For-Profit Higher Education: Growth, Innovation and Regulation. Part I

During the 2008-2009 academic year, there were nearly 1.8 million students enrolled at more than 2,800 for-profit institutions of higher learning in the United States. Students in for-profit colleges and universities accounted for over 9% of all students enrolled in postsecondary education.1 The numbers have continued to grow, and today (2010) the number is rapidly approaching two million, about 10 percent of total student enrollments. The industry has also grown significantly in recent decades. Enrollment in for-profits has increased nearly six-fold since 1986, a time when the sector only enrolled about 2% of all students.3 Once an insignificant part of the higher education landscape in the United States, for-profit institutions now command a substantial portion of the market and have established themselves as legitimate and viable participants in the postsecondary education arena.

The growth of for-profits is due, in no small part, to the variety of institutions and offerings the sector provides. Institutions range from small vocational and technical schools that offer hands-on career training to large fully-accredited colleges and universities that offer a traditional classroom experience. Many for-profits offer non-degree programs and technical certificates, however associates, bachelors, and doctoral programs, once reserved primarily for traditional universities, are now offered by institutions within the for-profit sector.

Traditional public and private nonprofit institutions of higher learning are similar to for-profit institutions in that they are all providers of instruction at the postsecondary level. The traditional universities and for-profits differ, however, in their control, operation, and mission. Traditional universities are configured as nonprofit organizations whose stated mission often invokes a service of the public good. In contrast, for-profits are structured as profit-maximizing firms whose success depends on providing a valuable service to the student/customer. For-profit institutions can only be profitable if they are able to provide a service that is valuable to the student.

While traditional colleges and universities rely heavily on government appropriations and private donations, for-profits must be self-sufficient and respond to market forces to be successful. The marketplace naturally forces for-profit institutions to offer an educational product that is valuable to students and to do so at a reasonable price. Traditional institutions, however, are not always subject to this threat of “creative destruction.” The recent growth and success of for-profits at a time when many traditional universities are struggling financially serves as a testament to the viability of the sector.

The recent growth of the for-profit education industry has aroused some criticism and concerns about the place of profit in an educational setting and practices within the industry. Critics argue that for-profit universities are simply diploma mills that push students through programs of dubious quality with the primary goal of increasing the firm’s bottom line. Supporters of the industry assert that it provides educational opportunities to traditionally underserved students in areas of study that directly increase students’ employability. While neither extreme view is likely to be completely accurate, there is no doubt that for-profit educational institutions are becoming a much more prominent part of the higher education landscape. The primary purposes of this report are to provide an objective overview of the industry and its students, to discuss operational differences between the traditional educational sector and for-profits, to assess the regulatory environment facing the industry, and to examine the economics of education as a profit-making enterprise.

A View from the Inside

In preparing this report, we considered it important to talk to leaders in the for-profit education industry. We talked to many different senior officials with for-profit institutions, for example, Randy Best (several interrelated higher education companies), Andrew Clark and Jane McCauliffe of Bridgepoint Education, Mark Pelesh, a senior vice president of Corinthian Colleges, Andrew Rosen and several other associates at Kaplan Higher Education, Richard Bishirjian of Yorktown University, and Michael Clifford, a person intimately involved in financing or supporting several major companies. We also talked to lower level professional personnel, including faculty, at several other schools, such as ITT Educational Services and Rasmussen College. In part to avoid revealing any sensitive information or assign viewpoints to specific individuals who preferred to remain anonymous, we avoid specific quotes in the following discussion.

One thing was clear from talking to everyone above, in marked contrast to talks with similar high ranking people in the nonprofit sector: the focus is strongly on the student—what does she or he want taught? How can we get better learning outcomes in a cost effective way? Should we offer new courses or programs? In conversations with presidents of major nonprofit universities, conversation often turns to issues associated with raising money from third parties, the difficulties of dealing with intercollegiate athletic issues, the problem of exploding costs at university hospitals, the difficulties in measuring and convincing the federal government about research overhead expenditures, the rankings of the college in various magazines, and a host of other matters not directly related to pleasing the undergraduate customer.

Yet it should be stressed that the for-profit community is far from uniform in its views of some issues. Take accreditation. Two of the individuals interviewed were very hostile to current accreditation procedures, one going so far as to suggest that accreditation barriers were the single biggest obstacle to offering quality low cost education to American students. The second made a strong case that both accrediting rules and potentially damaging federal government regulations were the single biggest obstacle to entering business, arguing that for a small higher education start-up company with, say, $5 million or less in assets, it often takes literally millions of dollars to receive accreditation and rights to engage in business in multiple states. Both individuals noted the irrationality of having firms engaged in business nationally often having to receive approval from multiple regional accrediting agencies or state licensure agencies.

Yet others took a different position. At least two of those interviewed said accreditation agencies sometimes did irrational and costly things, but also provided implicitly an endorsement of achievement of at least minimal quality standards, useful in achieving customer acceptance. As a segment of the industry without a long-standing academic reputation, the for-profits often find the accreditation endorsement crucial to winning consumer acceptance, independent of the fact that students cannot borrow money via the federal student loan program without accreditation. Moreover, they acknowledged accreditation did help sometimes get rid of diploma mills and other consumer scams that reduced the reputation of the entire sector, hurting business for all the legitimate operators. In general, smaller firms were more critical of accreditation than larger ones. At least one individual with a smaller enterprise argued that accreditation should be favored by the big firms because it served to reduce new startup competition.

Yet on most issues there was more agreement than disagreement. All thought that both online and live human instruction would play a role in the future. Everyone thought that the future was generally bright, and that demand for proprietary higher education in the United States is far from saturated. Some thought, however, that international expansion was desirable because of an inevitable slowdown in American demand growth sometime in the not-too-distant future (and one favored it because of what was viewed as excessive regulation of firms in America relative to some other countries), while others believed they had their hands full expanding within the United States. Reaching new market niches appealed to some, such as introducing college courses more aggressively to high school audiences, a market segment others found relatively unappealing. One or two leaders talked about entering the traditional liberal arts oriented market of residential styled colleges in at least small ways, while others considered it unadvisable to compete head on with established (and always subsidized by third parties) traditional providers.

