Higher Education: Ensuring Quality Education From Proprietary
Institutions (Testimony, 06/06/96, GAO/T-HEHS-96-158).
Pursuant to a congressional request, GAO examined whether proprietary
schools receiving Title IV funding are providing students with quality
educational programs. GAO found that: (1) fewer proprietary schools have
been accredited since 1992 because of increases in school closures and
oversight by accrediting agencies; (2) the proportion of proprietary
school students receiving Title IV aid fell from 80 percent in the
1986-87 school year to 67 percent in the 1992-93 school year; (3) loan
default rates fell, but remained substantially higher than those for
students attending nonprofit institutions; (4) the 1992 Higher Education
Act Amendments adopted a rule prohibiting schools from participating in
Title IV programs if they receive more than 85 percent of their revenue
from Title IV programs; (5) since the so-called 85-15 rule went into
effect, only four proprietary schools have notified the Department of
Education of their failure to meet the 85 percent standard; (6) schools
not meeting the standard had more than 85 percent of their revenue
coming from Title IV funding, improperly documented their eligibility,
misunderstood the reporting rules, or intentionally misrepresented their
findings; and (7) proprietary school students incur significant debt and
are often unable to find jobs in their fields.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-HEHS-96-158
TITLE: Higher Education: Ensuring Quality Education From
Proprietary Institutions
DATE: 06/06/96
SUBJECT: Student loans
Higher education
Fraud
Program abuses
Vocational education
Student aid programs
Institution accreditation
State programs
Loan repayments
Noncompliance
IDENTIFIER: Pell Grant
Dept. of Education Stafford Student Loan Program
Federal Family Education Loan Program
Federal Direct Student Loan Program
Dept. of Education Perkins Student Loan Program
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Cover
================================================================ COVER
Before the Subcommittee on Human Resources and Intergovernmental
Relations, Committee on Government Reform and Oversight, House of
Representatives
For Release on Delivery
Expected at 2:00 p.m.,
Thursday,
June 6, 1996
HIGHER EDUCATION - ENSURING
QUALITY EDUCATION
FROM PROPRIETARY INSTITUTIONS
Statement of Cornelia M. Blanchette
Associate Director
Education and Employment Issues
Health, Education, and Human Services Division
GAO/T-HEHS-96-158
GAO/HEHS-96-158T
(104854)
Abbreviations
=============================================================== ABBREV
HEA - Higher Education Act
SPRE - State Postsecondary Review Entities
IG - Inspector General
HIGHER EDUCATION: ENSURING
QUALITY EDUCATION FROM PROPRIETARY
INSTITUTIONS
============================================================ Chapter 0
Mr. Chairman and Members of the Subcommittee:
We are pleased to be here today to assist the Subcommittee in its
oversight responsibilities for the Department of Education. The
Department administers an array of student financial aid programs
under Title IV of the Higher Education Act (HEA) of 1965, as
amended.\1 These programs provide grants, loans, and work-study
support to students pursuing postsecondary education. In fiscal year
1995, under Title IV, the federal government made about $35.2 billion
available to about 7 million postsecondary students with $5.4 billion
(15 percent) for Pell grants and $14.3 billion (41 percent) for
subsidized Stafford loans--two of the three largest Title IV
programs.
A considerable history of concern exists about the integrity of Title
IV programs, particularly the federal student loan programs. Since
the late 1980s, the Department's Office of Inspector General, the
Congress, and GAO have all concluded after completing several
investigations that extensive fraud and abuse exist in student aid
programs. Between fiscal years 1983 and 1993, annual federal
payments to honor default claims increased over 400 percent, from
$445 million to $2.4 billion.\2
Annually, almost 1 million students enroll in about 5,000 proprietary
(private for-profit) schools that represent about 50 percent of all
postsecondary institutions. As a sector of the postsecondary
education community, proprietary institutions make an important
contribution to the nation's economic competitiveness by providing
occupational training to those who are not college-bound. However,
the actions of some proprietary school owners have been at the core
of program concerns given past findings. For example, some
proprietary school operators have enriched themselves at the expense
of economically disadvantaged students while providing little or no
education in return. Faced with large debts and no new marketable
skills, these students often defaulted on their loans. In fact,
default rates for proprietary school students peaked at around 41
percent in 1990 at a time when the student loan default rate for all
postsecondary students averaged about 22 percent.
