 
to salaries available or whose graduates are unable to find work in the 
field in which they trained. The proprietary schools' lobbying arm, 
CCA, has represented that more than 80 percent of the programs it 
surveyed would meet the 8 percent flag, and likely additional programs 
would meet one of the two alternatives, although CCA did not run the 
numbers for the alternatives. It is unclear how many programs would 
meet a 70 percent employment requirement, but most national accrediting 
agencies already claim to have that high, or a higher standard. In 
California, until 2008, that was the standard schools were required to 
meet. The requirement did not seem to have slowed the development of 
proprietary schools in California (although the State agency charged 
with enforcement apparently did little to enforce the law).
    Schools should also be required to report on their Web sites, if 
they have one, their statistics for each program offered, as well as to 
provide a fact sheet to every prospective student showing the 
information for the program in which the prospective student has 
expressed an interest. Currently, there is no competition among schools 
based on such quality factors because those factors are not 
transparent. Making them transparent, if they are verified/monitored 
for accuracy, would provide some possibility of competition arising 
based on these quality criteria. Such real competition would help the 
good schools.
    While the Department could promulgate these changes, it has yet to 
do so. Congressional action might be needed. Of course there might need 
to be provisions related to an employment requirement to address 
extraordinary circumstances, such as limited employment available in a 
particular region after a major disruption, e.g., after hurricane 
Katrina, or to address the time lag for getting the results from 
licensing exams.

 2. STRICTLY PROHIBIT QUOTAS AND INCENTIVE COMPENSATION FOR RECRUITING 
                           AND FINANCIAL AID

    The recent Department of Education proposed regulation on incentive 
compensation goes a long way to restoring the full intent of the 
statute prohibiting incentive compensation. I am concerned, however, 
that a few possible loopholes may still exist and will be working with 
others to comment on the proposed rule. In addition, I also recommend a 
statutory change to make very clear that the use of quotas in 
connection with compensation for such staff is prohibited. From the 
information I have seen, it appears schools may be trying to get around 
the prohibition on incentive compensation by setting quotas and 
punishing in some way or firing those who do not reach the quota. While 
this may well be covered under the current statute, additional clarity 
would be advisable.
    The payment of incentive compensation or the use of quotas for 
those involved in or supervisors over admissions or financial aid tasks 
is particularly pernicious. Prospective students are likely to trust 
the ``admissions advisor'' or ``financial aid advisor'' or school 
director as a person there to assist them. Prospective students don't 
readily realize they are dealing with commissioned sales persons, as 
they would when, e.g., buying a car.
    Good schools can compete on the basis of quality, and need not 
compete on incentives. The natural result of incentives/quotas is to 
encourage some of the types of abuse noted at the hearing, including 
misrepresentations, enrolling students ill-suited to a particular 
training program, or providing training that does not qualify the 
graduates for employment.

 3. PUBLISH AND BASE CONTINUED ELIGIBILITY ON LIFE-TIME COHORT DEFAULT 
                                 RATES

    Proprietary schools first came fully into the Higher Education Act 
financial aid programs in 1972. By the mid-80s, stories of fraud and 
abuse and high default rates were accumulating. One of the provisions 
enacted after the 1992 hearings by the Senate Permanent Subcommittee on 
Investigations was to eliminate from eligibility schools with high 
default rates. Initially, that change had an impact, but the rule has 
been watered down over the years, and schools have learned how to 
manipulate the data to prevent defaults from showing up within the time 
(2, soon to be 3 years) in which defaults are measured. Both the 
Inspector General and the GAO have pointed out that the short-time 
cohort default rate is a misleading indicator. It is a mere snapshot in 
time that does not give a full picture of default trends.\1\
---------------------------------------------------------------------------
    \1\ See, e.g., U.S. Department of Education, Office of Inspector 
General, ``Final Audit Report: Audit to Determine if Cohort Default 
Rates Provide Sufficient Information on Defaults in the Title IV Loan 
Program'', ED-OIG/A03-C0017 (December 2003); General Accounting Office, 
``Student Loans: Default Rates Need to be Computed More 
Appropriately'', GAO/HEHS-99-135 (July 1999).
---------------------------------------------------------------------------
    There are problems not only with the time period, but also with the 
cohort rate calculation method. In addition, the default measure does 
not include borrowers that are current, but struggling with overly 
burdensome debt or borrowers that are delinquent, but not yet in 
default (i.e., less than 9 months behind in their payments). These 
problems are expected to grow as interest rates rise along with 
borrowing levels.
    Unless cohort default rates are tracked for life, schools will 
continue to be able to manipulate this limitation. Additionally, the 
default rate cut-off applied to each interval of time should be a 
reasonable measure of defaults in credit markets that are not skewed by 
an influx of Federal loans. For example, current default limits over 2 
years of 25 percent (soon to be 30 percent over 3 years) are 
extraordinarily high compared to normal market-based credit default 
rates. Congress needs to act to make these changes.

       4. REQUIRE REAL STANDARDS FOR STATE AUTHORIZATION AGENCIES

    Traditionally, the Higher Education Act has depended on the triad 
of oversight, requiring a school to be accredited by a recognized 
accrediting agency, to be ``legally authorized within [the State in 
which it operates] to provide a program of education beyond secondary 
education,'' and to submit to the provisions of a participation 
agreement with the Department of Education. Currently, however, 
proprietary schools and their allies, the accrediting agencies, have 
successfully lobbied many States to rely on accreditation for most, if 
not all of their State oversight responsibilities. The Department of 
Education recently proposed a regulation that would require States to 
undertake at least some of the responsibilities contemplated by law, 
but apparently under pressure from some schools and accrediting 
agencies, failed to fully address the statutory requirements for State 
oversight. Current law requires the State agency to notify the 
Department of Education promptly of any fraud or substantial violation 
of the Higher Education Act, but the proposed rule does not require the 
State to have any mechanism by which it would be likely to notice such 
conduct.
    The Department has never had sufficient resources to adequately 
police the fraud and abuse in the proprietary sector. In my experience, 
local or State agencies are in a much better position to learn about 
problems early. As discussed below, accrediting agencies are not 
designed to fulfill this role. The Department's proposed regulation 
needs to be strengthened or the law needs to be revised to make clear 
that schools are not eligible if the State agency in the State in which 
the school operates relies on accrediting agencies for its essential 
functions. State agencies must themselves approve schools, monitor 
their compliance with provisions of the Higher Education Act or with 
State provisions that are as strong, or stronger than the Higher 
Education Act, and act to revoke authorization of schools that are not 
in compliance.

           5. REFORM ACCREDITING AGENCY ROLE AND REQUIREMENTS

    As was pointed out at the hearing, the advisory commission that 
recommends to the Department of Education about accrediting agency 
recognition is heavily loaded with representatives or employees of 
schools that live or die by accreditation; there is an incestuous 
relationship between accrediting agency boards and the schools they 
accredit; and schools are using purchase of small, previously 
accredited schools to gain accreditation, then expanding the schools 
beyond all recognition of the school and programs originally 
accredited. As I pointed out, virtually every school I have prosecuted 
was accredited, but accreditation did not address the poor outcomes, 
nor stop abuse and fraud. Typically, among other limitations, 
accrediting agencies have very small staffs, rely on volunteer staff 
from members to evaluate other members, do not have trained 
investigators or prosecutors involved in designing their oversight 
activities, do not set specific enough ``standards'' so that one can 
tell if they have been violated, have non-transparent procedures, and 
keep information about problems gathered confidential.
    Congress needs to address these deficiencies. At a minimum, the 
advisory commission needs to be revised so that the majority represents 
consumer and student interests, not the interests of schools that 
depend on accreditation. To the extent the financial aid programs 
continue to rely on accrediting agencies, minimum uniform criteria need 
to be established, particularly outcome criteria which all recognized 
accrediting agencies will monitor for compliance. Criteria, such as how 
much work is required for a unit of credit should not be based on 
accrediting agency determinations, but should be required to be set by 
the Department, and monitored by accrediting agencies.

                      6. REVISE 90/10 REQUIREMENT

    One of the requirements that came out of the 1992 hearings on 
proprietary school fraud and abuse was the requirement that at least 15 
percent of a school's revenues should come from other than title IV 
funds. This provision was derived from, but did not track the 
requirement for Veterans' programs. The rule for Veterans' programs was 
that at least 15 percent of the students must not use the GI benefit to 
pay for their schooling. This requirement was established because after 
the first GI bill, proprietary schools developed to capture the 
veterans benefits proliferated, and fraud and abuse were rampant (see 
above). Proprietary schools later successfully reduced the percentage 
not to be from title IV financial funds to 10 percent. Nevertheless, 
proprietary schools continue to operate near the 90 percent title IV 
subsidized margin. After lobbying Congress to be able to count all 
institutional loans toward their 10 percent in the years in which the 
loans are made (rather than when they are repaid), some proprietary 
schools began to offer, or increase their offering of school financing. 
Some schools admit they expect to collect less than 50 percent of the 
amounts owed on their loans for students, suggesting these ``loans'' 
are driven, in part, by the need to come up with enough non-Federal 
funding to meet the watered down 10 percent. Apparenty and perversely, 
some proprietary schools are increasing their fees above the amount 
available in title IV grants and loans as a strategy for meeting the 10 
percent that cannot be from title IV funds.
    Even if one looks at just independent students taking 4-year 
programs at public, nonprofit, and for-profit schools, the percentage 
of borrowers varies dramatically. In the publics and non-profits, 24 
percent to 31 percent of students have no Federal loans, but at the 
for-profits, only 4 percent do not have Federal loans. The concept of 
the Veterans' 85/15 limit is that in the marketplace, a good school 
could attract at least 15 percent of its students without reliance on 
the Veteran benefit. The 90/10 limit under title IV needs to be 
restructured. I would recommend that it be changed to be 85/15 and to 
apply not to revenues, but to the numbers of students who receive any 
Federal student financial aid, whether grants or loans under title IV, 
the VA, or similar programs. Proprietary schools will likely argue that 
because they attract a lower income student, such a restriction would 
not be possible for them. One has to wonder, however, if they are 
providing a good education, why they are not also attracting some 
higher income students. Some higher income students do want to become 
radiologists, vocational nurses, computer technicians or obtain 
Bachelors' or advanced degrees in career-focused fields. This change 
would incentivize proprietary schools not to raise tuition, but to 
lower it, as they would have to compete for students in the market 
generally, rather than just trying to maximize the financial aid the 
school can collect by selling dreams of a career to poor people.
    This change would have to be accompanied by a strict requirement 
that the school must first make known to the student all financial aid 
the student can qualify for, before offering information about private, 
non-Federal loans so that schools would not just push students into 
even higher interest, less favorable private loans. It would also have 
to be accompanied by some changes in private loans, as discussed below.

 7. CHANGE INCENTIVES FOR PRIVATE LENDERS AND SCHOOLS BY ENSURING THE 
          EXISTING FTC HOLDER RULE IS ENFORCED AGAINST LENDERS

    Under the Federal Trade Commission's rule, commonly referred to as 
the ``Holder Rule,'' sellers of consumer goods and services are 
required to include a provision in credit contracts they assign to a 
lender, or in loans if they refer the consumer to the lender or arrange 
the loan, that makes the creditor subject to the same claims and 
defenses the purchaser could assert against the seller. This standard 
rule prevents a seller from selling a defective product, but having the 
payments due to another party who claims the right to collect, even 
though the product is defective. Unfortunately, some courts have held 
that if the seller (in this case, the school) does not see to it that 
the provision is in the credit document, the creditor is not bound by 
the rule.
    The FTC does not regulate lenders, so it cannot require them to 
include the provision, and the agencies that do regulate lenders have 
failed to promulgate a parallel rule. This means that lenders need have 
little concern about whether the school is good or not. This 
inconsistency needs to be addressed so that lenders will have incentive 
to provide credit only for students at good schools, or to require 
schools to put up a deposit to cover potential future claims or 
defenses to payment. Congress should address this by requiring the 
notice in contracts for student loans and by specifying that the lender 
is liable, whether or not the notice is included, if the notice should 
have been included by law.
    In connection with the ``holder'' issue, schools should be required 
to certify all private student loans and that the student has exhausted 
all means of Federal financing, before a private loan may be disbursed. 
This would also insure that when schools are determining their 
students' loan debt, they are including any private loans the student 
may have.

  8. STUDY AND ESTABLISH APPROPRIATE STANDARDS FOR DISTANCE EDUCATION

    This is probably the fastest growing segment of proprietary schools 
and the area most susceptible to abuse. Before 2006, eligible schools 
were limited to providing distance education, including correspondence 
courses, for no more than 50 percent of their students and no more than 
50 percent of their courses. Despite caution from the GAO and IG \2\ 
that removing this limitation without better controls would lead to 
increased fraud and abuse, the limit was lifted as to 
telecommunications courses (those offered by electronic means), but not 
as to correspondence courses. The only limit on telecommunications 
courses is that they must provide regular and substantive interaction 
between the student and teacher, but that interaction need not be 
synchronous. The only clarification of those terms States that the 
interaction must be at regular intervals and not be trivial.
---------------------------------------------------------------------------
    \2\ General Accounting Office, ``Distance Education: Improved Data 
on Program Costs and Guidelines on Quality Assessments Needed to Inform 
Federal Policy,'' GAO-04-279 (February 2004); see also 2009 testimony 
at http://edlabor.house.gov/documents/111/pdf/testimony/
20091014MaryMitchelsonTestimony.pdf.
---------------------------------------------------------------------------
    This provision leaves the student financial aid programs wide open 
to fraud and abuse. Among other issues, for-profit schools may purchase 
a small, reputable school, then turn the school into a massive online 
college, with virtually no oversight. A further concern must be that 
schools that may have been providing good, needed hands-on programs at 
an on-site facility, will be tempted to reduce costs by going to all, 
or almost all on-line programs. Although telecommunications programs 
are required to be accredited, the GAO has found the same lack of 
accrediting agency standards here as noted above.
    In her testimony, the Inspector General also noted her concern 
about the lack of measures to insure Federal dollars are not being 
spent for little or no benefit because of the lack of oversight of 
distance education programs. Congress should reinstate the 50 percent 
limitation on on-line programs until the means to prevent abuse can be 
studied and implemented. There needs to be a study to establish what 
requirements and monitoring needs to be implemented to prevent the 
massive potential for problems in this burgeoning area.

  9. REQUIRE CANCELLATION PERIODS AND PRO-RATA REFUNDS, AND PROHIBIT 
    CONTRACTUAL OBLIGATION OR PAYMENT BEYOND ONE TERM OR FOUR MONTHS

    Each of these suggestions have in common that they offer a measure 
of self-help to students who may find themselves in one of the ``bad 
actor'' schools, and that they have been used in one or more States, to 
curb abuses, but without preventing good schools from flourishing.
    In California, the State law for 19 years required proprietary 
schools to provide a full refund (except for a modest registration fee) 
to any student who canceled the program within the first 5 class days. 
That way, there was a chance the student would discover if the 
equipment or facilities were lacking, or if teachers were untrained or 
had no practical experience before the student had spent thousands of 
dollars on a worthless education. Other States prevent the school from 
keeping even a registration fee if the student cancels on or before the 
first day of class. While bad actor schools become adept at giving a 
good first impression, some students may discover the problems in this 
initial period.
    For 19 years, California required proprietary schools to provide a 
full pro-rata refund throughout the program. That requirement reduced 
the churn from schools constantly admitting new students and ignoring 
students' needs once they passed an arbitrary percentage (which varies 
by school) of the course, after which students were no longer entitled 
to any refund. Oregon has used a similar concept, prohibiting schools 
from collecting from students or obligating students for more than one 
term or four months. Again, students under this system might lose some 
money on a bad school, but when they realize that things are not as 
represented, they are free to leave, without being obligated for many 
months more. Without such a policy, students report that the school 
responds to their complaints by saying, the student already owes all 
the money, so there is no point to quitting out of dissatisfaction with 
the program.

10. REQUIRE ABILITY TO BENEFIT TESTING, EITHER FOR ALL STUDENTS, OR AT 
LEAST FOR ALL STUDENTS WHO DID NOT GRADUATE FROM A PUBLIC HIGH SCHOOL; 
  ELIMINATE 6 UNIT ALTERNATIVE MEASURE FOR ENTRANCE UNTIL SUFFICIENT 
               STUDY AT PROPRIETARY SCHOOLS HAS OCCURRED

    To be admitted, students are supposed to have a high school 
diploma, or pass a test demonstrating their ability to benefit from the 
program being offered. The Inspector General has testified that $12 
billion in financial aid was granted in fiscal year 2009 based on 
results of Ability-to-Benefit (ATB) tests.\3\ Needless to say, this has 
been a well-known area where fraud occurs. The Department has recently 
proposed much-needed changes, but I believe those are inadequate to 
clean up this problem area.
---------------------------------------------------------------------------
    \3\ http:/ /studentlendinganalytics.typepad.com/
student_lending_analytics / 2009 /10 /highlights-from-house-hearing-on-
oversight- of- atb-testing-and-diploma-mills-11-of-aid-recipients-ent
.html.
---------------------------------------------------------------------------
    There has been no definition of ``high school diploma,'' so that 
proprietary schools could turn a blind eye to bogus diplomas which 
could be obtained for a fee. The Department has proposed to require 
schools to have procedures to deal with suspect diplomas, but the 
proposed rule still leaves a lot of room for turning a blind eye. 
Additionally, a high school diploma may not be adequate to determine if 
a prospective student has the basic skills needed for the coursework 
for particular careers.
    Current rules require an ability-to-benefit (ATB) test to be 
administered to non-high school graduates by an independent tester. 
This requirement has had limited impact, however, as testers are 
generally selected by the school, give the tests at the school, and 
rely on the school to maintain the tests and answer sheets. Apparently, 
the so-called ``independent'' testers do not run a business in which 
they have the facilities to guard the tests themselves. Recently, the 
GAO found in undercover operations that tests were not administered 
properly, but instead were compromised to ensure the student could be 
admitted. It is unclear whether the ATB test is even required for 
students who did graduate from high school, but in a country in which 
their education was in another language. Sometimes such students are 
told courses will be offered in their language, but ultimately they are 
put in English-only classes they cannot hope to comprehend.
    Under the law, the Department is charged with determining 
appropriate test scores to allow eligibility. This is also problematic 
because the Department has not interpreted the law to require ability 
to benefit from the specific program for which a student is enrolling, 
but rather, to be simply the equivalent of having a high school 
diploma. Obviously, the beginning skills for, say, security guard, may 
be different from those required for a sonographer or radiologist or 
cosmetologist.
    In addition, recently, on the basis of a study carried out in 
community colleges, an alternative measure--the successful completion 
of 6 units--is now allowed to determine whether a student may be 
eligible for Federal financial aid. This provision has been enacted, 
but there are virtually no regulations to prevent abuse. Those schools 
that simply want more students can easily manipulate this provision to 
claim students have successfully completed some course that is 
available to complete some program.
    In short, the current ability-to-benefit process needs overhaul. 
Tests should be related to the skills that are needed to succeed in the 
particular program in which the student is enrolling. Tests should be 
administered at a location away from the school, by persons not 
recruited by the school, who have sufficient resources to guard tests 
and answer sheets from being compromised. If all students are required 
to be tested, unless they graduated from a public high school, the 
problem with bogus high school diplomas can be reduced, if not 
eliminated. Testing of all students, even if they have a public high 
school diploma, would help prevent students enrolling in programs for 
which they do not have the basic skills necessary. And the 6-unit 
alternative should be allowed in proprietary schools only after 
adequate study in proprietary schools to show it is comparable to 
testing.

  11. EXPAND BASES FOR LOAN DISCHARGE AND REQUIRE REIMBURSEMENT FROM 
   SCHOOL OR LENDER OR ALLOW STUDENTS TO SEEK REMEDIES DIRECTLY FROM 
                           SCHOOL AND LENDER

    Students could play a role in program integrity if they had tools 
to do so. Currently, however, students may only have their student 
loans canceled (discharged) by the Department of Education in very 
narrow circumstances, such as the school's false certification of the 
student's ability to benefit, the school's failure to properly return 
title IV money, or the school's closure. The student's burden to prove 
the false certification discharge is very difficult, given that the 
Department (in some cases) and the school have the needed records, 
which the student does not have. Additionally, the Department has been 
very limited in agreeing to cancellation for groups of students, even 
if there is a judgment finding the false certification applied to an 
entire group of students, or if the Department has similar claims from 
students in its files evidencing the alleged false certification by the 
same school. Additionally, to be effective in stopping bad actors, the 
Department needs to be aggressive in recovering money from schools that 
have falsely certified eligibility. Sometimes, of course, the 
Department's failure to collect is because the school has closed, 
without funds to repay the loan.
    The other traditional remedy for fraud and abuse, a civil action, 
is not readily available. It is not allowed under current Federal law. 
Employees who have witnessed false claims for Federal money by the 
school may sue and recover a share of the money paid in the judgment. 
Students, however, have no right to sue under the Higher Education Act. 
They may be able to assert claims under State law. But even there, they 
are often thwarted because the school requires arbitration in which the 
students' ability to discover needed facts is limited, rather than 
allowing a lawsuit.
    In addition to the limits on these means of redress by students, 
claims students do pursue successfully are generally not publicly 
known. Arbitration proceedings are generally private, not public, like 
courts. Schools often require students' confidentiality to settle a 
claim and often also prohibit the student from discussing their 
grievance with others. Sometimes such confidentiality provisions seem 
to prevent the student even from contacting government agencies about 
the issue. Typically, evidence of wrongdoing in private arbitrations or 
actions that settle is hidden away, not available to the Department, 
accrediting agencies or law enforcement agencies.
    These limits on redress and on public information about settlements 
of disputes both artificially depress Congress' and the public's 
awareness of problems, and prevent students from playing a larger role 
in program integrity. Congress should examine these limitations to 
increase the part students play in program integrity. In particular, 
notice of settlements should be provided to the Department and law 
enforcement agencies, and evidence developed that points to violations 
of the Higher Education Act should be required to be made available to 
the Department and law enforcement agencies.

            12. CONSIDER ESTABLISHING TUITION RECOVERY FUND

    One remedy that has been used in States, including in California, 
is the establishment of a tuition recovery fund, funded by fees on 
schools, based on numbers of students or amount of tuition. Students 
can collect from such a fund if they obtain a judgment against a school 
which they cannot collect, if they were enrolled in programs which the 
school stopped offering before the student could complete, or if the 
school itself closed before the student could complete the program.

      13. REQUIRE A HIGHER RATIO OF CURRENT ASSETS TO LIABILITIES

    One recurring problem is when a school takes in tuition fees in the 
form of Federal aid, then closes before students can complete their 
programs. Because the proprietary schools' educational quality often 
does not measure up to non-profit or public schools, the credits the 
students have already received are not transferable. Indeed, even when 
proprietary schools have the opportunity to make their credits 
transfer, they frequently choose not to do so, forcing the student to 
continue at the proprietary school or have to start over at another 
school. Sometimes so-called ``teach-outs'' are offered at another 
school, but often they are inadequate or require additional 
expenditures to complete the program the student has already paid for. 
Currently, only a 1 to 1 ratio of current assets to liabilities is 
required under Federal law. A 1 to 1 ratio is, in essence, a penny away 
from bankruptcy. The ratio is too low. In other businesses, ratios of 2 
to 1 are considered appropriate. In California schools had to have at 
least a 1.25 to 1 ratio (excluding such intangible assets as good 
will). The requirement, if enforced, could reduce the number of such 
closures while still allowing stable schools to flourish.

          14. DIRECT MORE FEDERAL FUNDS TO COMMUNITY COLLEGES

    Although this may be outside of your question, it may be a 
necessary component. I believe there are sound grounds to direct funds 
to public community colleges which perform some functions similar to 
proprietary schools, but at a much lower cost to students and the 
government. State community college systems reach throughout the 
country. In many cases, State community college systems have the 
flexibility in schedules and in developing new programs that 
proprietary schools tout. Students who go to community colleges, 
however, borrow much less, wind up with less debt service after they 
finish, and, if they want to continue their education, generally can 
transfer credits to other public schools in the State. I think we need 
to seriously look at whether funds would be allocated more equitably, 
and whether we would be better able to serve the population if more 
funds were directed to community colleges, rather than continuing the 
massive increases in the dollar amount and proportion of Federal funds 
spent supporting proprietary schools.
    I have tried to list some of the most salient improvements I 
believe are needed, based on my experience as a prosecutor. Others with 
expertise in different aspects of the student financial aid programs 
may suggest other valuable provisions, so I don't contend the list is 
necessarily comprehensive. Also, to the extent some changes are made, 
others may be less (or more) necessary. As a former prosecutor, I find 
it very frustrating that the main way to address the fraud, abuse and 
waste currently seems to be by expensive, resource-intensive, time-
consuming litigation, including prosecutions. I recognize that 
implementation of these suggestions would require careful drafting. I 
am quite willing to cooperate with you and the other members of the 
committee in drafting provisions so that the incentives can be turned 
around to operate to reduce the waste in the use of Federal financial 
aid in the proprietary school sector.

    Question 2. We have recently required that cohort default rates be 
reported on the College Navigator Web site. Do you think that entrance 
counseling for student loan borrowers should include a disclosure about 
default rates? Would some students decline to borrow if they knew that 
one third or even one half of all students who borrow to attend the 
institution were not able to repay the loans?
    Answer 2. I am not very hopeful that disclosures/counseling would 
make much difference, especially if the disclosures/counseling are 
provided by the school, or even by some independent organization that 
contracts with the school. I have seen that the enrollment process can 
so easily be manipulated to make a school sound like the best thing 
since sliced bread, despite required disclosures. Schools can and do 
undermine the impact of required counseling or disclosures by the rest 
of what they say. I believe preventing schools from operating, or from 
offering certain courses if they do not meet minimum standards, such as 
low lifetime default rates and high completion and gainful employment 
for their graduates, is the better approach. More information could be 
somewhat useful if it were readily available on the school's Web site 
and, especially for those who do not contact the school via the 
Internet, in a uniform disclosure form that had to be provided to 
prospective students on their first contact with a school, not buried 
in other materials, e.g., by a short video. Information provided later, 
just before the student signs enrollment agreements is usually too late 
in the process to overcome all the statements the school has already 
made that undermine or contradict the disclosures.

                       QUESTIONS OF SENATOR CASEY

    Question 1. The President has set the goal of the United States 
leading the world in college graduates by the year 2020. In your 
opinion, what is the role of for-profit colleges in trying to achieve 
this goal?
    Answer 1. I understand the goal to mean college graduates who are 
well-trained and able to find skilled work in their profession. We do 
not have a way to figure out how many proprietary schools are really 
contributing to this goal and how many are simply using students to 
milk the system and leave the students with huge debt burdens and 
little useable or transferable education. We don't know which schools 
really are sufficiently screening applicants for ability to succeed in 
the career program they choose, which are preparing their students for 
gainful employment and which are not, which are succeeding at having 
students graduate, which are adequately counseling students to match 
likely debt to likely earnings so they will not be overburdened with 
loans, or which are succeeding at having their graduates meet or exceed 
licensing or professional certification exam pass rates. So, I am not 
certain what role for-profit colleges will be able to play, because we 
currently have so little information about which for-profit colleges 
are really preparing students. What I do know is that the kinds of 
abuses and problems that I have observed are facilitated by the current 
regulatory system. Until we address the major problems in the system, I 
do not know how we can determine what role for-profit colleges will be 
able to play in meeting this goal.

    Question 2. What are for-profit schools currently required to 
report to the Department of Education around graduation rates and 
placement rates? How are placement rates tracked?
    Answer 2. My focus was on placement rates, not graduation rates, 
and I focused on the requirements of the California law, so there are 
probably others better qualified than I to discuss graduation rate 
reporting.
    Currently, for the vast majority of programs, there is no 
requirement for tracking job placement rates, much less reporting them. 
A provision under the Higher Education Act, which was enacted back when 
most programs were much shorter, applies only to courses of 300 to 599 
clock hours. 20 U.S.C.  1088(b)(2)(A). Apparently, virtually no 
programs are subject to this requirement, now, because schools have 
lengthened their courses to avoid the requirement. The statute requires 
these programs to have a 70 percent completion rate and a 70 percent 
job placement rate. 34 CFR 668.8(d)(2) and (e). That means (70 percent 
x 70 percent = 49 percent) forty-nine percent of those who begin the 
program and do not cancel with a full refund would have to be placed in 
a job for which they trained or ``a related comparable recognized 
occupation.'' The schools are supposed to determine the number of 
graduates who are employed within 180 days of graduation and stay 
employed for at least 13 weeks. 34 CFR 668.8(g). Schools are allowed to 
rely on ``[a] written statement from the student's employer,'' 
``[s]igned copies of State or Federal income tax forms'' or [w]ritten 
evidence of payments of Social Security taxes'' to demonstrate 
employment. 34 CFR 668.8(g)(2). Schools are also to submit an 
``attestation'' from a certified public accountant as to the placement 
and completion statistics. 34 CFR 668.23. In response to your third 
question below, see my comments regarding the deficiencies in this 
rule.

    Question 3. What, if any, statutory or regulatory changes should be 
made to strengthen the rules governing for-profit colleges? Are the 
penalties strong enough to hold these institutions accountable?
    Answer 3. Answering your second question first: As we relied on 
penalties under California law, I am not sufficiently familiar with 
penalties directly under the Higher Education Act to opine. As I 
discuss in more detail below, one failure of the remedies for 
violations is that they are not available directly to either students 
or law enforcement agencies.
    I have compiled a list of suggestions, some of which could be 
accomplished by regulations or by legislation, and others of which 
would require legislation. In general, most of the suggestions are 
remedies that have been used by California or other States or are 
revisions to laws that were enacted after the Nunn hearings, but have 
been weakened over time. Some remedies have been widely discussed, and 
I will only mention them briefly as you are undoubtedly already 
familiar with them. First, I list the suggestions. More detail about 
each suggestion then follows:

    1. Define and Enforce the Longstanding Requirement that Proprietary 
Programs (and certain other programs) Prepare Students for Gainful 
Employment.
    2. Strictly Prohibit Quotas and Incentive Compensation for 
Recruiting and Financial Aid.
    3. Publish and Base Continued Eligibility on Life-time Cohort 
Default Rates.
    4. Require Real Standards for State Authorization Agencies.
    5. Reform Accrediting Agency Role and Requirements.
    6. Revise 90/10 Requirement.
    7. Change Incentives for Private Lenders and Schools by Ensuring 
the Existing FTC Holder Rule Is Enforced Against Lenders.
    8. Study and Establish Appropriate Standards for Distance 
Education.
    9. Require Cancellation Periods and Pro-rata Refunds, and Prohibit 
Contractual Obligation or Payment Beyond One Term or 4 Months.
    10. Require Ability to Benefit Testing, Either for All Students, or 
at Least for All Students Who Did Not Graduate From a Public High 
School; Eliminate 6 Unit Alternative Measure for Entrance Until 
Sufficient Study at Proprietary Schools Has Occurred.
    11. Expand Bases for Loan Discharge and Require Reimbursement from 
School or Lender or Allow Students to Seek Remedies Directly from 
School and Lender.
    12. Consider Establishing Tuition Recovery Fund.
    13. Require a Higher Ratio of Current Assets to Liabilities.
    14. Direct More Federal Funds to Community Colleges.

  1. DEFINE AND ENFORCE THE LONGSTANDING REQUIREMENT THAT PROPRIETARY 
  PROGRAMS (AND CERTAIN OTHER PROGRAMS) PREPARE STUDENTS FOR GAINFUL 
                               EMPLOYMENT

    Congress apparently first noted the widespread exploitation of 
students by proprietary schools after enactment of the GI bill after 
World War II. The House Select Committee to Investigate Educational, 
Training, and Loan Guaranty Programs under GI bill, 2/14/1952 
describing the abuses in the GI bill from 1944 to 1950 in connection 
with recommending safeguards for veterans of the Korean War noted, 
inter alia:

          ``Exploitation by private schools has been widespread.''
          ``There was a rapid uncontrolled expansion of private profit 
        schools. . . .''
          ``Many schools have offered courses in fields where little or 
        no employment opportunity existed.''
          ``Training programs have been approved for unskilled or semi-
        skilled occupations where little or no training was required, 
        resulting in needless expenditure of funds and waste. . . .