One huge difference between for-profit and traditional institutions relates to facilities. The for-profit institutions have fewer square feet of space per student (even excluding online programs), use their space more intensively and, most important, generally do not own it—they rent from private entrepreneurs. The for-profit sites we have visited generally were clean, well lighted with good temperature controls, and ample parking. But they did not have fancy atriums, expensive art work, etc., and little or nothing in the way of recreational facilities or other non-instructional “frills” for students. 

We asked several executives, “why do you rent most of the space you use, instead of own it?” One response was the one we expected: “we are experts in the education business, not the real estate business.” Another was, “in this environment with vast vacancy in commercial office space, it is possible to get real value by renting, conserving our capital.” Still a third response emphasized flexibility—if you own buildings you have a vast fixed cost, which is reduced dramatically with short to medium length lease agreements. Rental allows schools to respond with respect to their space needs more quickly to changes in student demand with respect to both location and subject matter.

There was particular reluctance to talk on the record about current policy issues relating to higher education, one reason we decided to not explicitly quote individuals in this essay. It is fair to say that concerns are very high (changes in stock prices of for-profit firms in response to policy announcements are often fairly substantial, suggesting considerable investor nervousness on this point). In general, executives felt the Bush Administration was mostly sympathetic and willing to work with the for-profits, while the Obama Administration is more hostile. Changes in student loan policies were not pleasing, as student borrowers must now deal with a single loan provider rather than a multiplicity of private providers. While the expansion of Pell Grants was welcomed, statements by administration officials singling out forprofits for questionable behavior have frightened and angered some senior executives.

More than one executive pointed out that both state and federal government lack the resources to vastly expand colleges, something that seems implicit in presidential goals for high rates of higher education attainment. As one person put it, “the State of California is not going to build eight new campuses for the University of California.” They note that the proprietary schools are already picking up a significant portion of the incremental college enrollments, and disproportionately serve underrepresented populations. Some argued that putting up higher barriers to entry (unreasonable licensing requirements for online providers for example) actually makes it more difficult to meet stated goals with respect to college attainment. The so-called “90/10” rule limiting the proportion of revenues generated from federal financial aid programs was mentioned as a barrier by one respondent, but was something of secondary importance to most of those interviewed.

Regarding faculty, none of those interviewed viewed the prospect of faculty unionization as a threat. We asked whether they expected to make greater use of even lower cost faculty in oversea locales, such as Indian instructors of mathematics, but generally found that little effort was being made to aggressively do this, although some did not rule it out. Most saw no problem with obtaining relatively reliable and inexpensive staff in coming years as enrollments grow. Some admitted that they “piggy back” off other nonprofit universities, and using moonlighting faculty from traditional universities sometimes gives them an advantage (since these instructors often work for less than the average salary they receive per course from other schools.).

Despite regulatory concerns, all the individuals we talked to were bullish about the future, planning significant investments in coming years. As indicated before, some are increasing their attention beyond the market niches currently favored by for-profits—the adult, vocationally-oriented market. A majority predicted more consolidation of firms will occur, although perhaps not for several years. The recent practice of for-profits buying nonprofit institutions may even accelerate, one or two of those interviewed thought.

History of For-Profit Education

The roots of market-based education stretch as far back as classical Greece in the fifth century B.C., when proprietary schools and travelling teachers for hire, known as sophists, provided instruction to students willing to pay for their services. The Greek citizenry’s growing demand for educational services combined with the freedom of educators to establish private for-profit schools led to the emergence of a nimble educational system, which was particularly prominent in Athens. In response to the needs of the students and their families, educators taught the subjects students wanted to learn.

Competition among sophists and proprietary schools was brisk and produced two beneficial outcomes for the consumers of education: affordability and quality. Since there was no state-run monopoly on the provision of education, there always existed the threat that one school could undercut the tuition of another, which kept fees at reasonable levels. Education was not just a luxury for children from wealthy families; underprivileged families were also able to send their children to school, if only for a short time.5 Competition in the marketplace naturally maintained quality in the Athenian educational system. Able teachers whose lessons were valuable to students thrived, while teachers who provided instruction of questionable quality and value were swiftly forced out of the market.

The proprietary educational system in Athens was adept at responding to the changing demands of students and was able to provide tailored educational offerings to a varied array of students. Sophists, motivated by potential profit, travelled to areas where their services were in most demand and subsequently modified their offerings to their new customers’ needs.As Greek society developed and changed over time, so too did the offerings of Athenian teachers in response to the changing needs of their customers.

Educational outcomes were outstanding for that period in history; literacy rates in Athens were the highest of any area in the West at the time, which allowed commerce to flourish and was instrumental to the ascendancy of Athens as a bastion of quality education and an intellectual and cultural powerhouse.6 Market forces shaped one of the most successful educational systems in the classical world in which affordability, quality, and flexibility were maintained naturally by the forces of competition and responsiveness to the demands of consumers.

The proprietary educational system in Athens was so successful because of its ability to adapt to the ever changing wants and needs of its students; profit acted as an incentive for educators to provide instruction that was in demand. Swift adaptation to the demands of the customer was an aspect of forprofit education that was vital to the success of the Athenian system, but which has also been an important component of for-profit education ever since.

Historically, for-profit institutions have been the first to step in when an instructional vacuum has existed, created by the inability or unwillingness of the educational establishment to adapt to the changing needs of students. Private instructors in commerce during the Renaissance provide another example of this phenomenon. While traditional universities were primarily focused on classical scholarly pursuits during the era, merchants employed private instructors to deliver lessons in accounting.7 A focus on teaching skills readily applicable to the working world is another theme that has been important to the provision of for-profit education historically, and which is still important to the industry today.

