Education for Profit

Why is everyone flaming the University of Phoenix?

By many measures, the University of Phoenix is the most successful institution for higher education in American history. With more than 325,000 students currently enrolled—22 times the number at the University of Chicago—Phoenix is vast, and contains multitudes. On campuses scattered across 39 states, and online as well, it offers everything from associate's degrees in sports management to Spanish-language MBAs. And unlike most universities, Phoenix makes a hefty profit. Its parent company, the Apollo Group, produced margins of 11.7 percent last year on revenue of $2.9 billion. What began in 1976 as a small night school where firemen and policemen between shifts completed unfinished bachelor's degrees is now an educational and commercial powerhouse listed on NASDAQ, with a market capitalization of $7.4 billion.

But in recent years, the University of Phoenix has become the poster child for everything the mainstream academic establishment thinks is wrong about for-profit higher education. The school's aggressive recruiting practices and high dropout rates have drawn fire from The Chronicle of Higher Education, where a college admissions specialist in 2004 called Phoenix's approach "an affront to the principles that have been developing in college admissions over the last three decades." The head of the major accreditation body for business schools, the Association to Advance Collegiate Schools of Business, last year accused Phoenix of using "a lot of come-and-go faculty." The U.S. Department of Education has punished the school for insufficient hours spent in the classroom and illegal recruiting practices, exacting two settlements during the last decade totaling $15.8 million. "Their business degree," Henry M. Levin, a professor at Columbia University's Teachers College, told The New York Times last year, "is an MBA Lite."

Many of the criticisms are technically accurate. The school does have aggressive recruiters and skimpy class hours. The faculty is nearly all part time. Graduation rates are low, and the level of instruction can be too.

But much of what academic traditionalists see as problems, Phoenix advertises proudly as solutions. The university aims to meet underserved demand for post-secondary education, tailor-made to fit the individual circumstances of harried adults. Like other for-profit schools such as DeVry and ITT, Phoenix offers the educational equivalent of a subprime mortgage: not the best product the industry has to offer, but a potentially valuable option for people who might not otherwise get into a desired market.

As with subprimes, a nonnegligible portion of consumers won't be able to stay afloat, exiting school moderately poorer and perhaps not much wiser. But the students who do graduate—like the millions who use subprime deals to gain a firmer foothold in the housing market—have a much different story to tell. Their tales are not about sunshine on the quad, Saturday night football games, or ivy-covered walls. They're about a kind of practical, bare-bones education that you never see in coming-of-age films but that is usually superior to no education at all.

At the same time, the size of the Phoenix student body—like the number of homeowners during the recent bubble-has been artificially inflated by policies set in Washington. There are legitimate criticisms of the university. But the education establishment's hostility to the institution often lies elsewhere, in an attitude toward for-profit higher ed that is essentially an aversion to change and commerce, the same snobbish disdain directed at payday lenders, providers of adjustable rate mortgages, and inner-city fast-food vendors. Few sins are less forgivable in polite society than offering poor people products they actively seek.

From 'Plague Spot' to Juggernaut
For-profit higher education is nothing new in America. Up through the 19th century, most doctors, lawyers, and accountants picked up their basic skills at schools that were out to make a buck. The army of typists and stenographers that midwifed the information age at the turn of the last century came pouring out of commercial institutions all over the country. One hundred years ago, most medical schools were still small trade operations run by practicing local or retired doctors as a way to supplement their income.

But in 1910, amid newspaper horror stories about quack doctors ("The Doctor Who Killed His Patients With Germs") and fears that the U.S. was falling behind the rest of the world ("Germany to Stop Quackery"), the Carnegie Foundation sent the prominent educator Abraham Flexner to survey the state of medical education in North America. The influential Flexner Report, which singled out Chicago's 14 mostly for-profit medical schools as "the plague spot of the nation," called for standardizing curriculum and dramatically reducing the overall number of diplomas issued. As a result, the 160 institutions that educated more than 28,000 med students in 1904 became 85 schools educating half that many in 1920. (Among the effects: a decrease in medical competition and an increase in doctors' fees.)

The Progressive Era also saw the creation of the modern research university. Schools such as Princeton, with its Institute for Advanced Study (founded by Flexner himself), hit on the magic formula of combining under one roof undergraduate education, graduate and professional training, and academic research. Universities expanded and began to swallow smaller medical schools. By 1935 there were only 66 medical schools left in the country, 57 of which were affiliated with universities, according to a study by the University of Virginia radiologist Mark Hiatt and the D.C.-based consultant Christopher Stockton.

After World War II, the baby boom and the GI Bill helped usher in the "golden age of higher education," a three-decade stretch in which America went from a country where two-thirds of adults hadn't even managed to complete high school to one in which more than 17 percent earned a college degree. Not coincidentally, this era was also the golden age of public funding for universities. Federal and state research grants and student aid became major sources of revenue for public schools and nonprofits. In 1972 Congress allowed for-profit colleges to sidle up to the government trough as well. Now students were allowed to carry what would eventually be called Pell grants with them from school to school; as with vouchers, the money adhered to the student, not the institution.