    With reason, when Congress later added proprietary schools to the 
Higher Education Act, it specified that only schools that prepared 
students for gainful employment were eligible. However, the Department 
of Education has never defined, much less made much of any attempt to 
enforce this requirement. In the negotiated rulemaking on program 
integrity the Department initiated in 2009, the Department proposed a 
definition that is a modest step toward enforcement of this 
requirement. The proposal, which it has yet to officially propose, 
would set a flag to identify programs for which the students' median 
loan debt would be more than 8 percent of the projected salaries (at 
the 25th decile of salaries determined by the Bureau of Labor 
Statistics for the occupations for which the training is to prepare 
students). Programs that could not meet that standard would still be 
eligible if the school could demonstrate that the median debt load is 
less than 8 percent of the actual salaries graduates of those programs 
earn, or if 90 percent of the graduates of the program did not default 
(with ``default'' defined more accurately than under the current cohort 
default rate standards).
    Given that the 8 percent standard is usually used by lenders to 
determine the amount of all non-housing debt a borrower should 
reasonably carry, and that many students at proprietary schools are 
older and already have other debts such as auto loans and credit card 
debts, the 8 percent standard may be too high, especially for those 
whose salaries would be less than 150 percent of the poverty level. 
Nevertheless, it is a modest, reasonable first step. I believe the debt 
load of those who enroll, but do not complete also needs to be 
considered, so that there is no temptation for the bad actors to 
discourage those with the highest debt loads from completing the 
course, in order to lower the median debt load of students in a 
program.
    The Department's proposal, however, deals only with the ``gainful'' 
part of the phrase, not with the ``employment'' part. If a school does 
a poor job of training students, even if the program met the 8 percent 
or related criteria mentioned above, it might still have a minority of 
graduates who could actually obtain employment. Consequently, 
proprietary school programs should also have to meet a certain level of 
employment. In California, for example, for 19 years, proprietary 
schools were required to have at least 70 percent of the graduates from 
a program obtain employment within 6 months, in a position that lasted 
at least 60 days, for at least 32 hours a week. (Part time employment 
could also count if the student had specified in advance of the program 
and at the end that the student only wanted part-time employment.) As 
was obvious from my testimony, there needs to be some way to verify 
that claimed employment levels are true. One suggestion for accuracy in 
employment statistics is to require use of State unemployment insurance 
data, which some States already do for community colleges.
    A current provision under the Higher Education Act, which was 
enacted back when most programs were much shorter, applies only to 
short courses. The Department has now proposed to apply it more 
broadly, so far, as a reporting device only. Based on my experience, to 
be used more broadly, the existing provision needs to be strengthened 
and improved to prevent manipulation. For example, under the current 
provision, while accurate reporting would be helpful, the existing 
provision would not be useful. The documentation of employment allowed 
would not demonstrate that the employment really meets the standard. 
The current provision also relies on an ``attestation engagement'' by 
an accountant to verify the reported percentages, but the lack of 
specificity as to the sampling needed, and other details I believe, 
leaves this provision open to false or inflated reports.
    And, as noted above, completion rates also need to be tracked and 
verified, and a standard set to insure schools are not manipulating the 
data by discouraging completion by students they consider least likely 
to be able to get a job. In California, for example, after certain 
exceptions--death, military service, those who canceled within the 100 
percent full refund cancellation period, etc.--authorized programs had 
to show 60 percent of those enrolled completed the program.
    I view such standards as critical to separating out the good from 
the bad actors. Good schools would continually evaluate their programs, 
eliminating or revising those that have high debt levels in comparison 
to salaries available or whose graduates are unable to find work in the 
field in which they trained. The proprietary schools' lobbying arm, 
CCA, has represented that more than 80 percent of the programs it 
surveyed would meet the 8 percent flag, and likely additional programs 
would meet one of the two alternatives, although CCA did not run the 
numbers for the alternatives. It is unclear how many programs would 
meet a 70 percent employment requirement, but most national accrediting 
agencies already claim to have that high, or a higher standard. In 
California, until 2008, that was the standard schools were required to 
meet. The requirement did not seem to have slowed the development of 
proprietary schools in California (although the State agency charged 
with enforcement apparently did little to enforce the law).
    Schools should also be required to report on their Web sites, if 
they have one, their statistics for each program offered, as well as to 
provide a fact sheet to every prospective student showing the 
information for the program in which the prospective student has 
expressed an interest. Currently, there is no competition among schools 
based on such quality factors because those factors are not 
transparent. Making them transparent, if they are verified/monitored 
for accuracy, would provide some possibility of competition arising 
based on these quality criteria. Such real competition would help the 
good schools.
    While the Department could promulgate these changes, it has yet to 
do so. Congressional action might be needed. Of course there might need 
to be provisions related to an employment requirement to address 
extraordinary circumstances, such as limited employment available in a 
particular region after a major disruption, e.g., after hurricane 
Katrina, or to address the time lag for getting the results from 
licensing exams.

 2. STRICTLY PROHIBIT QUOTAS AND INCENTIVE COMPENSATION FOR RECRUITING 
                           AND FINANCIAL AID

    The recent Department of Education proposed regulation on incentive 
compensation goes a long way to restoring the full intent of the 
statute prohibiting incentive compensation. I am concerned, however, 
that a few possible loopholes may still exist and will be working with 
others to comment on the proposed rule. In addition, I also recommend a 
statutory change to make very clear that the use of quotas in 
connection with compensation for such staff is prohibited. From the 
information I have seen, it appears schools may be trying to get around 
the prohibition on incentive compensation by setting quotas and 
punishing in some way or firing those who do not reach the quota. While 
this may well be covered under the current statute, additional clarity 
would be advisable.
    The payment of incentive compensation or the use of quotas for 
those involved in or supervisors over admissions or financial aid tasks 
is particularly pernicious. Prospective students are likely to trust 
the ``admissions advisor,'' ``financial aid advisor,'' or school 
director as a person there to assist them. Prospective students don't 
readily realize they are dealing with commissioned sales persons, as 
they would when, e.g., buying a car.
    Good schools can compete on the basis of quality, and need not 
compete on incentives. The natural result of incentives/quotas is to 
encourage some of the types of abuse noted at the hearing, including 
misrepresentations, enrolling students ill-suited to a particular 
training program, or providing training that does not qualify the 
graduates for employment.

 3. PUBLISH AND BASE CONTINUED ELIGIBILITY ON LIFE-TIME COHORT DEFAULT 
                                 RATES

    Proprietary schools first came fully into the Higher Education Act 
financial aid programs in 1972. By the mid-80s, stories of fraud and 
abuse and high default rates were accumulating. One of the provisions 
enacted after the 1992 hearings by the Senate Permanent Subcommittee on 
Investigations was to eliminate from eligibility, schools with high 
default rates. Initially, that change had an impact, but the law has 
been watered down over the years, and schools have learned how to 
manipulate the data to prevent defaults from showing up within the time 
(2, soon to be 3 years) in which defaults are measured. Both the 
Inspector General and the GAO have pointed out that the short-time 
cohort default rate is a misleading indicator. It is a mere snapshot in 
time that does not give a full picture of default trends.\4\
---------------------------------------------------------------------------
    \4\ See, e.g., U.S. Department of Education, Office of Inspector 
General, ``Final Audit Report: Audit to Determine if Cohort Default 
Rates Provide Sufficient Information on Defaults in the Title IV Loan 
Program'', ED-OIG/A03-C0017 (December 2003); General Accounting Office, 
``Student Loans: Default Rates Need to be Computed More 
Appropriately'', GAO/HEHS-99-135 (July 1999).
---------------------------------------------------------------------------
    There are problems not only with the time period, but also with the 
cohort rate calculation method. In addition, the default measure does 
not include borrowers that are current, but struggling with overly 
burdensome debt or borrowers that are delinquent, but not yet in 
default (i.e., less than 9 months behind in their payments). These 
problems are expected to grow as interest rates rise along with 
borrowing levels.
    Unless cohort default rates are tracked for the life, schools will 
continue to be able to manipulate this limitation. Additionally, the 
default rate cut-off applied to each interval of time tracked should be 
a reasonable measure of defaults in credit markets that are not skewed 
by an influx of Federal loans. For example, current default limits over 
2 years of 25 percent (soon to be 30 percent over 3 years) are 
extraordinarily high compared to normal market-based credit default 
rates. Congress needs to act to make these changes.

       4. REQUIRE REAL STANDARDS FOR STATE AUTHORIZATION AGENCIES

    Traditionally, the Higher Education Act has depended on the triad 
of oversight, requiring a school to be accredited by a recognized 
accrediting agency, to be ``legally authorized within [the State in 
which it operates] to provide a program of education beyond secondary 
education,'' and to submit to the provisions of a participation 
agreement with the Department of Education. Currently, however, 
proprietary schools and their allies, the accrediting agencies, have 
successfully lobbied many States to rely on accreditation for most, if 
not all of their State oversight responsibilities. The Department of 
Education recently proposed a regulation that would require States to 
undertake at least some of the responsibilities contemplated by law, 
but apparently under pressure from some schools and accrediting 
agencies, failed to fully address the statutory requirements for State 
oversight. Current law requires the State agency to notify the 
Department of Education promptly of any fraud or substantial violation 
of the Higher Education Act, but the proposed rule does not require the 
State to have any mechanism by which it would be likely to notice such 
conduct.
    The Department has never had sufficient resources to adequately 
police the fraud and abuse in the proprietary sector. In my experience, 
local or State agencies are in a much better position to learn about 
problems early. As discussed below, accrediting agencies are not 
designed to fulfill this role. The Department's proposed regulation 
needs to be strengthened or the law needs to be revised to make clear 
that schools are not eligible if the State agency in the State in which 
the school operates relies on accrediting agencies for its essential 
functions. State agencies must themselves approve schools, monitor 
their compliance with provisions of the Higher Education Act or with 
State provisions that are as strong, or stronger than the Higher 
Education Act, and act to revoke authorization of schools that are not 
in compliance.

           5. REFORM ACCREDITING AGENCY ROLE AND REQUIREMENTS

    As was pointed out at the hearing, the advisory commission that 
recommends to the Department of Education about accrediting agency 
recognition is heavily loaded with representatives or employees of 
schools that live or die by accreditation; there is an incestuous 
relationship between accrediting agency boards and the schools they 
accredit; and schools are using purchase of small, previously 
accredited schools to gain accreditation, then expanding the schools 
beyond all recognition from the school and programs originally 
accredited. As I pointed out, virtually every school I have prosecuted 
was accredited, but accreditation did not address the poor outcomes, 
nor stop abuse and fraud. Typically, among other limitations, 
accrediting agencies have very small staffs, rely on volunteer staff 
from members to evaluate other members, do not have trained 
investigators or prosecutors involved in designing their oversight 
activities, do not set specific enough ``standards'' so that one can 
tell if they have been violated, have non-transparent procedures, and 
keep information about problems gathered confidential.
    Congress needs to address these deficiencies. At a minimum, the 
advisory commission needs to be revised so that the majority represents 
consumer and student interests, not the interests of schools that 
depend on accreditation. To the extent the financial aid programs 
continue to rely on accrediting agencies, minimum uniform criteria need 
to be established, particularly outcome criteria which all recognized 
accrediting agencies will monitor for compliance. Criteria, such as how 
much work is required for a unit of credit should not be based on 
accrediting agency determinations, but should be required to be set by 
the Department, and monitored by accrediting agencies.

                      6. REVISE 90/10 REQUIREMENT

    One of the requirements that came out of the 1992 hearings on 
proprietary school fraud and abuse was the requirement that at least 15 
percent of a school's revenues should come from other than title IV 
funds. This provision was derived from, but did not track the 
requirement for Veterans' programs. The rule for Veterans' programs was 
that at least 15 percent of the students must not use the GI benefit to 
pay for their schooling. This requirement was established because after 
the first GI bill, proprietary schools developed to capture the 
veterans benefits proliferated, and fraud and abuse were rampant (see 
above). Proprietary schools later successfully reduced the percentage 
not to be from title IV financial aid funds to 10 percent. 
Nevertheless, proprietary schools continue to operate near the 90 
percent title IV subsidized margin. After lobbying Congress to be able 
to count all institutional loans toward their 10 percent in the years 
in which the loans are made (rather than when they are repaid), some 
proprietary schools began to offer, or increase their offering of 
school financing. Some schools admit they expect to collect less than 
50 percent of the amounts owed on their loans for students, suggesting 
these ``loans'' are driven, in part, by the need to come up with enough 
non-Federal funding to meet the watered down 10 percent. Apparently and 
perversely, some proprietary schools are increasing their fees above 
the amount available in title IV grants and loans as a strategy for 
meeting the 10 percent that cannot be from title IV funds.
    Even if one looks at just independent students taking 4-year 
programs at public, non-profit, and for-profit schools, the percentage 
of borrowers varies dramatically. In the publics and non-profits, 24 
percent to 31 percent of students have no Federal loans, but at the 
for-profits, only 4 percent do not have Federal loans. The concept of 
the Veterans' 85/15 limit is that in the marketplace, a good school 
could attract at least 15 percent of its students without reliance on 
the Veteran benefit. The 90/10 limit under title IV needs to be 
restructured. I would recommend that it be changed to be 85/15 and to 
apply not to revenues, but to the numbers of students who receive any 
Federal student financial aid, whether grants or loans under title IV, 
the VA, or similar programs. Proprietary schools will likely argue that 
because they attract a lower income student, such a restriction would 
not be possible for them. One has to wonder, however, if they are 
providing a good education, why they are not also attracting some 
higher-income students. Some higher income students do want to become 
radiologists, vocational nurses, computer technicians or obtain 
Bachelors' or advanced degrees in career-focused fields. This change 
would incentivize proprietary schools not to raise tuition, but to 
lower it, as they would have to compete for students in the market 
generally, rather than just trying to maximize the financial aid the 
school can collect by selling dreams of a career to poor people.
    This change would have to be accompanied by a strict requirement 
that the school must first make known to the student all financial aid 
the student can qualify for, before offering information about private, 
non-Federal loans so that schools would not just push students into 
even higher interest, less favorable private loans. It would also have 
to be accompanied by some changes in private loans, as discussed below.

 7. CHANGE INCENTIVES FOR PRIVATE LENDERS AND SCHOOLS BY ENSURING THE 
          EXISTING FTC HOLDER RULE IS ENFORCED AGAINST LENDERS

    Under the Federal Trade Commission's rule, commonly referred to as 
the ``Holder Rule,'' sellers of consumer goods and services are 
required to include a provision in credit contracts they assign to a 
lender, or in loans if they refer the consumer to the lender or arrange 
the loan, that makes the creditor subject to the same claims and 
defenses the purchaser could assert against the seller. This standard 
rule prevents a seller from selling a defective product, but having the 
payments due to another party who claims the right to collect, even 
though the product is defective. Unfortunately, some courts have held 
that if the seller (in this case, the school) does not see to it that 
the provision is in the credit document, the creditor is not bound by 
the rule.
    The FTC does not regulate lenders, so it cannot require them to 
include the provision, and the agencies that do regulate lenders have 
failed to promulgate a parallel rule. This means that lenders need have 
little concern about whether the school is good or not. This 
inconsistency needs to be addressed so that lenders will have 
incentives to provide credit only for students at good schools, or to 
require schools to put up a deposit to cover potential future claims or 
defenses to payment. Congress should address this by requiring the 
notice in contracts for student loans and by specifying that the lender 
is liable, whether or not the notice is included, if the notice should 
have been included by law.
    In connection with the ``holder'' issue, schools should be required 
to certify all private student loans and that the student has exhausted 
all means of Federal financing, before a private loan may be disbursed. 
This would also insure that when schools are determining their 
students' loan debt, they are including any private loans the student 
may have.

  8. STUDY AND ESTABLISH APPROPRIATE STANDARDS FOR DISTANCE EDUCATION

    This is probably the fastest growing segment of proprietary schools 
and the area most susceptible to abuse. Before 2006, eligible schools 
were limited to providing distance education, including correspondence 
courses, for no more than 50 percent of their students and no more than 
50 percent of their courses. Despite caution from the GAO and IG \5\ 
that removing this limitation without better controls would lead to 
increased fraud and abuse, the limit was lifted as to 
telecommunications courses (those offered by electronic means), but not 
as to correspondence courses. The only limit on telecommunications 
courses is that they must provide regular and substantive interaction 
between the student and teacher, but that interaction need not be 
synchronous. The only clarification of those terms states that the 
interaction must be at regular intervals and not be trivial.
---------------------------------------------------------------------------
    \5\ General Accounting Office, ``Distance Education: Improved Data 
on Program Costs and Guidelines on Quality Assessments Needed to Inform 
Federal Policy,'' GAO-04-279 (February 2004); see also 2009 testimony 
at http://edlabor.house.gov/documents/111/pdf/testimony/
20091014MaryMitchelsonTestimony.pdf.
---------------------------------------------------------------------------
    This provision leaves the student financial aid programs wide open 
to fraud and abuse. Among other issues, for-profit schools may purchase 
a small, reputable school, then turn the school into a massive online 
college, with virtually no oversight. A further concern must be that 
schools that may have been providing good, needed hands-on programs at 
an on-site facility, will be tempted to reduce costs by going to all, 
or almost all on-line programs. Although telecommunications programs 
are required to be accredited, the GAO has found the same lack of 
accrediting agency standards here as noted above.
    In her testimony, the Inspector General also noted her concern 
about the lack of measures to insure Federal dollars are not being 
spent for little or no benefit because of the lack of oversight of 
distance education programs. Congress should re-instate the 50 percent 
limitation on on-line programs until the means to prevent abuse can be 
studied and implemented. There needs to be a study to establish what 
requirements and monitoring needs to be implemented to prevent the 
massive potential for problems in this burgeoning area.

  9. REQUIRE CANCELLATION PERIODS AND PRO-RATA REFUNDS, AND PROHIBIT 
    CONTRACTUAL OBLIGATION OR PAYMENT BEYOND ONE TERM OR FOUR MONTHS

    Each of these suggestions have in common that they offer a measure 
of self-help to students who may find themselves in one of the ``bad 
actor'' schools, and that they have been used in one or more States to 
curb abuses, but without preventing good schools from flourishing.
    In California, the State law for 19 years required proprietary 
schools to provide a full refund (except for a modest registration fee) 
to any student who canceled the program within the first 5 class days. 
That way, there was a chance the student would discover if the 
equipment or facilities were lacking, or if teachers were untrained or 
had no practical experience before the student had spent thousands of 
dollars on a worthless education. Other States prevent the school from 
keeping even a registration fee if the student cancels on or before the 
first day of class. While bad actor schools become adept at giving a 
good first impression, some students may discover the problems in this 
initial period.
    For 19 years, California required proprietary schools to provide a 
full pro-rata refund throughout the program. That requirement reduced 
the churn from schools constantly admitting new students and ignoring 
students' needs once they passed an arbitrary percentage (which varies 
by school) of the course after which students were no longer entitled 
to any refund. Oregon has used a similar concept, prohibiting schools 
from collecting from students or obligating students for more than one 
term or four months. Again, students under this system might lose some 
money on a bad school, but when they realize that things are not as 
represented, they are free to leave, without being obligated for many 
months more. Without such a policy, students report that the school 
responds to their complaints by saying, the student already owes all 
the money, so there is no point to quitting out of dissatisfaction with 
the program.

10. REQUIRE ABILITY TO BENEFIT TESTING, EITHER FOR ALL STUDENTS, OR AT 
LEAST FOR ALL STUDENTS WHO DID NOT GRADUATE FROM A PUBLIC HIGH SCHOOL; 
  ELIMINATE 6 UNIT ALTERNATIVE MEASURE FOR ENTRANCE UNTIL SUFFICIENT 
               STUDY AT PROPRIETARY SCHOOLS HAS OCCURRED

    To be admitted, students are supposed to have a high school 
diploma, or pass a test demonstrating their ability to benefit from the 
program being offered. The Inspector General has testified that $12 
billion in financial aid was granted in fiscal year 2009 based on 
results of Ability-to-Benefit (ATB) tests.\6\ Needless to say, this has 
been a well-known area where fraud occurs. The Department has recently 
proposed much-needed changes, but I believe those are inadequate to 
clean up this problem area.
---------------------------------------------------------------------------
    \6\ http:/ /studentlendinganalytics.typepad . com / 
student_lending_analytics / 2009/10/highlights-from-house-hearing-on-
oversight- of -atb-testing-and-diploma-mills-11-of-aid-recipients-ent
.html.
---------------------------------------------------------------------------
    There has been no definition of ``high school diploma,'' so that 
proprietary schools could turn a blind eye to bogus diplomas which 
could be obtained for a fee. The Department has proposed to require 
schools to have procedures to deal with suspect diplomas, but the 
proposed rule still leaves a lot of room for turning a blind eye. 
Additionally, a high school diploma may not be adequate to determine if 
a prospective student has the basic skills needed for the coursework 
for particular careers.
    Current rules require an ability-to-benefit (ATB) test to be 
administered to non-high school graduates by an independent tester. 
This requirement has had limited impact, however, as testers are 
generally selected by the school, give the tests at the school, and 
rely on the school to maintain the tests and answer sheets. Apparently, 
the so-called ``independent'' testers do not run a business in which 
they have the facilities to guard the tests themselves. Recently, the 
GAO found in undercover operations that tests were not administered 
properly, but instead were compromised to ensure the student could be 
admitted. It is unclear whether the ATB test is even required for 
students who did graduate from high school, but in a country in which 
their education was in another language. Sometimes such students are 
told courses will be offered in their language, but ultimately they are 
put in English-only classes they cannot hope to comprehend.
    Under the law, the Department is charged with determining 
appropriate test scores to allow eligibility. This is also problematic 
because the Department has not interpreted the law to require ability 
to benefit from the specific program for which a student is enrolling, 
but rather, to be simply the equivalent of having a high school 
diploma. Obviously, the beginning skills for, say, security guard, may 
be different from those required for a sonographer or radiologist or 
cosmetologist.
    In addition, recently, on the basis of a study carried out in 
community colleges, an alternative measure--the successful completion 
of 6 units--is now allowed to determine whether a student may be 
eligible for Federal financial aid. This provision has been enacted, 
but there are virtually no regulations to prevent abuse. Those schools 
that simply want more students can easily manipulate this provision to 
claim students have successfully completed some course that is 
available to complete some program.
    In short, the current ability-to-benefit process needs overhaul. 
Tests should be related to the skills that are needed to succeed in the 
particular program in which the student is enrolling. Tests should be 
administered at a location away from the school, by persons not 
recruited by the school, who have sufficient resources to guard tests 
and answer sheets from being compromised. If all students are required 
to be tested, unless they graduated from a public high school, the 
problem with bogus high school diplomas can be reduced, if not 
eliminated. Testing of all students, even if they have a public high 
school diploma, would help prevent students enrolling in programs for 
which they do not have the basic skills necessary. And the 6-unit 
alternative should be allowed in proprietary schools only after 
adequate study in proprietary schools to show it is comparable to 
testing.

  11. EXPAND BASES FOR LOAN DISCHARGE AND REQUIRE REIMBURSEMENT FROM 
   SCHOOL OR LENDER OR ALLOW STUDENTS TO SEEK REMEDIES DIRECTLY FROM 
                           SCHOOL AND LENDER

    Students could play a role in program integrity if they had tools 
to do so. Currently, however, students may only have their student 
loans canceled (discharged) by the Department of Education in very 
narrow circumstances, such as the school's false certification of the 
student's ability to benefit, the school's failure to properly return 
title IV money, or the school's closure. The student's burden to prove 
the false certification discharge is very difficult, given that the 
Department (in some cases) and the school have the needed records, 
which the student does not have. Additionally, the Department has been 
very limited in agreeing to cancellation for groups of students, even 
if there is a judgment finding the false certification applied to an 
entire group of students, or if the Department has similar claims from 
students in its files evidencing the alleged false certification by the 
same school. Additionally, to be effective in stopping bad actors, the 
Department needs to be aggressive in recovering money from schools that 
have falsely certified eligibility. Sometimes, of course, the 
Department's failure to collect is because the school has closed, 
without funds to repay the loan.
    The other traditional remedy for fraud and abuse, a civil action, 
is not readily available. It is not allowed under current Federal law. 
Employees who have witnessed false claims for Federal money by the 
school may sue and recover a share of the money paid in the judgment. 
Students, however, have no right to sue under the Higher Education Act. 
They may be able to assert claims under State law. But even there, they 
are often thwarted because the school requires arbitration in which the 
students' ability to discover needed facts is limited, rather than 
allowing a lawsuit.
    In addition to the limits on these means of redress by students, 
claims students do pursue successfully are generally not publicly 
known. Arbitration proceedings are generally private, not public, like 
courts. Schools often require students' confidentiality to settle a 
claim and often also prohibit the student from discussing their 
grievance with others. Sometimes such confidentiality provisions seem 
to prevent the student even from contacting government agencies about 
the issue. Typically, evidence of wrongdoing in private arbitrations or 
actions that settle is hidden away, not available to the Department, 
accrediting agencies or law enforcement agencies.
    These limits on redress and on public information about settlements 
of disputes both artificially depress Congress' and the public's 
awareness of problems, and prevent students from playing a larger role 
in program integrity. Congress should examine these limitations to 
increase the part students play in program integrity. In particular, 
notice of settlements should be provided to the Department and law 
enforcement agencies, and evidence developed that points to violations 
of the Higher Education Act should be required to be made available to 
the Department and law enforcement agencies.

            12. CONSIDER ESTABLISHING TUITION RECOVERY FUND

    One remedy that has been used in States, including in California, 
is the establishment of a tuition recovery fund, funded by fees on 
schools, based on numbers of students or amount of tuition. Students 
can collect from such a fund if they obtain a judgment against a school 
which they cannot collect, if they were enrolled in programs which the 
school stopped offering before the student could complete, or if the 
school itself closed before the student could complete the program.

      13. REQUIRE A HIGHER RATIO OF CURRENT ASSETS TO LIABILITIES

    One recurring problem is when a school takes in tuition fees in the 
form of Federal aid, then closes before students can complete their 
programs. Because the proprietary schools' educational quality often 
does not measure up to non-profit or public schools, the credits the 
students have already received are not transferable. Indeed, even when 
proprietary schools have the opportunity to make their credits 
transfer, they frequently choose not to do so, forcing the student to 
continue at the proprietary school or have to start over at another 
school. Sometimes so-called ``teach-outs'' are offered at another 
school, but often they are inadequate or require additional 
expenditures to complete the program the student has already paid for. 
Currently, only a 1 to 1 ratio of current assets to liabilities is 
required under Federal law. A 1 to 1 ratio is, in essence, a penny away 
from bankruptcy. The ratio is too low. In other businesses, ratios of 2 
to 1 are considered appropriate. In California, schools had to have at 
least a 1.25 to 1 ratio (excluding such intangible assets as good 
will). The requirement, if enforced, could reduce the number of such 
closures while still allowing stable schools to flourish.

          14. DIRECT MORE FEDERAL FUNDS TO COMMUNITY COLLEGES

    Although this may be outside of your question, it may be a 
necessary component. I believe there are sound grounds to direct funds 
to public community colleges which perform some functions similar to 
proprietary schools, but at a much lower cost to students and the 
government. State community college systems reach throughout the 
country. In many cases, State community college systems have the 
flexibility in schedules and in developing new programs that 
proprietary schools tout. Students who go to community colleges, 
however, borrow much less, wind up with less debt service after they 
finish, and, if they want to continue their education, generally can 
transfer credits to other public schools in the State. I think we need 
to seriously look at whether funds would be allocated more equitably, 
and whether we would be better able to serve the population if more 
funds were directed to community colleges, rather than continuing the 
massive increases in the dollar amount and proportion of Federal funds 
spent supporting proprietary schools.
    I have tried to list some of the most salient improvements I 
believe are needed, based on my experience as a prosecutor. Others with 
expertise in different aspects of the student financial aid programs 
may suggest other valuable provisions, so I don't contend the list is 
necessarily comprehensive. Also, to the extent some changes are made, 
others may be less (or more) necessary. As a former prosecutor, I find 
it very frustrating that the main way to address the fraud, abuse and 
waste currently seems to be by expensive, resource-intensive, time-
consuming litigation, including prosecutions. I recognize that 
implementation of these suggestions would require careful drafting. I 
am quite willing to cooperate with you and the other members of the 
committee in drafting provisions so that the incentives can be turned 
around to operate to reduce the waste in the use of Federal financial 
aid in the proprietary school sector.

                       QUESTIONS OF SENATOR HAGAN

    Question 1. At the end of fiscal year 2010, there are estimated to 
be over $700 billion in outstanding, federally backed student loans. 
Taxpayers are backing almost all of those loans.
    I realize that this question can apply equally to non-profit 
institutions as well, but since we're talking about the for-profit 
industry today, could any of the witnesses tell me what specific, 
quantitative measurements we have across the industry to tell us what 
the taxpayers are getting for all that money? What sort of industry-
wide performance measures are available to help us better understand 
the performance of institutions that survive on the largess of the 
taxpayer?
    Answer 1. Currently, virtually, none. The most we have is the very 
short period of cohort default rate reporting, which we have seen can 
easily be manipulated. A student can be behind in payments for 9 months 
before being in default and usually has a grace period right after 
graduation. Available deferments or forbearances, e.g., if unemployed, 
can stretch this period out even further, so that a diligent school can 
keep a student out of default the entire 2-year period, even if the 
student never makes a payment. This manipulation is most evident from 
the Department's reporting on school default rates in anticipation of 
the new requirement to track defaults over 3 years. There were huge 
differences between default rates for the current 2-year reporting 
period and the 3-year reporting period that will apply in the future. 
See http://federalstudentaid.ed.gov/datacenter/cohort.html.

    Question 2. Some say that the for-profit sector is highly regulated 
with oversight from the U.S. Department of Education, State licensure 
agencies and accrediting bodies. Others may disagree, citing that much 
more needs to be done.
    That said, what are your thoughts on how can we better align the 
goals of each of these agencies so that everyone is demanding the 
highest quality outcomes for every institution?
    Answer 2. I believe that substantial changes are needed with 
respect to accrediting agencies and State agencies.
 the role and requirements for accrediting agencies need to be reformed
    As was pointed out at the hearing, the National Advisory Committee 
on Institutional Quality and Integrity, the body that recommends to the 
Department of Education about accrediting agency recognition is heavily 
loaded with representatives or employees of schools that live or die by 
accreditation; there is an incestuous relationship between accrediting 
agency boards and the schools they accredit; and schools are using 
purchase of small, previously accredited schools to gain accreditation, 
then expanding the schools beyond all recognition of the school and 
programs originally accredited. As I pointed out, virtually every 
school I have prosecuted was accredited, but accreditation did not 
address the poor outcomes, nor stop abuse and fraud. Typically, among 
other limitations, accrediting agencies have very small staffs, rely on 
staff from members to evaluate other members, do not have trained 
investigators or prosecutors involved in designing their oversight 
activities, do not set specific enough ``standards'' so that one can 
tell if they have been violated, have non-transparent procedures, and 
keep information about problems gathered confidential.
    At a minimum, the advisory commission needs to be revised so that 
the majority represents consumer and student interests, not the 
interests of schools that depend on accreditation. To the extent the 
financial aid programs continue to rely on accrediting agencies, the 
Department needs to specify minimum uniform criteria, particularly 
outcome criteria in which all recognized accrediting agencies will 
monitor for compliance. Criteria, such as how much work is required for 
a unit of credit should not be based on accrediting agency 
determinations, but should be set by the Department, and monitored by 
accrediting agencies.

        REQUIRE REAL STANDARDS FOR STATE AUTHORIZATION AGENCIES

    Traditionally, the Higher Education Act has depended on the triad 
of oversight, requiring a school to be accredited by a recognized 
accrediting agency, to be ``legally authorized within [the State in 
which it operates] to provide a program of education beyond secondary 
education,'' and to submit to the provisions of a participation 
agreement with the Department of Education. Currently, however, 
proprietary schools and their allies, the accrediting agencies, have 
successfully lobbied many States to rely on accreditation for most, if 
not all of their State oversight responsibilities. The Department of 
Education recently proposed a regulation that would require States to 
undertake at least some of the responsibilities contemplated by law, 
but apparently under pressure from some schools and accrediting 
agencies, failed to fully address the statutory requirements for State 
oversight. Current law requires the State agency to notify the 
Department of Education promptly of any fraud or substantial violation 
of the Higher Education Act, but the proposed rule does not require the 
State to have any mechanism by which it would be likely to notice such 
conduct.
    The Department has never had sufficient resources to adequately 
police the fraud and abuse in the proprietary sector. In my experience, 
local or State agencies are in a much better position to learn about 
problems early. As discussed above, accrediting agencies are not 
designed to fulfill this role. The Department's proposed regulation 
needs to be strengthened or the law needs to be revised to make clear 
that schools are not eligible if the State agency in the State in which 
the school operates relies on accrediting agencies for its essential 
functions. State agencies must themselves approve schools, monitor 
their compliance with provisions of the Higher Education Act or with 
State provisions that are as strong, or stronger than the Higher 
Education Act, and act to revoke authorization of schools that are not 
in compliance.

    Question 3. Many of you in your testimony mention the ``90/10 
rule'', the provision that requires proprietary institutions of higher 
education to have at least 10 percent of the institution's revenues 
from sources that are not derived from funds provided through Federal 
financial aid.
    Is there a way to more accurately track the percentage of title IV 
dollars that schools receive?
    Answer 3. I don't have sufficient information to answer.

    Question 4. As you know, the purpose of this hearing is for all of 
us to get a better sense of how well the for-profit education industry 
is serving students. We know that there are good actors as well as bad 
actors in the for-profit education industry.
    For those of us who want to ensure that anyone who has the drive 
and desire to get a high-quality education is able to do so, how do you 
suggest we work together to better identify those schools that are 
getting the job done and those that aren't?
    Answer 4. In addition to my comments above about accrediting 
agencies and State agencies, I offer the following suggestions to help 
us better identify those schools that are getting the job done and 
those that aren't. In making these suggestions, I am aware of the long 
reported history of fraud, abuse, and failure to adequately train 
students in the proprietary school sector. Past efforts at the Federal 
level and in some States to sort the good from the bad have at times 
made progress, but have often been insufficient. In general, most of 
the suggestions are remedies that have been used by California or other 
States or are revisions to laws that were enacted after the Nunn 
hearings, but have been weakened over time. The suggestions aim to 
change the incentives, so that schools will need to do a good job to 
succeed. That is in contrast to the current state of affairs, in which 
incentives encourage a rush to the bottom. Some remedies have been 
widely discussed, and I will only mention them briefly as you are 
undoubtedly already familiar with them. First, I list the suggestions. 
More detail about each suggestion then follows:

    1. Define and Enforce the Longstanding Requirement that Proprietary 
Programs (and certain other programs) Prepare Students for Gainful 
Employment.
    2. Strictly Prohibit Quotas and Incentive Compensation for 
Recruiting and Financial Aid.
    3. Publish and Base Continued Eligibility on Life-time Cohort 
Default Rates.
    4. Revise 90/10 Requirement.
    5. Change Incentives for Private Lenders and Schools by Ensuring 
the Existing FTC Holder Rule Is Enforced Against Lenders.
    6. Study and Establish Appropriate Standards for Distance 
Education.
    7. Require Cancellation Periods and Pro-rata Refunds, and Prohibit 
Contractual Obligation or Payment Beyond One Term or 4 Months.
    8. Require Ability to Benefit Testing, Either for All Students, or 
at Least for All Students Who Did Not Graduate From a Public High 
School; Eliminate 6 Unit Alternative Measure for Entrance Until 
Sufficient Study at Proprietary Schools Has Occurred.
    9. Expand Bases for Loan Discharge and Require Reimbursement from 
School or Lender or Allow Students to Seek Remedies Directly from 
School and Lender.
    10. Require a Higher Ratio of Current Assets to Liabilities.

