The Decision Threatening The Future Of For-Profit Colleges

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For 15 years the University of Phoenix conducted an incredible experiment. Fueled by the Internet and a take-all-comers approach, the private for-profit college became a massive national institution, earning hundreds of millions of dollars in the process. But on Monday, executives at Phoenix’s parent company, Apollo Education Group, declared the experiment a failure that had to end. The rest of the for-profit college community should be terrified of what that means for them.

Before it had 460,000 students in campuses across the country, Phoenix was a college that identified a gap in the educational market: working adult learners. These older students had some college experience or exhibited the discipline to successfully balance, work, life and academic demands. These students were not well-served by most traditional four-year institutions, many of which were on an endless quest for high-income 18-year-olds instead of older and poorer adults.

So in the 1970s Phoenix created a model attuned to this type of learner, complete with flexible schedules and programs paired to workforce demands. But Phoenix would not take just anyone: Enrollees had to be at least 23, work fulltime, have at least two years of employment experience, and have some college credit. It was certainly not selective in the way that status-seeking traditional colleges were, but Phoenix did say no to people who were not set up to succeed in its coursework.

Phoenix found a population waiting to be served. By 1994 it had 31,000 students—the size of most large public colleges. But the university wanted to be bigger, and Wall Street was ready to assist. In 1995, the university’s parent company went public and, before the decade was out, enrollment passed the 100,000 student mark.

There was just one problem: The population suited to Phoenix’s specific model was not big enough to keep meeting the quarterly investor demands for new students. Faced with the choice between maintaining quality but capping growth (and stock prices) or abandoning the core model in pursuit of profit, Phoenix’s age, work and other restrictions went by the wayside. A learning environment calibrated to a very particular set of students was suddenly welcoming anyone with a pulse.

A for-profit-friendly Congress and George W. Bush’s Department of Education helped fuel Phoenix’s expansion. In the mid-2000s Congress removed limitations that prevented colleges from offering more than half of a course via distance education, ushering in the online education boom. And the Department of Education undermined statutory requirements that prevented college recruiters from offering monetary incentives to enroll more students. A model willing to take anyone now truly could accomplish that goal through the Internet and it could handsomely compensate its employees to do so.

On paper, this open access approach seemed great for students who suddenly had more educational opportunities. The problem was the cost-to-value equation was off. Students who before could try a low-cost community college with little longterm risk if they did not finish were now asked to borrow thousands of dollars to try something. The result was like flooding the system with lottery tickets where the non-winners must keep paying for a decade.

The results for Phoenix were predictable: It grew by leaps and bounds, more than quadrupling its enrollment. And it created a business model for companies like Corinthian Colleges, ITT Technical Institute, and others to emulate.

It was easy to foresee the other half of the story, too. Phoenix ran afoul of the weakened rules on compensating recruiters. Axia College, which the company created in 2004 to offer two-year programs, suffered from poor quality and was eventually merged into the main college. The Senate Health, Education, Labor and Pensions Committee started investigating what was going on and a Democratic administration that was less friendly to for-profit colleges started closing loopholes and introducing new regulations.

The descent was not pretty. More than a hundred campuses closed. Enrollment halved and kept dropping. A special learning platform built by top-notch engineers had technical difficulties so significant the company says it hurt retention rates and is being dropped for other commercial options. Phoenix’s peers in the for-profit education market started shrinking too. One went bankrupt; another is exiting the market. Still others might fold.

On Monday, Phoenix’s parent company ended the experiment and announced that it was considering implementing new admissions criteria that would limit the number of underprepared students it enrolls. It is also closing most of those problematic associate degree programs once housed under the Axia brand.

Phoenix is making the right call, but years too late. While it was tarnishing its brand in pursuit of growth at all costs, other companies like Strayer and Capella kept some standards intact and maintained a better reputation. Moving back into a market that has some degree of admissions standards will also put it back into competition with regional public universities that will always look better in terms of cost. And that’s to say nothing of how Phoenix’s investors might respond to a new approach that willingly puts quality ahead of short-term profits.

Still, even Phoenix’s diminished size is more than 200,000 students. And much like tobacco companies, it is actively pursuing opportunities in foreign markets. The company is not in great shape, but it is probably not in a tailspin yet.

It’s the bottom of the publicly traded college market that should be most worried about Phoenix’s repudiation of the “take everyone” model. Corporations like ITT or the Education Management Corporation are already fighting to stay in business and do not have the cash to sustain the large student losses that would come with a willingness to say no to unprepared applicants. And moving upmarket would mean completely changing their business, not just ending some bad experiments.

John Sperling, the University of Phoenix’s founder, died last August at the age of the 93. During his time as the head of Phoenix he showed that the right combination of factors could drive a university to a size and scale far beyond what anyone had previously imagined. But if Phoenix and the rest of the for-profit sector want to rise again, they need to recognize the truth: It was Sterling’s original vision, not the gargantuan Wall-Street-backed monster it became, that was the right model.

Ben Miller is the Senior Director for Postsecondary Education at the Center for American Progress.

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