John Sperling was a middle-aged professor of humanities at San Jose State University in the mid-1970s when he decided to take advantage of what he saw as a gap in the market by risking his life savings, a whopping $26,000, to start a private school. According to Phoenix's official history, Sperling hatched the idea after realizing that "working adult students were invisible on the traditional campus and were treated as second-class citizens."

Initially, there was little more than a facility in San Jose called the Institute for Professional Development, dedicated exclusively to adult education—that is, education for students past their early 20s. At the time, Sperling found, it was taking adult students in the U.S. about eight years to finish a typical four-year degree, in part because nearly all university business happened during work hours. Even if classes were offered at night, the rest of the campus was typically closed, forcing full-time workers to take time off just to register for class, meet with a professor, or buy a book. By offering extended hours and a host of other individualized tweaks, Sperling made it possible for older students with jobs to satisfy all the requirements for a college degree in about four years.

Sperling's fledgling school left San Jose in 1976 and struck out for Arizona after being denied accreditation (not for the last time), in this case by the Western Association of Schools and Colleges. (Nonprofit regional accreditation bodies certify most schools in the U.S. based on site visits and other measures of quality, though schools do not need any accreditation to operate.) The Institute for Professional Development was reassembled as the University of Phoenix, winning accreditation from North Central Association of Colleges and Schools the following year.

The school grew quickly, graduating its first full class in 1981 and gaining accreditation for a nursing school in 1987. In 1989 it inaugurated an online campus. A few years later it launched an online library, one of the first of its kind, offering course materials and reference books that might otherwise require students to dig through the stacks of an academic library—a time-consuming luxury many Phoenix students can't afford.

Although the university is now best known for its online programs, in which students log on for lessons and group projects and deal with their professors via email, it has more than 200 physical campuses across the country, many of which are little more than leased rooms in buildings near a convenient highway off-ramp.

'Every Academic Decision Has to Be a Business Decision'
Phoenix first attracted widespread attention when Sperling took his company public in 1994. Since then, the press notices haven't been especially flattering. When the school tried to expand into New Jersey in the late 1990s, New Jersey Education Association Executive Director Robert Bonazzi complained to the Newark Star-Ledger that "pre-packaged programs such as these are the antithesis of any known definition of [academic] freedom."

The criticism has intensified during the last few years. In a series of breathless stories culminating in a comprehensive takedown last year, The New York Times aired accusations by prominent educators, former students, and current and former staff members that at Phoenix "the relentless pressure for higher profits…has eroded academic quality." The story highlighted the school's low graduation rates, numerous sanctions from regulators, and a mounting concern that Phoenix was taking taxpayer education dollars without providing promised services in return. David W. Breneman, dean of the University of Virginia's Curry School of Education, told the Times that "Wall Street has put them under inordinate pressure to keep up the profits, and my take on it is that they succumbed to that." Or as James Samels, president of the Education Alliance consulting firm, put it to the Dallas Morning News in 2004: "One cannot serve two masters. They've got investors, and they have a different mission."

University of Phoenix President Bill Pepicello readily agrees that Phoenix has a different orientation than a traditional school. "A successful for-profit higher education enterprise has to survive on the tension between the academic side and the business side of the house," he says. Students want low tuition and easy classes, so there is always commercial pressure to ease academic rigor. Part-time instructors are cheaper, and a standardized curriculum handed down from on high produces lower transaction costs. "Every academic decision has to be a business decision" Pepicello says, "and, conversely, every business decision is an academic decision." Pepicello, whose previous role at Phoenix was as a dean of academics, thinks for-profit education's reputation is "tainted by earlier endeavors," such as cash-for-paper diploma mills. "Bad business decisions and bad academic decisions left a bad taste," he says.

Phoenix offers a much more substantial education than fly-by-nights like degrees-r-us.com. But there's another aspect of its business decisions that does leave a bad taste.

Asses in Classes
Phoenix's business model relies on federal tax dollars. In 2004-05, its 300,000-plus students received a total of $1.8 billion in federally supported student loans, making it the biggest single recipient of student aid in the country. Because the school, unlike elite universities, receives zero government research grants, every one of those greenbacks from Uncle Sam comes attached to a student, usually in the form of a Pell grant. This leads to a very simple equation: More students equals more money. The school helps students apply for the maximum amount of aid they're eligible to receive and speeds the processing of the government money into their coffers. Phoenix has every incentive to be aggressive in its recruiting practices.