  1. DEFINE AND ENFORCE THE LONGSTANDING REQUIREMENT THAT PROPRIETARY 
  PROGRAMS (AND CERTAIN OTHER PROGRAMS) PREPARE STUDENTS FOR GAINFUL 
                              EMPLOYMENT.

    Congress apparently first noted the widespread exploitation of 
students by proprietary schools after enactment of the GI bill after 
World War II. The House Select Committee to Investigate Educational, 
Training, and Loan Guaranty Programs under GI bill, 2/14/1952 
describing the abuses in the GI bill from 1944 to 1950 in connection 
with recommending safeguards for veterans of the Korean War noted, 
inter alia:

          ``Exploitation by private schools has been widespread.''
          ``There was a rapid uncontrolled expansion of private profit 
        schools. . . .''
          ``Many schools have offered courses in fields where little or 
        no employment opportunity existed.''
          ``Training programs have been approved for unskilled or semi-
        skilled occupations where little or no training was required, 
        resulting in needless expenditure of funds and waste. . . .''

    With reason, when Congress later added proprietary schools to the 
Higher Education Act, it specified that only schools that prepared 
students for gainful employment were eligible. However, the Department 
of Education has never defined, much less made much of any attempt to 
enforce this requirement. In the negotiated rulemaking on program 
integrity the Department initiated in 2009, the Department proposed a 
definition that is a modest step toward enforcement of this 
requirement. The proposal, which it has yet to officially propose, 
would set a flag to identify programs for which the students' median 
loan debt would be more than 8 percent of the projected salaries (at 
the 25th decile of salaries determined by the Bureau of Labor 
Statistics for the occupations for which the training is to prepare 
students). Programs that could not meet that standard would still be 
eligible if the school could demonstrate that the median debt load is 
less than 8 percent of the actual salaries graduates of those programs 
earn, or if 90 percent of the graduates of the program did not default 
(with ``default'' defined more accurately than under the current cohort 
default rate standards).
    Given that the 8 percent standard is usually used by lenders to 
determine the amount of all non-housing debt a borrower should 
reasonably carry, and that many students at proprietary schools are 
older and already have other debts such as auto loans and credit card 
debts, the 8 percent standard may be too high, especially for those 
whose salaries would be less than 150 percent of the poverty level. 
Nevertheless, it is a modest, reasonable first step. I believe the debt 
load of those who enroll, but do not complete also needs to be 
considered, so that there is no temptation for the bad actors to 
discourage those with the highest debt loads from completing the 
course, in order to lower the median debt load of students in a 
program.
    The Department's proposal, however, deals only with the ``gainful'' 
part of the phrase, not with the ``employment'' part. If a school does 
a poor job of training students, even if the program met the 8 percent 
or related criteria mentioned above, it might still have a minority of 
graduates who could actually obtain employment. Consequently, 
proprietary school programs should also have to meet a certain level of 
employment. In California, for example, for 19 years, proprietary 
schools were required to have at least 70 percent of the graduates from 
a program obtain employment within 6 months, in a position that lasted 
at least 60 days, for at least 32 hours a week. (Part time employment 
could also count if the student had specified in advance of the program 
and at the end that the student only wanted part-time employment.) As 
was obvious from my testimony, there needs to be some way to verify 
that claimed employment levels are true. One suggestion for accuracy in 
employment statistics is to require use of State unemployment insurance 
data, which some States already do for community colleges.
    A current provision under the Higher Education Act, which was 
enacted back when most programs were much shorter, applies only to 
short courses. The Department has now proposed to apply it more 
broadly, so far, as a reporting device only. Based on my experience, to 
be used more broadly, the existing provision needs to be strengthened 
and improved to prevent manipulation. For example, under the current 
provision, while accurate reporting would be helpful, the existing 
provision would not be useful. The documentation of employment allowed 
would not demonstrate that the employment really meets the standard. 
The current provision also relies on an ``attestation engagement'' by 
an accountant to verify the reported percentages, but the lack of 
specificity as to the sampling needed, and other details I believe, 
leaves this provision open to false or inflated reports.
    And, as noted above, completion rates also need to be tracked and 
verified, and a standard set to insure schools are not manipulating the 
data by discouraging completion by students they consider least likely 
to be able to get a job. In California, for example, after certain 
exceptions--death, military service, those who canceled within the 100 
percent full refund cancellation period, etc.--authorized programs had 
to show 60 percent of those enrolled completed the program.
    I view such standards as critical to separating out those which are 
getting the job done from those that are not. Good schools would 
continually evaluate their programs, eliminating or revising those that 
have high debt levels in comparison to salaries available or whose 
graduates are unable to find work in the field in which they trained. 
The proprietary schools' lobbying arm, CCA, has represented that more 
than 80 percent of the programs it surveyed would meet the 8 percent 
flag, and likely additional programs would meet one of the two 
alternatives, although CCA did not run the numbers for the 
alternatives. It is unclear how many programs would meet a 70 percent 
employment requirement, but most national accrediting agencies already 
claim to have that high, or a higher standard. In California, until 
2008, that was the standard schools were required to meet. The 
requirement did not seem to have slowed the development of proprietary 
schools in California (although the State agency charged with 
enforcement apparently did little to enforce the law).
    Schools should also be required to report on their Web sites, if 
they have one, their statistics for each program offered, as well as to 
provide a fact sheet to every prospective student showing the 
information for the program in which the prospective student has 
expressed an interest. Currently, there is no competition among schools 
based on such quality factors because those factors are not 
transparent. Making them transparent, if they are verified/monitored 
for accuracy, would provide some possibility of competition arising 
based on these quality criteria. Such real competition would help the 
good schools.
    Of course there might need to be provisions related to an 
employment requirement to address extraordinary circumstances, such as 
limited employment available in a particular region after a major 
disruption, e.g., after hurricane Katrina, or to address the time lag 
for getting the results from licensing exams.

 2. STRICTLY PROHIBIT QUOTAS AND INCENTIVE COMPENSATION FOR RECRUITING 
                           AND FINANCIAL AID

    The recent Department of Education proposed regulation on incentive 
compensation goes a long way to restoring the full intent of the 
statute prohibiting incentive compensation. I am concerned however, 
that a few possible loopholes may still exist and will be working with 
others to comment on the proposed rule. In addition, I also recommend a 
statutory change to make very clear that the use of quotas in 
connection with compensation for such staff is prohibited. From the 
information I have seen, it appears schools may be trying to get around 
the prohibition on incentive compensation by setting quotas and 
punishing in some way or firing those who do not reach the quota. While 
this may well be covered under the current statute, additional clarity 
would be advisable.
    The payment of incentive compensation or the use of quotas for 
those involved in or supervisors over admissions or financial aid tasks 
is particularly pernicious. Prospective students are likely to trust 
the ``admissions advisor,'' ``financial aid advisor,'' or school 
director as a person there to assist them. Prospective students don't 
readily realize they are dealing with commissioned sales persons, as 
they would when, e.g., buying a car.
    Good schools can compete on the basis of quality, and need not 
compete on incentives. The natural result of incentives/quotas is to 
encourage some of the types of abuse noted at the hearing, including 
misrepresentations, enrolling students ill-suited to a particular 
training program, or providing training that does not qualify the 
graduates for employment.

 3. PUBLISH AND BASE CONTINUED ELIGIBILITY ON LIFE-TIME COHORT DEFAULT 
                                 RATES

    Proprietary schools first came fully into the Higher Education Act 
financial aid programs in 1972. By the mid-80s, stories of fraud and 
abuse and high default rates were accumulating. One of the provisions 
enacted after the 1992 hearings by the Senate Permanent Subcommittee on 
Investigations was to eliminate from eligibility schools with high 
default rates. Initially, that change had an impact, but the law has 
been watered down over the years, and schools have learned how to 
manipulate the data to prevent defaults from showing up within the time 
(2, soon to be 3 years) in which defaults are measured. Both the 
Inspector General and the GAO have pointed out that the short-time 
cohort default rate is a misleading indicator. It is a mere snapshot in 
time that does not give a full picture of default trends.\7\
---------------------------------------------------------------------------
    \7\ See, e.g., U.S. Department of Education, Office of Inspector 
General, ``Final Audit Report: Audit to Determine if Cohort Default 
Rates Provide Sufficient Information on Defaults in the title IV Loan 
Program'', ED-OIG/A03-C0017 (December 2003); General Accounting Office, 
``Student Loans: Default Rates Need to be Computed More 
Appropriately'', GAO/HEHS-99-135 (July 1999).
---------------------------------------------------------------------------
    There are problems not only with the time period, but also with the 
cohort rate calculation method. In addition, the default measure does 
not include borrowers that are current, but struggling with overly 
burdensome debt or borrowers that are delinquent, but not yet in 
default (i.e., less than 9 months behind in their payments). These 
problems are expected to grow as interest rates rise along with 
borrowing levels.
    Unless cohort default rates are tracked for the life, schools will 
continue to be able to manipulate this limitation. Additionally, the 
default rate cut-off applied to each interval of time tracked should be 
a reasonable measure of defaults in credit markets that are not skewed 
by an influx of Federal loans. For example, current default limits over 
2 years of 25 percent (soon to be 30 percent over 3 years) are 
extraordinarily high compared to normal market-based credit default 
rates. Congress needs to act to make these changes.

                      4. REVISE 90/10 REQUIREMENT

    One of the requirements that came out of the 1992 hearings on 
proprietary school fraud and abuse was the requirement that at least 15 
percent of a school's revenue should come from other than title IV 
funds. This provision was derived from, but did not track the 
requirement for Veterans' programs. The rule for Veterans' programs was 
that at least 15 percent of the students must not use the GI benefit to 
pay for their schooling. This requirement was established because after 
the first GI bill, proprietary schools developed to capture the 
veterans benefits proliferated, and fraud and abuse were rampant (see 
above). Proprietary schools later successfully reduced the percentage 
not to be from title IV financial aid funds to 10 percent. 
Nevertheless, proprietary schools continue to operate near the 90 
percent title IV subsidized margin. After lobbying Congress to be able 
to count all institutional loans toward their 10 percent in the years 
in which the loans are made (rather than when they are repaid), some 
proprietary schools began to offer, or increase their offering of 
school financing. Some schools admit they expect to collect less than 
50 percent of the amounts owed on their loans for students, suggesting 
these ``loans'' are driven, in part, by the need to come up with enough 
non-Federal funding to meet the watered down 10 percent. Apparently and 
perversely, some proprietary schools are increasing their fees above 
the amount available in title IV grants and loans as a strategy for 
meeting the 10 percent that cannot be from title IV funds.
    Even if one looks at just independent students taking 4-year 
programs at public, non-profit, and for-profit schools, the percentage 
of borrowers varies dramatically. In the publics and non-profits, 24 
percent to 31 percent of students have no Federal loans, but at the 
for-profits, only 4 percent do not have Federal loans. The concept of 
the Veterans' 85/15 limit is that in the marketplace, a good school 
could attract at least 15 percent of its students without reliance on 
the Veteran benefit. The 90/10 limit under title IV needs to be 
restructured. I would recommend that it be changed to be 85/15 and to 
apply not to revenues, but to the numbers of students who receive any 
Federal student financial aid, whether grants or loans under title IV, 
the VA, or similar programs. Proprietary schools will likely argue that 
because they attract a lower income student, such a restriction would 
not be possible for them. One has to wonder, however, if they are 
providing a good education, why they are not also attracting some 
higher-income students. Some higher income students do want to become 
radiologists, vocational nurses, computer technicians or obtain 
Bachelors' or advanced degrees in career-focused fields. This change 
would incentivize proprietary schools not to raise tuition, but to 
lower it, as they would have to compete for students in the market 
generally, rather than just trying to maximize the financial aid the 
school can collect by selling dreams of a career to poor people.
    This change would have to be accompanied by a strict requirement 
that the school must first make known to the student all financial aid 
the student can qualify for, before offering information about private, 
non-Federal loans so that schools would not just push students into 
even higher interest, less favorable private loans. It would also have 
to be accompanied by some changes in private loans, as discussed below.

 5. CHANGE INCENTIVES FOR PRIVATE LENDERS AND SCHOOLS BY ENSURING THE 
          EXISTING FTC HOLDER RULE IS ENFORCED AGAINST LENDERS

    Under the Federal Trade Commission's rule, commonly referred to as 
the ``Holder Rule,'' sellers of consumer goods and services are 
required to include a provision in credit contracts they assign to a 
lender, or in loans if they refer the consumer to the lender or arrange 
the loan, that makes the creditor subject to the same claims and 
defenses the purchaser could assert against the seller. This standard 
rule prevents a seller from selling a defective product, but having the 
payments due to another party who claims the right to collect, even 
though the product is defective. Unfortunately, some courts have held 
that if the seller (in this case, the school) does not see to it that 
the provision is in the credit document, the creditor is not bound by 
the rule.
    The FTC does not regulate lenders, so it cannot require them to 
include the provision, and the agencies that do regulate lenders have 
failed to promulgate a parallel rule. This means that lenders need have 
little concern about whether the school is good or not. This 
inconsistency needs to be addressed so that lenders will have 
incentives to provide credit only for students at good schools, or to 
require schools to put up a deposit to cover potential future claims or 
defenses to payment. Congress should address this by requiring the 
notice in contracts for student loans and by specifying that the lender 
is liable, whether or not the notice is included, if the notice should 
have been included by law.
    In connection with the ``holder'' issue, schools should be required 
to certify all private student loans and that the student has exhausted 
all means of Federal financing, before a private loan may be disbursed. 
This would also insure that when schools are determining their 
students' loan debt, they are including any private loans the student 
may have.

  6. STUDY AND ESTABLISH APPROPRIATE STANDARDS FOR DISTANCE EDUCATION

    This is probably the fastest growing segment of proprietary schools 
and the area most susceptible to abuse. Before 2006, eligible schools 
were limited to providing distance education, including correspondence 
courses, for no more than 50 percent of their students and no more than 
50 percent of their courses. Despite caution from the GAO and IG \8\ 
that removing this limitation without better controls would lead to 
increased fraud and abuse, the limit was lifted as to 
telecommunications courses (those offered by electronic means), but not 
as to correspondence courses. The only limit on telecommunications 
courses is that they must provide regular and substantive interaction 
between the student and teacher, but that interaction need not be 
synchronous. The only clarification of those terms states that the 
interaction must be at regular intervals and not be trivial.
---------------------------------------------------------------------------
    \8\ General Accounting Office, ``Distance Education: Improved Data 
on Program Costs and Guidelines on Quality Assessments Needed to Inform 
Federal Policy,'' GAO-04-279 (February 2004); see also 2009 testimony 
at http://edlabor.house.gov/documents/111/pdf/testimony/
20091014MaryMitchelsonTestimony.pdf.
---------------------------------------------------------------------------
    This provision leaves the student financial aid programs wide open 
to fraud and abuse. Among other issues, for-profit schools may purchase 
a small, reputable school, then turn the school into a massive online 
college, with virtually no oversight. A further concern must be that 
schools that may have been providing good, needed hands-on programs at 
an on-site facility, will be tempted to reduce costs by going to all, 
or almost all on-line programs. Although telecommunications programs 
are required to be accredited, the GAO has found the same lack of 
accrediting agency standards here as noted above.
    In her testimony, the Inspector General also noted her concern 
about the lack of measures to insure Federal dollars are not being 
spent for little or no benefit because of the lack of oversight of 
distance education programs. Congress should re-instate the 50 percent 
limitation on on-line programs until the means to prevent abuse can be 
studied and implemented. There needs to be a study to establish what 
requirements and monitoring needs to be implemented to prevent the 
massive potential for problems in this burgeoning area.

  7. REQUIRE CANCELLATION PERIODS AND PRO-RATA REFUNDS, AND PROHIBIT 
    CONTRACTUAL OBLIGATION OR PAYMENT BEYOND ONE TERM OR FOUR MONTHS

    Each of these suggestions have in common that they offer a measure 
of self-help to students who may find themselves in one of the ``bad 
actor'' schools, and that they have been used in one or more States to 
curb abuses.
    In California, the State law for 19 years required proprietary 
schools to provide a full refund (except for a modest registration fee) 
to any student who canceled the program within the first 5 class days. 
That way, there was a chance the student would discover if the 
equipment or facilities were lacking, or if teachers were untrained or 
had no practical experience before the student had spent thousands of 
dollars on a worthless education. Other States prevent the school from 
keeping even a registration fee if the student cancels on or before the 
first day of class. While bad actor schools become adept at giving a 
good first impression, some students may discover the problems in this 
initial period.
    For 19 years, California required proprietary schools to provide a 
full pro-rata refund throughout the program. That requirement reduced 
the churn from schools constantly admitting new students and ignoring 
students' needs once they passed an arbitrary percentage (which varies 
by school) of the course after which students were no longer entitled 
to any refund. Oregon has used a similar concept, prohibiting schools 
from collecting from students or obligating students for more than one 
term or four months. Again, students under this system might lose some 
money on a bad school, but when they realize that things are not as 
represented, they are free to leave, without being obligated for many 
months more. Without such a policy, students report that the school 
responds to their complaints by saying, the student already owes all 
the money, so there is no point to quitting out of dissatisfaction with 
the program.

 8. REQUIRE ABILITY TO BENEFIT TESTING, EITHER FOR ALL STUDENTS, OR AT 
LEAST FOR ALL STUDENTS WHO DID NOT GRADUATE FROM A PUBLIC HIGH SCHOOL; 
  ELIMINATE 6 UNIT ALTERNATIVE MEASURE FOR ENTRANCE UNTIL SUFFICIENT 
               STUDY AT PROPRIETARY SCHOOLS HAS OCCURRED

    To be admitted, students are supposed to have a high school 
diploma, or pass a test demonstrating their ability to benefit from the 
program being offered. The Inspector General has testified that $12 
billion in financial aid was granted in fiscal year 2009 based on 
results of Ability-to-Benefit (ATB) tests.\9\ Needless to say, this has 
been a well-known area where fraud occurs. The Department has recently 
proposed much-needed changes, but I believe those are inadequate to 
clean up this problem area.
---------------------------------------------------------------------------
    \9\ http:/ /studentlendinganalytics.typepad.com / 
student_lending_analytics / 2009 /10 / highlights-from-house-hearing-
on-oversight- of -atb-testing-and-diploma-mills-11-of-aid-recipients-
ent
.html.
---------------------------------------------------------------------------
    There has been no definition of ``high school diploma,'' so that 
proprietary schools could turn a blind eye to bogus diplomas which 
could be obtained for a fee. The Department has proposed to require 
schools to have procedures to deal with suspect diplomas, but the 
proposed rule still leaves a lot of room for turning a blind eye. 
Additionally, a high school diploma may not be adequate to determine if 
a prospective student has the basic skills needed for the coursework 
for particular careers.
    Current rules require an ability-to-benefit (ATB) test to be 
administered to non-high school graduates by an independent tester. 
This requirement has had limited impact, however, as testers are 
generally selected by the school, give the tests at the school, and 
rely on the school to maintain the tests and answer sheets. Apparently, 
the so-called ``independent'' testers do not run a business in which 
they have the facilities to guard the tests themselves. Recently, the 
GAO found in undercover operations that tests were not administered 
properly, but instead were compromised to ensure the student could be 
admitted. It is unclear whether the ATB test is even required for 
students who did graduate from high school, but in a country in which 
their education was in another language. Sometimes such students are 
told courses will be offered in their language, but ultimately they are 
put in English-only classes they cannot hope to comprehend.
    Under the law, the Department is charged with determining 
appropriate test scores to allow eligibility. This is also problematic 
because the Department has not interpreted the law to require ability 
to benefit from the specific program for which a student is enrolling, 
but rather, to be simply the equivalent of having a high school 
diploma. Obviously, the beginning skills for, say, security guard, may 
be different from those required for a sonographer or radiologist or 
cosmetologist.
    In addition, recently, on the basis of a study carried out in 
community colleges, an alternative measure--the successful completion 
of 6 units--is now allowed to determine whether a student may be 
eligible for Federal financial aid. This provision has been enacted, 
but there are virtually no regulations to prevent abuse. Those schools 
that simply want more students can easily manipulate this provision to 
claim students have successfully completed some course that is 
available to complete some program.
    In short, the current ability-to-benefit process needs overhaul. 
Tests should be related to the skills that are needed to succeed in the 
particular program in which the student is enrolling. Tests should be 
administered at a location away from the school, by persons not 
recruited by the school, who have sufficient resources to guard tests 
and answer sheets from being compromised. If all students are required 
to be tested, unless they graduated from a public high school, the 
problem with bogus high school diplomas can be reduced, if not 
eliminated. Testing of all students, even if they have a public high 
school diploma, would help prevent students enrolling in programs for 
which they do not have the basic skills necessary. And the 6-unit 
alternative should be allowed in proprietary schools only after 
adequate study in proprietary schools to show it is comparable to 
testing.

   9. EXPAND BASES FOR LOAN DISCHARGE AND REQUIRE REIMBURSEMENT FROM 
   SCHOOL OR LENDER OR ALLOW STUDENTS TO SEEK REMEDIES DIRECTLY FROM 
                           SCHOOL AND LENDER

    Students could play a role in program integrity if they had tools 
to do so. Currently, however, students may only have their student 
loans canceled (discharged) by the Department of Education in very 
narrow circumstances, such as the school's false certification of the 
student's ability to benefit, the school's failure to properly return 
title IV money, or the school's closure. The student's burden to prove 
the false certification discharge is very difficult, given that the 
Department (in some cases) and the school have the needed records, 
which the student does not have. Additionally, the Department has been 
very limited in agreeing to cancellation for groups of students, even 
if there is a judgment finding the false certification applied to an 
entire group of students, or if the Department has similar claims from 
students in its files evidencing the alleged false certification by the 
same school. Additionally, to be effective in stopping bad actors, the 
Department needs to be aggressive in recovering money from schools that 
have falsely certified eligibility. Sometimes, of course, the 
Department's failure to collect is because the school has closed, 
without funds to repay the loan.
    The other traditional remedy for fraud and abuse, a civil action, 
is not readily available. It is not allowed under current Federal law. 
Employees who have witnessed false claims for Federal money by the 
school may sue and recover a share of the money paid in the judgment. 
Students, however, have no right to sue under the Higher Education Act. 
They may be able to assert claims under State law. But even there, they 
are often thwarted because the school requires arbitration in which the 
students' ability to discover needed facts is limited, rather than 
allowing a lawsuit.
    In addition to the limits on these means of redress by students, 
claims students do pursue successfully are generally not publicly 
known. Arbitration proceedings are generally private, not public, like 
courts. Schools often require students' confidentiality to settle a 
claim and often also prohibit the student from discussing their 
grievance with others. Sometimes such confidentiality provisions seem 
to prevent the student even from contacting government agencies about 
the issue. Typically, evidence of wrongdoing in private arbitrations or 
actions that settle is hidden away, not available to the Department, 
accrediting agencies or law enforcement agencies.
    These limits on redress and on public information about settlements 
of disputes both artificially depress Congress' and the public's 
awareness of problems, and prevent students from playing a larger role 
in program integrity. Congress should examine these limitations to 
increase the part students play in program integrity. In particular, 
notice of settlements should be provided to the Department and law 
enforcement agencies, and evidence developed that points to violations 
of the Higher Education Act should be required to be made available to 
the Department and law enforcement agencies.

      10. REQUIRE A HIGHER RATIO OF CURRENT ASSETS TO LIABILITIES

    One recurring problem is when a school takes in tuition fees in the 
form of Federal aid, then closes before students can complete their 
programs. Because the proprietary schools' educational quality often 
does not measure up to non-profit or public schools, the credits the 
students have already received are not transferable. Indeed, even when 
proprietary schools have the opportunity to make their credits 
transfer, they frequently choose not to do so, forcing the student to 
continue at the proprietary school or have to start over at another 
school. Sometimes so-called ``teach-outs'' are offered at another 
school, but often they are inadequate or require additional 
expenditures to complete the program the student has already paid for. 
Currently, only a 1 to 1 ratio of current assets to liabilities is 
required under Federal law. A 1 to 1 ratio is, in essence, a penny away 
from bankruptcy. The ratio is too low. In other businesses, ratios of 2 
to 1 are considered appropriate. In California, schools had to have at 
least a 1.25 to 1 ratio (excluding such intangible assets as good 
will). The requirement, if enforced, could reduce the number of such 
closures while still allowing stable schools to flourish.
    I have tried to list some of the most salient improvements I 
believe are needed, based on my experience as a prosecutor. Others with 
expertise in different aspects of the student financial aid programs 
may suggest other valuable provisions, so I don't contend the list is 
necessarily comprehensive. Also, to the extent some changes are made, 
others may be less (or more) necessary. As a former prosecutor, I find 
it very frustrating that the main way to address the fraud, abuse and 
waste currently seems to be by expensive, resource-intensive, time-
consuming litigation, including prosecutions. I recognize that 
implementation of these suggestions would require careful drafting. I 
am quite willing to cooperate with you and the other members of the 
committee in drafting provisions so that the incentives can be turned 
around to operate to reduce the waste in the use of Federal financial 
aid in the proprietary school sector.

                      QUESTIONS OF SENATOR COBURN

    Question 1. What role do States play--above and beyond the role 
currently played by the Federal Government--in ensuring the quality and 
integrity of post-secondary degree programs? Are States best positioned 
to make qualitative judgments about post-secondary institutions and to 
police improper behavior?
    Answer 1. While States could and should play a larger role, the 
trend has been in the opposite direction. It appears that more and more 
States have abdicated their oversight role to accrediting agencies.
    Traditionally, the Higher Education Act has depended on the triad 
of oversight, requiring a school to be accredited by a recognized 
accrediting agency, to be ``legally authorized within [the State in 
which it operates] to provide a program of education beyond secondary 
education,'' and to submit to the provisions of a participation 
agreement with the Department of Education. Currently, however, 
proprietary schools and their allies, the accrediting agencies, have 
successfully lobbied many States to rely on accreditation for most, if 
not all of their State oversight responsibilities. According to a 
report from the Western Association of Schools and Colleges provided to 
negotiated rulemaking participants, three States have no State agency 
or oversight over schools participating in the Federal student 
assistance programs (Alaska, Arizona and Montana). Another 
approximately 26 States turn over some, or all of their State functions 
to accrediting agencies. Some of these States exempt particular classes 
of accredited schools (such as schools operating before a certain date, 
e.g., 2006 or for 10 years. Other States exempt from State oversight 
schools accredited by particular accreditors or classes of accreditors. 
Others have minimum oversight over accredited schools. Still others 
even rely on accreditors to insure compliance with consumer protection 
laws. Oklahoma, for example, exempts all accredited degree-granting 
schools from State oversight. Memorandum by Kessenick, Gamma & Free, 
dated January 20, 2010.
    The Department of Education recently proposed a regulation that 
would require States to undertake at least some of the responsibilities 
contemplated by law, but apparently under pressure from some schools 
and accrediting agencies, failed to fully address the statutory 
requirements for State oversight. Current law requires the State agency 
to notify the Department of Education promptly of any fraud or 
substantial violation of the Higher Education Act, but the proposed 
rule does not require the State to have any mechanism by which it would 
be likely to notice such conduct.
    The Department has never had sufficient resources to adequately 
police the fraud and abuse in the proprietary sector. In my experience, 
local or State agencies are in a much better position to learn about 
problems early. As discussed above, accrediting agencies are not 
designed to fulfill this role. The Department's proposed regulation 
needs to be strengthened or the law needs to be revised to make clear 
that schools are not eligible if the State agency in the State in which 
the school operates relies on accrediting agencies for its essential 
functions. State agencies must themselves approve schools, monitor 
their compliance with provisions of the Higher Education Act or with 
State provisions that are as strong, or stronger than the Higher 
Education Act, and act to revoke authorization of schools that are not 
in compliance.

    Question 2. Do non-profit and public colleges and universities use 
the Federal student aid programs to suit their business models? Are 
for-profit colleges the only sector of higher education that capitalize 
on the Federal student aid programs?
    Answer 2. How different types of schools address the Federal 
student aid programs in their business models is not something on which 
I have expertise, so it is a topic best addressed to others. What we do 
know is that for-profit schools, although ostensibly actors in a market 
economy, as a sector, are much more highly dependent on the subsidies 
of Federal student financial aid than other sectors. For example, even 
if one looks at just independent students taking 4-year programs at 
public, non-profit, and for-profit schools, the percentage of borrowers 
varies dramatically. In the publics and non-profits, 24 percent to 31 
percent of students have no Federal loans, but at the for-profits, only 
4 percent do not have Federal loans.

    Question 3. Does it concern you that, as a country, we have created 
a student aid system that has helped fuel tuition costs? According to 
the National Center for Public Policy and Higher Education, from 1982 
to 2007, tuition and fees increased 439 percent while median family 
income rose 147 percent. Does the overall framework work in your mind, 
or has the government created a system that helps drive up tuition and 
that invites waste, fraud and abuse into all sectors of higher 
education?
    Answer 3. I do not have sufficient information to respond. I do not 
know if Federal financial aid has kept pace with, lagged behind, or 
exceeded increased tuition costs, so I don't know if it could be said 
to be fueling the increases in tuition, or if it is a factor, how 
significant that factor may be. I do not know how much of the increase 
in tuition may be due for example, to large increases in fees in one 
sector, rather than across the board. I do not know what portion of 
that increase is due to increased costs, such as the need for more 
expensive technology, e.g., in allied health programs. And I do not 
know if the difference between the cost of tuition and family income is 
due to policies that caused tuition to rise excessively, or to policies 
that caused median income to be depressed excessively.
    It is a worthy topic, given the importance of widespread education 
in a democracy and in the competitive world economy, and one I am very 
interested in learning more about, but others may be more able to 
respond than I.

    Question 4. What responsibility do post-secondary students, as 
adult consumers, have in taking their futures into their own hands and 
researching their post-secondary education and training options?
    Answer 4. How much responsibility post-secondary students can have 
in researching their training options depends on a number of factors, 
several of which I identify here.
    First, about half of the population functions at the below basic or 
basic literacy level. According to the National Adult Literacy Surveys, 
about a quarter of the population (depending on the type of task) tests 
below basic, meaning, for example, they cannot carry out such low level 
functions as entering background information on an application for 
social security, identifying the gross pay for the year on a pay stub, 
or calculating the weekly salary based on the hourly wage. Another 
approximately 25 percent (depending on the type of task) of the 
population tests basic, which means, for example, they cannot tell from 
a bus schedule how long one will have to wait to catch a bus, write a 
short letter to explain an error in a credit card bill, or summarize 
the work experience needed for an advertised job.\10\ A full 87 percent 
of those surveyed, even those with intermediate level literacy skills, 
could not contrast financial information presented in a table about 
differences among credit cards. If those who are attracted to for-
profit schools are similar to the population at large, about half of 
them may not be capable of undertaking meaningful research on their 
education options.
---------------------------------------------------------------------------
    \10\ National Assessment of Adult Literacy performed by National 
Center for Education Statistics for the U.S. Department of Education in 
1992 and 2003.
---------------------------------------------------------------------------
    Second, even for a sophisticated person, finding out the quality of 
a for-profit school can be difficult, if not impossible. As I explained 
in my testimony, there are no standard, reliable, transparent 
statistics on such important matters as the record of the school's 
graduates in obtaining employment in the field, the salaries obtained, 
or the success of graduates on licensing exams. Most of the pertinent 
information, such as employment rates, lifetime default rates, or 
salary potential are either not available at all, not readily 
available, or not reliable. In the case about which I testified, for 
example, the documents the school was required by law to prepare and 
provide students consistently contained inflated statements of 
employment and salaries after graduation.
    Similarly, at the hearing, even Senators expressed their confusion 
about the kind of accreditation needed. A school may be nationally 
accredited (meaning its students can get Federal financial aid), but 
the school may not have programmatic accreditation for a particular 
specialty it offers. The programmatic accreditation may not be 
something required by the State, but may be what most employers would 
require. Or a school may represent that it has programmatic 
accreditation, but the organization giving that accreditation is not 
the one recognized by most professionals in the field. It is not 
necessarily that easy for a person with little prior knowledge of the 
field to figure out that the program a school offers in a particular 
field will not actually prepare one to work in that field.
    Third, schools are not like used car dealers. People may be on 
guard for sales tricks when looking for a used car. People generally 
are unlikely to suspect that an ``admission advisor'' or ``financial 
aid advisor'' is really a salesperson, not someone looking after the 
student's best interest.
    These examples illustrate why placing the burden of program 
integrity on the students' ability to research their training options 
is unlikely to safeguard the Federal aid dollars. Nevertheless, there 
are some things that can be done to enlist students in efforts to 
prevent fraud, abuse and waste.
    require cancellation periods and pro-rata refunds, and prohibit 
    contractual obligation or payment beyond one term or four months
    Each of these suggestions has in common that it offers a measure of 
self-help to students who may find themselves in one of the ``bad 
actor'' schools, and that it has been used in one or more States to 
curb abuses, but without preventing good schools from flourishing.
    In California, the State law for 19 years required proprietary 
schools to provide a full refund (except for a modest registration fee) 
to any student who canceled the program within the first 5 class days. 
That way, there was a chance the student would discover if the 
equipment or facilities were lacking, or if teachers were untrained or 
had no practical experience before the student had spent thousands of 
dollars on a worthless education. Other States prevent the school from 
keeping even a registration fee if the student cancels on or before the 
first day of class. While bad actor schools become adept at giving a 
good first impression, some students may discover the problems in this 
initial period.
    For 19 years, California required proprietary schools to provide a 
full pro-rata refund throughout the program. That requirement reduced 
the churn from schools constantly admitting new students and ignoring 
students' needs once they passed an arbitrary percentage (which varies 
by school) of the course, after which students were no longer entitled 
to any refund. Oregon has used a similar concept, prohibiting schools 
from collecting from students or obligating students for more than one 
term or four months. Again, students under this system might lose some 
money on a bad school, but when they realize that things are not as 
represented, they are free to leave, without being obligated for many 
months more. Without such a policy, students report that the school 
responds to their complaints by saying, the student already owes all 
the money, so there is no point to quitting out of dissatisfaction with 
the program.
    I appreciate this opportunity to address your questions. I am quite 
willing to cooperate with you and the other members of the committee in 
drafting provisions so that the incentives can be turned around to 
operate to reduce the waste in the use of Federal financial aid in the 
proprietary school sector.
                                 ______
                                 
                                        DeVry Inc.,
                              Downers Grove, IL 60515-5799,
                                                     July 15, 2010.
Hon. Tom Harkin, Chairman,
Committee on Health, Education, Labor, and Pensions,
428 Dirksen Senate Office Building,
Washington, DC 20510.