In recent years, the Congress has enacted legislation to address the
problems plaguing Title IV programs. The Omnibus Budget
Reconciliation Act of 1990 (P.L. 101-508) established a process for
terminating institutions with unacceptably high default rates from
participation in the federal loan program. The act set a default
rate threshold of 35 percent for fiscal years 1991 and 1992, and 30
percent for fiscal year 1993. Under the act, institutions that meet
or exceed the threshold for 3 consecutive years are ineligible to
participate in the program. The Higher Education Amendments of 1992
(P.L. 102-325) further tightened eligibility requirements by
lowering the threshold to 25 percent for subsequent fiscal years.
You requested that today we talk about several issues related to
"gatekeeping"--the process of ensuring that only schools providing
quality education and training access Title IV funds. First, we will
provide a broad overview of the regulatory framework for Title IV
programs, outlining the roles and responsibilities of the principal
actors. Second, we will discuss some of our preliminary observations
on proprietary schools from ongoing work for the Subcommittee,
describing trends in some quantitative measures, such as default
rates, and laying out the framework for (1) examining the legislative
provision limiting Title IV participation to schools receiving at
least 15 percent of their revenues from non-Title IV sources and (2)
determining the extent to which Title IV funds pay to train students
for jobs in no- or low-demand occupations.
The information we present today is based on a review of the
legislative history of the 1992 amendments to HEA, discussions with
Department of Education officials responsible for examining
accrediting agencies, and discussions with six nationally recognized
accrediting agencies that cover 95 percent of all proprietary schools
that participate in Title IV programs. In addition, we developed
trend information on proprietary school students and Title IV
programs using data from the Department.
In summary, to address long-standing concerns, the Congress sought to
strengthen Title IV oversight by amending HEA in 1992. Recent trend
data show mixed results. Some signs of modest progress exist: The
six accrediting agencies that cover 95 percent of proprietary schools
participating in Title IV accredit from 3 to 26 percent fewer schools
than in 1992; proprietary schools' share of Title IV funding has
declined; and the default rate for proprietary school students has
fallen 12 percentage points, from 36 percent in 1991 to 24 percent in
1993. These trends, however, do not abate concern about program
quality. For example, while proprietary school students' default
rates have been reduced, their rates remain substantially higher than
those for their peers who attend nonprofit institutions--about 14
percent for students attending 2-year nonprofits and about 7 percent
for those attending 4-year nonprofits. In addition, questions remain
about (1) whether proprietary schools that overwhelmingly rely on
federal student aid for revenue should be allowed to continue
participating in Title IV and (2) to what extent proprietary schools
are training students for jobs that do not exist.
--------------------
\1 Title IV established financial aid programs for students attending
institutions of higher education and vocational schools and includes
the Federal Family Educational Loan Program and the Federal Direct
Student Loan Program. Both offer subsidized and unsubsidized
Stafford loans and Parent Loans for Undergraduate Students. Title IV
also established the Federal Pell Grant Program and the Federal
Perkins Loan Program.
\2 At the time of our review, the Department of Education did not
maintain data disaggregated by type of institution on federal
payments for default claims.
BACKGROUND
---------------------------------------------------------- Chapter 0:1
Vast sums of money funnel into America's higher education system each
year through student financial aid programs authorized by Title IV of
HEA, as amended. In 1995, about $35.2 billion in aid was made
available to almost 7 million students to attend postsecondary
institutions, with aid available projected to reach $40 billion in
1997.
As funding for Title IV programs has increased, so have losses to the
federal government from honoring its guarantee on student loans. In
1968, the government paid $2 million to cover loan defaults; in 1987,
default payments exceeded $1 billion; and by 1991, default claim
payments reached a staggering $3.2 billion. In 1992, GAO listed the
student loan program as 1 of 17 high-risk federal program areas
especially vulnerable to waste, fraud, abuse, and mismanagement.