The beginnings of proprietary education in America date back to the mid seventeenth century when Dutch settlers established private, evening schools. As the colonies developed and commerce expanded, there grew a strong demand for instruction in disciplines important to employment, including surveying, navigation, and accounting.8 Since these subjects were not traditionally taught in the colleges of the era, proprietary for-profit institutions stepped in to fill the void.

Early colonial colleges such as Harvard, William and Mary, and Yale were established as offshoots of organized religion. As such, their curriculums were rigid and focused primarily on theology, ancient languages, and philosophy. During the late colonial period through the mid nineteenth century, however, there grew a demand for instruction in the areas of business, farming, and engineering that was not adequately satisfied by the classical colleges. By 1800, farmers’ organizations were imploring colleges to provide education on the rapidly developing science of agriculture, but the colleges were unwilling to change their curricula. The first traditional agricultural college was not established until 1855. During this halfcentury gap, a host of successful for-profit agricultural schools sprang up to satisfy the demand.

Modern for-profit universities can trace their lineage primarily to the proprietary business schools that emerged as a dominant force in education in the United States during the nineteenth century. In 1850 only twenty such institutions existed, while by 1890 there were around 250 in operation with total enrollment of 81,000 students.10 At the height of the Industrial Revolution, these schools satisfied a strong demand for practical skills training that was not provided by traditional universities of the era.11 An 1873 U.S. Bureau of Education report stated, “The rapid growth of the schools and the large number of pupils seeking the special training afforded by them sufficiently attest that they meet a want which is supplied by no other schools in an equal degree.”12 The most influential of the early for-profit business schools were the Bryant and Stratton colleges, established in 1852. The Bryant and Stratton schools developed some of the efficiency-enhancing tactics used by modern multi-campus for-profit universities today such as textbook and curriculum standardization.13 Several of the pioneer for-profit business schools are still in operation today including Strayer University and the now nonprofit Rider University.

The growth in the for-profit higher education industry sped up in the mid twentieth century following World War II, when federal financial assistance for students increased. Under the GI Bill, for-profit institutions became qualified to accept students taking advantage of the legislation’s benefits. Further accelerating the growth of the sector was the reauthorization of the Higher Education Act in 1972 which permitted tuition subsidies, like the Pell Grant, to be used by students at for-profit institutions.

With the introduction of federal student funding to the for-profit sector came a wave of scandals and fraud. A host of disreputable “schools” were established with the sole purpose of cashing in on the influx of federal money. Government investigations quickly followed and the industry was eventually purged of most illegitimate operations. By the 1990’s the industry was strongly regulated at the federal level to prevent abuse.16 The emergence and subsequent removal of fly-by-night scams in the industry left, for the most part, only legitimate for-profit institutions in the industry. This cleansing set the stage for the increasingly prominent position for-profits occupy in the education space today.

Recent Trends in Student Characteristics and Enrollment

The for-profit higher education sector in the United States has grown swiftly over the past two decades. As shown in Figure 1, in 1986 these institutions enrolled just over 300,000 students, while by 2008 enrollment had climbed to nearly 1.8 million.17 The growth of the sector has significantly outpaced the growth of traditional nonprofit institutions and the higher education industry as a whole. From 1986 to 2008, the for-profit sector grew at an average annualized rate of 8.4%, while public universities and private nonprofit institutions grew at 1.6% and 1.4% per year, respectively, for the same 22 year period.

While the absolute change in for-profit enrollment has been impressive, even more revealing of industry’s increasing prominence is the share of the total higher education market that is has been able to capture. For-profit market share, as defined by its share of total students enrolled in institutions of higher learning in the United States, stood at 9.2% in 2008, up from just 2.4% in 1986, as shown in Figure 2.

For-profit institutions satisfy a real and growing demand for their educational services, as evidenced by the significant share of the total market they have been able to capture. A closer look at the characteristics of students enrolled at for-profits indicates that the growth of the sector has been achieved, in part, by providing educational opportunities for students historically underserved by traditional institutions of higher learning. As shown in Figure 3, for-profit institutions generally serve an older student population. In 2007, more than half of all students enrolled in for-profit institutions were older than 25, while only one quarter to one third of students enrolled in traditional private nonprofit and public universities were 25 or older.


Serving racial minorities has also been instrumental in the growth of the for-profit sector. As shown in Figure 4, students enrolled in for-profit universities represent a much more diverse group than do students in traditional public and private nonprofit universities. In 2007, students who are black, Hispanic, Asian, or American Indian accounted for nearly 40% of total enrollment in for-profit schools, while the same groups accounted for only 31% and 25% of enrollment in public and private nonprofit universities, respectively.

Female students have outnumbered male students in higher education in the United States in recent decades, but the trend is much more pronounced within the for-profit sector. As shown in Figure 5, female students make up 64% of enrollment in for-profit institutions, while in public and private nonprofit institutions females account for 57% and 58%, respectively, of total enrollment.22 Not only do women outnumber men in for-profit universities, but their enrollment has grown at a much faster rate. From 1986 to 2007, female enrollment in for-profits grew at an average annualized rate of 9.6%, while male enrollment grew at an average annualized rate of 5.9%.23 The growth in female enrollment at for-profit institutions has also outpaced the growth in female enrollment at traditional schools, as seen in Figure 5.

As is the case with all sectors of higher education, undergraduate students outnumber graduate students by a significant margin at for-profit institutions. As can be seen in Figure 6, graduate students account for 13% of enrollment at for-profit institutions, which is very similar to the proportion of graduate students at public institutions (10%), and the proportion of all students enrolled in an institution of higher learning (14%).


Most students enrolled in for-profit schools choose to pursue their education full time. Surprisingly, the proportion of full-time students in for-profit institutions is higher than in the traditional public and private nonprofit universities. As Figure 7 shows, 79% of student at for-profits study full time, while the proportion stands at 57% and 74% for public and private nonprofit institutions, respectively.