Hon. Michael B. Enzi, Ranking Member,
Committee on Health, Education, Labor, and Pensions,
835 Hart Senate Office Building,
Washington, DC 20510.
    Dear Chairman Harkin and Ranking Member Enzi: Thank you once again 
for the opportunity to testify before the Senate Committee on Health, 
Education, Labor, and Pensions hearing on ``Emerging Risk?: An Overview 
of the Federal Investment in For-Profit Education.'' DeVry has a long 
history serving our Nation's educational needs and it was an honor to 
share my experience in the sector with you and the other honorable 
members of the committee.
    Please find enclosed the written responses to questions that you 
and other members of the committee had regarding my testimony. This 
material will also be e-mailed, per your instructions, to the 
appropriate committee staff. With your consent, we request 1 additional 
week to complete our response to Chairman Harkin's question 4(d) 
concerning Apollo College and Western Career College, so that we can 
obtain the relevant data. Additionally, relative to Chairman Harkin's 
question 6(b), should the committee require more information, we are 
happy to discuss how to provide such detail with you or your staff. 
Please contact me directly at (630) 515-3146 or at [email protected].
    President Obama has set some ambitious goals before the higher 
education community and the work that you and the committee are doing 
will be critical to the future of our Nation.
            Sincerely,
                                     Sharon Thomas Parrott,
                                             Senior Vice President,
                                Government and Regulatory Affairs, 
                                          Chief Compliance Officer.
                                 ______
                                 
 Response to Questions of Senator Harkin, Senator Enzi, Senator Dodd, 
Senator Casey, Senator Hagan, Senator Alexander, and Senator Coburn by 
                         Sharon Thomas Parrott

                      QUESTIONS OF SENATOR HARKIN

    During the course of your testimony you volunteered that the 
Department of Education tracks student retention from one September to 
the next, i.e. that schools must report the number of the students 
enrolled in one September, and the following September must report how 
many of those remain enrolled, have graduated or completed a program, 
and how many have dropped out. You suggested that this data set 
accurately captures the number of students who withdraw from for-profit 
colleges like DeVry and would be able to explain what is happening to 
the students indicated in green on the chart below:



    Question 1. Isn't it correct that, contrary to your testimony, all 
students who have attended another post-secondary institution are 
excluded from this data set?
    Answer 1. The Integrated Post-Secondary Education Data System 
(IPEDS) retention rate is the percentage of first-time, bachelor-
seeking students in the previous fall semester who are enrolled in the 
current fall semester.
    The IPEDS retention rate does indeed exclude those who have 
attended another post-secondary institution as well as those seeking a 
degree other than a bachelor's.
    For further discussion of IPEDS retention rates, please see my 
response to Question 5.
    My testimony was in reference to the undergraduate withdrawal rate 
furnished to compliance auditors as part of the annual title IV audit 
required by the Department of Education for DeVry University and 
Chamberlain College of Nursing. The rate is calculated as the 
percentage of students enrolled at the start of the fall semester that 
had not graduated and were not enrolled the end of the following spring 
semester. It encompasses all undergraduate students, not just those who 
were first-time-to-college.
    For Apollo College and Western Career College, the rate is 
calculated as the percentage of those enrolled between July 1 and June 
30 who withdrew for the remainder of the year.
    The withdrawal rates provided as part of the fiscal year 2009 title 
IV audit are as follows:

     Apollo College: 12-17 percent (across locations).
     Chamberlain College of Nursing: 14 percent.
     DeVry University: 21 percent.
     Western Career College: 19.9 percent.

    Although it is not reported as such, the inverse of the withdrawal 
rate can be thought of as a retention measure. That is, fall through 
spring retention rates for DeVry University and Chamberlain College of 
Nursing were 79 percent and 86 percent, respectively. For Apollo 
College and Western Career College the retention rates were 83-88 
percent (across locations) and 79 percent, respectively.

    Question 2. Isn't it also true that any student who enrolls in a 
school outside the September window is not captured by this data set 
unless they remain at the school until the following September?
    Answer 2. No. Please see my response to Question 1. I referenced 
the title IV audit withdrawal rate, which is a fall through spring 
measure. You may have been referring to the IPEDS retention rate, which 
is a fall-to-fall measure and is discussed in my response to Question 
5.

    Question 3. Is it correct to say that large numbers of students 
attending schools owned and operated by DeVry enroll throughout the 
year, not just in the Fall?
    Answer 3. Yes. Unlike typical traditional institutions that admit 
students once a year in the fall, DeVry University and Chamberlain 
College of Nursing accept new students in summer, fall and spring 
semesters throughout the year. Apollo College and Western Career 
College accept students on a rolling calendar throughout the year as 
well.
    An increasing number of all college students are ``non-
traditional,'' including older, working adult students. Multiple start 
dates, along with evening/weekend programs and online courses are some 
of the ways we try to serve this growing need.

    Question 4a. For the year beginning September 1, 2008 and ending 
September 1, 2009 could you please provide the following information:
    Although the September to September academic year in your question 
is a typical period for traditional institutions, it is not reflective 
of our academic calendar. DeVry's institutions operate on an academic 
calendar beginning July 1 and ending June 30.
    Answer 4a. The total number of students enrolled in the six schools 
operated by DeVry on September 1, 2008.
    Four of DeVry's schools have undergraduate enrollment and provide 
the proper context for the retention rates in the 2008-2009 IPEDs Fall 
Enrollment Survey.
    Ross University and DeVry University's Keller Graduate School of 
Management are not included because neither admits students at the 
undergraduate level.
    Below are the fall 2008 undergraduate enrollments as reported in 
the 2008-2009 IPEDS Fall Enrollment Survey.

     Apollo College: 6,884.
     Chamberlain College of Nursing: 3,203.
     DeVry University (U.S.): 48,166.
     Western Career College: 6,001.

    For Chamberlain College of Nursing and DeVry University, the fall 
2008 semester began on October 27, 2008. The official census date was 
November 24, 2008. For Apollo College and Western Career College, the 
official fall reporting period began August 1, 2008 and ended October 
31, 2008.

    Question 4b. The number of those enrolled who were not first-time 
students?
    Answer 4b. Although the September to September academic year in 
your question is a typical period for traditional institutions, it is 
not reflective of our academic calendar. DeVry's institutions operate 
on an academic calendar beginning July 1 and ending June 30.
    Of those undergraduate students counted in 4(a), the number who 
were not first-time degree/certificate-seeking is provided below, as 
reported in the 2008-2009 IPEDS Fall Enrollment Survey.

     Apollo College: 5,038.
     Chamberlain College of Nursing: 3,158.
     DeVry University (U.S.): 39,560.
     Western Career College: 4,485.

    Question 4c. The number of students who enrolled between October 1, 
2008 and August 1, 2009?
    Answer 4c. Although the September to September academic year in 
your question is a typical period for traditional institutions, it is 
not reflective of our academic calendar. DeVry's institutions operate 
on an academic calendar beginning July 1 and ending June 30.
    Below are the 2008-2009 undergraduate head counts for each 
institution, as reported in the 2009-2010 IPEDS 12-month Enrollment 
Survey.

     Apollo College: 12,818.
     Chamberlain College of Nursing: 5,701.
     DeVry University: 85,931.
     Western Career College: 9,601.

    Question 4d. The number of students who enrolled between October 1, 
2008 and August 1, 2009 but were no longer enrolled in September 2009?
    Answer 4d. Of those undergraduate students counted in 4(c), the 
number who had not graduated and were not enrolled in summer 2009 is 
provided below for DeVry University and Chamberlain College of Nursing. 
Because the requested data is not publicly available and has not been 
compiled in this manner before, our team is still conducting the 
analysis for Apollo College and Western Career College. We would like 
to provide the most accurate information possible, so with your 
permission we will follow up with the data for these two schools with 
our submission next week.

     Apollo College: data forthcoming.
     Chamberlain College of Nursing: 1,436.
     DeVry University (U.S.): 33,745.
     Western Career College: data forthcoming.

    Question 5.  With regard to the DeVry College of New York, the 
school reported that for the September 2007 to September 2008 period 
the retention rate for that particular campus was 30 percent for full-
time students and 14 percent for part-time students. Do you believe 
that these numbers are consistent with the retention rates of schools 
described in the chart above? Why or why not? Do you believe the 
numbers for DeVry New York accurately reflect the retention rate of 
DeVry overall, and if not why not?
    Answer 5. In New York, DeVry University operates as DeVry College 
of New York. The full-time retention rate for this location was 30 
percent for full-time students and 14 percent for part-time students, 
as reported in the 2008-2009 IPEDS Fall Enrollment Survey. In other 
words, 30 percent of first-time, bachelor-seeking students attending 
full-time at DeVry College of New York in fall 2007 were enrolled in 
fall 2008 (14 percent for those attending first-time, part-time in fall 
2007).
    To provide context, the first-time bachelor-seeking cohort for the 
IPEDS retention rate covered only 54 percent of all new undergraduate 
students enrolled at DeVry College of New York in fall 2007.
    But setting aside the limitations of the IPEDS measure, the 
retention rate for DeVry College of New York is not representative of 
DeVry University as a whole. Nationwide the first-time, full-time, 
bachelor-seeking student retention rate was 44 percent and the first-
time, part-time bachelor-seeking student retention rate was 31 percent. 
Other examples include DeVry University-Ohio with a 50 percent first-
time full-time bachelor-seeking student retention rate and a 31 percent 
first-time, part-time, bachelor-seeking student retention rate and 
DeVry University-California with a 53 percent first-time, full-time 
bachelor-seeking student retention rate and a 30 percent first-time, 
part-time bachelor-seeking student retention rate.
    The first-time bachelor-seeking context applicable to DeVry College 
of New York is also applicable to DeVry University-California and DeVry 
University-Ohio. The first-time bachelor-seeking retention rate cohort 
covered only 47 percent of new undergraduates in fall 2007 at DeVry 
University-California and only 41 percent at DeVry University-Ohio. For 
DeVry University nationwide the first-time bachelor-seeking retention 
rate cohort accounted for only 38 percent of new undergraduates in fall 
2007.
    Additionally, I believe that in measuring colleges and 
universities, it is important to compare like-institutions based on 
student profile and risk factors.
    I am unable to speak to the retention rates in the provided chart 
because the institutions are not identified and do not appear to 
include any DeVry schools. Additionally, it is difficult for me to 
decipher a retention rate from the chart without knowing factors such 
as the length of the programs at the schools. If, for example, those 
schools have programs of less than 1 year, then the ``departed 
students'' may be graduates, rather than drop-outs. In any case, I 
would be very happy to meet with you or your staff to provide more 
information and analysis--it may be easier to clarify these questions 
in a meeting.

    Question 6.  In your testimony you stated that DeVry spends 14 
percent of revenues on advertising. Could you please also state, in 
similar percentage terms, how much DeVry spends on the following: (a) 
Direct recruiting (salary and costs of admissions representatives and 
managers); (b) Marketing and Outreach Total including breakdown of:

          i. Advertising (television, radio, print, billboard and 
        Internet)
          ii. Telemarketing
          iii. Direct mail
          iv. Other promotional efforts

    As stated in our Form 10-K filing (Attachment 1), DeVry Inc. 
advertising expense for the fiscal year ended June 30, 2009 was $179.4 
million as compared to $669.7 million spent on educational services. 
Advertising expense represented 12.3 percent of total revenues of 
$1,461.5 million versus 45.8 percent for educational services. 
Advertising expense represents about 14.6 percent and educational 
services represent about 54.6 percent of total operating costs and 
expenses of $1,226.6 million.

    [Editor's Note: Attachment 1 referred to may be found at: http://
www.ann
ualreports.com/HostedData/AnnualReports/PDFarchive/dv2009.pdf.]

    DeVry spent about $670 million on educational services, 
approximately 370 percent of the amount spent on advertising.
    As a publicly held organization DeVry discloses the financial 
information noted above in regular filing with the Securities and 
Exchange Commission (SEC). DeVry does not publicly disclose more 
specific details concerning operating costs for competitive reasons. If 
the committee requires additional details, we would be happy to discuss 
how to provide them to you and your staff.

    Question 7. In your testimony you stated that the 54 percent of 
revenues that DeVry spends on education services is slightly higher 
than the amount spent by not-for-profit or public schools. Please 
explain your methodology for this assertion and provide concrete 
examples to support it?
    Answer 7. DeVry's educational services are 54.6 percent of total 
costs. Please allow me to clarify one point of potential confusion. At 
the hearing you mentioned that DeVry's educational services accounted 
for 54 percent of costs rather than revenues, while in this question 
you mentioned it as a percent of revenues. The available comparisons 
are in terms of percent of costs, and I will proceed on that basis.
    The benchmark for the comparison was from table 362 from the 
Department of Education's 2009 Digest of Education Statistics 
(Attachment 2). The report on expenditures of public institutions shows 
the following percentage distribution on instructional costs:

 Table 1.--Calculation of Total Instructional Costs (as a percent of Total Costs); Selected data from table 362
----------------------------------------------------------------------------------------------------------------
                                       Total
                                   Instructional     Academic         Student      Institutional    Total  [In
                                     Cost  [In     Support  [In    Services [In    Support  [In      percent]
                                     percent]        percent]        percent]        percent]
----------------------------------------------------------------------------------------------------------------
2003-2004.......................           27.68            6.64            4.60            8.22           47.13
2004-2005.......................           27.65            6.61            4.65            8.09           47.00
2005-2006.......................           27.80            6.75            4.69            8.18           47.43
2006-2007.......................           28.13            6.83            4.76            8.36           48.08
----------------------------------------------------------------------------------------------------------------

    Table 364 and 366 (Attachments 3 and 4) of the same digest provides 
information for private not-for-profit/independent colleges and private 
for-profit/private sectors schools respectively. Weighting for 
enrollment, the expenditure allocation for education services for all 
publics and not-for-profits averages less than 52 percent.

    Question 8. Information reported to the U.S. Department of 
Education is that the University of Northern Iowa, with 2008 enrollment 
of 12,098, spent 37.5 percent of its core expenses on instruction and 
11.4 percent on academic support. DeVry University-Illinois with 
enrollment of 19,417 reported 18.3 percent spending on instruction and 
82.7 percent on academic support. Do you believe that DeVry typically 
spends more on instruction than public universities such as the 
University of Northern Iowa or comparable schools?
    Answer 8. DeVry University's instructional expenditures are 
typically similar to comparable 4-year public institutions. DeVry 
University-Illinois is not representative of DeVry University overall. 
The other 25 DeVry University locations had higher percentages more in 
line with like-type public institutions in the States in which we 
operate. The average was 30 percent. One reason DeVry University-
Illinois appears to be lower is that online students and online 
expenses nationwide are reported at that IPEDS location.
    DeVry University's instructional expenditures as a percentage of 
core expenditures are similar to comparable 4-year public institutions. 
Table Two provides examples for seven of DeVry University's IPEDS 
locations.

                                 Table 2
------------------------------------------------------------------------
                                                             Instruction
                                                                as a
                                                             percentage
                        Institution                            of core
                                                              expenses,
                                                              2007-2008
                                                            [In percent]
------------------------------------------------------------------------
DeVry College of New York.................................           29
Stony Brook University....................................           34
DeVry University-California...............................           30
California State University-Fresno........................           35
DeVry University-Florida..................................           28
Florida Agricultural and Mechanical University............           30
DeVry University-Georgia..................................           29
Georgia Institute of Technology-Main Campus...............           23
DeVry University-Illinois.................................           18
Northeastern Illinois University..........................           31
DeVry University-Pennsylvania.............................           32
Cheyney University of Pennsylvania........................           27
DeVry University-Texas....................................           32
University of Houston.....................................           28
------------------------------------------------------------------------


    Question 9a. You stated in your testimony that from the 1970s to 
date DeVry has averaged 90 percent employment of graduates who actively 
participated in a job search with DeVry in educationally related jobs. 
You agreed as well to produce that data as well as the methodology used 
in calculating those percentages. In addition to the underlying data 
and methodology, please answer the following to aid in our 
understanding of the data:
    Answer 9a. The graduate employment data provided during my 
testimony was for the years 1975 through 2008, the last calendar year 
for which the statistics were audited. The following terms are used in 
calculating and disclosing graduate employment statistics for DeVry 
University:
    Graduates eligible for career assistance: All graduates other than 
those continuing their education, foreign graduates legally ineligible 
to work in the United States or Canada, our own employees, national 
servicemen and women, foreign residents, graduates we are unable to 
locate and those ineligible for career assistance because of extreme 
circumstances. Extreme circumstances include death, suffering from a 
serious illness or medical condition, maternity/paternity leave, 
participation in religious mission work, incarceration or community 
service that prevent a graduate from obtaining employment during this 
time period.
    We offer lifetime employment assistance and thus those graduates 
who are not included in this count due to current circumstances can 
take full advantage when/if they are able to resume their employment 
search.
    Graduates who actively pursued employment: Net number of graduates 
eligible for career assistance who meet the requirements in (c) below.
    Education-related employment: Requires the graduate to be using 
degree-related skills and knowledge they attained while attending DeVry 
University.
    Employment rate: Percent of graduates who actively pursued and 
obtained employment and those who were already employed in education-
related careers within 180 days or 26 weeks of graduation.
           employment rate calculation from 1975 through 2008
    Total Graduates: 237,957.
    Graduates eligible for career assistance: 210,569.
    Graduates who actively pursued employment: 186,788.
    Graduates employed in education-related positions: 168,596.
    Employment Rate: 90.3 percent.

    Question 9b. What does it mean that a graduate ``actively 
participated in a job search?''
    Answer 9b. Graduates who are actively engaged in a job search prior 
to graduation through 26 weeks following graduation, as well as those 
graduates who are already employed in an education-related field at the 
time of graduation. Active participation includes resume preparation; 
willingness to interview; contacting and following up on employment 
opportunities and bi-weekly contact with their assigned Career Services 
Advisor.

    Question 9c. How many graduates each year participated in such a 
search?
    Answer 9c. The average percent of eligible graduates who pursued 
employment for the period from 1975 through 2008 was 88.7 percent 
(186,788/210,569).

    Question 9d. What are the categories of programs from which they 
graduated?
    Answer 9d. DeVry University offers undergraduate programs in 
business, technology and health care administration. For 2009 graduates 
earned degrees in the following programs:

    Associate Degree Programs

    Accounting
    Electroneurodiagnostic Technology
    Electronics and Computer Technology
    Health Information Technology
    Network Systems Administration
    Web Graphic Design

    Bachelor Degree Programs

    Biomedical Engineering Technology
    Business Administration
    Computer Engineering Technology
    Computer Information Systems
    Electronics Engineering Technology
    Game and Simulation Programming
    Technical Management
    Network and Communications Mgt

    Question 9e. For each category please describe all jobs that are 
considered ``educationally related'' for purposes of calculating the 
employment rates?
    Answer 9e. Please see the term definitions above. ``Educationally 
related'' is determined from position responsibilities as reported by 
the graduate. Career Services staff determines whether the position 
responsibilities are related to the graduate degree program based on 
their knowledge of the educational outcomes of each program.

                       QUESTIONS OF SENATOR ENZI

    Question 1. How does DeVry help students manage their financial aid 
needs, and ensure that they understand their loans?
    Answer 1. I believe that DeVry schools provide high levels of 
customer service to our students in order to help them achieve their 
educational and career goals.
    Prospective students are assigned a student finance advisor 
immediately after completing their enrollment agreements. Student 
finance advisors explain financing options; provide technical 
assistance with completing financial aid and scholarship applications; 
and provide information about the various loan programs, their terms 
and repayment responsibilities. The student finance advisor-student 
relationship is maintained for the duration of the student's studies. 
The advisor is responsible for helping the student with their financial 
planning including providing debt counseling to minimize overall debt 
levels. Advisors also administer our $16-million institutional 
scholarship programs, helping to target these programs to students with 
financial need.
    At the hearing we were asked for best-practices that could be 
employed to help meet U.S. educational goals. We believe that among the 
best practices being developed and implemented with our student finance 
advisors is the financial review that is conducted with students before 
they begin their studies. During this review process, the advisor 
determines each student's financial aid eligibility and projects out 
the expected costs and method of financing with the student. The 
student is able to look at the cost of attending part-time versus full-
time as well as determine the long-term ramifications of that decision. 
They are able to estimate the amount of debt they may have to take on 
to complete their studies and make decisions of how much to pay now 
versus how much they want to pay later (in repayment of student loans). 
This process not only gives the prospective student a long-range look 
toward graduation, it advances their financial literacy level which is 
helpful in other areas of their life.

    Question 2. What does DeVry do to hold itself accountable?
    Answer 2. DeVry is guided by its values, which include maintaining 
a high standard of performance and integrity in all areas of operation. 
These values are articulated in DeVry's Code of Business Conduct and 
Ethics and detail key policies and procedures that help our employees 
to legally and ethically perform the tasks associated with their 
employment.
    Like other higher education institutions--whether public or 
private--DeVry is governed by a wide variety of Federal and State 
regulations. Our colleges and universities are accredited by U.S. 
Department of Education approved accrediting bodies.
    In the United States, DeVry's institutions are regulated by the 
U.S. Department of Education and State regulatory bodies.
    As a publicly held organization, DeVry discloses financial and a 
host of qualitative information in regular filings with the Security 
and Exchange Commission (SEC). This creates a level of public 
disclosure and transparency not generally found among traditional 
higher education institutions.
    DeVry holds itself accountable through clear internal operating 
procedures, internal quality controls, regular and standardized 
professional staff development, independent outside auditors and 
internal quality assurances. These compliance measures include 
dedicated regulatory and compliance personnel, standardized policies 
and procedures updated at least annually, extensive training and 
mentoring that is ongoing, peer review and internal and external 
audits.
    We hold ourselves accountable to the academic outcomes that our 
students achieve. An example of this is exam results on the nursing 
licensure examination the NCLEX-RN. Recent graduates of Chamberlain 
College of Nursing have a first-time NCLEX-RN pass rate between 90-98 
percent depending on the campus location.
    Perhaps the ultimate measure of accountability is success in the 
career marketplace. As I detail in Chairman Harkin's question No. 9, 
90.3 percent of eligible graduates active in the job market were 
employed during the period from 1975 through 2008.
    We appreciate this question as we believe that all schools, 
regardless of sector, must be held accountable for the quality of their 
academic outcomes.

    Question 3. What does DeVry do to help its students find 
employment?
    Answer 3. Local and national advisory boards and faculty with 
experience and expertise in their profession help DeVry University to 
develop an academic curriculum that is relevant to workforce 
requirements. We regularly review entire programs of study to ensure 
that course materials and objectives continue to be rigorous and 
relevant. We provide capstone courses in each program to prepare 
students to enter the workforce through a team-based experience working 
in a real-world environment on assignments requiring students to apply 
their knowledge and skills. The final semesters of study include career 
development courses that reinforce presentation skills, self-
assessment, goal-setting and career planning.
    Our 150 career service professionals develop and maintain 
relationships with employers (some of these relationships have 
persisted for decades) to keep abreast of employment needs and 
opportunities and share this information with staff. Career fairs are 
held on campuses throughout the year. Our career services professionals 
coordinate on-site interviews for employers. DeVry also maintains an 
interactive employer database that contains information on thousands of 
North American companies. This database is available to students and 
alumni and provides real-time access to current job leads, details on 
career events and other career-related information.

                       QUESTIONS OF SENATOR DODD

    Question 1. Do you see any potential problem that schools sit on 
the same accreditation boards that provide the official legitimacy for 
their schools to operate? Do you see this as a potential conflict of 
interest? How can we ensure that this does not become a conflict of 
interest?
    Answer 1. As explained by the Council for Higher Education 
Accreditation (CHEA) in its booklet, The Value of Accreditation 
(Attachment 5), ``Accreditation in the United States is a means to 
assure and improve higher education quality, assisting institutions and 
programs using a set of standards developed by peers . . . 
Accreditation assures that a neutral, external party (the accrediting 
organization) has reviewed the quality of education provided and has 
found it to be satisfactory, based upon appropriate peer expertise.'' 
The participation of affiliated school representatives on accreditation 
boards is an integral part of the peer review method.
    In the United States, accreditation operates as a democratic 
process. Members of the community volunteer to represent and lead. 
Because there is potential for a conflict of interest in any form of 
democracy, there are safeguards in place to ensure a process of 
integrity. It is standard practice among accrediting agencies that 
persons with potential conflicts of interest recuse themselves from 
voting on institution-specific decisions related to their own colleges 
or universities. At the Accrediting Council for Independent Colleges 
and Schools, for example, members of the Board of Directors who have a 
conflict of interest, or even the appearance of a conflict of interest, 
recuse themselves from voting and physically leave the room during the 
voting process for such institutions.
    The U.S. Department of Education operates with appropriate 
oversight to prevent conflicts of interest in the accreditation 
community. According to The Criteria for Recognition of an Accrediting 
Agency for post-secondary students (Attachment 6), the basic 
eligibility requirements mandate: ``At least one member of the agency's 
decisionmaking body is a representative of the public, and at least 
one-seventh of that body consists of representatives of the public'' 
(602.14 b-2); and, ``The agency has established and implemented 
guidelines for each member of the decisionmaking body to avoid 
conflicts of interest in making decisions'' (602.14 b-3). The Criteria 
also require, ``Clear and effective controls against conflicts of 
interest, or the appearance of conflicts of interest, by the agency's 
(i) Board members; (ii) Commissioners; (iii) Evaluation team members; 
(iv) Consultants; (v) Administrative staff; and (vi) Other agency 
representatives'' (602.15 a-6). Additionally, it is required that any 
appeals panel, ``is subject to the conflict of interest policy'' 
(602.25 f-1-ii). These regulations demonstrate a thorough and effective 
policy throughout the accreditation community.

    [Editor's Note: Attachment 6 referred to may be found at: http://
www2.ed.
gov/print/admins/finaid/accred/accreditation.html.]

    To incorporate another safeguard for the integrity of the peer 
review process, the Council of Regional Accrediting Commissions, with 
assistance from CHEA, instituted a policy on interregional 
accreditation. As explained in the policy manual of the Higher Learning 
Commission (Attachment 7), ``To preserve the values and practices of 
peer review and regional accreditation, the Commission's evaluation of 
affiliated institutions that deliver education at a physical site(s) in 
another region(s) within the United States or its territories will be 
undertaken with the participation of the host regional accrediting 
commission(s). This will include the joint (home/host) evaluation of 
the off-campus sites in a host region against the accreditation 
standards of that region.'' This policy is evaluated every 3 years, and 
ensures procedural respect among the regional, institutional 
accreditors.

    [Editor's Note: Attachment 7 referred to may be found at: http://
ncahlc.org/policy/commission-policies.html. Click on policy book in 
first paragraph for updated pdf.]

    When the Higher Learning Commission of the North Central 
Association of Colleges and Schools (HLC) conducted its comprehensive 
review of DeVry University in 2002, the process required an assessment 
of five campuses outside of its own region. The following accrediting 
agencies were invited to participate in the review process: the Middle 
States Commission on Higher Education, the Northwest Commission on 
Colleges and Universities, the Southern Association of Colleges and 
Schools Commission on Colleges, and the Western Association of Schools 
and Colleges Accrediting Commission for Senior Colleges and 
Universities. All four agencies participated in the process with HLC at 
their affiliate campus locations and submitted their reviews of the 
campuses with the HLC reviewer team report.

    Question 2. We agree that with the increased need for and 
importance of distance learning, coupled with President Obama's goal of 
8.2 million additional graduates in 2020, for-profit schools serve a 
definite need in our education sector. As someone in the industry, what 
steps do you suggest we take in order to ensure that Federal funding is 
not being used to raise stocks for bad actors, and instead that these 
important funds are directed to the good actors in the business?
    Answer 2. We appreciate this question as we believe that all 
schools, regardless of sector, must be held accountable for the quality 
of their academic outcomes. The stewardship of student aid funds is 
applicable to all sectors of higher education. Government oversight and 
control is critically important to ensuring the integrity of the 
government financial aid system. Because private-sector schools serve a 
definite need in our education system, it is critical that we do not 
``throw the baby out with the bath water.''
    We offer the following steps to ensure program integrity.

     Recognizing that over time, and with the best of 
intentions, we have built a complex and often conflicting set of rules 
and regulations--and that it is time for a regulatory reform package. 
We agree with the need for higher education regulation.

        Key regulatory reform package elements should be:

          Measure of program completion rate.
          Measure of graduate employment.
          Measure of cohort default rate, adjusted for socio-
        demographic factors. Thus schools that serve students of lesser 
        means should not be unfairly punished for doing so.
          Measure of pass rate on standard exams, where they 
        exist (e.g. nursing).

     Robust disclosure regimen (Attachment 8).

    We must also be careful to be specific when referring to ``bad 
actors.'' To paraphrase Secretary Duncan, we need to hold bad actors 
accountable, regardless of sector. Further, we must have data and not 
only media anecdotes. Just last week we learned that one widely 
reported issue raised to the Secretary of Education was reported by 
someone paid by Wall Street short-sellers.
    I would also like to note that student aid funds are not directed 
to schools but rather to students themselves. As you noted at the 
hearing, just like the GI Bill, the financial aid goes to the student 
and the student then votes with their feet--they can use their aid at 
any accredited school. This model of education funding has contributed 
to the strength of America's system of higher education, by promoting 
competition and accountability.

                       QUESTIONS OF SENATOR CASEY

    Question 1. The President has set the goal of the United States 
leading the world in college graduates by the year 2020. In your 
opinion, what is the role of for-profit colleges in trying to achieve 
this goal?
    Private-sector colleges and universities play a critical role in 
reaching President Obama's 2020 education goals. An analysis by the 
National Center on Higher Education Management Systems (Attachment 9) 
estimates that the United States will need to produce an additional 8.2 
million post-secondary degrees to meet these goals. With cuts in State 
higher education budgets forcing caps in enrollment and program cuts, 
it is impossible to imagine meeting the President's goals without the 
capacity being built by private-sector schools.
    Public and independent schools have been shrinking enrollment for 
quite some time, even before the current budget issues forced State 
governments to cut higher education funding. Public-sector and 
independent colleges, for the last 10 years for which the data are 
available (1997-2007), have actually shrunk enrollments of bachelor's 
degree seeking students age 25+ by 50,000 students while the private 
sector has grown by 400,000 students (Attachment 10). And with public 
schools like the California State University System projecting 
enrollment cuts of 40,000 students, the Nation is clearly facing even 
greater capacity challenges (Attachment 11).
    From a capacity building perspective, the private sector is key in 
reaching the President's 2020 goals. The private sector is also 
critical as the growth we need in college attainment will come largely 
from ``non-traditional'' students. This includes working moms, first-
in-family college-goers, recent immigrants and career changers. They 
represent 73 percent of current college and university attendees and 
are the new majority in higher education (Attachment 12).

    [Editor's Note: Attachment 12 referred to may be found at: http://
nces.ed.
gov/pubs2002/2002012.pdf.]

    Private-sector schools have proven to be especially nimble and 
innovative in meeting the needs of non-traditional students. Online 
learning was first developed and implemented by private-sector schools 
and is key to reaching this critical demographic. Public-sector and 
independent schools have gradually taken it up as well. Other 
innovative approaches have also been critical: flexible schedules, 
increased academic and career services support, year-round classes so 
that students can earn their Bachelor's degree in 3 years or their 
Associate's degree in 18 months, and closely following employment 
trends to develop courses that are quickly adaptable to the workforce. 
Innovations such as these, often led by private-sector colleges, are 
necessary to serve these ``non-traditional'' students.
    But the private sector cannot make up all the additional degrees 
required to regain our leadership in college attainment. All sectors of 
higher education are needed and must work together. We need to share 
and embrace new technological approaches, adopt simple, long-overdue 
administrative changes like making transfers of credit hours between 
institutions easier, and relentlessly focus on the student and their 
desired career and learning outcomes. The United States has a system of 
higher education that is the envy of the world, due to its diversity of 
student choice among public-sector, private-sector, and independent 
colleges and universities.

    Question 2. What are for-profit schools currently required to 
report to the Department of Education around graduation rates and 
placement rates? How are placement rates tracked?
    Answer 2. Graduation rates are reported to the Department of 
Education only for first-time, full-time students. These are done 
annually through the Integrated Post-Secondary Education Data System 
(IPEDS). ``Placement'' or graduate employment rates are not reported to 
the Department. There is no placement rate calculation methodology 
defined for regionally accredited colleges and universities. The 
Accrediting Council for Independent Colleges and Schools (ACICS), a 
national accreditor, which accredits Apollo College (as of June 30, 
2010 renamed Carrington College) define a methodology for calculating 
placements and requires all schools to annually report placement data.
    Placement data reported to ACICS includes:

     Number of graduates.
     Number placed in field of study.
     Number placed in related field of study.
     Number placed out of field of study.
     Number of graduates not available for placement due to 
pregnancy, death, other health-related situations, continuing 
education, military service or because they are not eligible for 
placement in the United States.
     Number of graduates not working.