More specifically, we found, among other things, that (1) schools
used the program as a source of easy income with little regard for
students' educational prospects or the likelihood of their repaying
loans and (2) management weaknesses plagued the Department that
prevented it from keeping on top of these problems.\3 The proprietary
school sector has been associated with some of the worst examples of
program abuse.
In the United States, 5,235 proprietary schools represent about 50
percent of all postsecondary institutions. Most are small, enrolling
fewer than 100 students, and offer occupational training of 2 years
or less in fields ranging from interior design to computer
programming. Proprietary schools enrolled more than 1 million
students in fall 1993--about 10 percent of all undergraduates.
Compared with nonprofit institutions, proprietary schools enroll
higher percentages of women, minorities, and low-income students.
About 67 percent of proprietary school students receive federal
student aid under Title IV.
While average default rates for all postsecondary institutions
reached an all-time high of 22 percent in 1990, the default rate for
proprietary schools exceeded 41 percent. This disparity has
triggered numerous investigations. Congressional investigations, for
example, discovered evidence of fraud and abuse by proprietary school
owners. The Congress found that some proprietary schools focused
their efforts on enrolling educationally disadvantaged students and
obtaining federal funds rather than on providing meaningful training
or education. The Congress also concluded that the regulatory
oversight system of Title IV programs provided little or no assurance
that schools were educating students efficiently or effectively.
Several recommendations emanating from these findings were included
in the 1992 amendments to HEA.
--------------------
\3 See Guaranteed Student Loans (GAO/HR-93-2, Dec. 1992).
TITLE IV REGULATORY FRAMEWORK
---------------------------------------------------------- Chapter 0:2
The Title IV regulatory structure includes three actors--the
Department of Education, states, and accrediting agencies--known as
the "triad." Because of concern about federal interference in school
operations, curriculum, and instruction, the Department has relied on
accrediting agencies and states to determine and enforce standards of
program quality. HEA recognizes the roles of the Department, the
states, and the accrediting agencies as providing a framework for a
shared responsibility for ensuring that the "gate" to student
financial aid programs opens only to those institutions that provide
students with quality education or training worth the time, energy,
and money they invest.
DEPARTMENT OF EDUCATION
-------------------------------------------------------- Chapter 0:2.1
The Department plays two roles in gatekeeping. First, it verifies
institutions' eligibility and certifies their financial and
administrative capacity. In verifying institutional eligibility, the
Department reviews documents provided by schools to ensure their
compliance with state authorization and accreditation requirements;
eligibility renewal is conducted every 4 years. In certifying that a
school meets financial responsibility requirements, the Department
determines whether the school can pay its bills, is financially
sound, and that the owners and employees have not previously been
convicted of defrauding the federal government. In certifying that
institutions meet administrative requirements, the Department
determines whether institutions have personnel resources adequate to
administer Title IV programs and to maintain student records.
Second, the Department grants recognition to accrediting agencies,
meaning that the Department certifies that such agencies are reliable
authorities as to what constitutes quality education or training
provided by postsecondary institutions. In deciding whether to
recognize accrediting agencies, the Secretary considers the
recommendations of the National Advisory Committee on Institutional
Quality and Integrity. The advisory committee consists of 15 members
who are representatives of, or knowledgeable about, postsecondary
education and training. Appointed by the Secretary of Education,
committee members serve 3-year terms. The advisory committee
generally holds public meetings twice a year to review petitions for
recognition from accrediting agencies. The Department's Accrediting
Agency Evaluation Branch is responsible for reviewing information
submitted by the accrediting agencies in support of their petitions.
Branch officials analyze submitted materials, physically observe an
accrediting agency's operations and decision-making activities, and
report their findings to the advisory committee.
STATES
-------------------------------------------------------- Chapter 0:2.2
States use a variety of approaches to regulate postsecondary
educational institutions. Some states establish standards concerning
things like minimum qualifications of full-time faculty and the
amount of library materials and instructional space. Other state
agencies define certain consumer protection measures, such as refund
policies. In the normal course of regulating commerce, all states
require postsecondary institutions to have a license to operate
within their borders.
