Proprietary or For-Profit Colleges and Universities

• Background
• Student Characteristics
• The Higher Education Act and For-Profit Colleges
• The Future of For-Profit Colleges and Universities

In the United States, the postsecondary educational landscape has been dominated historically by the existence of nonprofit public and private degree-granting colleges and universities. Over the past two decades, however, for-profit or proprietary colleges and universities have emerged as one of the fastest growing sectors of postsecondary institutions in U.S. higher education, with student enrollments continuing to grow at a rapid pace of nearly 10% a year. This entry examines possible legal issues that may arise in connection with proprietary or for-profit institutions of higher education in the United States.

Background

For-profit colleges and universities rely largely on student tuition to cover operating expenses and maintain a profit. Currently, for-profit colleges and universities enroll nearly 2 million of the approximately 20 million students enrolled at accredited two- and four-year colleges and universities throughout the United States. While forprofit colleges and universities in the U.S. still account for only a relatively small percentage of the total postsecondary student enrollment, publicly traded higher education corporations, such as the University of Phoenix, founded in 1976, are using the Internet on a large scale to deliver courses in their degree programs to students in the United States and abroad.
According to the U.S. Department of Education, students at for-profit colleges and universities are eligible to receive Title IV funds if the institutions provide at least a six-month degree or certificate program preparing students for employment in a recognized occupation, have been legally providing instruction in such capacities for a minimum of two years, and derive at least 10% of their revenues from non–Title IV funds, mainly tuition. At the same time, for-profit or proprietary colleges and universities are distinguished from traditional, not-for-profit higher education institutions in two major ways. First, the primary student outcome focus of for-profit colleges and universities is the employment of their student graduates, while traditional institutions tend to place a much greater emphasis on student learning and academic development even while preparing them for gainful employment. Second, compared to traditional public and private colleges and universities, for-profit colleges and universities receive less funding from Title IV governmental sources, such as the federal Pell Grant, Supplemental Educational Opportunity Grant (SEOG), and Perkins Loan programs.

Student Characteristics

Recent studies reveal significant differences in average student enrollment characteristics between traditional public and private postsecondary institutions and for-profit colleges and universities. For example, students enrolled at for-profit colleges and universities tend to be much older. The 2000 Futures Project study from Brown University indicated that the average age of a University of Phoenix student was 35 years, compared to the average student age of 23 years for those enrolled at a traditional public or private postsecondary institution. Additionally, student enrollment statistics reveal that for-profit colleges and universities disproportionately serve minority, low-income, and other traditionally underserved postsecondary student populations. Statistics from the College Board indicate that students attending for-profit colleges and universities incur significantly more student loan debt compared to students at public or private colleges and universities. For example, the average student attending a for-profit college or university for an associate’s degree incurs twoand- a-half times as much student loan debt as a student who attended a public community college. Students earning a bachelor’s degree and attending a for-profit college or university incurred 58% more student loan debt than students who attended a public four-year postsecondary institution, and 26% more loan debt than students who attended a private, four-year institution.

The Higher Education Act and For-Profit Colleges

Since 1972, for-profit colleges and universities have been eligible for federal student aid under Title IV of the Higher Education Act (HEA) of 1965. Eligibility for federal student aid under Title IV has spurred controversy concerning whether forprofit colleges and universities should be classified alongside other accredited, nonprofit public and private postsecondary institutions recognized by the federal government. Subsequent reauthorizations of the HEA have given for-profit colleges and universities both heightened credibility and visibility within the U.S. higher educational system.
At a time when for-profit colleges and universities are experiencing student enrollment levels at their highest levels and receiving billions of dollars in federal aid, largely targeting low-income students, competition among higher education institutions to recruit and enroll students is intense. One particularly negative legal consequence of this fervent competition for students has been the adoption of unethical student recruiting practices. For example, some of the more well-known forprofit colleges and universities, including the University of Phoenix, have been sued and accused of violating the provisions of the HEA, based largely on allegations of Fraudulently providing financial incentives to some of their admissions employees to enroll students. Among these cases concerned with for-profit institutions of higher education, the one with the highest profile involves the University of Phoenix.

United States ex rel. Hendow v. University of Phoenix

In 2003, in United States ex rel. Hendow v. University of Phoenix, former enrollment counselors sued the University of Phoenix under the False Claims Act (FCA), a federal statute that renders anyone liable who “knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or Fraudulent claim paid or approved by the Government” (31 U.S.C. § 3729(a)(2)). The two former employees alleged that officials at the for-profit university violated the Higher Education Act’s incentive compensation plan by knowingly offering them financial incentives to recruit students. Moreover, the plaintiffs alleged that officials at the University of Phoenix falsely obtained hundreds of millions of dollars in federal financial aid after making false statements to officials at the Department of Higher Education in order to obtain financial aid in the form of Pell Grants and other programs.
After a federal trial court in California initially dismissed the suit as baseless, the former admissions representatives sought further review. In United States ex rel. Hendow v. University of Phoenix (2006), the Ninth Circuit reversed in favor of the plaintiffs. The court was of the opinion that because the former employees presented evidence that university officials had made the claims that the plaintiffs alleged, the former employees had presented a valid claim under the FCA. Although the Ninth Circuit did not explicitly remand the dispute to the trial court, the case is set to go to trial in 2010, subject to any settlement agreement that the parties may reach in the interim.

The Future of For-Profit Colleges and Universities

Most recently, there have been discussions about imposing tougher federal regulations on for-profit colleges and universities. However, officials at the U.S. Department of Education have reassured investors in for-profit colleges that these institutions serve a valuable role in today’s competitive and growing higher education marketplace. While it is clear that for-profit colleges and universities are not without controversy, they have firmly established themselves in the modern era of higher education as a growing component of the U.S. postsecondary landscape. As for-profit colleges and universities continue to expand their use of technology to deliver their courses, compete with traditional public and private postsecondary institutions for students, and provide admission opportunities for less traditional postsecondary students, all indications are that student enrollments at for-profit colleges and universities will continue to increase.

See also Loans and Federal Aid
Further Readings
Berg, G. A. (2005). Lessons from the edge: For-profit and non-traditional higher education in America. Westport, CT: Praeger.
Lederman, D. (2009). Ferment over for-profit colleges. Inside Higher Education. Retrieved June 16, 2009, from http://www.insidehighered.com/layout/set/print/ news/2009/06/16/cca
Ruth, R. S. (2001). Higher Ed. Inc.: The rise of the forprofit university. Baltimore: Johns Hopkins University Press.
Tierney, W. G., & Hentschke, G. C. (2007). New players, different game: Understanding the rise of for-profit colleges and universities. Baltimore: Johns Hopkins University Press.
Legal Citations
False Claims Act, Pub. L. No. 99-562 (1986).
United States ex rel. Hendow v. University of Phoenix, 461 F.3d 1166 (9th Cir. 2006).