    Many private-sector colleges and universities publicly report 
graduate employment data. To provide the information students need to 
be fully informed consumers, we should hold all institutions, 
regardless of sector, to the same standards of accountability.

    Question 3. What, if any, statutory or regulatory changes should be 
made to strengthen the rules governing for-profit colleges? Are the 
penalties strong enough to hold these institutions accountable?
    Answer 3. We appreciate this question as we believe that all 
schools, regardless of sector, must be held accountable for the quality 
of their academic outcomes. The stewardship of student aid funds is 
also applicable to all sectors of higher education. Government 
oversight and control is critically important to ensuring the integrity 
of the government financial aid system. Because private-sector schools 
serve a definite need in our education system, it is critical that we 
do not ``throw the baby out with the bath water'' or potentially 
proliferate the problem by limiting oversight to one sector over 
another.
    We offer the following steps to ensure program integrity.

     Recognizing that over time, and with the best of 
intentions, we have built a complex and often conflicting set of rules 
and regulations--and that it is time for a regulatory reform package. 
We agree with the need for regulation of higher education.

          Key regulatory reform package elements should be:

            Measure of program completion rate.
            Measure of graduate employment.
            Measure of cohort default rate, adjusted for socio-
        demographic factors. Thus schools that serve students of lesser 
        means should not be unfairly punished for doing so.
            Measure of pass rate on standard exams, where they 
        exist (e.g., nursing).

     Robust disclosure regimen (Attachment 8).

    We must also be careful to be specific when referring to ``bad 
actors.'' To paraphrase Secretary Duncan, we need to hold bad actors 
accountable, regardless of sector. Further, we must have data and not 
only media anecdotes. Just last week we learned that one widely 
reported issue raised to the Secretary of Education was reported by 
someone paid by Wall Street short-sellers.
    I would also like to note that student aid funds are not directed 
to schools but rather to students themselves. As you noted at the 
hearing, just like the GI Bill, the financial aid goes to the student 
and the student then votes with their feet--they can use their aid at 
any accredited school. This model of education funding has contributed 
to the strength of America's system of higher education, by promoting 
competition and accountability.
    With the proper training, evaluation and enforcement, the 
Department of Education has very strong powers to hold institutions 
accountable. Please see Attachment 8 for further information. DeVry has 
been actively engaged throughout this year with both the Secretary of 
Education's Office and the Congress in an attempt to define problems 
and develop solutions targeted to these problems. We look forward to 
continuing to help analyze and test potential solutions to identified 
problems.
    Currently, there is a broad array of penalties available to the 
Secretary for assessing in the event of noncompliance with Federal 
regulations. These include limitation, suspension or termination of an 
institution's title IV eligibility. Limitations can also include 
requiring the posting of letters of credit or payment of fines.

                       QUESTIONS OF SENATOR HAGAN

    Question 1. Over the last several years Congress has had to make 
some very difficult choices regarding the spending of Federal dollars, 
one of which was to devote a greater amount of Federal resources to the 
Pell Grant program over other priorities with just as much need.
    As you well know, Federal title IV loan and grant dollars now 
comprise close to 90 percent of total revenues at many for-profit 
institutions. In fact, Mr. Eisman's research states that the amount of 
Federal dollars flowing to the for-profit industry is over $21 billion.
    In a time in which budgets are very tight I strongly believe that 
it is critical for Congress to take a look at each and every dollar 
that we spend.
    The bulk of your revenue comes from Federal loans and grants but 
there is no assurance that you are providing the type of high quality 
education leading to a lucrative job that these students deserve and 
are paying for. This must change. Does DeVry, or the industry in 
general, have any accountability mechanisms in place that can 
demonstrate to us that you are making the most effective use of the 
Federal dollars from student financial aid that you currently receive? 
If not, what steps are you willing to take to make that change?
    Answer 1. DeVry is guided by its values, which include maintaining 
a high standard of performance and integrity in all areas of operation. 
These values are articulated in DeVry's Code of Business Conduct and 
Ethics and detail key policies and procedures that help our employees 
to legally and ethically perform the tasks associated with their 
employment.
    Like other higher education institutions--whether public or 
private--DeVry is governed by a wide variety of Federal and State 
regulations. Our colleges and universities are accredited by U.S. 
Department of Education approved accrediting bodies.
    In the United States, DeVry's institutions are regulated by the 
U.S. Department of Education and State regulatory bodies.
    As a publicly held organization, DeVry discloses financial and a 
host of qualitative information for regular filings with the Securities 
and Exchange Commission (SEC). This creates a level of public 
disclosure and transparency not generally found among traditional 
higher education institutions.
    DeVry holds itself accountable through clear internal operating 
procedures, internal quality controls, regular and standardized 
professional staff development, independent outside auditors and 
internal quality assurances. These compliance measures include 
dedicated regulatory and compliance personnel, standardized policies 
and procedures updated at least annually, extensive training and 
mentoring that is ongoing, peer review and internal and external 
audits.
    We hold ourselves accountable to the academic outcomes our students 
achieve. An example of this is exam results on the nursing licensure 
examination, the NCLEX-RN. Recent graduates of Chamberlain College of 
Nursing have a first-time NCLEX-RN pass rate between 90-98 percent 
depending on the campus location.
    The ultimate accountability measurement for career-oriented 
education is whether our graduates, either entering or re-entering the 
workforce or maintaining their job continue to be employed and whether 
that employer continues to hire our graduates for future positions. We 
have been measuring this for more than 35 years. Aside from employment 
rate, DeVry is measured much like every other institution. We report 
graduation, retention and withdrawal rates to the Department of 
Education, as well as cost and demographic information. The Department 
calculates cohort default and financial aid participation rates and 
makes all this information available to consumers on its College 
Navigator Web site as well as to financial aid applicants at the time 
of application. While this may be useful information, its 
disaggregation from the enrollment process limits its effectiveness.
    Subsequent to the conclusion of the recent negotiated rulemaking, 
we proposed (with two other schools) a robust disclosure process as an 
alternative to the Gainful Employment proposal discussed in the 
rulemaking sessions. This disclosure would provide specific program-
level cost, indebtedness and repayment information that we think should 
be readily available for every student. This disclosure would help 
assure students are making informed decisions and using taxpayer 
assistance to best meet their educational objectives.
    Since Mr. Eisman's testimony is cited, I would also like to note 
that Mr. Eisman is a Wall Street short-seller who has bet millions on 
seeing shares of publicly held colleges decline. He is not merely 
predicting what will happen, he and other short-sellers have conducted 
a carefully orchestrated campaign to make it happen. Just last week we 
learned that one widely reported issue that was raised with the 
Secretary of Education was reported to him by someone paid by Wall 
Street short-sellers.

    Question 2. I read and I hear stories of students like Yasmine 
Issa--our witness here today--a motivated and hard working student 
simply ready and willing to work hard to accomplish her goals. But for 
many students, their goals have slowly diminished as the clock ticks 
and they are unable to find a job.
    I also understand that there are many stories of students who have 
attended a for-profit institution and have gone on to successful 
careers and are able to manage their student loan debt.
    When you hear stories like Ms. Issa's, how do you defend the 
institution you work on behalf of and its counterparts?
    Answer 2. As you know, Ms. Issa did not attend one of our schools. 
Our students attend DeVry's schools to earn a degree or certificate 
that allows them to begin or advance in their careers and we work every 
day to ensure they leave our programs with the tools they need to 
succeed.
    We hold ourselves accountable to the academic outcomes our students 
achieve. An example of this is exam results on the nursing licensure 
examination, the NCLEX-RN. Recent graduates of Chamberlain College of 
Nursing have a first-time NCLEX-RN pass rate of between 90-98 percent 
depending on the campus location.
    As I detail in Chairman Harkin's question No. 9, 90.3 percent of 
eligible graduates active in the job market were employed during the 
period from 1975 through 2008.
    The ultimate accountability measurement for career-oriented 
education is whether our graduates, either entering or re-entering the 
workforce or maintaining their job continue to be employed and whether 
that employer continues to hire our graduates for future positions. We 
have been measuring this for more than 35 years. Aside from employment 
rate, DeVry is measured much like every other institution. We report 
graduation, retention and withdrawal rates to the Department of 
Education, as well as cost and demographic information. The Department 
calculates cohort default and financial aid participation rates and 
makes all this information available to consumers on its College 
Navigator Web site as well as to financial aid applicants at the time 
of application. While this may be useful information, its 
disaggregation from the enrollment process limits its effectiveness.
    Subsequent to the conclusion of the recent negotiated rulemaking, 
we proposed (with two other schools) a robust disclosure process as an 
alternative to the Gainful Employment proposal discussed in the 
rulemaking sessions. This disclosure would provide specific program-
level cost, indebtedness and repayment information that we think should 
be readily available for every student. This disclosure would help 
assure students are making informed decisions and using taxpayer 
assistance to best meet their educational objectives.
    As you point out, there are many successful graduates. The Arizona 
Republic ran a story last year on Bonnie Brown, a local DeVry student. 
She is a stay-at-home mother of three who wanted to get a degree in 
biomedical engineering technology and get back into the workforce. She 
graduated in 2009 in only 3 years, taking classes year round and now 
has a job at Phoenix Children's Hospital.
    Ms. Brown received a quality education, in a field with growing 
capacity needs, on a schedule that fit her busy life. In the not so 
distant past, students like Ms. Brown might not have had the chance to 
go back and get a degree. But today, because of changes in technology, 
in how we offer classes to students, and our flexible, competitive 
higher education system, she can.

    Question 3. At the end of fiscal year 2010, there are estimated to 
be over $700 billion in outstanding, federally backed student loans. 
Taxpayers are backing almost all of those loans.
    I realize that this question can apply equally to non-profit 
institutions as well, but since we're talking about the for-profit 
industry today, could any of the witnesses tell me what specific, 
quantitative measurements we have across the industry to tell us what 
the taxpayers are getting for all that money? What sort of industry-
wide performance measures are available to help us better understand 
the performance of institutions that survive on the largess of the 
taxpayer?
    Answer 3. The National Center for Education Statistics (NCES) 
collects a wide variety of student performance and cost information 
from schools each year. They provide 1-year snapshots of performance as 
well as longitudinal studies. For instance, from the 1996 Beginning 
Post-Secondary Students Longitudinal Study (Attachment 13), 55.6 
percent of all students starting at a for-profit, 2-year school 
received a degree or certificate by 2001 (the last year data was 
collected for this study) versus 36.7 percent for students starting at 
public, 2-year schools. Additionally, 52.8 percent of students starting 
at for-profit, 4-year schools had received a degree by 2001 versus 60.5 
percent at public schools.
    We recognize that taxpayers make a significant investment in higher 
education. According to the National Center for Education Statistics 
(NCES) 2008-2009 data (Table 3), Federal, State, county and/or 
municipal governments contributed the following average tax subsidy to 
public-sector institutions per full-time student equivalent:

    Public institutions: $13,920.
    Independent institutions: $7,546.
    Private sector institutions: $1,001.

    For-profit or private-sector institutions provide higher education 
that is worthwhile and far more cost efficient investment of taxpayer 
subsidies. Institutions like ours also help offset taxpayer subsidies 
to public institutions by returning to the government a significant 
portion of our earnings as Federal, State, county and/or municipal 
taxes. As an example, DeVry will pay over $100M in tax this year. In 
the latest tax year.

               National Center for Educational Statistics

 Table A-49-1.--Total and Per Student Revenue of Public, Private Not-For-Profit, and Private for-Profit Degree-Granting Post-Secondary Institutions, by
                                          Source of Funds: Selected Academic Years, 1999-2000 Through 2007-2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                 Total 2007-   Percentage distribution of total  revenue   Revenue per FTE student\1\ [In constant 2008-
                                                     2008    --------------------------------------------                  2009 dollars]
   Control of institution and source of funds    revenue [In                                             -----------------------------------------------
                                                  millions]   1999-2000  2003-2004  2006-2007  2007-2008   1999-2000   2003-2004   2006-2007   2007-2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
Public institutions
    Total......................................     $273,109        --      100.0      100.0      100.0           --     $27,702     $29,715     $28,432
Operating revenues.............................      151,079        --       58.0       55.4       55.3           --      16,063      16,461      15,728
Tuition and fees\2\............................       48,070        --       15.8       16.7       17.6           --       4,388       4,954       5,004
Grants and contracts...........................       42,054        --       19.2       17.3       15.4           --       5,312       5,153       4,378
Federal (excludes FDSL\3\).....................       25,523        --       13.0       11.5        9.3           --       3,605       3,406       2,657
State..........................................        7,832        --        3.0        2.8        2.9           --         822         842         815
Local..........................................        8,699        --        3.2        3.0        3.2           --         885         905         906
Auxiliary enterprises..........................       20,488        --        7.7        7.6        7.5           --       2,121       2,257       2,133
Hospitals......................................       25,183        --        8.8        8.4        9.2           --       2,445       2,498       2,622
Other operating revenues.......................       15,284        --        6.5        5.4        5.6           --       1,797       1,599       1,591
Nonoperating revenues..........................      105,254        --       36.6       38.5       38.5           --      10,137      11,434      10,958
Federal appropriations.........................        1,850        --        0.7        0.7        0.7           --         200         211         193
State appropriations...........................       68,375        --       24.3       23.5       25.0           --       6,727       6,993       7,118
Local appropriations...........................        9,319        --        3.5        3.3        3.4           --         962         976         970
Government grants..............................       12,109        --        1.6        1.6        4.4           --         450         474       1,261
Gifts..........................................        6,070        --        1.9        2.1        2.2           --         523         618         632
Investment income..............................        5,279        --        3.2        5.8        1.9           --         894       1,725         550
Other nonoperating revenues....................        2,251        --        1.4        1.5        0.8           --         381         437         234
Other revenues.................................       16,776        --        5.4        6.1        6.1           --       1,502       1,819       1,746

Private not-for-profit institutions
    Total......................................      139,251     100.0      100.0      100.0      100.0       60,242      55,273      64,760      46,511
Tuition and fees...............................       50,736      24.6       28.7       26.0       36.4       14,809      15,856      16,860      16,946
Federal Government\4\..........................       20,205      10.1       13.7       11.1       14.5        6,089       7,550       7,170       6,749
State governments..............................        1,857       0.9        1.1        0.9        1.3          558         599         578         620
Local governments..............................          528       0.5        0.4        0.3        0.4          290         200         191         177
Private gifts, grants, and contracts\5\........       20,992      13.7       11.8       11.1       15.1        8,235       6,526       7,170       7,012
Investment return..............................        6,447      31.3       23.0       30.7        4.6       18,860      12,723      19,852       2,153
Educational activities.........................        4,850       2.4        2.5        2.3        3.5        1,431       1,355       1,458       1,620
Auxiliary enterprises..........................       12,929       6.9        7.7        6.7        9.3        4,154       4,252       4,365       4,318
Hospitals......................................       13,300       6.0        7.2        6.9        9.6        3,600       3,977       4,487       4,442
Other..........................................        7,407       3.7        4.0        4.1        5.3        2,217       2,236       2,630       2,474

Private for-profit institutions
    Total......................................       16,084     100.0      100.0      100.0      100.0       14,248      16,027      15,579      15,825
Tuition and fees...............................       14,030      86.1       89.5       88.2       87.2       12,267      14,350      13,742      13,804
Federal Government.............................          960       4.6        4.4        5.2        6.0          656         709         809         944
State and local governments....................           68       1.7        0.7        0.5        0.4          237         105          78          67
Private gifts, grants, and contracts...........            5         #        0.1          #          #            7          13           4           5
Investment return..............................           65       0.4        0.2        0.3        0.4           61          30          54          64
Educational activities.........................          290       1.6        1.5        1.8        1.8          233         248         274         285
Auxiliary enterprises..........................          352       3.6        2.7        2.2        2.2          516         426         348         346
Other..........................................          315       1.9        0.9        1.7        2.0          271         146         270         310
--------------------------------------------------------------------------------------------------------------------------------------------------------
-- = Not available.
# = Rounds to zero.
\1\ Full-time-equivalent (FTE) enrollment includes full-time students plus the full-time equivalent of the part-time students.
\2\ Net of allowances and discounts.
\3\ Federal Direct Student Loans.
\4\ Includes independent operations.
\5\ Includes contracts and contributions from affiliated entities.
Note: For more information on the Integrated Post-Secondary Education Data System (IPEDS), see supplemental note 3.
Source: U.S. Department of Education, National Center for Education Statistics, 1999-2000 through 2007-2008 Integrated Post-Secondary Education Data
  System, ``Fall Enrollment Survey'' (IPEDS-EF: 99) and Spring 2001 through Spring 2009.


    Question 4. Some say that the for-profit sector is highly regulated 
with oversight from the U.S. Department of Education, State licensure 
agencies and accrediting bodies. Others may disagree, citing that much 
more needs to be done.
    That said, what are your thoughts on how can we better align the 
goals of each of these agencies so that everyone is demanding the 
highest quality outcomes for every institution?
    Answer 4. Without question, the for-profit or private-sector is 
highly regulated. In addition to the named entities, the sector is 
regulated by other Federal and State agencies, including for some, the 
SEC. The question is whether the regulation adequately ensures that 
institutions are effectively delivering a quality product and service 
that meets the student and taxpayer's expectations. This is not a 
question just for the private sector, but for all of higher education. 
In calling for an increase of 8.2 million college graduates, the 
President is not just telling us to throw open our doors and add more 
seats. He is telling us we need to first offer programs and services 
that meet the needs of the un-enrolled, and second, do a better job at 
seeing them through to graduation.
    The Triad, consisting of the Department of Education, State 
licensing entities and accrediting bodies, needs to work effectively 
and cohesively to enable this expansion while at the same time being 
able to better measure individual institutional performance towards 
those goals. While none of these entities operates in a silo, they each 
bring different strengths and responsibilities to the table. They each 
must be accountable to increasing the level of execution of their own 
responsibilities. For example, if it is the State's role to ensure that 
institutions are responsive to student consumers, then they need to 
have a rapid response process that assures complaints are not only 
resolved for an individual student, but that the institution ``learns'' 
from the resolution and will advance its product and services as a 
result. The Department currently has the authority to spearhead this 
effort within its existing enforcement authority. It also has the 
authority and resources to gather and report on meaningful qualitative 
results.
    Similarly, the Federal Negotiated Rulemaking process provides a 
meaningful opportunity for community input and serves as an integral 
part of engaging not only the Triad but the higher education community 
at-large. As members of this community, DeVry staff has served as 
Federal trainers, chairmen of Department of Education (USED) task 
forces, on the National Academy Foundation student aid research 
projects, on USED focus groups to simplify student aid and the steering 
committee of NCES's National Post-Secondary Education Cooperative which 
promotes better data for better decisionmaking. We have also 
participated as members of associations including the American Council 
of Education, The College Board, and the National Association of 
Student Financial Aid Administrators. Most recently DeVry staff served 
as negotiators in negotiated rulemaking and has provided recommended 
regulatory language to USED aimed at strengthening student disclosures. 
DeVry has and will continue to engage with Members of Congress on ways 
to improve educational opportunity and success for all students.

    Question 5. Many of you in your testimony mention the ``90/10 
rule'', the provision that requires proprietary institutions of higher 
education to have at least 10 percent of the institution's revenues 
from sources that are not derived from funds provided through Federal 
financial aid.
    Is there a way to more accurately track the percentage of title IV 
dollars that schools receive?
    Answer 5. Both the U.S. Department of Education and schools can 
accurately track the receipt of total title IV dollars. However, the 
allocation of those dollars towards an institution's 90/10 calculation 
is problematic. Currently, the Department requires that all title IV 
funds be counted first towards revenue. Many tuition-
restricted scholarships, State grants and other 3d party assistance are 
excluded from the 90/10 calculation. Title IV loans are often used to 
pay for non-institutional charges. These loans, which most schools 
discourage use of, must be counted towards the 90 percent limit even 
though they were never used to pay institutional charges. We have three 
recommendations related to this concern:

    1. Tuition-restricted funding should always count first (prior to 
title IV assistance) towards the calculation of the 90/10 rate, and;
    2. Schools should have the flexibility in their awarding policies 
to restrict borrowing for non-institutional costs.
    3. To provide incentives to institutions to help reduce student 
debt by providing need-based institutional grants and scholarships. 
These should be allowed to count toward the 10 percent requirement.

    Question 4. As you know, the purpose of this hearing is for all of 
us to get a better sense of how well the for-profit education industry 
is serving students. We know that there are good actors as well as bad 
actors in the for-profit education industry.
    For those of us who want to ensure that anyone who has the drive 
and desire to get a high-quality education is able to do so, how do you 
suggest we work together to better identify those schools that are 
getting the job done and those that aren't?
    Answer 4. As I stated in my written testimony:

          ``Please make no mistake, when an institution does something 
        wrong and in conflict with the best interests of students, they 
        must be held accountable. However, I submit that rather than 
        limiting oversight to one sector over another or one `actor' 
        over the `other', policymakers consider that there are `good 
        acts' and `bad acts' of which no sector is immune.''

    I have a few suggestions for working together to identify schools 
in all sectors that are getting the job done and those that are not.
    Given the enormity of the task facing our country, educating 8.2 
million additional post-secondary graduates by 2020, we must count on 
every single part of our higher education system to deliver high-
quality opportunities to an exponentially diverse and growing student 
population.
    Historically, American colleges and universities have not done the 
best job educating and graduating at-risk students. However, given the 
challenges we face, this has to change.
    In measuring how colleges and universities heed this challenge, it 
is important to compare like institutions based on student profile and 
risk factors. There are a myriad of ways to measure like institutions 
but still hold the whole of higher education accountable for student 
outcomes. In fact DeVry is currently working with a few schools at the 
request of a Member of Congress to come up with objective, risk-
adjusted performance standards that can be used to measure 
institutional effectiveness.
    I am also familiar with other examples; a notable one is found in 
the State of Texas. The Texas Higher Education Coordinating Board 
(THECB), the State authorizing body for degree-granting institutions, 
has a robust higher education accountability system that seeks to group 
like institutions based on a series of qualitative and quantitative 
measures (Attachment 14).

    [Editor's Note: Attachment 14 referred to may be found at: http://
www.tx
highereddata.org/Interactive/Accountability/History.cfm.]

    We are engaged with the Gates Foundation, Lumina Foundation and the 
Pell institute, along with other institutions of higher education, to 
determine ways of measuring success based on risk-based factors. We 
encourage the Congress to work with the broader community and the 
Department of Education to address this challenge.

                     QUESTIONS OF SENATOR ALEXANDER

    Question 1. What types of programs or assistance do you provide to 
your part-time or transfer students to help ensure that they actually 
graduate or complete their program? Are there better ways we could 
track that information so that we can have a better understanding of 
college completion across all sectors.
    Answer 1. DeVry provides high levels of support and service to all 
our students, whether part-time, transfer or first-time full-time 
students. Each of our incoming students is assigned a student success 
coach who is responsible for facilitating their successful transition 
into and through the first year of college. The coach works with his/
her students to establish their degree completion plan and assists with 
course selection. Throughout the students tenure coaches stay in 
contact with their students providing proactive advisement and support. 
Student attendance is monitored and the coaches act as liaisons with 
other University departments on their students' behalf.
    In student finance, as discussed in an earlier question, each 
student is assigned an advisor who works with him/her setting up a 
personalized financing plan, including debt counseling and scholarship 
search options.
    Finally, all graduating students are assigned a career services 
advisor to assist students with career planning and their job search. 
Even after a student graduates and begins their job, career services 
assistance is available as a life-long service to DeVry alumni.
    With respect to tracking college completion, currently the 
Department relies on schools to track transfer rates and does not 
require tracking of part-time and transfer-in students for reporting 
graduation rates. This omits a huge and increasing number of students 
from performance monitoring. We believe that the Department has the 
ability to monitor transferring students as well as continue 
longitudinal studies on part-time enrollments. They should be 
encouraged to do so. All full-time students should be included in a 
school's calculation.

    Question 2. What reporting requirements do you think we should ask 
of institutions of higher education to report on to the Department of 
Education and the public to ensure the quality of the school? What 
should we be measuring instead of the boxes and boxes we currently 
gather?
    Answer 2. I believe that all schools, regardless of sector, must be 
held accountable for the quality of their academic outcomes.
    A robust regulatory reform package should include:

     Measure of program completion rate.
     Measure of graduate employment.
     Measure of cohort default rate, adjusted for socio-
demographic factors. Thus schools that serve students of lesser means 
should not be unfairly punished for doing so.
     Measure of pass rate on standard exams, where they exist 
(e.g. nursing).

     Robust disclosure regimen (Attachment 8)

    Question 3. Could you tell us a little more about how the DeVry 
University Advantage Academy was created? Does DeVry intend to expand 
the Advantage Academy beyond Chicago and Columbus, OH?
    Answer 3. The DeVry University Advantage Academy (DUAA) was created 
at the urging of Mayor Richard Daley, who asked his then-CEO of the 
Chicago Public Schools (CPS), Arne Duncan, to work with DeVry to 
develop an innovative approach to help increase high school graduation 
rates and college attainment among CPS high school students. Together, 
DeVry and CPS developed a dual enrollment program that allowed high 
school students, beginning in their junior year, to take college 
courses in addition to their regular classes so that they could 
graduate with both their high school diploma and an Associate's degree. 
Launched in 2004, it has graduated four classes, and the 6th class 
matriculated in 2009.
    DUAA is geared not toward the super high achieving student, or the 
students with serious study and attendance issues. Students at either 
extreme of the educational spectrum typically get extra resources and 
attention. DUAA was created to help the ``regular kids'', students who 
come to school every day and want to learn and be challenged. And it 
has been very successful: The Chicago campus has a 92 percent 
graduation rate and the Columbus, OH, campus, launched in 2006 in 
partnership with Columbus City Schools, has a 100 percent graduation 
rate.
    Building off these successes, DeVry will partner with America's 
Promise Alliance, the foundation created by General Colin Powell, to 
expand the DUAA program to another 10 cities over the next 3 years. 
America's Promise is on a 10-year campaign called ``Grad Nation'' to 
mobilize our country as never before to reverse the dropout crisis and 
enable our children to be prepared for success in college, work and 
life. DeVry and America's Promise will work together to identify cities 
where a DeVry Advantage Academy can help improve high school graduation 
rates and work with the local school district in each city to develop a 
program that meets the needs of local students.
    DUAA is an innovative and successful approach that clearly works. 
DeVry would be honored to meet with members of the committee to talk 
more about the program and discuss how the DUAA approach could be 
applied in their home State school districts.

                      QUESTIONS OF SENATOR COBURN

    Question 1. Can you please discuss the potential economic impact of 
the Gainful Employment regulations on the country?
    Answer 1. This past spring, Professor Jon Guryan, an economist at 
the University of Chicago, conducted a comprehensive analysis of the 
potential impact of the Gainful Employment regulations as they were 
proposed during negotiated rulemaking (Attachment 15). His analysis 
came from data collected from 17 institutions on more than 640,000 
students enrolled in more than 10,000 separate programs of study. He 
concluded that more than 18 percent of all programs of study at for-
profit institutions would fail to meet the proposed Gainful Employment 
requirements. Furthermore, he concluded that more than 33 percent of 
all students enrolled in for-profit institutions were enrolled in 
programs that would be disqualified. The total estimated impact would 
be to displace more than 900,000 current students and 360,000 new 
students each year. The economic impact on the country would be 
tremendous. There is no capacity within public schools, and building 
this capacity would be time-consuming and beyond the ability of 
strained State budgets. If you conservatively assumed that 40 percent 
of the 900,000 currently affected students would have graduated and 70 
percent of these would have entered the workforce with $30,000 a year 
jobs, the aggregate lost earnings would be $7.6 billion--in the first 
year alone.

    [Editor's Note: Attachment 15 referred to may be found at: http://
nwcareer
colleges.org/documents/CRA-GainfulEmployment-full.pdf.]

    Question 2. What actions does your company take when it encounters 
so-called ``bad'' actors that ultimately stigmatize this industry?
    Answer 2. DeVry is a values-driven organization whose purpose is to 
empower our students to achieve their educational and career goals. We 
have a long history within higher education of working with industry 
partners to increase our accountability to students and taxpayers. We 
are helping to lead an initiative today to develop a Statement of 
Ethical Principles for our industry. When we hear about ``bad acts''--
whether intentional or the result of error or misunderstanding--we use 
them as teaching opportunities, to maintain our values and controls and 
to mitigate against these acts within our organization.

    Question 3. The testimony provided by Mr. Steven Eisman, Portfolio 
Manager of FrontPoint Financial Services Fund, discusses the amount 
that some for-profit colleges provision for losses on their respective 
institutional loans, sometimes in excess of 50 percent. In fiscal year 
2008 and fiscal year 2009, how much (and what percentage of loans) did 
DeVry maintain for losses against its institutional loans? Please 
provide your perspective on why companies maintain considerable 
reserves for losses anticipated on their own loans?
    Answer 3. Students incur debt to DeVry Inc. through either a 
tuition payment plan, which is to be repaid through the course of the 
term of studies and is similar to those offered by most institutions of 
higher education, or an institutional loan program which has a 
repayment period schedule of 5 years or longer depending on the 
program, beyond completion of their studies. The institutional loan 
program is designed to partially offset the impact of the credit crisis 
and loss of private loan availability. The amount of total indebtedness 
assumed by students through the institutional loan program comprises 
less than 2 percent of total DeVry Inc. revenue. The loss reserve 
established for the institutional loan program is based on the default 
experience on remaining tuition payment balances at the time a student 
withdraws or graduates. The total reserve for bad debt on institutional 
loans at the end of fiscal year 2009 was $6.3 million, representing 
35.6 percent of the total balance owed to DeVry Inc. Since we had no 
institutional loan programs in fiscal year 2008, we had no reserve for 
bad debt. DeVry's perspective on why we maintain this level of reserve 
is that we tend to be conservative in our accounting. Nobody likes 
surprises, including us, and our reserve reflects that. It could be 
that the actual losses we experience are less than this reserve amount.
    Since Mr. Eisman's testimony is cited, I would also like to note 
that Mr. Eisman is a Wall Street short-seller who has bet billions on 
seeing shares of publicly held colleges decline. He is not merely 
predicting that will happen, he and other short-sellers have conducted 
a carefully orchestrated campaign to make it happen. Just last week we 
learned that one widely reported issue that was raised with the 
Secretary of Education was reported to him by someone paid by Wall 
Street short-sellers.

    Question 4. In your testimony, you state that DeVry's net income 
margin for fiscal year 2009 was 11 percent, and that substantially all 
of these revenues were retained to re-invest in the future. You call 
this your students' endowment and note that during the last fiscal year 
DeVry has invested more than $100 million in equipment and facilities, 
upgraded classrooms, the re-development of curricula, expanded academic 
offerings and additional staff. Can you expand on the importance of re-
investing in your students? How does the amount that DeVry re-invests 
in students compare to the amount of endowment earnings that 
traditional schools re-invest in their student populations?
    Answer 4. Last year's earnings become the resource for this year's 
capital investments. Our capital investments for fiscal year 2010 will 
be about $140 million. This represents 85 percent of our net earnings 
of $165 million from fiscal year 2009. These investments include 
increasing our enrollment capacity to meet increased student interest 
in our programs, such as building two new nursing campuses, one in 
Chicago and another across the river in Arlington. It also includes 
adding new computers across our network of more than 120 campuses to 
support business and technology programs, purchasing patient simulators 
that can cost $100,000 each for our nursing and medical programs and 
implementing new technology systems designed to improve classroom 
learning and student services. In addition to funding capital 
expenditures, we funded more than $16 million in scholarships this past 
year. This re-investing in our students is an integral part of our 
strategic plan. Investing in academic quality leads to better student 
outcomes. When students achieve better outcomes, it creates more 
interest in our programs. And this enables us to support further 
investment into the quality of our academic programs.
    Although many universities rely on their endowment (instead of 
retained earnings) to fund capital investments, the difference in 
allocating funding is great. A traditional university's endowment 
consists of two components; the original endowment (or gift) received 
from individual donors and a component that is represented by the 
investment growth of that original endowment. CommonFund and National 
Association of College and University Business Officers (NACUBO) 
studies (Attachment 16) show that most schools target a spend rate for 
their endowments of 4.5-5.0 percent, which is typically less than the 
growth rate of the original endowment. This difference ensures a 
stabilization of the endowment to be used for generations in the 
future. Unlike an endowment, DeVry does not ``lock up'' its retained 
earnings and only use the income from those earnings to generate 
resources for capital investing and scholarships. We consistently use a 
substantial portion of prior year earnings to fund the current year's 
initiatives. But, similar to the stability that an endowment helps 
ensure for public and non-profit independent colleges, DeVry's long-
term stability is secured with its direct reinvestment into initiatives 
that support student access and success.

    Question 5. In your testimony you discuss the amount of counseling 
and financial literacy training that your students must go through 
before being allowed to receive loan disbursements. Would you say your 
students, consequently, are fully informed of the debt obligations and 
the contract to which they are entering?
    Answer 5. Students are fully informed of the estimated total cost 
of their program, how tuition charges are calculated each term and the 
cost of attendance used for financial aid calculations. Students are 
also fully informed of the terms and conditions for any loan program 
from which they may choose to borrow. Subsequent to the conclusion of 
the recent negotiated rulemaking, we, in addition to two other schools, 
proposed a robust disclosure process as an alternative to the Gainful 
Employment proposal discussed in the rulemaking sessions. This 
disclosure would provide specific program-level cost, indebtedness and 
repayment information that we think should be readily available for 
every student. Notwithstanding any rulemaking outcome, we will 
implement this process during the coming academic year at all of our 
schools.