Because of concerns about program integrity, the Congress, in
amending HEA in 1992, decided to strengthen the role of states in the
regulatory structure by authorizing the creation of State
Postsecondary Review Entities (SPRE). Under the amendments, the
Department would identify institutions for review by SPREs, using 11
criteria indicative of possible financial or administrative distress.
To review institutions, SPREs would use state standards to assess
such things as advertising and promotion, financial and
administrative practices, student outcomes, and program success. On
the basis of their findings, SPREs would recommend to the Department
whether institutions should retain Title IV eligibility. The
Congress terminated funding for SPREs in 1995.
ACCREDITING AGENCIES
-------------------------------------------------------- Chapter 0:2.3
The practice of accreditation arose as a means of having
nongovernmental, peer evaluation of educational institutions and
programs to ensure a consistent level of quality. Accrediting
agencies adopt criteria they consider to reflect the qualities of a
sound educational program and develop procedures for evaluating
institutions to determine whether they operate at basic levels of
quality.
As outlined by the Department of Education, the functions of
accreditation include
-- certifying that an institution or program has met established
standards,
-- assisting students in identifying acceptable institutions,
-- assisting institutions in determining the acceptability of
transfer credits,
-- creating goals for self-improvement of weaker programs and
stimulating a general raising of standards among educational
institutions,
-- establishing criteria for professional certification and
licensure, and
-- identifying institutions and programs for the investment of
public and private funds.
Generally, to obtain initial accreditation, institutions must prepare
an in-depth self-evaluation that measures their performance against
standards established by the accrediting agency. The accrediting
agency, in turn, sends a team of its representatives to the
institution to assess whether the applicant meets established
standards. A report, containing a recommendation based on the
institution's self-evaluation and the accrediting agency's team
findings, is reviewed by the accrediting agency's executive panel.
The panel either grants accreditation for a specified period of time,
typically no longer than 5 years, or denies accreditation. Once
accredited, institutions undergo periodic re-evaluation.
To retain accreditation, institutions pay sustaining fees and submit
status reports to their accrediting agencies annually. The reports
detail information on an institution's operations and finances and
include information on such things as student enrollment, completion
or retention rates, placement rates, and default rates. In addition,
institutions are required to notify their accrediting agencies of any
significant changes at their institutions involving such things as a
change in mission or objectives, management, or ownership.
Accrediting agencies judge whether institutions continue to comply
with their standards on the basis of the information submitted by
institutions and other information such as complaints. Whenever an
accrediting agency believes that an institution may not be in
compliance, the agency can take a variety of actions. For example,
agencies may require institutions simply to provide more information
so that they can render a judgment, conduct site visits to gather
information, require institutions to take specific actions that
address areas of concern, or, in rare instances, ultimately revoke
accreditation.
RECENT PROPRIETARY SCHOOL
TRENDS
---------------------------------------------------------- Chapter 0:3
Recent information points to some favorable trends regarding the
participation of proprietary schools in the Title IV program. Fewer
proprietary schools participate in Title IV programs now than 5 years
ago, a trend reflected in decreased numbers of schools accredited by
the six primary accrediting agencies. Proprietary schools receive a
much smaller share of Title IV aid dollars now than in the past.
And, while the default rates for proprietary school students are
still far above those associated with nonprofit institutions, the
rates have declined over the past few years.
ACCREDITATION
-------------------------------------------------------- Chapter 0:3.1
For the six agencies we contacted, we observed a trend toward
accrediting fewer institutions since 1992 (see table 1). Agency
officials pointed out a number of reasons for the decreases,
including recent changes in Title IV regulations, more aggressive
oversight by accrediting agencies, school closures, and the fact that
schools once accredited by two or more agencies are now accredited
only by one. We observed no clear trends in other accreditation
decisions such as an increasing or decreasing propensity to grant,
deny, or revoke school accreditation over the past few years. Some
accrediting agency officials told us that because they effectively
prescreen institutions applying for accreditation, they would not
expect to see much change in the number of cases in which
accreditation is denied or applications are withdrawn.
