Fueled by a blitzkrieg advertising strategy and some questionable recruitment practices, for-profit colleges sporting billboard-friendly names like DeVry University, University of Phoenix, and ITT Tech have made big profits in higher education. But at what cost?

Big gains come under big scrutiny

While public and private not-for-profit institutions of higher education have historically claimed the lion’s share of college enrollments, for-profit colleges have made strong inroads recently, increasing enrollment by 418% since 2000.

The first crack in those rosy numbers emerged when the federal government noticed some unscrupulous behavior by for-profit colleges in their treatment of U.S. veterans, including “signing up brain-injured troops for classes, forcing unneeded student loans on veterans, and promising career opportunities through worthless degree programs.”

Closer inspection revealed that more than one-quarter of all for-profit colleges receive 80% of their revenue – typically in the form of grants, loans and GI Bill funding – from the federal government.

Stars and Stripes, an independent U.S. military newspaper, reports that since a revamped GI Bill took effect in August 2009, for-profit colleges have snagged 35% ($618 million) of all federal dollars spent on veteran education, while offering online programs that may “hinder veterans’ reintegration into civilian society.” And recently, Student Veterans of America yanked their charters for student clubs at 26 for-profit institutions – 14 of which were “military friendly” – for defrauding veterans and misrepresentation.

It turns out that for-profit colleges actually have quite a rap sheet when it comes to practices intended to boost enrollment (read: profits). Swindling students, using unscrupulous tactics to lure veterans and manipulating statistics to remain eligible for federal dollars is the norm – while recruiters downplay higher rates of unemployment and loan default that are more common for graduates of for-profit institutions.

Of equal concern: Marketing by for-profit colleges – on average about 22% of their budgets – pales in comparison to those of not-for-profit institutions, which averages about 1%. Reports show the for-profit education industry spends more on marketing than brands like Tide, Revlon and FedEx – and this spending can exceed what is spent on instruction.

For-profits underperform on student debt, earnings potential

For their part, for-profit colleges argue low-income students enroll at higher rates than at other institutions – thus driving up student loan default rates. But that explanation doesn’t hold up under scrutiny.

While for-profits educate a larger fraction of minority, disadvantaged, and older students, student loan debt carried by students earning associate degrees at those institutions in 2007-08 was $14,000 – almost double the median debt for their peers at non-profit institutions. Graduates of for-profit colleges are also more likely to be unemployed (and long-term unemployed), and make less annually than their peers who attended other institutions.

In other words, matriculating low-income students from for-profit colleges are more likely to remain low-income, and have less in earnings to pay down a more burdensome student debt, than their counterparts at non-profit higher education institutions:

Will student debt be the next economic bubble that pops?

Following a Senate inquiry in 2010, the Obama Administration proposed legislation designed to protect students by ensuring colleges were offering training that “leads to gainful employment.” The recommended standards would have restricted institutions from receiving federal aid if more than 45% of former students were unable to pay their loans. Institutions below that mark would be “restricted,” and those with less than 35% of students paying back their loans would be ineligible for federal funds.

But for-profit colleges were uncomfortable with the idea of losing federal funds if fully half of their former students defaulted on their loans. So they launched an all-out lobbying effort, spending more than double on lobbying in 2010 than they had in 2008-09 combined. And just like their investments in advertising, their big spending in D.C. ($16+ million) paid off.

The Department of Education’s final rules watered down strong consumer protection standards for taxpayer-subsidized for-profit institutions. Under the new rules, institutions can continue to receive federal funds even if nearly two out of three students have defaulted on their loans; or if annual loan repayments do not exceed 12% of total earnings (up from the proposed 8%); or the estimated annual loan repayment of a typical graduate does not exceed 30% of their discretionary income (up from 20%). [Full rules]

The new standards are expected to affect just 5% of institutions, yet for-profit colleges somehow feel like they’re getting shafted. “We believe this was an unnecessary and improper step that contributes to the overregulation of higher education institutions already face,” said Brian Moran, Executive Vice President of Government Relations and General Counsel for the Association of Private Sector Colleges and Universities.

If that’s the sentiment of a pro-profit education industry insider, they’re truly out of touch with 25% of their graduates, who face much higher rates of default and unemployment thanks in part to weak regulation of the for-profit education sector.

On the plus side, President Obama has moved to protect veterans from shady practices in the for-profit college industry, which is targeting Iraq and Afghanistan veterans and their accompanying GI Bill funding. The executive order, signed April 27th, 2012, will make it easier to crack down on colleges that use deceptive practices to enroll veterans. Praised by the VFW, American Legion and Student Veterans of America, the order came under fire from Rep. Jeff Miller (R-FL). Rep. Miller, recipient of $16,000 from the “Education” industry in 2011-12, called it “an unnecessary attack on the free market.”

Senator Tom Harkin has also proposed legislation to protect consumers utilizing for-profit educational institutions. His proposed bill would ban the use of federal education dollars in all marketing, advertising and recruitment by institutions of higher education. This ban that would apply to all institutions that accept federal education dollars, but few non-profit colleges would be affected thanks to relatively small marketing budgets.

You don’t have to be an economist to understand that for-profit institutions – just like other corporations – have profit as their top priority. But doing it on the backs of students and veterans by doubling tuition costs, pocketing taxpayer dollars to pad advertising budgets, and providing lower-quality outcomes doesn’t just hurt the nation’s economy – it may be leading to our next big economic bubble.