Scope of the For-Profit Higher Education Industry

The for-profit sector of higher education in the United States is in no way monolithic; there exists tremendous variety among institutions in terms of program offerings, degrees awarded, and learning venue. Institutions range from small certificate granting institutions that focus primarily on specific vocational skills to institutions that offer a wide variety of courses and traditional undergraduate and graduate degrees.


During the 2008-2009 academic year there were over 6,700 institutions of higher learning in operation in the United States of which about 2,900 were private for-profit schools.26 While for-profit institutions account for more than 40% of the total schools in operation, students enrolled in these schools account for only 9.2% of the all students enrolled in an institution of higher learning. Consequently, the average for-profit school is quite small in comparison to the average public or private nonprofit institution. The average for-profit institution enrolls only about 600 students, while the averages for public and private nonprofit stand at 7,000 and 2,000 students, respectively.


Most students in the for-profit sector enrolled in a degree or certificate-granting program. Ninety nine percent of students enrolled in a for-profit school are seeking an associate’s, bachelor’s, or graduate degree, or a professional certificate. Only 38% of for-profit institutions, however, actually grant traditional undergraduate or graduate degrees.

In terms of the types of degrees offered, for-profits are well within the domain traditionally dominated by public and private nonprofit colleges and universities. The areas of study in which the degrees are offered, however, differ dramatically between for-profits and nonprofits. Because for-profit colleges and universities cannot rely primarily on public funding, they must be able to recover nearly all costs associated with the provision of their product in the form of tuition. For this reason, for-profits tend to focus on degree programs with measurable skill outcomes that are more likely to pass a costs-benefit test for students. An analysis of the disciplines in which for-profits offer the most degrees reveals that the majority of for-profit students are focused primarily on acquiring skills that will directly increase their value in labor markets. During the 2000-2001 academic year, 29.3% of all BA degrees awarded by public universities were in the arts and sciences disciplines, while only 0.3% of all BA degrees awarded by for-profit institutions fell within the arts and sciences. For the same academic year, 18.9% of BA degrees awarded by public institutions fell within the category of Business Management and Administrative Services, while 56.1% of BA degrees awarded by for-profits were within the same category.

As discussed earlier, the for-profit area of higher education contains a large number of institutions relative to the total students enrolled in the sector, resulting in a relatively small average institutional size. While this is true, the industry is actually dominated by a handful of very large institutions, some of which dwarf even the largest public university systems in the United States. Large multi-campus forprofit schools that offer both brick and mortar and online programs have become the driving force in the industry in recent decades. In terms of size, profitability, and corporate structure, these firms, such as the dominant Apollo Group, are similar in nature to other major US corporate powerhouses. As can be seen in Table 1, the largest 15 firms in the industry enroll nearly 60% of all students in the for-profit sector.

Major Industry Players

While there are literally thousands of schools offering post-secondary instruction on a proprietary basis, a relatively small number of industry leaders control a significant share of the market. Three of the largest firms are discussed in more detail below.

Apollo Group

By any measure, the Apollo Group (APOL) is overwhelmingly the leading player in the for-profit education industry. APOL’s beginnings can be traced back to 1973, when John Sperling founded an adult education program that worked with traditional institutions to provide educational offerings to nontraditional students. The firm’s focus on providing learning opportunities to an older demographic was a key element in its growth and dominance in the industry. In the early 1970’s, Sperling conducted research on the accessibility and quality of educational offerings for working adult students. He found that the limited availability of evening classes and academic support offices that were only available during regular business hours made it difficult for working adults to earn a degree without significant hassle and in a reasonable period of time. Sperling’s research provided the motivation to establish the University of Phoenix in 1976. The institution’s initial focus was to help the working adult student who already had some undergraduate credits finish his/her degree in a reasonable amount of time. In fact, until recently, the University of Phoenix would not admit students under 23 years of age. By focusing on the nontraditional student and avoiding the traditional higher education demographic, the University of Phoenix was able to carve out a highly successful niche market and become a dominant force in for-profit sector.

APOL’s meager beginnings stand in stark contrast to the firm’s position today. During the 2008–2009 academic year, APOL’s schools enrolled nearly 400,000 students. This enrollment represents a market share of about 21% within the for-profit sector and nearly 2% of all students enrolled in an institution of higher learning in the United States.38 APOL provides flexibility and accessibility for its customers, as students can choose to work towards more than 100 degree programs either online or at one of the institution’s 74 campuses and learning centers located across the country in 39 states. The firm has also performed exceptionally well financially. In 2009, APOL’s revenues stood at $4 billion and it turned a profit of $598 million.40 APOL is part of the S&P 500 index and had a total market capitalization of over $11 billion in 2009. As of this writing in May 2010, that valuation had declined somewhat, to above $8.7 billion, in part because of growing concerns about federal regulatory restrictions on the industry, which will be discussed later in this report.

APOL’s ascendency to the dominant position in the for-profit higher education space has not been completely smooth sailing. For example, in 2008 APOL was ordered to pay shareholders $280 million in damages as the result of a suit filed against the firm. The plaintiffs claimed APOL had withheld information contained in a damaging Department of Education report accusing the University of Phoenix of employing deceptive and aggressive recruitment tactics.

Education Management Corporation

As measured by total enrollment, Education Management Corporation (EMC) is the second largest forprofit education company. While the firm is an undoubtedly important player in the industry, enrollment in EMC’s schools (136,000 in October of 2009) is only a third of the size of total enrollment in Apollo Group schools.43 Founded in 1962, EMC focuses primarily on career-focused program offerings provided in both a traditional classroom setting and online.44 EMC is somewhat unique in terms of the market it serves. Almost half of the company’s students are “traditional” and over 70% choose to pursue their program in a campus based setting.

EMC serves its students through four distinct institutional brands, each with a specific focus on career training: the Art Institutes, Argosy University, Brown Mackie College, and South University. With 45 campuses and a total enrollment of 76,500 students, the Art Institutes is by far the largest of EMC’s operations.46 The Art Institutes offer art training that provides specific career-oriented skills such as graphic design, media arts and studies, culinary training and fashion.47 With 20 campuses and nearly 24,000 students, Argosy University is EMC’s second largest operation.48 It too focuses primarily on career skills, specifically the growing fields of education, health sciences, business, and behavioral sciences. The rest of EMC’s students are enrolled in either one of the Brown Mackie College campuses or a South University campus. These schools also focus primarily on in-demand career skills.