Table 1
Number of Institutions Accredited by Six
Agencies Accrediting Most Proprietary
Schools in Title IV, by Year
Percen
tage
change
1992-
1992 1993 1994 1995 95
------------------------------ ------ ------ ------ ------ ------
Accrediting Council for 335 317 287 261 -22
Continuing Education and
Training\a
Accrediting Commission of 1,002 954 938 956 -5
Career Schools and Colleges
of Technology\b
Accrediting Council for 543 491 431 404 -26
Independent Colleges and
Schools\a
Council on Occupational 203 198 186 159 -22
Education\a,c
National Accrediting 1,469 1,399 1,291 1,269 -14
Commission of Cosmetology
Arts and Sciences\b
Accrediting Bureau of Health 78 87 80 76 -3
Education Schools\b
----------------------------------------------------------------------
Note: Totals not provided because of differences in accrediting
agencies' methods of counting institutions and because some agencies
accredit both proprietary and nonprofit institutions.
\a Agency provided data on the number of institutions' main campuses
excluding their branch campuses.
\b Agency provided data on the number of institutions without
distinguishing between main and branch campuses.
\c Agency provided data on the number of accredited proprietary
institutions only.
Source: Information provided by accrediting agencies.
SHARE OF TITLE IV FUNDS
-------------------------------------------------------- Chapter 0:3.2
Proprietary schools' share of Title IV aid has steadily declined
since the late 1980s. For example, about 25 percent of all Pell
grant dollars went to students attending proprietary schools in
1986-87, but by 1992-93 that figure declined to about 18 percent (see
fig. 1). While total Pell grant expenditures rose from $3.4 billion
to $6.2 billion over these years, the amount retained by proprietary
schools only increased from $.9 billion to $1.1 billion. For the
subsidized Stafford loan program, the proprietary school share
declined from nearly 35 percent of all dollars in 1986-87 to about 10
percent in 1992-93. In the Federal Family Education Loan Program,
total dollars increased from $9.1 billion to $14.6 billion between
1986-87 and 1992-93, but dollars going to proprietary schools fell
from $3.2 billion to $1.7 billion.\4
Figure 1: Declining Share of
Title IV Dollars Going to
Proprietary Schools
(See figure in printed
edition.)
The proportion of proprietary school students receiving Title IV aid
has been declining as well, although these students remain more
likely than others to receive aid. The proportion receiving aid fell
from nearly 80 percent in 1986-87 to about 67 percent in 1992-93,
while the proportion of students receiving aid at the public and
private nonprofit schools remained steady.
Furthermore, for proprietary school students who receive aid, the
average dollar amount has risen more slowly than for students in
other sectors. Average aid received by proprietary school students
went up by 20 percent between 1986-87 and 1992-93; in contrast, the
increase was 34 percent for public school students and 47 percent for
private nonprofit school students.
--------------------
\4 These figures include subsidized Stafford loans, Parent Loans for
Undergraduate Students, and Supplemental Loans for Students, but not
unsubsidized Stafford loans.
DEFAULT RATES
-------------------------------------------------------- Chapter 0:3.3
Loan default rates for proprietary school students have been
declining in recent years, from 36.2 percent in 1991 to 23.9 percent
in 1993 (see fig. 2), while default rates in other sectors have not
changed. However, students at proprietary schools are still more
likely than others to default on student loans. The most recent
rates for 2- and 4-year nonprofit schools were 14 and 7 percent,
respectively.
Figure 2: Default Rates for
Students at Proprietary Schools
Have Declined but Are Still
Higher Than Those at Nonprofit
Schools
(See figure in printed
edition.)
THE 85-15 RULE
-------------------------------------------------------- Chapter 0:3.4
One new measure adopted in the 1992 HEA amendments to help tighten
eligibility for Title IV student financial aid programs was the
so-called 85-15 rule. This provision prohibits proprietary schools
from participating in Title IV programs if more than 85 percent of
their revenues come from these programs. The presumption under the
rule is that if proprietary schools are providing good services, they
should be able to attract a reasonable percentage of their revenues
from sources other than Title IV programs. In other words, the 85-15
rule is based on the notion that proprietary schools which rely
overwhelmingly on Title IV funds may be poorly performing
institutions that do not serve their students well and may be
misusing student aid programs, and therefore should not be subsidized
with federal student aid dollars.
