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What You Should Know About For-Profit Colleges

For several years for-profit colleges were on the rise. They launched advertising campaigns that made them seem highly attractive to prospective students. More recently, enrollment in for-profit colleges has been on the decline. A run of bad publicity has drawn attention to accreditation problems and other reasons to be wary of for-profit higher education.

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If you’re deciding where to go to college you may not think there’s much of a difference between non-profit and for-profit colleges. In fact, though, there are some important differences. First, what is a for-profit college? A for-profit college is an institution of higher education that is run as a private, for-profit business. For-profit colleges are accountable to investors and shareholders and seek to make money for those stakeholders.

For-Profit Colleges: The Basics

What You Should Know About For-Profit Colleges

A for-profit college can look a lot like a traditional non-profit college. A for-profit college might have a leafy campus and a range of departments and majors. Importantly, for-profit colleges, despite their private, for-profit status, can earn up to 90% of their revenue from federal student loans. The fact that tax dollars go to for-profit colleges in the form of federal student loans is why, even if you’re not planning on pursuing more higher education, you still have a stake in the debate over for-profit colleges.

Unlike non-profit institutions, for-profit colleges tend not to offer regular Bachelor’s degrees. Instead, they offer vocational training or graduate degrees and certificates. If a given for-profit college doesn’t qualify to receive federal dollars from student loans it will suggest private student loans, often in-house private loans, to students. The difference between having federal student loans and private student loans is an important one. Federal student loans generally have lower interest rates, and they come with more flexibility when it comes to repayment. Private student loans are generally more expensive and (this is huge) they are almost impossible to discharge in bankruptcy.

Related Article: 5 Student Loan Mistakes That Can Cost You

The Controversy

A quick search of for-profit colleges under investigation reveals problems with accreditation and more. For example, many students of for-profit colleges have found that the credits they earned at the for-profit institution don’t transfer to other schools. Famously, for-profit college chain Corinthian Colleges shuttered due to legal challenges based on its failure to produce students who could afford to pay their loans, and to its targeting of at-risk students.

At its peak, Corinthian had over 100 locations in the US and Canada. The for-profit chain filed for bankruptcy and the federal government forgave the debt of students left high and dry when Corinthian closed. It’s not quite as simple as “for-profit colleges are bad” but the Corinthian example shows why it’s a good idea to approach for-profit higher education with caution.

Critics of for-profit colleges say the institutions maximize their own profits by aggressively marketing to students likely to qualify for loans, without regard to whether the students are likely to graduate and find jobs. For-profit colleges have been accused of targeting vulnerable people living close to poverty, single parents and veterans – and of charging high sums for degrees that don’t increase earning power.

Some critics have gone so far as to call for-profit colleges “predatory.” From the point of view of the for-profit institution, each student is a source of revenue, whether that comes from the student’s own savings (or the savings of a parent), or whether the tuition is paid by private loans or federal loans. For-profit colleges say they are providing an essential service by offering degrees and certificates to non-traditional and lower-income students. The debate over the role of for-profit higher education shows no sign of letting up.

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Looking Ahead

The federal government has recently issued new rules aimed at policing for-profit colleges. The government has enacted a “gainful employment” standard that makes receipt of federal student loan dollars contingent on a for-profit college’s ability to graduate students who get jobs in which they earn enough to repay their loans.

Specifically, a non-profit or for-profit educational program that wants access to federal funds will have to show that the average annual loan payments of its graduates accounts for less than 8% of the students’ total income. Meanwhile, attorney generals in 37 states are investigating the practices of for-profit colleges. The days of easy money for for-profit higher education may be coming to an end.

The Takeaway

What You Should Know About For-Profit Colleges

The best for-profit colleges are accredited, affordable and have high rates of both graduation and job placement. In the great for-profit colleges vs. non-profit colleges debate, where you come down will depend on your priorities. For non-traditional students looking for flexibility and off-the-beaten path degrees, a for-profit institution could be an appealing option.

Just remember that there’s a lot of variation in quality within for-profit colleges. Any list of for-profit colleges that you compile should take job placement rates, accreditation and reputation into account. Unfortunately, higher education has gotten more expensive even as it has become more necessary to achieve a middle-class lifestyle or higher. You don’t want the cost of your higher education to go to waste.

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Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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