EMC has been successful in growing enrollment consistently, which is likely due to their specific focus on career training. In delivering these programs, however, the company has taken a somewhat unique accreditation strategy.49 While many for-profit providers seek accreditation from a single source for all campuses and operations, EMC has chosen to use multiple accreditors. The Art Institutes and Brown Mackie College use multiple accreditors, while Argosy University and South University each use a single accrediting body.

In 2006, EMC was taken private by a consortium of investors only to reemerge as a publicly traded company in 2009. Since becoming a publicly traded company again in 2009, the firm’s stock price has remained relatively flat, likely due to a more hostile regulatory environment and somewhat inconsistent profits. Despite this, EMC still has a total market capitalization of around $3.1 billion (May 2010) and generated a profit of over $100 million for the firm’s 2009 fiscal year.

Career Education Corporation

Founded in 1994, Career Education Corporation (CECO) is the youngest of the three largest for-profit schools. The firm was established primarily to acquire existing schools and was able to grow rapidly during the decade after its founding by employing this strategy. CECO went public in 1997 and used the proceeds from the sale of its stock to fuel its acquisition and growth strategy. Today, the firm has 90 campuses with a total enrollment of 116,000 worldwide. Consistent with the career-focused theme within the for-profit education industry, CECO offers degree programs in design, business, culinary arts, and health services across a variety of institutional brands such as American InterContinental University Colorado Technical University, International Academy of Design & Technology and Le Cordon Bleu North America. Nearly 40% of Career Education’s students choose to pursue their degree programs online.

Along with the firm’s rapid growth in the decade after its founding came a wave of scandals and controversy. CECO was sued by shareholders claiming misrepresentation in 2003 and 2004. The company was also investigated by its accreditors and was even featured in a 60 Minutes special that exposed unethical recruitment practices carried out by some of the company’s employees in 2005. In response to the scandals at CECO’s schools, the Department of Education prevented the company from expanding or opening new branches beginning in 2005. This restriction was lifted in 2007. Despite the scandals that plagued the firm, CECO has continued to be profitable, although its stock has remained relatively flat since the scandals began in the middle part of the 2000’s. Nonetheless, with a $2.5 billion capitalization it remains an important player in the industry.

At the time of this writing, there is considerable controversy relating to the accreditation of American InterContinental University by the Higher Education Commission (HEC), the accreditation division of America’s largest regional accreditation association, the North Central Association. The Inspector General of the U.S. Department of Education issued a report that was scathing in its denunciation of the HEC for granting American InterContinental accreditation, arguing that practices of that institution regarding the awarding of credit were inappropriate. The report produced shock waves both in the accreditation and for-profit higher education communities because of the harsh remedies recommended by the Inspector General, including a proposal to strip the HEC of its accreditation powers.

Other Leading Firms

As indicated above, there are many other leading firms, several with more than billion dollar capitalizations. Strayer Education, for example, which is concentrated in the states surrounding Washington, D.C., is smaller in terms of enrollment than any of those discussed above, but is exceedingly profitable, with post-tax profits exceeding 20 percent of revenues, and a total market capitalization greater than either CECO or EMC. Several other publicly traded companies are large in size, including, for example, Corinthian Colleges, Capella Education, DeVry, and ITT Educational Services. Some large companies are part of larger corporations with noneducational operations (notably Kaplan Higher Education), or are privately held (e.g., Laureate Education).

Financial Performance of the For-Profit Industry

In an era when many public and private nonprofit universities have struggled financially, for-profit institutions of higher learning have, for the most part, been financially successful. Further, this financial success has come in the absence of direct government appropriations to for-profit institutions, something upon which traditional colleges and universities are heavily reliant.

The equity shares of most of the top players in the for-profit industry are traded on major U.S. stock exchanges. These are not insignificant stocks; in late 2009, the combined market capitalization of the twelve largest firms stood at $30.6 billion.64 Investors have been extremely confident in the industry’s viability and continued success, as evidenced by the performance of many for-profit education stocks. CCAP has constructed a stock index that includes the largest twelve for-profit education companies. The CCAP For-Profit Higher Education Index (FPHEI) is market capitalization weighted, just as the S&P 500 Index.As seen in Figure 8, for-profit education firms have significantly outperformed the market. The FPHEI increased in value by over 700% from June 1996 to December 2009, a period during which the S&P 500 Index increased by 56 percent.


The FPHEI grew relentlessly until peaking in 2004. Until 2004, many of the for-profit stocks were viewed by investors as strong growth companies that had nowhere to go but up. This is due, in part, to continued profitability as well as strong enrollment growth in the industry. Since 2004, the index has seen much more volatility. This can be explained by questions raised by some observers about recruitment and other practices in the industry and a subsequent fear of increasing government scrutiny and regulation as for-profits continue to grow more dominant in higher education. Nevertheless, an investment in the index in 1996 would have vastly outperformed the broad market.

Strikingly, during the precipitous decline of broad stock indices induced by the global financial crisis, the FPHEI has grown. For almost the entire period that the S&P 500 was on a downward trajectory during 2008 and into 2009, the FPHEI was on an upward trajectory. During that period, the S&P 500 was cut almost in half, while the FPHEI grew by nearly 60%. The FPHEI tends not to correlate highly with the broad market, and in recent years it has become somewhat countercyclical. This counter-cyclicality is likely explained by the nature of the product offered by these firms. During an economic downturn, many workers may take the opportunity to pursue additional education to increase their value in the labor market in anticipation of an economic rebound. Interestingly, for-profit institutions are uniquely positioned to respond to this demand since the firms are to able cover their operational expenses primarily from tuition revenues. The same can certainly not be said for public universities, whose budgets are often significantly affected by state governments during recessions.