Too aggressive, says the federal government, which in return for ladling out Pell grants attaches several strings to the money. The tension between gobbling up federal aid and satisfying the conditions that come with it is at the heart of Phoenix's legal and reputational troubles. In 2004 a Department of Education report alleged that the university had violated the Higher Education Act by offering financial incentives and free trips to its most successful recruiters, those who, in the recruiters' slang, put the most "asses in classes." Phoenix has paid $9.8 million to the Department of Education for recruitment violations, and in January 2008 the Apollo Group was found liable for fraud because it failed to disclose the report to investors. That decision came with a price tag of about $280 million paid to investors.

I ask President Pepicello about accusations that the university pays commissions based on how many students recruiters enroll, regardless of academic qualifications. "We don't apologize for that," he replies. "Recruiters, as much as anyone else, should have responsibility for what their job description is." Pepicello points out, accurately, that what the law prohibits is paying recruiters "solely" on the basis of enrollment numbers, and he "vigorously" denies that the university does so.

As the University of Virginia's Breneman writes in his 2006 book on for-profit education, Earnings From Learning, "Such practices…are one of the key reasons why economists and others have doubted the wisdom of providing education through the mechanism of for-profit production." According to Breneman and other critics, overly aggressive recruitment leads to Phoenix's high dropout rates.

Using the federal government's standard measure of completing a degree within six years, Phoenix's graduation rate is just 16 percent, compared with nearly 50 percent at traditional schools. That measurement captures only 7 percent of Phoenix's total enrollment, since students who come into the institution with some prior college are not counted, but the school declines to release detailed figures for the remaining 93 percent. Methodologies aside, if 84 percent of any significant segment of your student body is dropping out, that's still pretty bad, a fact Pepicello acknowledges. It is also a less-than-ideal expenditure of federal tax dollars.

Just as there are high default rates on loans given to people with bad credit, Phoenix has high dropout rates (though compared to federally protected mortgage defaulters, Phoenix dropouts carry a modest amount of low-interest loan debt). By keeping admissions standards low, the university is opening up higher education not just to those who can't hack it but to others who can, and who might not have gotten in anywhere else. Phoenix takes the federal money, offers the courses, and considers the high failure rate a cost of doing business.

For-profit schools are not the only ones vulnerable to the distortions of federal education dollars. Nonprofits and state schools wallow in the stuff, too, including research grants and direct subsidies unavailable to Phoenix. What's more, many public schools make up their budget shortfalls not through charging their customers or synching up with employers (from whom Phoenix derives significant revenue) but from extra-academic fund raising, which can invite a whole world of curriculum-bending and attention-sapping distortions of its own. Breneman, a Phoenix critic, writes that he was nonetheless impressed with the comparative amount of time the school's deans spent on actual academic development: "As a dean in a public university, a substantial portion of my time is necessarily devoted to fund-raising and grant procurement. The ironies abound!"

Credentialing Mania
It's not just the people who own the campuses who spend time thinking about how to get their hands on more dough. Many students are in education for the money too. "University of Phoenix is, in some ways, exploiting this credentialing mania in our country," says the Ohio University economist Richard Vedder, who has written extensively about the economics of education. "People want to have a jump on their colleagues—an MBA, an MPH. University of Phoenix is exploiting that desire to make a profit."

Many student customers just want a piece of paper with a credential that their employers will accept. Employers, especially those footing the students' bills, want that piece of paper to be legitimate, backed by a certain amount of achievement. Both want the service to be affordable. Shareholders of the Apollo Group want the whole transaction to produce profits.

Vedder is ultimately enthusiastic about the role that Phoenix and for-profit institutions play: "I think it's great that we have the University of Phoenix. I wish we had more [schools like it]. It's providing a great education service to a large number of Americans at no direct costs to the taxpayers, though I might add that indirectly it depends on government loan money."

Students who stick it out can earn their credentials from Phoenix with a maximum of flexibility and a minimum of fuss; that's why they enroll. This aspect may have attracted such disparate graduates as Secretary of Transportation Mary Peters and basketball star Shaquille O'Neal.

But the typical student is considerably less flashy. Take 29-year-old Samantha Emrick, a lab tech at a hospital in Columbia, South Carolina, who liked her job but didn't see a future in it. Emrick had tried community college back in 2002 but found it was a scheduling nightmare. Evening offerings were so limited that she found herself skipping entire semesters because none of the classes she needed for her requirements were available at convenient times. "Just sitting out like that is really wasting time," she says. Unable to afford going back to school full time, Emrick saw a TV ad for the University of Phoenix's Axia College and decided to enroll.

Axia, a relatively new offering, is designed to speed people with little or no higher education through an associate's degree and prep them for a bachelor's. It's cheap: $7,084 a year, compared with an average tuition of $9,630 in other Phoenix programs and $23,712 at traditional private colleges (public universities average $6,185). "I support myself," Emrick says. She pays for her classes with the help of loans while continuing to work full time. Emrick is about six months into her associate's degree, with a focus in health care administration. She hopes to complete it in November 2008, then go directly into Phoenix's bachelor program. "It's helping me to prepare for being over people, management skills, writing memos, resumés, how to critique yourself," she says. "What I'm learning goes toward everyday life, too, not just professional life."