    Question 6. Do community colleges, public and nonprofit colleges 
and universities face capacity issues that limit their growth, and by 
consequence, limit opportunity for students--especially the most 
disadvantaged?
    Answer 6. There are capacity issues facing community colleges, 
public and non-profit (independent) colleges that can limit their 
growth and, by extension, limit opportunities for disadvantaged 
students. Considering that 80 percent of all college attendees are 
enrolled in public-sector schools (both community colleges and 4-year 
schools), capacity issues have a significant impact on educational 
opportunity. This capacity issue translates into many of these schools 
becoming more selective in determining who is enrolled. As a result, 
the most impacted are those who have traditionally been left out of 
higher education and are the ones most in need of college access.
    Publicly funded schools continue to face severe budget cuts that 
result in capping, and sometimes cutting, enrollment; eliminating 
courses; increasing class sizes; and laying off faculty and 
administrative staff. It is well known that the University of 
California System has proposed cutting 40,000 enrollments (Attachment 
11). Arizona State University recently considered eliminating their 
Clinical Lab Science bachelor's degree program (``Closure of clinical 
lab sciences programs threatens healthcare industry.'' Healthcare 
Finance News. May 13, 2009, http://www.
healthcarefinancenews.com/news/closure-clinical-lab-sciences-programs-
threatens-healthcare-industry). DeVry University Phoenix just opened 
one.
    An example of one capacity issue facing community colleges, public 
and nonprofit colleges and universities is our Nation's projected 
nursing shortage. It is estimated that more than 1 million new and 
replacement nurses will be needed by 2020. Yet nearly 99,000 qualified 
students are turned away each year from U.S. nursing schools due to a 
lack of capacity. Thousands of people want to be nurses but can't 
because there are not enough seats in nursing schools.
    Reductions in administrative staff and resources do affect those 
that get in the door at traditional schools. Disadvantaged and non-
traditional students often have less experience with higher education. 
They may be the first in their family to go to college, or are older 
students already in the workforce, with children or other dependents. 
These non-traditional students typically need much more in the way of 
support services, such as financial aid counselors, career counselors, 
admissions advisors, and academic support. Reductions in these 
administrative resources further limit opportunities for success for 
disadvantaged students.
    Many publicly funded schools have also been slow to adopt some of 
the innovations that the private sector has developed or embraced. 
Online courses were pioneered by the private sector, but many 
traditional schools have been slow to embrace this technology. Non-
traditional students, many of whom work full time, often find online 
courses to be the only option flexible enough to allow them to pursue a 
degree. Offering classes year-round is also critical to meeting the 
needs of non-traditional students. They want to graduate quickly and 
need a full offering of courses over the summer.
    Northern Virginia Community College President Robert Templin sums 
up the public education response to the current economic challenge in 
saying, ``A significant portion of higher education is hunkered down, 
trying to wait out the storm. We've taken the approach that while 
things will get better, they will never get back to the way they were. 
We're going to have to find new ways to do our work.'' (Attachment 17).
                                 ______
                                 
                              Attachment 2





                              Attachment 3





                              Attachment 4





   Attachment 5.--Council for Higher Education Accreditation (CHEA)

                       THE VALUE OF ACCREDITATION

    Accreditation in the United States is a means to assure and improve 
higher education quality, assisting institutions and programs using a 
set of standards developed by peers. An institution or program that has 
successfully completed an accreditation review has in place the needed 
instructional, student support and other services to assist students to 
achieve their educational goals. Accreditation has helped to provide 
the conditions necessary for the United States to develop diverse, 
flexible, robust and often admired higher education.

                 ACCREDITATION: A PROCESS AND A STATUS

    Accreditation is both a process and a status. It is the process of 
reviewing colleges, universities, institutions and programs to judge 
their educational quality--how well they serve students and society. 
The result of the process, if successful, is the award of ``accredited 
status.''
    Accreditation is carried out through nongovernmental organizations 
created in whole or in part by the higher education community. Some 
accrediting organizations review colleges and universities. Others 
review specific programs, e.g., law, medicine, engineering. In a number 
of fields, especially the health professions, graduation from an 
accredited program is a requirement for receiving a license to 
practice. At present, 80 recognized organizations accredit more than 
7,000 institutions and 19,000 programs serving more than 24 million 
students.*
---------------------------------------------------------------------------
    * Council for Higher Education Accreditation, 2008. The Council for 
Higher Education Accreditation (CHEA) is a private, nonprofit national 
organization that coordinates accreditation activity in the United 
States.  represents more than 3,000 colleges and universities and 60 
national, regional and specialized accreditors.
---------------------------------------------------------------------------
    All accrediting organizations create and use specific standards 
both to assure that institutions and programs meet threshold 
expectations of quality and to assure that they improve over time. 
These standards address key areas such as faculty, student support 
services, finance and facilities, curricula and student learning 
outcomes.
    All accrediting organizations use common practices, including a 
self review by the institution or program against the standards, an on-
site visit by an evaluation team of peer experts and a subsequent 
review and decision by the accrediting body about accredited status. 
This review is repeated every 3 to 10 years if the institution or 
program is to sustain its accreditation.
    Established accrediting organizations themselves are usually 
subject to external review, a process called ``recognition.'' This 
involves periodic examination of the organizations based on a set of 
standards. The external examination is carried out by the U.S. 
Department of Education or, in the private sector, the Council for 
Higher Education Accreditation.

             ACCREDITATION BENEFITS STUDENTS AND THE PUBLIC

    ``Accredited status'' means that students and the public can expect 
that a school or program lives up to its promises. It means that a 
student can have confidence that a degree or credential has value. 
Accreditation signals that the public can have confidence in the worth 
of an institution or program.
    For students, accreditation provides value related to not only 
judging quality, but also obtaining employment, receiving student aid 
and transferring credits. Accreditation:

     Encourages confidence that the educational activities of 
an accredited institution or program have been found to be 
satisfactory.
     Assists with student mobility: Accredited status indicates 
to institutions judging requests for transfer or applications for 
graduate school that the sending institution or program has met 
threshold expectations of quality.
     Signals to prospective employers that a student's 
educational program has met widely accepted standards, with graduation 
from an accredited program, in some cases, a prerequisite for entering 
a profession.
     Provides access to Federal and sometimes State financial 
aid, available to qualified students who attend institutions accredited 
by recognized accrediting organizations.

    To the public, the accreditation process provides value not only 
through judging quality, but also assuring reliable information about 
institutions and programs, promoting accountability and identifying 
successful improvement efforts. Accreditation:

     Confirms that the public presentation of an educational 
program, student services and graduate accomplishments is fair and 
accurate.
     Promotes accountability through ongoing external 
evaluation of the institution or program, with a finding that there is 
compliance with general expectations in higher education or a 
professional field as reflected in the accreditation standards.
     Identifies institutions and programs that have voluntarily 
undertaken explicit activities directed at improving the quality of the 
institution and its professional programs and are carrying them out 
successfully.
Frequently Asked Questions
    What is the Value of Accreditation?

    Accreditation:

     Encourages confidence that an institution's or program's 
presentation of the education it provides is fair and accurate, 
including the description of services available to students and the 
accomplishments of its graduates.
     Assures that a neutral, external party (the accrediting 
organization) has reviewed the quality of education provided and has 
found it to be satisfactory, based upon appropriate peer expertise.
     Confirms that institutions and programs have processes in 
place to meet changes in thinking within the academy and in the 
public's expectations;
     Provides for eligible students to have access to Federal 
financial aid if they attend institutions accredited by accreditors 
that are ``recognized'' or scrutinized for quality by the U.S. 
Department of Education (USDE).
     Assists with transfer of credits among institutions or 
admission to graduate school, with student mobility more likely to be 
successful among accredited institutions as compared to unaccredited 
institutions.
     Aids with entrance to a profession, when a particular 
field may require graduation from an accredited program or institution.
     Signals prospective employers that an educational program 
has met widely accepted educational standards.

    Why is the Accredited Status of an Institution or Program Important 
to Students?

    Accredited status is a reliable indication of the value and quality 
of educational institutions and programs to students and the public. 
Without accredited status, it is hard to be sure about the quality of 
the education or to be confident that an institution or program can 
deliver on its promises. Similarly, employers or graduate programs 
cannot be confident that graduates of an unaccredited institution or 
program will be appropriately prepared. Remember that accreditation of 
an institution may not mean that a specific program is accredited, 
particularly a professional program leading to licensure.

    What Does the Fact That the Institution or Program is Accredited 
Mean to Students?

    It means that students can have confidence in an institution or 
program because those who went before had access to a quality 
education. Through accreditation, peer experts have reviewed the 
quality of the education provided, the processes by which students are 
educated and the processes that the institution or program uses to 
maintain an acceptable level of quality over time.

    How Do Students Know That an Accredited Institution or Program Will 
Keep Its Word in Providing the Education Described in Its Public 
Materials?

    As part of the accreditation process, institutions and programs 
must demonstrate that they meet the accreditation standards requiring 
that they provide quality education. And, they have to demonstrate 
truth in advertising--that the information presented about the 
education they offer is accurate.

    Can Every Accreditor be Trusted?

    Not all accreditors are the same. Recognition of an accreditor by 
USDE or the Council for Higher Education Accreditation (CHEA) means 
that the accreditor has been reviewed by an outside organization to 
determine that the accreditor is trustworthy. Both of these 
organizations provide periodic external reviews of accrediting 
organizations and have high standards, checking, e.g., every 5 to 10 
years to see if the accreditors they have recognized continue to meet 
these standards. Some established accrediting organizations are not 
eligible to address either USDE or CHEA recognition standards. Others 
may deserve special scrutiny because they may be rogue providers of 
accreditation or ``accreditation mills.''

    What is a ``Recognized'' Accrediting Organization?

    Just as institutions and programs are accredited, accrediting 
organizations are reviewed to make sure that they have processes and 
outcomes in place to protect students and the public. An accrediting 
organization that has been reviewed and determined to meet the 
standards of an external body, such as USDE or CHEA, is 
``recognized.''

    How Does the Accrediting Organization Review Educational Outcomes?

    Accrediting organizations require institutions and programs to set 
standards for student learning outcomes and provide evidence that the 
learning outcomes are achieved. The expected outcomes and the evidence 
vary, depending on the level of education provided and the different 
skills or competencies required of graduates in different fields.

    What Are Some of the Differences Between Accredited and 
Unaccredited Institutions and Programs?

    All accredited institutions and programs must provide resources to 
assist students toward successful completion of their courses of study. 
Although similar resources may be available in institutions or programs 
that are not accredited, accreditation provides external assurance that 
those resources are in place.

    Where is Information About Accredited Institutions and Programs 
Available?
    All accrediting organizations provide information to the public 
about the institutions and programs they accredit, when they are 
reviewed and the general results of the most recent accreditation 
review. This is readily available on the accreditor's Web site.
    For a complete list of accrediting organizations and access to 
their accredited institutions or programs, go to: CHEA: http://
www.chea.org/pdf/2009_2010_
Directory_of_CHEA_Recognized_Organizations.pdf; USDE: http://
ope.ed.gov/accreditation/.
                              Attachment 8
                                                    April 19, 2010.
Hon. Anthony Wilder Miller,
Deputy Secretary,
U.S. Department of Education,
Washington, DC 20202.
    Dear Secretary Miller: Thank you for meeting with us this past 
Thursday to discuss the Department of Education's (ED) proposed Gainful 
Employment (GE) regulation. We appreciate the candid discussion, and 
want to follow up on several items that arose in our meeting.
    We appreciated your reinforcement of the ED's public statements 
that it views private sector presence in the higher education 
marketplace as positive. We also believe that it is not the ED's 
intention to eliminate private sector institutions or eliminate private 
capital from higher education. We view these as important points 
because the GE proposal made during Negotiated Rulemaking--which would 
substantially eliminate proprietary institutions' ability to offer 
degrees--is not consistent with the ED's goals.
    Our comments come from a sincere concern for the students we serve, 
an understanding of the limited educational opportunities afforded to 
these students, and the success stories of their fellow students who 
graduated before them. We educate hundreds of thousands of students 
each year, enabling them to obtain jobs and begin careers that are 
transformational not only for those students, but for generations to 
follow. We each offer non-degree, associate, baccalaureate and graduate 
degree programs. Across our three organizations, we enroll more than 
300,000 students and employ more than 50,000 faculty and staff each 
year.
    As we discussed, while the ED's GE proposal will exclude fully one-
third of our students from the programs they currently attend, its 
effect on degree programs is the most severe. The ED's GE proposal is 
unworkable for the vast majority of degree programs in our sector and 
will result in as many as half of the 2 million-plus degree students at 
our colleges being denied title IV funds. This includes, among 
countless examples, Bachelor's of Science in Nursing students, at a 
time when our country faces a growing nursing shortage. Private sector 
colleges are a vital source of new capacity in nursing education as 
well as in allied health fields, where they educate 54 percent of all 
such professionals. We do not believe this could possibly be the intent 
of the ED, which is why we are asking you to revise your proposal to 
avoid these unintended consequences.
    Likewise, we reiterate that the 50 percent graduation rate 
exception described recently does little to ameliorate the impact of 
the ED's last GE proposal. With the Nation's median aggregate college 
graduation rate at less than 50 percent for all types of colleges 
(private, public and non-profit alike--including elite colleges with 90 
percent+ graduation rates), even this exception would exclude the 
students at more than half of all colleges from participation in the 
title IV program. Many of those excluded students would be the very 
ones Congress was attempting to help through the Stafford and Pell 
programs, and those for whom there are few other educational 
opportunities today.
    We understand the objectives of the proposed GE regulations are 
focused on two concerns:

    1. The ED's concern that a material segment of students take on 
disproportionate debt for value received. More specifically, a concern 
that the risk tolerance of these students essentially means that no 
amount of warning would deter them from making a poor enrollment 
decision and ``over-borrowing''--i.e., borrowing more than their 
ultimate job prospects would enable them to repay.
    2. The ED's concern about the risk that certain investors could 
purchase schools with the intention of growing revenue by dramatically 
increasing enrollment without regard to educational quality, and then 
turning a quick profit by re-selling the institution to another buyer 
or to the investing public through a securities offering. The concern 
here is that such investors would take advantage of the difference 
between their short timetable and the inherently longer term during 
which regulatory problems mature--all while drawing Federal financial 
aid and increasing the overall student debt burden.

    As we discussed in our meeting, we share your concern about student 
over-borrowing and believe our proposal can solve that problem without 
harming quality schools. Section 1 of this letter expounds further on 
our student debt proposal and offers additional alternatives.
    We also understand your concerns about the incentives certain 
investors might have and believe that the ED has the tools to constrain 
them without harming students across the sector. The ED's ability to 
constrain such investors is discussed in section 2 of this letter.

  OUR PROPOSAL AND SIMPLE MODIFICATIONS TO THE DEBT-SERVICE-TO-INCOME 
 RATIO CAN SOLVE THE PROBLEM OF STUDENT OVER-BORROWING WITHOUT HARMING 
                      STUDENTS OF QUALITY SCHOOLS

    We continue to believe that student debt concerns can be addressed 
quickly and meaningfully by: (a) mandating that institutions disclose 
to students the information students need to make informed decisions 
prior to taking on debt, and (b) implementing a student consumer 
``lemon law'' that warns students prior to enrollment about programs 
that fail to meet a minimum debt-service-to-income ratio (Appendix A). 
This approach has at least four advantages over the ED's GE proposal: 
(1) it addresses the concern that defining ``gainful employment'' by 
student debt levels is beyond congressional intent; (2) it is a less 
draconian approach from an enforcement perspective; (3) it avoids the 
risk of inadvertently eliminating quality programs if the ratio 
parameters are not set appropriately; and (4) it will immediately 
address the ED's concerns while still allowing the ED and schools to 
complete the data collection and analysis necessary to develop a more 
studied approach, if necessary. This approach would indeed give the ED 
new tools to address the risk for programs that do not provide value 
commensurate with their cost.
    Under our proposal, in addition to disclosure, a school would be 
required to warn students if that school had failed certain debt-
service-to-income metrics. The proposed metrics would roughly follow 
those in the ED's latest GE proposal, but with the following 
modifications:
a. Any Debt-Service-To-Income Ratio Should Apply Only To Non-Degree 
        Programs
    As you are aware, the GE requirement contained in the Higher 
Education Act (HEA) applies to all program offerings at proprietary 
institutions including Associate's, Bachelor's and Master's and 
doctoral-level and professional degrees (other than a de minimis number 
of ``liberal arts'' programs) and only non-degree programs at public 
and private nonprofit institutions. While we believe that a debt-
service-to-income formula is inappropriate, we are especially concerned 
with a formula that is inherently biased against degree programs (and 
with corresponding alternative measures that are biased as well).
    There are a number of reasons why debt-service-to-income ratios 
such as those contained in the ED's GE proposal should not apply to 
degree programs. First, it is very unlikely that Congress intended the 
GE requirement to apply to degree programs. When the GE requirement was 
first introduced by Congress in the 1965 HEA, very few proprietary 
schools were degree granting. Second, the at-risk students the ED is 
seeking to protect are much more likely to enroll in non-degree 
programs than in degree programs. Third, the lifetime benefits 
conferred by degree programs, such as higher lifetime earnings, higher 
income growth rates, greater employability, better career advancement 
and job stability, don't readily lend themselves to a formulaic 
approach to measuring value using job codes and BLS statistics. For 
these reasons, debt-service-to-income ratios should not apply to degree 
programs.
    To accomplish the above and to overcome our concerns with the ED's 
debt-service-to-income proposal, we recommend the ED use the following 
language, which tracks the last language proposed at the Negotiated 
Rulemaking session (bolded to show changes/additions):

    (a) General. (1) An institution . . . offering an eligible non-
degree program . . .  shall be required to warn students that they are 
likely to have difficulty meeting their repayment obligations in such 
program where . . . at the end of each 3-year period . . . the debt to 
earnings ratio associated with the program is  12 percent or less . . .
    (b) Debt to earnings ratio. [A]n institution calculates the ratio 
for the 3-year period by----
    (1) Determining the median loan debt of students who completed or 
graduated from the non-degree program (loan debt includes title IV, HEA 
programs (except Parent PLUS), institutional loans and private 
educational loans) during the 3-year period and using the mean loan 
debt to calculate an annual loan payment based on a 15-year repayment 
schedule and the current annual interest rate on Unsubsidized Federal 
Stafford Loans or Direct Unsubsidized Loans;
    (2) Using the most current Bureau of Labor Statistics (BLS) data . 
. . to determine the annual earnings, at the 25th percentile, made by 
persons employed in occupations related to the training provided by the 
non-degree program; . . .
b. Alternatively, There Should Be a Tiered Approach To the Debt-
        Service-To-Income Formula
    Should the ED be inclined to include degree programs, we recommend 
different formulae for non-degree programs, Associate's degree 
programs, and Bachelor's degree programs. Post-baccalaureate programs 
would not be included as those students, having successfully completed 
at least a Bachelor's level of education, are more sophisticated 
consumers and better equipped to make informed borrowing decisions.
    We recommend the following graduated degree metrics:



------------------------------------------------------------------------
                                          Debt-
                                         service-
                                        to-income      BLS      Years in
             Program Level              threshold  Percentile  Repayment
                                           [In
                                         percent]
------------------------------------------------------------------------
Non-Degree............................         12        25th         15
Associate's Degree....................         15        50th         15
Bachelor's Degree.....................         15        50th         20
------------------------------------------------------------------------

    These numbers are consistent with the studies by Kantrowitz and 
Baum referenced in our April 12, 2010 letter.
c. Any Formula Should Contain an Exclusion for Prior School Debt
    As we also discussed, prior school debt should be excluded from any 
debt-service-to-income ratio test. By excluding prior debt, the ED can 
ensure that students who may have failed in the past will continue to 
have an opportunity to succeed in the future, without penalizing 
schools for giving the students that opportunity.
d. There Are Other Alternatives Worth Exploring
    In the event the ED chooses to pursue a debt-service-to-income 
ratio test, we reiterate our recommendation that the ED consider 
alternative routes to compliance as part of that test. These 
alternatives include maintaining target graduate cohort default rates 
(GCDRs) at 12.5 percent over 2 years and 15 percent over 3 years. They 
also include a threshold for post-graduate employment rates. We 
recommend setting a minimum employment rate of 70 percent within 6 
months following graduation. As we discussed, the employment rate would 
be measured using methodologies similar to those of the larger national 
accrediting agencies, but with additional flexibility, particularly for 
degree programs, as degree-seeking students are likely to use their 
degree for general employment advancement.

   2. THE ED HAS AN ARRAY OF POWERFUL TOOLS TO CONSTRAIN CERTAIN NEW 
                               INVESTORS

    As we discussed, most private sector higher education companies are 
invested in students for the long haul. Certainly, Kaplan, DeVry, and 
EDMC--as well as other higher education organizations--are focused on 
building enduring institutions that create value for our students, our 
employees, and our communities. Our institutions will only succeed to 
the extent our students succeed. We are passionate about our students' 
achieving their learning outcomes, securing good jobs, and becoming 
contributing members of society. Our reputation is essential to 
attracting students, faculty, and employees. Indeed, most of our alumni 
quietly but successfully enter into essential roles in the American 
economy--working hard, paying taxes, and raising their families. Their 
enthusiasm is what encourages other students to join our institutions--
and any unhappiness or frustration with their learning experiences 
would quickly hamper our institutions' ability to attract new students.
    We understand your concern that some firms may invest in higher 
education with different motives and according to a vastly different 
timetable. They may see an opportunity to purchase a struggling 
institution, grow it rapidly, and exit the business before difficulties 
like poor completion, employment rates, cohort default rates or other 
problems mature--all at the students' and the taxpayers' expense.
    We respectfully submit that the HEA currently provides the ED with 
ample measures to prevent such a scenario from occurring. A number of 
such measures are enumerated below. A chart providing additional detail 
regarding these measures is attached as Appendix B to this letter.

    1. The ED has the authority to condition or withhold title IV 
approval from new owners who do not have a demonstrated track record.
    2. The ED may condition or disallow the resumption of title IV 
participation following a change in ownership.
    3. Following a change in ownership, the ED may terminate an 
institution's eligibility to participate in the title IV programs 
without the institution having the usual due process rights to contest 
the termination.
    4. The ED has the ability to ensure that no students receive title 
IV funds until the ED is satisfied that the students are eligible for 
the funds and the school is worthy.

    We appreciate your meeting with us and we sincerely hope that you 
have found these observations and ideas useful. We look forward to 
discussing these matters further. Should you so desire, we would be 
happy to provide you with further clarifications and are available to 
meet at your convenience.
            Yours Truly,
                                           Andrew S. Rosen,
                                     Chairman and CEO, Kaplan, Inc.

                                          Daniel Hamburger,
                                      President and CEO, DeVry Inc.

                                            Todd S. Nelson,
                             CEO, Education Management Corporation.







                    Attachment 9.--Executive Summary
      Help Wanted: Projections of Jobs and Education Requirements 
                              Through 2018

        (By Anthony P. Carnevale, Nicole Smith, and Jeff Strohl)

    America is slowly coming out of the Recession of 2007--only to find 
itself on a collision course with the future: not enough Americans are 
completing college.\1\ The Georgetown University Center on Education 
and the Workforce shows that by 2018, we will need 22 million new 
college degrees--but will fall short of that number by at least 3 
million post-secondary degrees, Associate's or better. In addition, we 
will need at least 4.7 million new workers with post-secondary 
certificates. At a time when every job is precious, this shortfall will 
mean lost economic opportunity for millions of American workers.
---------------------------------------------------------------------------
    \1\ We conducted this research as an alternative to official 
government data, which consistently underestimate the demand for post-
secondary education. Actual counts of post-secondary workers in 2008 
showed that the official government estimate of post-secondary degrees 
was off by 47 percent. Our methodology, for that same period, over-
predicted post-secondary education demand by just 4 percent.
---------------------------------------------------------------------------
    This shortage is the latest indication of how crucial post-
secondary education and training has become to the American economy. 
The shortfall--which amounts to a deficit of 300,000 college graduates 
every year between 2008 and 2018--results from burgeoning demand by 
employers for workers with high levels of education and training. Our 
calculations show that America's colleges and universities would need 
to increase the number of degrees they confer by 10 percent annually, a 
tall order.
    Meeting this demand is not a challenge we can afford to ignore. Our 
grandparents' economy, which promised well-paying jobs for anyone who 
graduated from high school, is fading and will soon be altogether gone. 
Over the past three decades, higher education has become a virtual must 
for American workers. Between 1973 and 2008, the share of jobs in the 
U.S. economy which required post-secondary education increased from 28 
percent to 59 percent. According to our projections, the future 
promises more of the same. The share of post-secondary jobs will 
increase from 59 to 63 percent over the next decade. High school 
graduates and dropouts will find themselves largely left behind in the 
coming decade as employer demand for workers with post-secondary 
degrees continues to surge.
    In our analysis of occupations, we find that 9 out 10 workers with 
a high school education or less are limited to three occupational 
clusters that either pay low wages or are in decline (Figure 1). As the 
economy gets back on track over the next 5 years, 60 million Americans 
are at risk of being locked out of the middle class, toiling in 
predominantly low-wage jobs that require high school diplomas or less.



   the shift to a college economy will continue over the next decade
    The core mechanism at work in increasing demand for post-secondary 
education and training is the computer, which automates repetitive 
tasks and increases the value of non-repetitive functions in all jobs. 
Occupations with high levels of non-
repetitive tasks, such as professional and managerial jobs, tend to 
require post-secondary education and training. These types of jobs are 
growing, while positions dominated by repetitive tasks that tend to 
require high school or less, like production jobs, are declining.\2\
---------------------------------------------------------------------------
    \2\ Many low-wage, low-skill jobs--such as fast food positions--are 
also difficult to automate. This produces an occupational and wage 
structure in which low-wage/low-skill jobs continue to grow along with 
high-skill/high-wage jobs--although much more slowly. Our projections 
show that technology change preserves many low-wage/low-skill jobs that 
require high school or less; has mixed effects on mid-skill jobs that 
require certificates and AA's; and grows high-skill/high-wage jobs that 
require BA's or better (Autor, Katz and Kearney, 2008).
---------------------------------------------------------------------------
    The iPod is an example of a typical post-industrial product. Less 
than 20 percent of the value-added in the manufacture of video and 
audio equipment from the United States comes from the blue collar 
production workers who manufacture it. By contrast, about 80 percent of 
the value-added comes from the white collar office workers who design, 
market, finance, and manage the global production and dissemination of 
these products.\3\ \4\
---------------------------------------------------------------------------
    \3\ Anthony Carnevale and Steven Rose. Input Output Analysis of the 
U.S. Economy. Center on Education and the Workforce. Work in Progress, 
2010.
    \4\ On average, 18 percent of the product components are imported.
---------------------------------------------------------------------------
    Consider that, in 1973, there were 25 million jobs available to 
people with at least some college or better (Figure 2). By 2007 that 
number ballooned to 91 million jobs. In 34 years, the American job 
machine nearly quadrupled the number of jobs available to people with 
at least some formal education beyond high school.



 POSTSECONDARY EDUCATION HAS BECOME THE GATEKEEPER TO THE MIDDLE CLASS 
                          AND THE UPPER CLASS

    As the economy evolved, post-secondary education gradually became 
the threshold requirement for access to middle class status and 
earnings. In the 37-year timeframe shown in Figure 3, the share of 
people in the middle class with some college education and no degree or 
less, declined dramatically.\5\
---------------------------------------------------------------------------
    \5\ Dropouts, high school graduates and people with some college 
but no degree increasingly are on the economic down-escalator, falling 
out of the middle class and into the lower three deciles of family 
income. In 1970, almost half (46 percent) of high school dropouts were 
in the middle class. By 2007, the share of dropouts in the middle class 
had fallen to 33 percent. In 1970, almost 60 percent of high school 
graduates were in the middle class. By 2007, the share had fallen to 45 
percent. In 1970 almost 53 percent of workers with some college, no 
degree were in the middle class. By 2007, the share had fallen to 45 
percent.
---------------------------------------------------------------------------
    Over that same period, the share of people with college degrees 
have either stayed in the middle class or boarded the up-escalator to 
upper class incomes--the three highest family income deciles. After the 
dust has settled, the educational composition of the middle class 
favors workers with some college or better (Figure 4). In 1970, 26 
percent of the middle class had post-secondary education and training. 
By 2007, 61 percent of middle class workers had post-secondary 
education and training.





    Workers with post-secondary education and training are moving into 
the upper class.\6\ That is, the educational composition of the upper 
class also favors workers with some college or better (Figure 5). In 
1970, 44 percent of the upper class had post-secondary education and 
training. By 2007, 81 percent of upper class workers had post-secondary 
education and training.
---------------------------------------------------------------------------
    \6\ The share of people with Bachelor's degrees in the middle class 
declined from 47 percent to 38 percent. But the share of people with a 
Bachelor's in the top three income deciles jumped from 37 percent to 48 
percent. Meanwhile, the share of people with Graduate Degrees in the 
middle class declined from 46 to 30 percent. Clearly, though, they were 
leaving for higher standards of living, as the share of people with 
Graduate Degrees in the top three income deciles increased from 41 to 
61 percent.



    Given the transformation of workers by economic class, post-
secondary education and training is no longer just the preferred 
pathway to middle and upper income classes--it is, increasingly, the 
only pathway.

    TODAY'S CAREER PATHWAYS ARE IN OCCUPATIONS NOT WITHIN INDUSTRIES

    Federal, State, and local governments face a dilemma as they 
formulate economic development strategy because the traditional 
approach to understanding career pathways starts with an industry-based 
perspective while careers, and career mobility, are based on 
occupation. The emphasis on post-secondary preparation for new hires 
means that workers will tend to be attached more to the occupations 
they will be filling than to the specialized industries in which they 
work. The day when people left high school to go to work in the local 
industry and then worked their way up is disappearing. Starting out, 
straight from high school, on the loading dock or in the mail room and 
climbing to the CEO's corner office is no longer an option. People do 
not go to work in industries any more. They get educated or trained, go 
to work in occupations, and progress in an occupational hierarchy. Some 
occupations are tied tightly to particular industries--healthcare 
occupations for example--but more and more occupations are dispersed 
broadly across industries. And industries vary widely in how many jobs 
they create: old-line manufacturing, clearly, is in decline. But even 
some new industries, such as information services, have only limited 
hiring potential because they are tech-heavy and can achieve high 
levels of productivity with relatively few workers. This means 
governments will need to be selective about how they approach 
industries and where they deploy scarce development resources.

   CONCLUSION: HIGHER EDUCATION IS CRITICAL TO SUCCESS IN THE COMING 
                                ECONOMY

    As a result of a broad concern about the United States 
underperforming in post-secondary education, President Barack Obama in 
February 2009 told a joint session of Congress: ``By 2020, America will 
once again have the highest proportion of college graduates in the 
world.'' \7\ Subsequent analysis at the National Center on Higher 
Education Management Systems (NCHEMS) estimated that achieving the 
President's goal would require an additional 8.2 million post-secondary 
graduates by 2020.\8\
---------------------------------------------------------------------------
    \7\ In July 2009, the President committed to a down payment on 
reasserting America's global leadership in post-secondary education 
with a commitment to an increase of 5 million community college 
graduates.
    \8\ We produced this in collaboration with Dennis Jones and Patrick 
Kelly.
---------------------------------------------------------------------------
    At current cost the goal of producing 8.2 million new college 
graduates would require an increase of $158 billion by 2020 in nominal 
spending at the State and Federal level. The costs are daunting, nearly 
$16 billion per year.
    The Obama administration has come up with an additional $36 billion 
for spending on Pell grants in its reform of the post-secondary 
financing system (SAFRA). This leaves $122 billion outstanding which 
would have to come from State and local budgets.
    We recognize, in the current budget climate, that it will be 
difficult for States to come up with their share. Ultimately, Federal 
and State Governments will need to engage post-secondary institutions 
as partners in finding ways to pay for achieving this goal. Together 
they must develop reforms that result in both cost-efficient and 
quality post-secondary education and training programs.
    The impending shortage of at least 3 million Associate's degrees or 
better lends urgency to the questions about the financing of America's 
college and university system.
    Failure to achieve the mix of funding and reform required for the 
President's goal will not only leave more and more Americans behind--it 
will damage the Nation's economic future.
    And that, quite simply, is something we cannot afford.

                                Appendix

                                             Educational Distribution of Total Jobs (by occupation) in 2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             Some                                 Master's
                         Occupations                           High school  High school  college, no  Associate's   Bachelor's   degree or      Total
                                                                 dropouts    graduates      degree       degree       degree       better
--------------------------------------------------------------------------------------------------------------------------------------------------------
Healthcare Support...........................................      316,220    1,650,170    1,316,377    1,015,012      433,370       95,088    4,826,237
Community Services and Arts..................................       41,044      411,231      583,516      526,375    2,520,524    1,126,326    5,209,016
STEM.........................................................       27,717      729,443      865,555    1,054,172    3,614,642    2,261,768    8,553,297
Healthcare Professional and Technical........................           --      450,038      610,671    2,161,139    2,924,180    2,667,125    8,813,153
Education....................................................       60,302      654,477      825,721      674,515    3,906,200    4,112,993   10,234,208
Managerial and Professional Office...........................      253,580    2,033,003    2,340,385    1,766,664    7,518,784    3,771,595   17,684,011
Food and Personal Services...................................    5,311,606   10,375,799    5,176,370    2,953,944    3,705,516      472,328   27,995,563
Blue Collar..................................................    7,122,598   15,322,808    5,805,475    3,664,944    2,387,683      337,899   34,641,407
Sales and Office Support.....................................    2,326,477   12,838,226   10,908,550    5,901,593   10,069,661    1,498,611   43,543,118
                                                              ------------------------------------------------------------------------------------------
    Total*...................................................   15,459,544   44,465,195   28,432,620   19,718,358   37,080,560   16,343,733  161,500,010
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Center on Education and the Workforce forecast of educational demand through 2018.