The performance of for-profit education stocks represents the culmination of a transformation of the proprietary education industry. Historically, for-profit education was dominated by small independent trade schools, while in recent decades the industry has come to be dominated by large publicly traded corporations that offer educational programs once the domain of only public and private nonprofit colleges and universities. This transformation is simultaneously indicative of a growing demand for an alternative to the traditional higher education model and the engine that fueled the capacity growth necessary to satisfy the growing demand.

While the shift of for-profits towards large corporate structures has been vital to the growth of the industry, some observers have raised concerns about how the trend may negatively affect the quality of the educational offerings these firms provide. Some argue that a harmful culture of growth permeates the management of the largest players in the industry and that by focusing primarily on short-term profits the product could suffer. It is not inconceivable that there exists an incentive to admit and push through as many students as possible regardless of qualifications and the likelihood that the students will be able to complete the degree program. Such practices could certainly increase short-term profits. However, such actions also represent an unsustainable business model. Students are ultimately only willing to pay tuition or incur debt to do so if the benefits of the degree outweigh the cost, or at least there is a perception that such is the case. If for-profit institutions were to consistently provide watered-down and low quality offerings, the customers would simply not be there.

Standing as a testament to the viability of the sector are two for-profit education firms that went public during the depths of the global financial crisis when only a handful of companies were able to stage successful Initial Public Offerings (IPO). Grand Canyon Education, Inc. (LOPE) went public in November 2008 at an initial share price of $12. At the time of this writing, its shares were trading around $25.66 LOPE is a non-denominational university based in Phoenix that enrolls more than 22,000 students in both classroom-based and online courses. Bridgepoint Education (BPI) was the most recent pure play higher education IPO. The firm enrolls more than 25,000 students in its Ashford University and University of the Rockies operations. It went public in April of 2009 at an initial share price of $10.50. At this writing, BPI was trading for around $24 per share.

The success of these two IPOs during some of the most extreme financial turmoil in decades is further proof of the confidence investors have in the for-profit education industry. The companies were almost the only significant new IPOs during the financial crisis, yet not only were they successfully launched as public companies, their stock has risen sharply at a time of investor pessimism. Both have market capitalizations today exceeding one billion dollars.

While no two for-profit education firms are exactly alike and the industry is comprised of institutions that vary in size, scope, and program offerings, most of the largest firms in the industry are consistently profitable. This fact is the primary reason that investors have shown such faith in the equities of the major players in the sector. An analysis of the four largest firms in the sector as measured by total market capitalization (Apollo Group, ITT Educational Services, DeVry, and Strayer Education) indicates this trend of profitability.

For the past four years, all four firms have generally seen double digit revenue growth ranging from a low of around 8% to a high of nearly 34% year-over-year growth. Profits have also grown consistently in recent years. All four firms have been able to turn a significant portion of their revenues into profits. Profit margins for the firms range from 11% to 23% for their 2009 fiscal years. The return on equity the managements of these firms have been able to generate has also been impressive. At this writing, return on equity ranges from a low of 24% for DeVry to a high of 184% for ITT Education services.

Economic theory would suggest that where rates of return on investment are high and demand is growing rapidly, the lure of profits will draw new entrants into the field, ultimately lowering abnormally high rates of returns to existing dominant companies. The Grand Canyon and Bridgepoint experiences are examples of this theory playing out, as well as many privately held companies that are new but relatively well established (e.g., the companies controlled by Dallas merchant banker and entrepreneur Randy Best), or are beginning to emerge (e.g., Yorktown University). The relatively high stock valuations investors place on the for-profit companies are consistent with the view that investors believe that growth for these companies will continue to be robust, implicitly suggesting they will continue to gain market share at the expense of traditional colleges and universities.

Revenues and Expenditures: For-Profits Employ a Different Strategy

Among the many differences between for-profit institutions of higher learning and traditional public and private nonprofit institutions, perhaps the most striking is the source of their revenues and expenses. In contrast to the traditional sectors of higher education, for-profits exist to provide their owners with returns. Further, for-profits are subject to taxes and scrutiny by regulatory agencies such as the Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC), and receive little, if any, direct appropriations from governments. These differences between for-profits and traditional institutions of higher learning lead to very different revenue and expense management strategies.


Private for-profit institutions receive far less revenue per student than do public and private nonprofit colleges and universities. As Figure 9 shows, for-profits received, on average, $11,130 in revenues per student in 2008–2009, while public universities collected $18,922 per student and private nonprofit colleges received a staggering $37,869 per student. Since spending per student closely parallels revenues, this difference suggests that the total resources that society expends per student are much lower at the for-profit institutions.

In addition to extreme variation in the amounts of funds received per student, the relative proportions of funding sources also differ markedly. In contrast to their public and private nonprofit counterparts, the primary source of revenues in for-profit institutions is tuition. Over 85% of for-profit revenues are derived directly from tuition, while at public and private nonprofits, tuition only accounts for 17% and 36% of total revenues, respectively.

For-profit institutions receive very little direct government support, while at public and private nonprofit institutions government appropriations represent a much more substantial portion of total revenues. Government appropriations, grants, and contracts represent about 7% of for-profit revenues, or about $775 per student. These funding sources account for about 12.5% of total revenues at private nonprofits, or around $4,700 per student, and nearly half of total revenues at public institutions, or about $9,400 per student.

One might infer that, with little direct government support at for-profits, tuition must be extremely high to finance their operations. In fact, this is not the case. As shown in Figure 10, average tuition at forprofits is higher than what a public school would charge an out-of-state student, but it is still lower than the average tuition charged by a private nonprofit institution. In spite of little government support, taxes, and reasonable tuition, for-profits are generally able to remain profitable. This is all the more impressive when one takes into account the fact that for-profits’ competitors rely much more heavily on government appropriations and are exempt from taxes. Again, this feat is possible only by operating at much lower total costs per student than traditional institutions.