Since the 85-15 rule went into effect last July, proprietary schools
that fail to meet the standard must report this to the Department
within 90 days following the end of their fiscal year. Schools that
meet the standard must include a statement attesting to that fact in
their audited financial statements due to the Department within 120
days following the end of their fiscal year. The period has now
elapsed for the vast majority of schools. Thus far, however, only
four proprietary schools have notified the Department of their
failure to meet the 85-15 standard.
This finding may have a variety of possible explanations. For
example, it may be that very few schools actually had more than 85
percent of their revenues coming from Title IV when the rule became
law or that most such schools adjusted their operations to meet the
standard when it took effect. Conversely, the actual number of
schools that failed to meet the 85-15 standard could be substantially
higher. According to the Department, about 25 percent of the 830
proprietary schools that submitted financial statements during the
past 2 months have not properly documented whether they met the 85-15
standard. These schools may have met the 85-15 standard but
misunderstood the reporting rules, or they may have failed to meet
the 85-15 standard and intentionally not reported this fact in an
attempt to avoid or postpone losing their Title IV eligibility.
At the Chairman's request, we recently initiated a study to address
the core of this issue: Is there a clear relationship between
reliance on Title IV revenues and school performance? Using data
from national accrediting associations, state oversight agencies, and
the Department, we will attempt to determine whether greater reliance
on Title IV funds is associated with poorer outcomes, such as lower
graduation and placement rates.
TITLE IV-FUNDED TRAINING AND
LABOR-MARKET CONDITIONS
-------------------------------------------------------- Chapter 0:3.5
Annually, students receive over $3 billion from Title IV programs to
attend postsecondary institutions that offer occupational training
without regard to labor market circumstances. While Department
regulations stipulate that proprietary schools--the principal vendors
of occupational education and training under Title IV--provide
instruction to "prepare students for gainful employment in a
recognized occupation," schools are not required to consider
students' likelihood of securing such employment. Students who
enroll in occupational education programs, obtain grants, and incur
significant debt often risk being unable to find work because they
have been trained for fields in which no job demand exists.
Proprietary school students are particularly vulnerable in this
situation because, according to current research, unlike university
graduates, they are less likely to relocate outside of their
surrounding geographic region.\5
The Department's Inspector General (IG) recently estimated that about
$725 million in Title IV funds are spent annually to train
cosmetology students at proprietary schools, yet the supply of
cosmetologists routinely exceeds demand. For example, in 1990,
96,000 cosmetologists were trained nationwide, adding to a labor
market already supplied with 1.8 million licensed cosmetologists.
For that year, according to the Bureau of Labor Statistics, only
597,000 people found employment as cosmetologists, about one-third of
all licensed cosmetologists. In Texas, the IG also found that, not
surprisingly, the default rate for cosmetology students exceeded 40
percent in 1990.
At the Chairman's request, we have also initiated a study to address
this issue. States have information readily available to project
future employment opportunity trends by occupation. We are analyzing
its usefulness in identifying occupations that, in the short term,
have an over- or undersupply of trained workers. Using this data in
conjunction with databases from the Department, we hope to determine
the pervasiveness of this problem and the Title IV costs associated
with it. We expect to report our results on this matter to you early
next year.
--------------------
\5 Axel Borsch-Supan, "Education and its Double-Edged Impact on
Mobility," Economics of Education Review, Vol. 9, No. 1 (1990), pp.
39-53.
-------------------------------------------------------- Chapter 0:3.6
Mr. Chairman, this concludes my prepared remarks, and, as I
mentioned, we will be reporting to you in the near future on the
results of our ongoing work for the Subcommittee. I am happy to
answer any questions you may have at this time.
CONTRIBUTORS
---------------------------------------------------------- Chapter 0:4
For more information about this testimony, please call Wayne B.
Upshaw at (202) 512-7006 or C. Jeff Appel at (617) 565-7513. Other
major contributors to this testimony included Ben Jordan, Nancy
Kinter-Meyer, Gene Kuehneman, Carol Patey, Jill Schamberger, Tim
Silva, and Jim Spaulding.
*** End of document. ***