                                              Educational Distribution of Total Jobs (by industry) in 2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             Some                                 Master's
                          Industries                           High school  High school  college, no  Associate's   Bachelor's   degree or      Total
                                                                 dropouts    graduates      degree       degree       degree       better
--------------------------------------------------------------------------------------------------------------------------------------------------------
Wholesale and Retail Trade Services..........................    2,054,180    7,747,315    5,240,566    2,628,735    5,384,497    1,089,876   24,145,169
Professional and Business Services...........................    1,172,360    3,181,083    2,995,082    2,264,671    8,649,452    4,795,087   23,057,735
Government and Public Education Services.....................      347,226    3,465,799    4,127,209    3,909,128    7,246,199    2,764,115   21,859,676
Healthcare Services..........................................      991,378    4,124,082    3,519,395    3,936,313    5,116,397    2,866,496   20,554,061
Leisure and Hospitality Services.............................    4,029,596    4,635,877    2,937,440    1,351,427    2,690,571      509,823   16,154,733
Manufacturing................................................    1,262,440    4,646,339    1,984,204    1,458,667    2,612,356    1,116,125   13,080,131
Financial Services...........................................      217,869    1,780,750    2,220,391    1,177,103    4,506,022    1,441,828   11,343,964
Construction.................................................    1,809,463    3,554,175    1,387,382      878,205      837,183      162,861    8,629,269
Transportation and Utilities Services........................      553,317    2,871,578    1,262,668      768,033    1,049,958      181,151    6,686,704
Personal Services............................................      970,426    2,065,142    1,064,372      914,406      750,046      447,987    6,212,379
Private Education Services...................................       40,041      432,463      366,395      263,122    1,141,766    1,237,942    3,481,728
Information Services.........................................           --      291,555      736,215      381,689    1,547,880      503,713    3,461,051
Natural Resources............................................      817,562    1,158,793      281,276      257,506      275,567       92,117    2,882,822
                                                              ------------------------------------------------------------------------------------------
    Total*...................................................   14,265,858   39,954,951   28,122,595   20,189,005   41,807,893   17,209,121  161,549,423
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The education totals for education categories do not match totally between occupation and industry due to methodological differences. A discussion of
  the methodology used to generate all forecasts in this document is available at the Center's Web site at cew.georgetown.edu.
Source: Center on Education and the Workforce forecast of educational demand through 2018.





                             Attachment 10


 Attachment 11.--Public Affairs--California State University Officials 
          Outline Enrollment Cuts and Preview 2010-2011 Budget

       CSU OUTLINES ENROLLMENT CUTS AND PREVIEW 2010-2011 BUDGET

    (Nov. 10, 2009)--Facing a $564 million budget cut for this fiscal 
year, California State University Chancellor Charles B. Reed provided 
an update on the drastic measures that the CSU is undertaking to 
address the deficit including slashing enrollment by more than 40,000 
students, as demand to attend the CSU continues to rise.
    CSU estimates that it cut 4,000 students in fall 2009, and will see 
a much larger drop in spring as a result of curtailing enrollment 
including the elimination of spring admissions. In all, CSU needs to 
reduce its student numbers by more than 40,000 students in order to 
match student enrollment with funding received from the State.
    ``Last year, we declared systemwide impaction and said we were 
going to reduce enrollment by 10,000 students that we did not receive 
any funding for by the State,'' said Reed. ``By spring, we will reach 
that total, and project an even larger enrollment decrease for fall 
2010. This reduction in access is the direct result of the almost $600 
million that has been cut from our budget. You cannot see a 20 percent 
drop in revenue and serve the same number of students.''
    Campuses are currently in the process of receiving applications for 
admissions in fall 2010, and to date, the CSU has received more than 
266,000 applications, a 53 percent increase over the same time last 
year. Specifically, there has been a 127 percent increase in the number 
of applications from community college transfers, partially due to the 
closing of spring admissions that heavily impacts transfer students 
from community colleges. Freshmen applications are up by about 32 
percent over the same time period last year.
    ``Denying students access to higher education is just about one of 
the worst things you can do in a recession,'' said Reed. ``The State 
needs our graduates to enter the workforce and help the State's 
economic recovery. But, when your budget is cut so drastically, we are 
left with little choice but to restrict our enrollment.''
    CSU officials did stress the importance of students applying by 
November 30, when about half of its campuses will stop accepting 
applications for all freshmen, and most community college transfer 
students. Students are also encouraged to apply to the campus in their 
local service area.
    Chancellor Reed also provided a preview of the proposed 2010-2011 
budget that the CSU will present to its board of trustees next week. 
Calling it a ``recover and reinvest'' budget, CSU is asking the State 
to restore funding for one-time cuts imposed in 2009-2010 totaling $305 
million, as well as an additional $579 million for mandatory cost 
increases, enrollment growth, compensation increases, and a restoration 
of the revenues that would have been part of the Compact funding for 
higher education. The total $884 million increase includes a request 
for revenue needed for the legislature to ``buy out'' a 10 percent 
student fee increase. The board is expected to vote on the budget at 
its meeting November 17 and forward the request to the Governor and the 
legislature.
    ``This is a very ambitious budget in these very challenging 
times,'' said Reed, ``but it is critical that the State legislature and 
administration realize the true fiscal needs to run the CSU.''

                 ABOUT THE CALIFORNIA STATE UNIVERSITY

    The California State University is the largest system of senior 
higher education in the country, with 23 campuses, approximately 
450,000 students and 48,000 faculty and staff. Since the system was 
created in 1961, it has awarded nearly 2.5 million degrees, about 
90,000 annually. Its mission is to provide high-quality, affordable 
education to meet the ever-changing needs of the people of California. 
With its commitment to excellence, diversity and innovation, the CSU is 
the university system that is working for California.

                                                                                          Attachment 13
   Table 318. Percentage Distribution of Enrollment and Completion Status of First-Time Post-Secondary Students Starting During the 1995-1996 Academic Year,  by Type of Institution and Other
                                                                                  Student Characteristics: 2001
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             Students starting in 2-year institutions                                   Students starting in 4-year institutions
                                          ------------------------------------------------------------------------------------------------------------------------------------------------------
                                                         Highest degree attained                                                     Highest degree attained
  Student and institution characteristic  ----------------------------------------------------- No degree,  No degree, -------------------------------------------------- No degree,  No degree,
                                           Total, any                                              still        not     Total, any                            Bachelor's     still        not
                                            degree\1\  Certificate  Associate's  Bachelor's\2\   enrolled    enrolled    degree\1\  Certificate  Associate's      \2\      enrolled    enrolled
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1                                                   2            3            4             5            6           7           8            9           10          11          12          13
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Total................................  38.4 (1.7)   11.5 (1.2)   17.3 (1.3)     9.7 (1.1)   16.4 (1.4)  45.2 (1.6)  65.1 (1.0)    2.7 (0.3)    4.0 (0.4)  58.4 (1.2)  14.4 (0.6)  20.5 (0.8)
                                          ------------------------------------------------------------------------------------------------------------------------------------------------------
Male.....................................  39.2 (2.4)   10.8 (1.6)   18.7 (1.9)     9.7 (1.5)   18.0 (2.2)  42.8 (2.4)  60.6 (1.4)    2.5 (0.4)    3.6 (0.6)  54.6 (1.5)  16.2 (0.9)  23.2 (1.1)
Female...................................  37.7 (2.2)   12.0 (1.6)   15.9 (1.7)     9.8 (1.4)   14.9 (1.7)  47.4 (2.2)  68.7 (1.3)    2.9 (0.3)    4.3 (0.5)  61.6 (1.4)  12.9 (0.8)  18.4 (1.0)
Age when first enrolled:
  18 years or younger....................  43.8 (2.3)    7.3 (1.2)   19.4 (2.0)    17.0 (1.9)   17.8 (2.1)  38.4 (2.1)  70.0 (1.0)    1.8 (0.2)    3.4 (0.4)  64.7 (1.1)  13.4 (0.6)  16.6 (0.7)
  19 years...............................  38.2 (4.1)    8.2 (2.0)   24.3 (4.0)     5.7 (2.2)   20.9 (3.6)  40.9 (4.0)  57.1 (2.8)    3.3 (0.9)    6.0 (1.3)  47.9 (2.9)  16.4 (2.0)  26.6 (2.3)
  20 to 23 years.........................  29.9 (4.2)   13.1 (3.0)   13.0 (3.4)     3.7 (1.6)   20.1 (4.2)  50.0 (4.8)  37.7 (3.8)    8.7 (2.1)    6.7 (2.1)  22.3 (3.0)  20.9 (3.0)  41.4 (3.6)
  24 to 29 years.........................  36.5 (4.8)   25.6 (4.6)    8.4 (2.2)     2.5 (1.5)   11.0 (3.5)  52.6 (5.1)  34.4 (5.5)    4.3 (1.8)    7.2 (3.5)  23.0 (4.7)  22.7 (5.8)  42.9 (6.3)
  30 years or over.......................  30.6 (5.5)   14.1 (3.8)   14.5 (3.3)     2.0 (1.5)    8.7 (2.4)  60.7 (5.8)  26.1 (4.3)   11.5 (3.5)    4.3 (1.6)  10.3 (2.8)  17.0 (4.2)  56.9 (5.1)
Race/ethnicity:
  White..................................  40.5 (2.0)   10.9 (1.3)   18.2 (1.5)    11.4 (1.6)   16.5 (1.7)  43.0 (2.0)  68.1 (1.1)    2.4 (0.3)    3.8 (0.4)  61.9 (1.3)  12.5 (0.7)  19.4 (0.9)
  Black..................................  28.4 (4.2)   16.7 (4.0)    8.5 (2.3)     3.2 (1.3)   13.3 (2.9)  58.3 (4.3)  51.3 (2.6)    4.6 (1.0)    3.2 (0.8)  43.4 (2.8)  20.6 (2.3)  28.2 (2.2)
  Hispanic...............................  34.3 (4.8)   11.1 (3.2)   17.8 (3.2)     5.5 (2.3)   18.1 (3.3)  47.6 (4.8)  53.9 (2.3)    3.1 (0.7)    6.8 (1.7)  44.0 (2.4)  20.4 (1.8)  25.7 (2.1)
  Asian/Pacific Islander.................  41.9 (9.2)   11.6 (6.4)   23.0 (8.2)     7.4 (3.7)   21.2 (7.7)  36.9 (8.7)  71.3 (3.1)    0.2 (0.2)    2.0 (0.8)  69.1 (3.1)  13.9 (2.3)  14.8 (2.4)
  American Indian/Alaska Native..........         ()          ()          ()           ()          ()         ()        55.4          ()    3.7 (3.7)        51.7  26.1 (8.4)  18.5 (6.8)
                                                                                                                            (10.6)                                (10.7)
Highest education level of parents:
  High school diploma or less............  36.5 (2.3)   13.5 (1.8)   17.0 (1.9)     6.0 (1.2)   12.4 (1.6)  51.1 (2.4)  52.0 (1.6)    4.1 (0.6)    4.8 (0.6)  43.1 (1.6)  16.5 (1.3)  31.5 (1.5)
  Some post-secondary....................  32.8 (3.3)   10.1 (2.1)   14.3 (2.6)     8.4 (2.0)   19.0 (2.8)  48.2 (2.9)  59.5 (1.9)    3.1 (0.7)    5.4 (1.1)  50.9 (2.1)  16.4 (1.4)  24.2 (1.6)
  Bachelor's degree......................  47.7 (4.2)    9.1 (2.3)   22.4 (3.7)    16.2 (3.2)   18.8 (3.5)  33.5 (3.9)  72.1 (1.5)    1.8 (0.4)    4.0 (0.6)  66.3 (1.5)  13.4 (1.1)  14.5 (1.1)
  Advanced degree........................  45.4 (6.0)    3.1 (2.0)   17.2 (4.4)    25.2 (5.5)   25.2 (5.4)  29.4 (6.0)  76.5 (1.7)    1.2 (0.3)    1.4 (0.3)  73.9 (1.7)  11.7 (1.2)  11.8 (1.2)
Dependency status when first enrolled:
  Dependent..............................  42.1 (2.2)    8.2 (1.2)   20.1 (1.8)    13.8 (1.7)   18.3 (1.9)  39.6 (2.1)  68.0 (1.0)    2.1 (0.2)    3.6 (0.4)  62.1 (1.2)  14.0 (0.6)  18.1 (0.7)
  Independent............................  32.9 (3.1)   17.6 (2.4)   12.3 (1.9)     3.0 (0.9)   13.8 (2.4)  53.4 (3.5)  35.9 (2.9)    8.8 (1.7)    6.4 (1.6)  20.6 (2.3)  19.1 (2.5)  45.0 (3.2)
Dependent student family income in 1994:
  Less than $25,000......................  43.0 (3.8)   10.9 (2.6)   24.5 (3.4)     7.6 (2.1)   14.3 (2.6)  42.7 (3.5)  58.8 (1.8)    3.4 (0.7)    5.1 (1.0)  50.3 (2.1)  18.6 (1.5)  22.6 (1.5)
  $25,000 to $44,999.....................  41.2 (4.5)   10.5 (2.3)   16.4 (2.9)    14.3 (2.7)   19.1 (3.0)  39.6 (3.6)  61.7 (1.7)    2.3 (0.4)    4.4 (0.8)  55.0 (1.7)  15.1 (1.3)  23.1 (1.4)
  $45,000 to $69,999.....................  40.2 (3.8)    5.3 (1.8)   22.1 (3.2)    12.8 (2.5)   19.3 (3.5)  40.5 (4.0)  69.1 (1.6)    1.7 (0.4)    3.7 (0.7)  63.6 (1.7)  13.2 (1.0)        17.7
                                                                                                                                                                                           (1.3)
  $70,000 or more........................  44.7 (5.5)    4.5 (1.8)   15.8 (3.6)    24.4 (4.5)   22.1 (4.2)  33.2 (4.8)  77.4 (1.3)    1.6 (0.4)    2.0 (0.4)  73.8 (1.5)  10.7 (1.0)  11.9 (0.9)
Timing of post-secondary enrollment:
  Did not delay\3\.......................  43.9 (2.3)    7.0 (1.1)   20.9 (2.0)    15.9 (1.8)   18.4 (2.0)  37.7 (2.1)  69.2 (1.0)    1.9 (0.2)    3.3 (0.4)  64.0 (1.1)  13.7 (0.6)  17.1 (0.7)
  Delayed entry..........................        32.8   15.6 (2.0)   13.7 (1.8)     3.5 (1.0)   14.9 (2.0)  52.3 (2.8)  45.0 (2.2)    6.6 (1.0)    7.0 (1.3)  31.4 (2.1)  18.0 (1.6)  37.0 (2.2)
                                                (2.7)
Attendance status when first enrolled:
  Full-time..............................  47.3 (2.4)   10.2 (1.4)   21.3 (1.9)    15.8 (2.1)   15.9 (2.0)  36.8 (2.3)  69.3 (1.0)    1.9 (0.2)    4.0 (0.4)  63.3 (1.2)  12.7 (0.6)  18.0 (0.8)
  Part-time..............................  29.5 (3.2)   13.9 (2.7)   12.2 (2.3)     3.4 (1.0)   15.6 (2.4)  54.9 (3.4)  33.4 (3.2)    7.3 (2.0)    2.1 (0.8)  23.9 (3.3)  27.3 (3.0)  39.3 (3.4)
Intensity of enrollment through 2001:
  Always part-time.......................  13.2 (2.9)   11.5 (2.8)    1.7 (0.8)         # ()   13.3 (3.0)  73.4 (3.8)  10.3 (2.9)    9.7 (2.9)    0.6 (0.6)       # ()  12.9 (3.8)  76.8 (4.1)
  Mixed..................................  42.3 (2.5)   12.6 (1.7)   20.8 (2.0)     8.9 (1.3)   21.7 (2.1)  36.0 (2.2)  51.7 (1.5)    4.4 (0.6)    5.5 (0.6)  41.8 (1.6)  26.6 (1.3)  21.7 (1.1)
  Always full-time.......................  49.5 (3.2)    9.3 (1.4)   22.0 (2.8)    18.1 (3.1)    9.1 (1.8)  41.4 (3.1)  74.2 (1.1)    1.5 (0.2)    3.3 (0.5)  69.4 (1.2)   8.1 (0.6)  17.8 (0.9)
Degree goal at first institution:
  Certificate............................  45.2 (5.1)   38.4 (5.3)    6.2 (2.3)     0.7 (0.4)    6.8 (2.5)  48.0 (4.8)  37.7 (7.0)   16.1 (6.2)    4.2 (7.5)   7.5 (3.0)  19.4 (6.5)  42.8 (6.7)
  Associate's degree.....................  40.9 (2.3)    8.7 (1.3)   24.7 (2.1)     7.5 (1.4)   15.6 (2.0)  43.5 (2.3)  52.6 (4.2)    7.3 (2.4)   24.7 (3.7)  20.7 (3.3)   8.9 (2.3)  38.5 (4.2)
  Bachelor's degree......................     40.3\4\       6.0\4\      11.7\4\  22.6\4\ (3.3)     21.9\4\     37.8\4\  67.6 (1.0)    2.1 (0.3)    2.7 (0.3)  62.9 (1.1)  14.2 (0.6)  18.2 (0.7)
                                                (3.7)        (1.9)        (2.4)                      (3.5)       (3.4)
Worked while enrolled 1995-1996:
  Did not work...........................  43.0 (3.0)   13.9 (2.3)   21.5 (2.8)     7.6 (1.9)   10.4 (2.5)  46.6 (3.1)  71.1 (1.3)    2.0 (0.4)    3.7 (0.7)  65.3 (1.6)  11.9 (0.8)  17.0 (1.1)
  Worked part time.......................  44.7 (2.6)    8.5 (1.5)   20.9 (2.1)    15.2 (2.0)   18.4 (2.4)  36.9 (2.3)  65.0 (1.3)    2.3 (0.4)    4.0 (0.4)  58.6 (1.4)  14.7 (0.8)  20.3 (1.0)
  Worked full time.......................  27.2 (2.6)   14.3 (2.2)    9.6 (1.5)     3.4 (0.9)   17.0 (2.5)  55.8 (2.9)  41.7 (2.6)    7.1 (1.3)    4.2 (1.1)  30.5 (2.5)  21.7 (2.2)  36.6 (2.5)
Control of first institution:
  Public.................................  36.7 (1.8)   10.1 (1.3)   16.4 (1.4)    10.3 (1.3)   17.4 (1.6)  45.9 (1.7)  60.5 (1.2)    2.8 (0.3)    4.4 (0.6)  53.3 (1.4)  17.4 (0.8)  22.2 (1.0)
  Private, not for profit................  58.9 (5.4)   19.3 (4.6)   27.8 (3.9)    11.8 (3.3)    8.4 (2.4)  32.7 (4.6)  73.6 (1.7)    1.8 (0.3)    2.8 (0.5)  68.9 (2.0)   9.3 (0.8)  17.1 (1.3)
  Private, for profit....................  55.6 (3.2)   27.8 (3.9)   25.8 (3.9)     2.0 (0.8)    4.3 (1.2)  40.0 (3.4)        52.8   17.9 (7.2)   14.9 (6.0)  20.0 (5.1)  11.1 (3.1)  36.1 (8.6)
                                                                                                                            (10.5)
Socioeconomic status in 1995-1996 \5\:
  Not disadvantaged......................  41.7 (2.8)    8.9 (1.8)   18.1 (2.1)    14.6 (2.0)   20.4 (2.7)  38.0 (2.7)  71.4 (1.1)    2.0 (0.3)    3.3 (0.4)  66.1 (1.3)  12.3 (0.7)  16.3 (0.8)
  Minimally disadvantaged................  33.9 (2.4)   12.8 (1.7)   14.9 (1.8)     6.2 (1.4)   13.1 (1.6)  53.0 (2.7)  59.8 (1.6)    3.7 (0.6)    5.4 (0.7)  50.8 (1.7)  16.4 (1.2)  23.8 (1.3)
  Moderately or highly disadvantaged.....  43.7 (3.6)   14.6 (3.0)   21.6 (3.4)     7.5 (1.9)   14.5 (2.7)  41.8 (3.7)  47.1 (2.0)    3.7 (0.8)    3.8 (0.8)  39.6 (2.1)  19.5 (1.9)  33.4 (2.1)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 = Not applicable.
# = Rounds to zero.
 = Reporting standards not met.
\1\ Includes a small percentage of students who had attained a degree and were still enrolled. Includes recipients of degrees not shown separately.
\2\ Includes a small percentage of students who had attained an advanced degree.
\3\ Includes students with a standard high school diploma who enrolled in post-secondary education in the same year as their graduation.
\4\ Includes students whose goal was to transfer to a 4-year institution.
\5\ Determined by a socioeconomic diversity index that includes parental income as a percentage of the 1994 Federal poverty level, parental education, and the proportion of the student body at
  the student's high school that was eligible for free or reduced-price lunch.
Note: Data reflect completion and enrollment status by spring 2001 of first-time post-secondary students starting in academic year 1995-1996. Race categories exclude persons of Hispanic
  ethnicity. Detail may not sum to totals because of rounding. Standard errors appear in parentheses.
Source: U.S. Department of Education, National Center for Education Statistics, 1996/01 Beginning Post-Secondary Students Longitudinal Study (BPS:96/01). (This table was prepared in August).

                             Attachment 16

                          [November 25, 2008]

          The Chronicle of Higher Education--Graduate Students

          NACUBO AND COMMONFUND TO TEAM UP ON ENDOWMENT REPORT

    The two organizations that now compile and analyze data on 
university endowments plan to announce today that they are combining 
their efforts to produce a single report.
    The new report, which will be a joint project of the National 
Association of College and University Business Officers and the 
Commonfund Institute, will cover the 2009 fiscal year and be released 
in January 2010.
    Nacubo's report on endowments for the 2008 fiscal year, due out in 
late January, will be the last one conducted in partnership with TIAA-
CREF, the giant pension and investment company.
    The Commonfund Institute now publishes an annual ``Benchmarks Study 
of Educational Endowments'' that includes information on endowments of 
colleges, independent schools, and other educational institutions. The 
institute said it would continue to collect data on such entities, but 
publish those statistics in a separate report.
    Officials of both organizations said the change would eliminate the 
need for institutions to respond to two similar surveys. About 800 
institutions now reply to each one, with a rate of duplication of 66 
percent. Officials hope to have about 1,000 institutions participate in 
the combined survey.--Goldie Blumenstyk
                                 ______
                                 

                           [January 24, 2008]

                 Endowment Spending Rate Drops Slightly

    At a time that some lawmakers are pushing colleges to spend more of 
their endowments, data being released today suggest that the opposite 
was the trend last year. The average spending rate on college 
endowments in 2007 was 4.6 percent, the lowest since 1999 and 0.5 
percentage points lower than the high point of the last decade, 5.1 
percent in 2002 and 2003.
    For the wealthiest colleges, the spending rate was even lower. 
Colleges with endowments larger than $500 million spent on average only 
4.4 percent in 2007. For colleges with endowments greater than $500 
million but less than $1 billion, that's the lowest rate since 1999, 
and for colleges with endowments greater than $1 billion, that's the 
lowest rate since 2001.
    The figures come from the annual endowment report of the National 
Association of College and University Business Officers. The report 
found that the average rate of return of the 785 colleges in the study 
was 17.2 percent. As is typically the case, the wealthier institutions 
saw the largest gains. The average returns for those in the billion-
dollar plus category were 21.3 percent last year, while those with 
endowments up to $25 million saw a rate of return of only 14.1 percent.
    Those at the very top saw astronomical gains. Harvard's endowment 
grew by just under 20 percent, to $34.6 billion. If you took just the 
gain in Harvard's endowment in 2007 ($5.7 billion), that sum alone 
would be larger than the endowments of all but 15 universities. Number 
16, Washington University in St. Louis, has an endowment of $5.6 
billion. Harvard's gains alone are more than the combined endowments of 
every historically black college in the country (and plenty of other 
categories of college, too). Even within the group of national research 
universities, Harvard and a few other institutions are in a completely 
different financial league from most others. If you added the 
endowments of Johns Hopkins University, Cornell University, Duke 
University and the University of Chicago, you wouldn't equal the total 
of either Harvard or Yale University, which is in second at $22.5 
billion.
    The release of the annual report on endowments is both miserably 
timed and beautifully timed, from the perspective of those with large 
endowments. The timing is poor because there are plenty of figures that 
will buttress the arguments being made that colleges are exceptionally 
wealthy and should be spending much more of their money. The timing is 
ideal--in a somewhat odd way--because a development that endowment 
managers hate to see (sharp declines in the stock market) backs up one 
of their main points: that endowments shouldn't be pressured to spend 
more in good years because they need the money for tight years.
    The data on endowment spend rates show a gradual decline over the 
last 5 years.

                                   Average Endowment Spending Rates, 2003-2007
----------------------------------------------------------------------------------------------------------------
                                                                2007 [In  2006 [In  2005 [In  2004 [In  2003 [In
                       Endowment Assets
                                                                percent]  percent]  percent]  percent]  percent]
----------------------------------------------------------------------------------------------------------------
Greater than $1 billion.......................................       4.4       4.5       4.8       5.2       5.3
Greater than $500 million to $1 billion.......................       4.4       4.5       4.7       5.0       5.2
Greater than $100 million to $500 million.....................       4.6       4.6       4.7       5.0       5.2
Greater than $50 million to $100 million......................       4.8       4.7       4.8       4.9       5.3
Greater than $25 million to $50 million.......................       4.8       4.7       4.7       4.7       4.9
Up to $25 million.............................................       4.6       4.7       4.7       4.5       4.8
All...........................................................       4.6       4.7       4.7       4.9       5.1
----------------------------------------------------------------------------------------------------------------

    John Walda, president of NACUBO, said that the declines this year 
in spending rates are largely because so many colleges saw large 
increases in endowment earnings. ``It takes a while to catch up, and to 
direct money into programs that they weren't spending before,'' he 
said. The many colleges that are significantly increasing spending on 
financial aid this year, Walda said, are generally doing so in part by 
increasing their spending rates.
    Further, Walda said that ``the focus shouldn't be on what the spend 
rate is from 1 year to the next or the value of an endowment from 1 
year to the next, but the value over time and over a 10-year period.'' 
He added: ``You don't set a spend rate based on 1 year's investment 
results. You arrive at a spend rate as a matter of policy so you can 
maintain value.''
    Those arguments are generally accepted by college leaders, but not 
by some prominent critics. Lynne Munson, an adjunct research fellow at 
the Center for College Affordability and Productivity, is working on a 
book on endowment hoarding, and she has written here and elsewhere that 
colleges should spend more now to cut tuition and in some cases to 
eliminate it.
    ``Even though many schools continue to get better and better at 
managing their endowments, they haven't thought about sharing this 
tremendous wealth,'' she said, arguing that the wealthiest institutions 
should become free. She noted that Harvard's much-discussed shift in 
financial aid policies will cost the university about $22 million a 
year--hardly enough to make a dent in the $5 billion-plus coming in 
from endowment earnings and gifts. Munson called Harvard's aid plans 
``little more than a PR stunt.''
    Walda said he was concerned that the public and journalists were 
paying too much attention to Harvard. He said that the 76 colleges with 
endowments of at least $1 billion shouldn't be used to set policy for 
everyone else. Most institutions have far more limited resources and 
can't afford to take as much risk as do wealthier universities, he 
said.
    While the higher education lobbying groups are lining up to oppose 
any effort by Congress to push colleges to spend more of their 
endowments, some institutions that serve low-income students--and do so 
with small endowments--say that they don't have much sympathy for the 
idea that Ivy League institutions need to be protected to spend less.
    Philander Smith College is a historically black institution in 
Arkansas, with an endowment of about $14.5 million. Its president, 
Walter M. Kimbrough, said that the college typically spends between 4 
and 5 percent of its endowment a year--a proportion similar to that 
used at the wealthiest institutions. But Kimbrough noted that his 
college doesn't have professional money managers and can't afford to 
take much risk, so his endowment is typically earning 5 to 7 percent a 
year. So he's spending most (and some years all) of his endowment 
growth.
    ``I have to squeeze out every bit I can for my students, so I'm not 
going to have a strict policy. I spend what I need to,'' he said. With 
70 percent of his students eligible for Pell Grants, a year when 
Federal aid spending is flat is going to be a year he has to spend 
more, or he would lose students, he said.
    Kimbrough said he understands the principles that college 
endowments should be saved for rainy days, and that the market can 
never be a sure thing. But from the perspective of an institution 
without much of an endowment, he said it's hard to understand why 
others aren't spending more.
    ``When you have successive years of earning double-digit increases, 
15 percent and above, you can't spend 5 percent?'' he asked, noting a 
figure some critics say should be a minimum. ``There isn't a 
substantive reason why those institutions can't spend 5 percent.''
    Imagine what might happen if colleges with mega-endowments gave 
some of that money to Pell Grants for use anywhere, Kimbrough said. 
While the idea may seem unrealistic, he said there comes a point when 
enough money should be enough. ``There's a point where you should say: 
They have plenty of money. They don't need any more. Don't give them 
any more. There isn't a greater good any more.''
    Over all, the 1-year returns have been exceptionally good for the 
wealthiest colleges, especially in the last year. But Walda noted that 
taking a 10-year perspective, the returns are healthy but not as 
spectacular.

           Returns by Endowment Size Over 1, 3, 5 and 10 years
------------------------------------------------------------------------
                                   1-Year    3-Year    5-Year    10-Year
                                   Return    Return    Return    Return
        Endowment Assets             [In       [In       [In       [In
                                  percent]  percent]  percent]  percent]
------------------------------------------------------------------------
Greater than $1 billion.........      21.3      16.4      13.9      11.1
Greater than $500 million to $1       19.3      14.2      12.3       9.5
 billion........................
Greater than $100 million to          18.0      13.1      11.5       8.5
 $500 million...................
Greater than $50 million to $100      16.7      11.9      10.8       7.9
 million........................
Greater than $25 million to $50       15.9      10.7       9.8       7.3
 million........................
Up to $25 million...............      14.1       9.7       8.8       6.7
All.............................      17.2      12.4      11.1       8.6
------------------------------------------------------------------------

    The data continue to show the impact of wealthier colleges' ability 
to invest with riskier strategies, which may also have the highest 
potential payoff. Generally, wealthier colleges have larger shares of 
their endowments in hedge funds, private equity and venture capital--
and smaller shares in fixed income and domestic equity. Walda said he 
expected that the current market downturn would probably prompt 
strategy shifts at some institutions, but he said it was too early to 
tell exactly what they would be.
    The NACUBO data on individual colleges show endowment growth, but 
not rates of return. Endowment growth includes earnings and gifts, and 
takes away spending. Not every college participates in the NACUBO 
survey, although generally the wealthiest institutions do. So it is 
possible that in some of the subcategories noted below that other 
colleges would be in the lists had they participated in the survey. The 
rank figure refers to the colleges' ranks among all survey 
participants. So Williams College, first among liberal arts colleges, 
is 33 among all institutions.
    Among the top institutions, there was relatively little change, 
with the very top remaining the same and some institutions moving up or 
down a few spots. In the liberal arts category, Williams and Pomona 
Colleges displaced Grinnell College from its recent position on the top 
of the list.