It should be noted that while for-profits receive very little in direct government appropriations, they importantly benefit from government grants to students, such as the Pell Grant. Further, since the majority of for-profit revenues are derived from tuition and the majority of students in for-profit schools finance their education through student loans, for-profits are ultimately reliant on federal student loan programs. Federal student loan money is the lifeblood of the for-profit education industry. Without the reauthorization of the Higher Education Act in 1972 that allowed the students at for-profits to qualify for federal student aid, it is unlikely that the for-profit industry would have been able to achieve the growth and profitability it has displayed.

A breakdown of financial aid received by students across sectors further illustrates the importance of student loan aid in the for-profit business model. Not only are students at for-profit schools the most likely to use student loans to finance their education, but the average student loan aid received per student is the highest in the for-profit sector. During the 2006–2007 academic year, the average amount of student loan aid received by students in for-profit institutions stood at $5,491, while in public and private nonprofits the average student borrowed $3,468 and $4,971, respectively.71 For the same academic year, nearly 61% of students at for-profits received student loan aid, while 29% and 56% of students used loan aid at public and private nonprofits, respectively.72 This can be explained, in part, by the fact that the average student at a for-profit school is much less likely to receive institutional, state or local grant aid than the typical student in the traditional sectors, as can be seen in Figures 11 and 12.



For-profit institutions also differ markedly from traditional higher educational institutions in how they decide to spend their money. As seen in Figure 13, for-profits spend the least amount per student among the sectors of higher education. For-profits spent, on average, $9,758 per student in 2008–2009, while public colleges spent almost double that amount and private nonprofits spend nearly four times as much per student. Based on these data, one might surmise that the quality of education at for-profits is necessarily poor when compared to the traditional sectors because of lower spending per student. A more likely explanation is that for-profits focus primarily on educating students unlike the traditional sectors, which along with student education, produce research, entertainment and arts programs, and generally maintain more extensive facilities. Additionally, it seems probable that for-profit school operate at a higher level of efficiency, however measured.

An examination of overall spending per student is interesting, but does not fully illustrate the differences between sectors. The primary mission of higher education is to provide educational services to students. For this reason, it is important to look at how spending per student breaks down by category. In terms of instructional spending per student, for-profits lag behind the traditional sector. On average, forprofits spent $2,512 on instructional expenses per student, while public universities spent more than twice that amount, and private nonprofits spent nearly five times as much per student.

It should be noted that these figures do not necessarily provide an accurate assessment of the actual amount of money that contributes to the education of each student. Some instructional expenses listed by traditional institutions appear to actually be research support. For example, faculty salaries are typically considered part of instructional expenses, even though the faculty may spend as much of their time on research as instruction. That caveat aside, higher spending by nonprofit schools is not surprising, since both public and private nonprofit schools generate more revenue per student.


An analysis of spending by category as a percentage of total expenses further illustrates differences between the sectors. As Figure 14 shows, for-profits and the traditional institutions are relatively similar in terms of the percentage of total spending going to instruction at about a quarter to a third of their total budgets. The sectors differ dramatically, however, in spending on research and public service; and student services, academic, and institutional support. As would be expected, for-profits spend virtually nothing on research and public service, while these categories account for 14% and 12.5% of overall spending in public and private nonprofit universities, respectively.75 For-profit universities spend a much larger portion of their budgets on student services, academic, and instructional support than do the traditional sectors (see Figure 14).

Unfortunately, due to the way in which all postsecondary institutions report their expenses, even an analysis of spending by category can be misleading. For example, for-profits report spending on student services, academic, and institutional support in one category, which stands at a full 62.5% of total spending by the sector.76 The institutional support component of this category includes spending on activities that do not directly contribute to a student’s education, such as marketing and lobbying. Marketing expenses can account for a large portion of a for-profit institution’s total budget. For example, for the firm’s 2009 fiscal year, Apollo Group spent nearly 33% of its total budget on selling and promotional activities.

The case could be made that advertising provides valuable information to potential students about what is available that ultimately helps them decide on the best school for their needs. The same could not be said about spending on lobbying within the higher education space. Unfortunately, all sectors of higher education, not just for-profits, spend money to engage in rent-seeking behavior that produces nothing of value to society and is necessarily a waste of society’s resources. A 2005 survey of 336 private nonprofit institutions revealed that the schools spent a total of $34.7 million on lobbying, while surveyed for-profit institutions reported spending $2.1 million on lobbying.


A major caveat is in order here. It can be argued that the profits of the proprietary institutions represent a measure of capital costs –compensation for the use of capital resources. Typically, nonprofit institutions disguise a portion of their capital costs, For example, for-profits must depreciate capital investments according to strict rules set out by agencies such as the Securities and Exchange Commission and the Financial Accounting Standards Board. A typical nonprofit institution largely does not set aside funds for depreciation, and relies on occasional gifts from private donors, state appropriations, etc., to finance new facilities and to renovate old ones—and these funds are not typically counted as costs in the standard data provided to the U.S. Department of Education. We believe the strict use of comparable accounting practices would lead to an increase in the cost per student differential between the proprietary and non-proprietary institutions.

Prior to concluding this section, we must discuss an important caveat that was stated earlier: the tax environment of for-profit institutions is quite different from the tax environment of the traditional sector. As businesses, for-profits must pay a portion of their income to the government. The traditional sector, in contrast, is almost entirely tax-exempt. Consequently, and perhaps perversely, the government tends to give more money to the traditional sector as they increase enrollment, yet takes away money from for-profits as they increase enrollment. The tax environment also affects the ability of institutions to raise capital. Money given to the traditional sector can be written off as charitable donations, even if the donation goes exclusively to non-educational activities such as athletics. When for-profits raise capital by selling securities, their investors are subject to capital gains taxes. Consequently, for-profits are at disadvantage when it comes to funding their educational endeavors. 