                                                Top 20 Endowments
----------------------------------------------------------------------------------------------------------------
                                                                                                         1-Year
                                                                                                         Change
                      Rank                                   Institution               2007 Endowment      [In
                                                                                                        percent]
----------------------------------------------------------------------------------------------------------------
1..............................................  Harvard U.........................    $34,634,906,000     +19.8
2..............................................  Yale U............................    $22,530,200,000     +25.0
3..............................................  Stanford U........................    $17,164,836,000     +21.9
4..............................................  Princeton U.......................    $15,787,200,000     +21.0
5..............................................  U. of Texas System................    $15,613,672,000     +18.0
6..............................................  Massachussetts Inst. of Technology     $9,980,410,000     +19.3
7..............................................  Columbia U........................     $7,149,803,000     +20.4
8..............................................  U. of Michigan....................     $7,089,830,000     +25.4
9..............................................  U. of Pennsylvania................     $6,635,187,000     +24.9
10.............................................  Texas A&M U. System...............     $6,590,300,000     +16.8
11.............................................  Northwestern U....................     $6,503,292,000     +26.5
12.............................................  U. of California..................     $6,439,436,000     +16.2
13.............................................  U. of Chicago.....................     $6,204,189,000     +27.5
14.............................................  U. of Notre Dame..................     $5,976,973,000     +34.7
15.............................................  Duke U............................     $5,910,280,000     +31.4
16.............................................  Washington U. in St. Louis........     $5,567,843,000     +18.9
17.............................................  Emory U...........................     $5,561,743,000     +14.2
18.............................................  Cornell U.........................     $5,424,733,000     +25.5
19.............................................  Rice U............................     $4,669,544,000     +17.1
20.............................................  U. of Virginia....................     $4,370,209,000     +20.8
----------------------------------------------------------------------------------------------------------------


                                     Top 10 Liberal Arts College Endowments
----------------------------------------------------------------------------------------------------------------
                                                                                                         1-Year
                                                                                                         Change
                      Rank                                     College                 2007 Endowment      [In
                                                                                                        percent]
----------------------------------------------------------------------------------------------------------------
33.............................................  Williams College..................     $1,892,055,000     +29.4
38.............................................  Pomona College....................     $1,760,902,000     +20.8
40.............................................  Grinnell College..................     $1,718,313,000     +16.7
42.............................................  Amherst College...................     $1,662,377,000     +24.3
43.............................................  Wellesley College.................     $1,656,565,000     +17.3
50.............................................  Swarthmore College................     $1,441,232,000     +15.7
53.............................................  Smith College.....................     $1,360,966,000     +17.7
68.............................................  Berea College.....................     $1,102,272,000     +16.2
84.............................................  Middlebury College................       $936,354,000     +20.7
87.............................................  Vassar College....................      $,869,122,000     +17.2
----------------------------------------------------------------------------------------------------------------


                                      Top 5 Canadian University Endowments
----------------------------------------------------------------------------------------------------------------
                                                                                                         1-Year
                                                                                       2007 Endowment    Change
                      Rank                                     College                    (U.S. $)         [In
                                                                                                        percent]
----------------------------------------------------------------------------------------------------------------
37.............................................  U. of Toronto.....................     $1,763,764,000     +24.7
75.............................................  U. of British Columbia............     $1,013,532,000     +31.2
88.............................................  McGill U..........................       $863,405,000     +18.3
99.............................................  U. of Alberta.....................       $722,539,000     +29.6
122............................................  Queen's U.........................       $614,739,000     +22.5
----------------------------------------------------------------------------------------------------------------


                                   Top 5 Historically Black College Endowments
----------------------------------------------------------------------------------------------------------------
                                                                                                         1-Year
                                                                                                         Change
                      Rank                                     College                 2007 Endowment      [In
                                                                                                        percent]
----------------------------------------------------------------------------------------------------------------
138............................................  Howard U..........................       $523,690,000     +23.5
189............................................  Spelman College...................       $340,261,000     +16.7
223............................................  Hampton U.........................       $256,990,000     +18.1
433............................................  Meharry Medical College...........        $78,421,000     +19.5
502............................................  Morehouse School of Medicine......        $56,385,000     +22.3
----------------------------------------------------------------------------------------------------------------


                                       Top 5 Community College Endowments
----------------------------------------------------------------------------------------------------------------
                                                                                                         1-Year
                                                                                                         Change
                      Rank                                     College                 2007 Endowment      [In
                                                                                                        percent]
----------------------------------------------------------------------------------------------------------------
462............................................  Valencia CC (Florida).............        $68,004,000     +19.4
612............................................  Florida CC at Jacksonville........        $32,923,000     +35.9
623............................................  Harrisburg Area CC (Pennsylvania).        $30,563,000     +10.6
642............................................  Sinclair CC (Ohio)................        $27,690,000     +17.3
644............................................  Kentucky Community and Technical          $27,422,000     +29.3
                                                  College System.
----------------------------------------------------------------------------------------------------------------

                             Attachment 17

                   [Washington Times, April 12, 2010]

           Community Colleges Enjoy Attention But Need Money

                   (By Eric Gorski, Associated Press)

    Politicians and policymakers are lavishing unprecedented attention 
on community colleges, promoting them as engines to train workers in 
the recession and boost the country's college graduation rates.
    Where rhetoric meets reality on campus, you'll find people like 
Tania DeLeon, a student at Folsom Lake College in California who has 
trouble getting into the classes she wants, must shuttle between two 
campuses 45 minutes apart and is spending spring break earning a 
paycheck so she can pay for gas and graduate on time.
    Grappling with soaring enrollment and plummeting State support, 
community colleges are grateful for the higher profile but disappointed 
that money has yet to materialize to help them keep up with demand, let 
alone meet ambitious Obama administration goals to make the United 
States the global leader in college graduation rates again by 2020.
    ``It's a difficult, challenging time for us,'' said George Boggs, 
president and chief executive officer of the American Association of 
Community Colleges. ``But in the longer-term view, we've never seen the 
image of community colleges as high as it is right now. Overall, I'm 
optimistic for the future.''
    No longer the afterthought of higher education, the Nation's 1,200 
community, technical and junior colleges enroll more than 6 million 
students--almost half the Nation's college population. Public colleges' 
open-door policies and low fees draw many low-income, first-generation, 
immigrant and Hispanic students.
    The economic downturn has pressured schools as well as their 
students, most of whom work long hours. Sinking tax revenues at State 
and local levels have forced public colleges to cut courses or schedule 
them around the clock, slash summer sessions, eliminate academic 
programs and even restrict enrollment.
    In Detroit, record demand prompted the Wayne County Community 
College District to cap student enrollment this spring for the first 
time in its 40-year history. Louisiana's community and technical 
colleges, facing a 4.5 percent State budget cut, have slashed 100 
academic programs in the past year.
    A survey of 128 community college systems released last week found 
that 52 percent reported reductions in their operating budgets this 
year, a slight improvement over last year's grim numbers. But those 
facing cuts face steeper ones: The number of campuses with cuts 
exceeding 10 percent more than doubled.
    The crunch leaves little money for remedial education reform, 
counseling to better prepare students for college's challenges and 
other innovations to improve completion rates. Just 35 percent of 
community college entrants earn a certificate or an associate or 
bachelor's degree within 6 years, estimates show.
    ``You put all these factors together, it's sort of a perfect 
storm,'' said Michael Kirst, professor emeritus of education and 
business administration at Stanford University. ``One would predict our 
graduation rates will decline, not increase, from the community 
colleges. We'll move backwards.''
    Consider the challenges facing Miss DeLeon, who, like many other 
community college students, is trying to become the first in her family 
to graduate from college.
    When she started at Folsom Lake College outside Sacramento in 2007, 
Miss DeLeon had no problem finding courses. She finished school by 
midday and went to work. Then the budget crisis struck California.
    ``Now I'm taking a class that ends at 10 o'clock at night,'' she 
said.
    Miss DeLeon commuted between two campuses in the Los Rios Community 
College system--California's second largest--to take the courses she 
needed to finish on time. Next month, Miss DeLeon will graduate and 
transfer to California State University at Sacramento to pursue a 
career in juvenile justice.
    The picture is even bleaker for some schools that rely on local as 
well as State tax dollars.
    Montgomery College in Maryland, renowned for its engineering 
program, is facing a proposed 12 percent cut in county money and $14.5 
million less than it requested--the cost of operating one of its three 
campuses.
    ``Everyone talks about jobs, jobs, jobs,'' interim President 
Hercules Pinkney said. ``Well, we're the ones training the workforce. 
Hopefully, that argument will win the day.''
    The timing couldn't be worse coming off a record fall enrollment of 
26,000, State budget cuts and proposed tuition increases.
    Community colleges received their latest lesson in economic and 
political realities recently when President Obama signed legislation 
overhauling the Federal student loan program.
    The law, a centerpiece of Mr. Obama's education agenda, strips 
banks of their role as middlemen in the loan business and puts the 
government in charge, saving an estimated $61 million over 10 years.
    The House version approved last fall called for community colleges 
to receive $10 billion to help fulfill the White House's American 
Graduation Initiative, providing an infusion of Federal cash for job 
training, building projects and initiatives to get more students out 
the door with degrees or certificates.
    But because the projected savings from axing the bank subsidies 
were less than anticipated, community colleges instead will get only $2 
billion for job training alone.
    Most of the money from the overhaul will go to expand the maximum 
size of Pell grants for needy students. Additional money set aside for 
Hispanic-serving institutions will benefit community colleges.
    Frank Chong, the U.S. Department of Education's deputy assistant 
secretary for community colleges, said the $2 billion is ``something of 
a down payment'' on the graduation initiative.
    ``We need to use those funds to move the cause forward,'' said Mr. 
Chong, former president of Laney College, the flagship of California's 
Peralta Community College District. ``We know our work is not done 
yet.''
    For now, community colleges are doing what they've always done: 
more with less.
    One case in point is Northern Virginia Community College, the 
setting for Mr. Obama's bill-signing ceremony for the student loan 
initiative.
    The school has experienced a 23 percent cut in State funding and 24 
percent enrollment growth in the past 3 years. Yet it has expanded 
online offerings to better combine electronic learning with classroom 
instruction and used its world language program to attract 
international students, who pay higher tuition.
    ``A significant portion of higher education is hunkered down, 
trying to wait out the storm,'' said college President Robert Templin. 
``We've taken the approach that while things will get better, they will 
never get back to the way they were. We're going to have to find new 
ways to do our work.''
                                 ______
                                 
                                        DeVry Inc.,
                              Downers Grove, IL 60515-5799,
                                                     July 22, 2010.
Hon. Tom Harkin, Chairman,
Committee on Health, Education, Labor, and Pensions,
428 Dirksen Senate Office Building,
Washington, DC 20510.

Hon. Michael B. Enzi, Ranking Member,
Committee on Health, Education, Labor, and Pensions,
835 Hart Senate Office Building,
Washington, DC 20510.
    Dear Chairman Harkin and Ranking Member Enzi: As per our previous 
communication on July 15, 2010, below please find the answer to 
Chairman Harkin's question 4(d):

    Question 1. What was the number of students who enrolled between 
October 1, 2008 and August 1, 2009 but were no longer enrolled in 
September 2009?
    Answer 1. Of those undergraduate students counted in 4(c), the 
number who had not graduated and were not enrolled in summer 2009 is 
provided below for DeVry University and Chamberlain College of Nursing. 
The number who had not completed their program and were not enrolled as 
of July 1, 2009 is provided for Apollo College and Western Career 
College.

    Apollo College: 4,294
    Chamberlain College of Nursing: 1,436
    DeVry University (U.S.): 33,745
    Western Career College: 2,580

    Thank you again for the opportunity to provide this information to 
the Senate Committee. Should the need arise for further information; 
please contact me directly at (630) 515-3146 or at [email protected].
            Sincerely,
                                     Sharon Thomas Parrott,
                             Senior Vice President, Government and 
                       Regulatory Affairs Chief Compliance Officer.
                                 ______
                                 
 Response to Questions of Senator Harkin, Senator Enzi, Senator Dodd, 
Senator Casey, Senator Hagan, Senator Brown, and Senator Coburn, M.D.* 
                            by Steven Eisman

                       QUESTION OF SENATOR HARKIN

    Question 1.  In exploring comparisons between the subprime mortgage 
crisis and the business model used by large for-profit schools, it was 
discussed that student loans, unlike other consumer debt may not be 
discharged in bankruptcy except in cases of extreme hardship. You were 
then asked if a home mortgage could be discharged in bankruptcy and 
responded that you did not believe it could. My understanding is that 
if a borrower files for bankruptcy and stops paying his or her 
mortgage, he or she loses her house. Is that your understanding as 
well?
---------------------------------------------------------------------------
    * The views expressed herein and at the June 24, 2010 hearing are 
exclusively those of Steven Eisman and do not necessarily reflect those 
of FrontPoint Partners LLC or its affiliates.
---------------------------------------------------------------------------
    Answer 1. Yes. A mortgage is not dischargeable in bankruptcy but a 
borrower can default and lose his house. Generally, a lender will not 
go after the borrower any longer.

                       QUESTIONS OF SENATOR ENZI

    Question 1. Mr. Eisman, I understand you are a hedge fund manager 
and that you and your hedge fund profited from short selling mortgage 
investments during the subprime crisis. What financial interests do 
you, your firm and its current clients have in the topic of this 
hearing? Please explain, including whether your fund has or will take 
short positions in any for-profit educational investments. Are you 
willing to commit to this committee that you will not take short 
positions in for-profit educational investments?
    Answer 1. I am a hedge fund manger who has the ability to go long 
and short stocks. My research has led me to believe that the for-profit 
education industry is loading its students up with too much debt. And 
that, in many cases, the education provided by the for-profit industry 
is poor. I am short several companies in this industry under an 
assumption that changes that can and should be made will hurt the 
profitability of the industry. I have been very transparent that I am 
short in this industry and I will not make any commitment that I will 
not take short positions in this sector.

    Question 2. Have you done a similar analysis of student debt, 
default rates, graduation rates and placement rates at other 
institutions of higher education? Specifically, have you compared your 
findings regarding for-profit schools to community colleges? If so, 
what did your research reveal?
    Answer 2. Tuition and fees at for-profit institutions averaged 
$14,174 in 2008-2009. During the same years, the average in-state 
tuition and fees at public 4-yr institutions was $7,020 per year and 
the annual tuition and fees at public 2-yr colleges (community 
colleges) was $2,544 per year.
    For-profit students borrow much more than traditional 4-year and 
community college students. Eighty-eight percent of students in the 
for-profit sector took out Stafford Loans in 2007-2008, compared to 42 
percent of public 4-year students, and only 10 percent of public 2-year 
college students.
    For-profit students also borrow substantially more on a per student 
basis. According to data from the College Board, the debt incurred from 
attending a 2-yr program at a community college is about $4,550; the 
debt incurred from attending a for-profit 2-yr program is approximately 
$20,100. The debt incurred from attending a for-profit institution is 
roughly 5x the debt incurred from attending a community college for 
both associates degrees and certificate programs.

            Distribution of Undergraduate Debt by Sector and Type of Degree or Certificate, 2007-2008
----------------------------------------------------------------------------------------------------------------
                                                $0-10K    $10K-20K   $20K-30K   $30K-40K    $40K+
         Institution Type           $0  [In      [In        [In        [In        [In        [In       Average
                                    percent]   percent]   percent]   percent]   percent]   percent]      Debt
----------------------------------------------------------------------------------------------------------------
Bachelor's Degree:
  Public 4-yr....................         38         16         19         14          6          6      $12,850
  Private 4-yr...................         28         10         19         17         10         15     $20,1000
  FOR-PROFIT.....................          4          4         12         23         33         24      $33,700
Associate's Degree:
  Public 2-yr (comm college).....         62         23          9          3          2          1       $4,550
  FOR-PROFIT.....................          2         22         34         23         13          6      $20,100
Certificate:
  Public 2-yr (comm college).....         70         21          7          1          1          1       $2,825
  FOR-PROFIT.....................        100         46         34          8          2          1      $10,400
----------------------------------------------------------------------------------------------------------------
Source: College Board Trends in Student Aid 2009.

    According to the Department of Education's recent release of 3-yr 
trial cohort default data, for-profit institutional default rates are 
higher than every other institution type.


------------------------------------------------------------------------
                                                   2-Year       3-Year
                                                  default      default
               Institution Type                  rate  [In    rate  [In
                                                  percent]     percent]
------------------------------------------------------------------------
Private 2-Yr..................................          7.7         14.7
Private 4-Yr..................................          3.7          6.3
Public 2-Yr (comm college)....................          9.9         16.2
Public 4-Yr...................................          4.4          7.1
FOR PROFIT....................................         11.0         21.2
------------------------------------------------------------------------

    In addition, recent data released by the Department of Education 
shows that the 15-year default rate (closer to true lifetime rates) for 
community college students is 31 percent, while the 15-year default 
rate for for-profit students is 40 percent. This also mirrors the 
Department's view of expected lifetime default rates for for-profit 
versus community college students. For community college students 
entering repayment in 2007, the DOE expects 31.6 percent of students to 
default; for the for-profit students of the same year (2007), the DOE 
expects 47 percent of the students to enter default. With the way 
current default rates are trending, we expect that the DOE's lifetime 
default expectations for the for-profit student classes of 2008 and 
2009 will be north of 50 percent.


----------------------------------------------------------------------------------------------------------------
                                                  Cohort Yr    Cohort Yr    Cohort Yr    Cohort Yr    Cohort Yr
                                                     2003         2004         2005         2006         2007
                                                ----------------------------------------------------------------
                                                    Budget       Budget       Budget       Budget       Budget
             Institutional category                lifetime     lifetime     lifetime     lifetime     lifetime
                                                   default      default      default      default      default
                                                  rate  [In    rate  [In    rate  [In    rate  [In    rate  [In
                                                   percent]     percent]     percent]     percent]     percent]
----------------------------------------------------------------------------------------------------------------
2-Yr Nonprofit.................................         26.4         27.4         29.3         31.2         31.6
2-Yr Proprietary...............................         42.5         42.5         42.3         43.5         47.0
4-Yr Freshman & Sophomores.....................         19.3         20.5         21.9         22.2         22.0
4-Yr Juniors & Seniors.........................          8.2          8.5          9.8         11.6         12.3
Graduate Students..............................          3.4          3.7          4.5          5.9          6.3
                                                ----------------------------------------------------------------
  Overall......................................         11.5         12.2         13.2         14.6         15.3
----------------------------------------------------------------------------------------------------------------
Source: http://ifap.ed.gov/eannouncements/attachments/121409EACDRlifetimerateattachment2ratechartPPD.pdf.

                        QUESTION OF SENATOR DODD

    Question 1. Mr. Eisman, to your knowledge, are there other Federal 
funding streams that are such a large percentage of another industry's 
profit? Do you know what percentage of these funds are spent on 
executive compensation? Are these funding streams equitable to the 
spending practices and investments of this sector?
    Answer 1. The Defense Industry receives as a large a percentage of 
its revenues and profits directly from the Federal Government. In 2009, 
companies such as Lockheed Martin, Raytheon, and Northrop Grumman 
received 85 percent, 88 percent and 91 percent of their revenues 
(respectively) directly from the U.S. Government. In 2009, Lockheed 
earned a 9.9 percent operating margin (pre-tax profits) on U.S. 
Government contracts. Raytheon earned a 12.4 percent operating margin 
and Northrop earned a 7.4 percent operating margin. This basically 
means that defense companies earns about 7 to 12 cents of pre-tax 
profit on every dollar of revenue received from the U.S. government. 
This pales in comparison to some of the larger for-profit education 
companies such as Apollo Group, ITT Technical Institute and Strayer 
Education, who in 2009 reported 28 percent, 37 percent, and 34 percent 
operating margins, or between 28 cents and 37 cents of pre-tax profits 
on every dollar of revenue. Education companies earn roughly 3 times as 
much profit as Defense companies on every U.S. government dollar they 
receive.
    In terms of compensation, the table below shows the top 5 
executives at major for-profit institutions earn more than 7 times as 
much as the top 5 executives at major Defense Companies on every dollar 
of revenue received from the U.S. Government.


----------------------------------------------------------------------------------------------------------------
                                                          Defense companies             Education companies
                                                   -------------------------------------------------------------
                                                                                   Apollo
                                                    Lockheed  Raytheon  Northrup    Group   ITT Tech  Corinthian
----------------------------------------------------------------------------------------------------------------
2009 Sales........................................   $45,189   $24,881   $33,755    $3,974    $1,319     $1,308
Percent of revenue from U.S. Govt.................       85%       88%       91%       89%       85%        89%
2009 Top 5 total compensation.....................     $52.9     $34.8     $41.8     $34.7     $14.4      $11.2
Percent of 2009 Sales.............................     0.12%     0.14%     0.12%     0.87%     1.09%      0.86%
Defense company avg. percent sales................     0.13%  ........  ........  ........  ........  ..........
For-profit company avg. percent sales.............     0.94%  ........  ........  ........  ........  ..........
For-profit vs. Defense comp.......................    7.4 x   ........  ........  ........  ........  ..........
----------------------------------------------------------------------------------------------------------------
Source: Company financials and proxy statements. Sales and compensation dollars in millions.

    In 2009, the top 5 executives at the largest for-profit education 
company (Apollo Group) earned roughly the same amount as the top 5 
executives from Raytheon, or $35 million. In 2009, Raytheon reported 
$25 billion in revenues and Apollo reported $4 billion. Therefore, 
Apollo executives took home more than 6 times as much in total 
compensation on every dollar of revenue received; revenue which is 
predominantly from the U.S. government.

                       QUESTIONS OF SENATOR CASEY

    Question 1. The President has set the goal of the United States 
leading the world in college graduates by the year 2020. In your 
opinion, what is the role of for-profit colleges in trying to achieve 
this goal?
    Answer 1. It is not my place to comment on the role of for-profit 
education in the larger scheme of education. I believe that is the 
appropriate role for policymakers and lawmakers. I am simply trying to 
bring out the problems of the for-profit education industry and how it 
might be fixed.

    Question 2. What are for-profit schools currently required to 
report to the Department of Education around graduation rates and 
placement rates? How are placement rates tracked?
    Answer 2. For-profit schools are not required to report either 
graduation or placement rates. They must maintain certain placement 
rates (typically >70 percent) to remain in compliance with their 
accrediting bodies, but there are no legal requirements for graduation 
or placement rates.
    For-profit schools report graduation rates of 1st time 1st borrower 
students to the DOE (those are true ``traditional'' 1st time college 
students, who have no prior college experience or loans). Those 
students however, only make up a fraction of total students at the for-
profit schools, so it is very difficult to know what the true 
graduation rates are. For placements, some schools disclose graduate 
placement rates (although I don't believe they are required to) yet the 
numbers are not independently verified. There are no formal 
requirements or official mechanisms to track actual graduation and 
placement rates that we are aware of.

    Question 3. What, if any, statutory or regulatory changes should be 
made to strengthen the rules governing for-profit colleges? Are the 
penalties strong enough to hold these institutions accountable?
    Answer 3. The problem with the for-profit education industry, in my 
view, is that risk and reward have been divorced. The for-profit 
education industry receives close to 90 percent of its revenue from 
Federal loans and grants but it bears none of the risk of default. That 
risk is borne by the government, the student and the taxpayer. Risk 
sharing is appropriate. In the power point presentation I submitted to 
the committee along with my original testimony, I outlined how such a 
risk sharing would work. Essentially, the industry should take the 
first loss position up to a certain level chosen by Congress and/or the 
Department of Education. That way, all losses up to a certain 
percentage are borne solely by the industry. Because the companies 
would be financially penalized for recruiting students that they didn't 
believe would ultimately succeed, a measure of this sort would force 
companies to focus on and improve outcomes. These schools are profit-
motivated operations; to keep their profits (or avoid losses from 
defaults), this measure would change the behavior of the industry by 
making it accountable for the product/service it is delivering. This 
should ultimately bring default rates down dramatically.

                       QUESTIONS OF SENATOR HAGAN

    Question 1. Mr. Eisman, in your testimony you give an example of a 
school that has roughly a 40 percent operating margin--as compared to 
the 7-12 percent margin other companies that receive major government 
contracts.
    Can you give us some perspective on how the proprietary education 
sector's profits compare to other major industries?
    Answer 1. Please see answer to Senator Dodd's question above.
    In addition to that answer, below is a table of the Dow 30 
companies 2009 operating margins versus for-profit education companies.


------------------------------------------------------------------------
                                                               2009 OM
               Ticker                         Name               [In
                                                               percent]
------------------------------------------------------------------------
MMM UN Equity......................  3M Co.................         20.8
AA UN Equity.......................  Alcoa Inc.............         ^5.2
AXP UN Equity......................  American Express Co...         10.6
T UN Equity........................  AT&T Inc..............         17.5
BAC UN Equity......................  Bank of America Corp..         10.1
BA UN Equity.......................  Boeing Co/The.........          3.1
CAT UN Equity......................  Caterpillar Inc.......          1.8
CVX UN Equity......................  Chevron Corp..........          9.0
CSCO UW Equity.....................  Cisco Systems Inc.....         20.5
KO UN Equity.......................  Coca-Cola Co/The......         26.6
DD UN Equity.......................  DuPont................          6.1
XOM UN Equity......................  Exxon Mobil Corp......          9.5
GE UN Equity.......................  General Electric Co...          6.5
HPQ UN Equity......................  Hewlitt Packard Co....         30.5
HD UN Equity.......................  Home Depot Inc........          7.3
INTC UW Equity.....................  Intel Corp............         16.9
IBM UN Equity......................  International Business         17.8
                                      Machines Corp..
JNJ UN Equity......................  Johnson & Johnson.....         26.9
JPM UN Equity......................  JPMorgan Chase & Co...         18.2
KFT UN Equity......................  Kraft Foods Inc.......         13.5
MCD UN Equity......................  McDonald's Corp.......         29.8
MRK UN Equity......................  Merck & Co. Inc.......         25.6
MSFT UW Equity.....................  Microsoft Corp........         35.4
PFE UN Equity......................  Pfizer Inc............         31.0
PG UN Equity.......................  Procter & Gamble Co./          20.4
                                      The.
TRV UN Equity......................  Travelers Cos Inc./The         20.6
UTX UN Equity......................  United Technologies            12.2
                                      Corp..
VZ UN Equity.......................  Verizon Communications         18.1
                                      Inc..
WMT UN Equity......................  Walmart Stores, Inc...          5.9
DIS UN Equity......................  Walt Disney Co./The...         15.8
                                    ------------------------------------
                                     Average Operating              16.1
                                      Margins.
                                    ------------------------------------
                                     Apollo Group..........         28.2
                                     Corinthian Colleges...          9.5
                                     Career Education               12.3
                                      Corporation.
                                     Capella Education              19.1
                                      Company.
                                     DeVry Inc.............         16.7
                                     ITT Technical                  37.1
                                      Institute.
                                     Strayer University....         33.7
                                    ------------------------------------
                                     Average Operating              22.3
                                      Margins.
------------------------------------------------------------------------


    Question 2. Mr. Eisman, you have spent a great deal of time 
studying the for-profit education industry.
    That said, could you elaborate on parallels you see between the 
oversight of subprime lenders and the oversight and accountability 
system that deals with for-profit colleges?
    Answer 2. Some subprime lending occurred at banks and their 
activities were overseen by Federal regulators. But much subprime 
lending occurred at non-bank financials, and they were regulated by 
State authorities, if at all.
    The for-profit education industry is partially regulated by the 
Department of Education. However the accreditation process is performed 
by independent accrediting bodies.
    There are two kinds of accreditation--national and regional. 
Accreditation bodies are non-governmental, non-profit peer-reviewing 
groups. Schools must earn and maintain proper accreditation to remain 
eligible for title IV programs. The relationship of the for-profit 
education industry and the national accrediting boards is, in my view, 
similar to the relationship between the rating agencies and investment 
banks. There, Wall Street paid the rating agencies for ratings on 
subprime securitizations that turned out to be overly optimistic. Here, 
the industry, we believe, controls the national accrediting bodies by 
actually sitting on the boards of those very same institutions.
    Historically, most for-profit schools are nationally accredited but 
national accreditation holds less value than regional accreditation. 
The latest trend of for-profit institutions is to acquire the dearly 
coveted Regional Accreditation through the outright purchase of small, 
financially distressed non-profit institutions and then put that school 
on-line. In March 2005, BPI acquired the regionally accredited 
Franciscan University of the Prairies and renamed it Ashford 
University. On the date of purchase, Franciscan (now Ashford) had 312 
students. BPI took that school online and at the end of 2009 it had 
54,000 students.

    Question 3. At the end of fiscal year 2010, there are estimated to 
be over $700 billion in outstanding, federally backed student loans. 
Taxpayers are backing almost all of those loans.
    I realize that this question can apply equally to non-profit 
institutions as well, but since we're talking about the for-profit 
industry today, could any of the witnesses tell me what specific, 
quantitative measurements we have across the industry to tell us what 
the taxpayers are getting for all that money? What sort of industry-
wide performance measures are available to help us better understand 
the performance of institutions that survive on the largess of the 
taxpayer?
    Answer 3. There are virtually no independently verifiably 
performance measures that exist to determine the quality of the 
education delivered by for-profit education companies. While some 
companies report graduation and placement rates and starting salary 
data, all of these numbers are internally generated within the 
companies and are not verifiable. They do not paint an accurate picture 
of quality. Cohort default rates help to highlight some degree of 
quality--generally schools with higher defaults are perceived to be of 
lower quality (in our view). But default numbers are also misleading 
due to their short timeframe and the widespread use of forbearances and 
deferrals to bring default numbers down. We have even seen instances of 
schools paying down student's government loans to reduce reported 
default rates. In sum, we don't believe there are any reliable measures 
to measure the quality of programs at for-profit institutions and have 
no means of gauging the return taxpayers are getting on their 
investment.

    Question 4. Some say that the for-profit sector is highly regulated 
with oversight from the U.S. Department of Education, State licensure 
agencies and accrediting bodies. Others may disagree, citing that much 
more needs to be done.
    That said, what are your thoughts on how can we better align the 
goals of each of these agencies so that everyone is demanding the 
highest quality outcomes for every institution?
    Answer 4. No answer.

    Question 5. Many of you in your testimony mention the ``90/10 
rule,'' the provision that requires proprietary institutions of higher 
education to have at least 10 percent of the institution's revenues 
from sources that are not derived from funds provided through Federal 
financial aid.
    Is there a way to more accurately track the percentage of title IV 
dollars that schools receive?
    Answer 5. The Department of Education already tracks gross 
disbursements to students, by institution. They would need to factor in 
title IV returns and refunds on an annual basis and match that with 
annual gross disbursements to get to a net title IV disbursement 
number. I am not sure if the Department tracks returns and refunds by 
school.
    The problem with 90/10 is that it is a company-reported figure 
(similar to graduation rates, placement rates and other measures of 
quality). There is no way to independently verify the accuracy of any 
of these company-reported metrics. What would help is to have the 
government report whether each company is using a net title IV 
disbursement figure.

    Question 6. As you know, the purpose of this hearing is for all of 
us to get a better sense of how well the for-profit education industry 
is serving students. We know that there are good actors as well as bad 
actors in the for-profit education industry.
    For those of us who want to ensure that anyone who has the drive 
and desire to get a high-quality education is able to do so, how do you 
suggest we work together to better identify those schools that are 
getting the job done and those that aren't?
    Answer 6. The way to ultimately identify good from bad players in 
our view is entirely outcomes-based. Schools that overcharge and under 
deliver (the majority of schools we have researched), will often have 
higher than average defaults as a result of high tuition, high drop-out 
rates and poor placement rates for their graduates. Therefore, defaults 
are critical in understanding the quality of an institution.
    In addition, we believe that it is critical to look at the percent 
of revenues spent on education. Of the 12 for-profit schools we have 
done research on, not one spends more than 50 percent of their revenue 
on education. Across 12 schools, the average percent of revenues spent 
on educational-related items is 37 percent. A few of the schools such 
as Grand Canyon and Bridgepoint actually spend more money on marketing 
and advertising (33 percent and 32 percent of sales respectively) then 
they do on education.
                       question of senator brown
    Question 1. Your proposal about adding an element of risk sharing 
to the for-profit sector in higher education is intriguing. Would you 
set up a risk sharing requirement based on size or loan volume? Would 
you base it on the ratio of student aid revenue to other revenue? Would 
there be a requirement for a reserve fund to reimburse the Federal 
Government for loan losses? How would you design a risk sharing 
program?
    Answer 1. See answer above.

                      QUESTIONS OF SENATOR COBURN

    Question 1. Are institutions of higher education clients of any of 
the funds within FrontPoint Financial Services Fund? If so, please 
provide a list of the institutions of higher education that FrontPoint 
Partners currently represents.
    Answer 1. No Answer.

    Question 2. Is there an inherent conflict of interest for a hedge 
fund to testify before Congress on an industry it is potentially 
selling short? Please explain.
    Answer 2. I believe in full disclosure. I am short companies in 
this industry. But I believe my arguments should stand or fall on their 
own merit. In 2007, I was short the mortgage sector, the rating 
agencies and the investment banks. I was quite vocal that I was short 
and for the reasons why I was short. Being short did not make those 
arguments right or wrong; it just turned out I was right. The same 
research process that led me to short the financial services sector has 
led me to short the for-profit education industry.

    Question 3. In your testimony, you allege that the for-profit 
college sector is piling debt onto students who cannot afford to repay 
their debt obligations. However, you fail to discuss the numerous 
repayment options available to help Federal student loan borrowers 
fulfill their debt obligations. How do repayment options such as the 
Income-based Repayment (IBR) program--an option that allows borrowers 
to scale their student loan repayment amounts to their income, with a 
total payment due of $0 for the lowest income earners--factor into your 
analysis? Given that the IBR program discharges all outstanding Federal 
student loan debt for these borrowers after 20 years, are taxpayers not 
already on the hook for a potentially substantial amount of student 
loans that borrowers will never repay?
    Answer 3. Our analysis does take into account programs like IBR. 
IBR has been around for a while and to-date, most schools have admitted 
that using IBR has relatively no impact on overall default rates. We do 
not know why using IBR has proven ineffective at reducing defaults but 
we assume that the historical impact of IBR will continue going 
forward.

    Question 4. Concerning student loan cohort default rates (both the 
current 2-year and draft 3-year rates), how do the cohort default rates 
of non-profit and private 2-year colleges and minority serving 
institutions compare to those of for-profit institutions? How do the 
graduation rates of these institutions compare to those of for-profit 
colleges?
    Answer 4. See Enzi question #2 answer concerning default rates by 
institution-type. Graduation rates are not reported by institution type 
and so I do not know how the rates compare.

    Question 5. Given the current law sanctions associated with high 
cohort default rates, is it the fiduciary responsibility of for-profit 
institutions to maintain low default rates?
    Answer 5. I don't know if I would call it a fiduciary 
responsibility. But the industry is careful to keep its cohort default 
rates below those levels. We believe schools manage cohort defaults 
through the extensive use of forbearance and deferral options to push 
defaults out past the regulated 2-year window. Schools face no 
financial or regulatory penalties for operating high default rates so 
long as they meet the 2-year threshold requirement.

    Question 6. In your opinion, how would Wall Street react to the 
Gainful Employment regulations that have been contemplated by the U.S. 
Department of Education?
    Answer 6. It is always impossible to predict how the market will 
react because no one ever knows what is and is not priced. In my view, 
the stocks are down from their year highs because of increased 
regulation by the DOE and the potential for the imposition of gainful 
employment, as well as the potential for new legislation. My 
fundamental research indicates that if GE goes through as originally 
proposed many schools will have to cut tuition and that would cause 
margins to decline.

    Question 7. Do nonprofit and public colleges and universities use 
the Federal student aid programs to suit their business models? Are 
for-profit colleges the only sector of higher education that capitalize 
on the Federal student aid programs?
    Answer 7. No Answer.

    Question 8. Does it concern you that, as a country, we have created 
a student aid system that has helped fuel tuition costs? According to 
the National Center for Public Policy and Higher Education, from 1982 
to 2007, tuition and fees increased 439 percent while median family 
income rose 147 percent. Does the overall framework work in your mind, 
or has the government created a system that helps drive up tuition and 
that invites waste, fraud and abuse into all sectors of higher 
education?
    Answer 8. I cannot speak to waste and fraud throughout the entire 
higher education system because I have not researched the topic.

    Question 9. What responsibility do post-secondary students, as 
adult consumers, have in taking their futures into their own hands and 
researching their post-secondary education and training options?
    Answer 9. No Answer.

    [Whereupon, at 1:06 p.m., the hearing was adjourned.]

                                   