Operational Differences between For-Profit and Nonprofit Education

How is it that in an era when many traditional colleges and universities are struggling financially, forprofit institutions are able to generate profits? This phenomenon can be explained partially by operational differences between the sectors, but, in a broader context, it can be explained by the fact that the missions of for-profit and traditional institutions are fundamentally different. It is true that there is overlap between the activities of for-profits and traditional institutions, especially in the area of providing instruction to students. The similarities end there, however.

Student as Customer

The mission of a typical public or private nonprofit university is first to provide instruction to students, but also to produce research, provide public service, and generally contribute to society’s understanding of the world. In so doing, the traditional sector must employ far more resources than the for-profit sector. The mission of a for-profit institution of higher learning is, like any other profit-making firm, to maximize shareholder wealth. For-profit schools do this by selling a product to customers. The product in this case is education. For-profits are thus forced to focus their efforts on selling educational products that the student/customer wants to purchase. One observer wrote, “A for-profit board has an obligation to get out of a bad business while a nonprofit board may have an obligation to stay in, if it is to be true to its mission.

In traditional institutions of higher learning it is often unclear who the primary customer is. In contrast, for-profits are narrowly focused on providing a product for the student/customer because in so doing these institutions are able to increase their bottom lines. A customer service orientation does not mean however, that for-profits give in to every student’s preferences, because to do so would devalue the product.80 The customer service orientation does mean that for-profit institutions have strong incentives to keep tuition reasonable in order to attract students, all the while trimming excess costs by minimizing administration, maintaining a competitive work environment and keeping wages at a market clearing level.

One might argue there is an inherent conflict of interest that for-profit providers face. By making students happy—for example, by giving them degrees they do not deserve, grades that they do not earn, etc.—for-profits can increase revenues and profits. By accepting students that are highly unlikely to graduate, revenues and profits are enhanced but students are ill-served. Yet there are two problems with this argument. First, in the long run if universities develop a reputation for offering a shoddy product, that will lower demand, or, at the extreme, cost the institution its accreditation. Second, the problem of accepting marginal students applies equally to nonprofit schools, some of which have extremely low graduation rates and end products with dubious academic accomplishment.

To a larger extent than in a traditional university, for-profits must continually strive to keep their students satisfied. Nonprofits only get a fraction of their funding from students and consequently can afford to be dismissive of some student needs, since students who leave school out of anger do not impose a high cost on the university. For-profits, however, derive nearly all their revenue from students and thus are more inclined to see their students as valuable paying customers. As a result, for-profits tend to be more responsive to the needs and demands of their students.

In addition to the incentive to keep tuition reasonable to maintain student business, it is also necessary that for-profits offer programs that clearly pass a cost-benefit test for the student. Such programs are typically career focused and have measurable skills outcomes.82 Examples include information technology, medical services, business management, education, and other vocational skills programs. Providing degree programs in areas such as these are generally profitable. These programs often require few capital resources, and can be effectively taught by industry practitioners instead of higher paid research PhDs. 

Few for-profit schools emphasize training in the liberal arts such as the humanities and social sciences. Many persons, including us, believe that such learning, while not directly tied to vocational training, is nonetheless beneficial to the development of good citizenship and in some cases improved critical learning skills that facilitate learning on the job after graduation. It will be interesting to see if in the future the for-profits expand upon their current vocational orientation to more studies in these less vocationally oriented areas of “general education” that often form the core of learning at many nonprofit schools.

Resource Utilization

Other significant cost advantages for-profits have over traditional universities come from their use of resources. Traditional public and private nonprofit universities are extremely capital intensive. The typical traditional university owns large tracts of land in addition to a collection of classroom buildings, libraries, recreational facilities, and stadiums. Along with these facilities comes a high level of fixed costs including maintenance, utilities, and grounds keeping that can use up a significant portion of a school’s budget. In contrast, for-profit universities tend to run much leaner and less capital intensive operations. For example, classroom space is often leased in office buildings. This allows the firms to be more flexible in terms of physical capacity and frees them from the fixed cost burdens under which many traditional universities suffer.

For-profits and traditional college also differ markedly in their use of human resources. While no two for-profits are exactly alike in their operations, it is much more likely to see classes taught by adjuncts in a for-profit university than in a traditional university. However, full-time faculty members also play a significant role in the operations of many for-profits. For-profits do not gain a cost advantage by paying their full time faculty less than the traditional sector would. They do gain a cost advantage, however, in terms of the teaching loads of those faculty members. Most faculty members at a for-profit university teach far more classes than their public and private nonprofit counterparts since their primary duty to the organization is to teach, not produce research.

One efficiency enhancing tactic employed by most for-profits that affords them another cost advantage over the traditional sector is the use of standardized curricula. Economics courses, for example, would cover the same material and use the same text across all branches of a for-profit university. By leaving the course design up to professional curriculum specialists, instructional staff can reduce the amount of time spent on preparing courses and increase the amount of time teaching and meeting with students.

Delivery methods also differ across the sectors of higher education. Increasingly, for-profits are using a traditional bricks and mortar classroom to deliver the educational product to students. However, online courses and even online supplements for traditional classes are also widespread in the industry. From a cost perspective, online courses make sense. The tuition a for-profit school can charge for an online class typically far exceeds the marginal cost per student, which is essentially zero. What this means in economic terms is that there are tremendous economies of scale in on-line education, suggesting in the long run the possibility that a few dominant providers may prevail, not unlike the automobile industry of nearly a century ago. Online education is an extremely profitable line of business. With the profits earned from their online operations, many for-profits can essentially subsidize their bricks and mortar operations. This makes sense from a business perspective; industry insiders claim that a traditional campus is of tremendous marketing value that can increase the perceived legitimacy of an institution.

This point was made abundantly clear to us by Andrew Clark, the chief executive officer of Bridgepoint Education, and Jane McAuliffe, president of Ashford University, the largest school in the Bridgepoint system. Speaking in an interview with us from their traditional Iowa campus (a former Catholic liberal arts college), they pointed out that many attending this year’s graduation ceremony were on-line students who wanted their families to see them receive a diploma.

For-Profit Higher Education: Growth, Innovation and Regulation. Part II