Faculty Fraud?
One of the thorniest issues that regulators and critics raise regarding the University of Phoenix is its reliance on part-time faculty. A full 95 percent of Phoenix instructors teach part time, compared to an average of 47 percent nationwide.

Phoenix's instructors describe themselves as "delivering" course material, since most of the classes are centrally crafted and standardized across teachers. Half of the class sessions are spent in "learning teams," where students work together without an instructor present. This makes Phoenix cheaper to run, since the school only pays an instructor for half of the course hours. President Pepicello calls the learning teams "integral" to the university's education model, but as Breneman notes, "A cynic might suggest that students have been known to shirk efforts that are not monitored."

In 2000 the university paid the federal government $6 million to settle a complaint from the Department of Education, which ruled that the school's class hours fell short of the minimum 12 hours per week of instructional time required for federal student aid eligibility. Phoenix upped its hours a little, and the 1992 amendment to the Higher Education Act that had instituted the 12-hour rule was allowed to expire in 2001, partly in recognition that standards for what counted as a "week" of classes were changing in the era of online education, work-study semesters, and other education innovations.

Mandating a class-hours percentage is a decidedly 20th-century approach in the age of the Internet. As the single biggest education-industry enthusiast for technological change, Phoenix is bearing the brunt of outdated expectations. Many students, says Phoenix writing and English teacher Carol Rzadkiewicz, switch from courses in person to courses online, sometimes mid-semester. "If you have that option, if you have that convenience," she says, "you don't have to drop out, like so many women in my situation did."

Rzadkiewicz is exactly the kind of nontraditional university participant that Phoenix was designed to attract. At age 16, she was a married and pregnant high school dropout who still maintained some vague literary ambitions. "I was young," she says. "I was in a hopeless situation, with no education, no training." Eventually she obtained a GED, took some classes at a community college, enrolled in the State University of West Georgia at age 44, got a divorce, and earned her master's degree online through a state school. Now she's a published short story writer who has been teaching at Phoenix since 2003, often telling her story to incoming students as an example of what's possible in the modern world. "Had there been something like University of Phoenix, especially the online aspect, that would have made a big difference in my decisions," she says. "I might have done what I did a lot sooner."

Phoenix's reliance on part-time faculty such as Rzadkiewicz prevents the university from winning accreditation from the top credentialing institutions. Though many of the components of the school are regionally accredited, the university's business school is ineligible for the gold standard of business schools, accreditation from the Association to Advance Collegiate Schools of Business, largely because of the part-time faculty issue.

But the truth is, Phoenix made the tradeoff between efficiency and accreditation a long time ago. The school has never applied for accreditation for its MBA program, because it's not eligible. It doesn't provide the same education as Kellogg or Wharton, and it doesn't even have some of the basic facilities of community colleges.

Pepicello is more concerned about the university's relationships with "more than 1,000 employers across the country," most of whom pay student tuition. "That's an indicator that employers see the value of what we're doing," he says. When employers withdraw a tuition benefit—as Intel did in 2006, citing lack of top-level accreditation—"we take that very seriously, because they are our customers too."

'The Nation Is the Better for It'
In the coming decades, says economist Vedder, for-profit and nonprofit models for higher education will compete directly with each other for customers. For-profit schools have saturated the adult education market, so more and more commercial institutions will be thinking about turning their attention toward younger students. The pool of 18-to-21-year-olds has been expanding for many years, as the children of baby boomers reach college age, but that growth has begun to slow and is expected to reverse itself three or four years from now. "When the for-profits continue to grow," Vedder argues, "that is going to have some noticeable enrollment effects" on traditional colleges.

This isn't a problem for elite schools, which maintain their status by turning away as many potential customers as possible. But mid- and bottom-tier schools offering cheaper versions of the traditional four-year bachelor's degree may have something to worry about. As more and more people realize that their college degree doesn't come with a $1 million check, they're going to look for ways to minimize the huge opportunity cost of attending a traditional four-year college. One way is to work full time while attending school.

Until recently, Phoenix didn't consider applications from anyone younger than 23. That minimum age requirement was dropped to 21 in 2004, and now 18-year-olds are allowed to enroll in some programs. Other for-profit educational institutions are also getting more aggressive. A group of former Phoenix employees, organized as Bridgeport Education, recently started buying small, failing nonprofit schools and turning them into for-profit campuses on a tweaked version of the Phoenix model. This approach solves several problems at once, including accreditation, since the existing schools were already accredited when purchased.

Vedder argues that "for-profit education is part of the solution to America's higher education problems, not the problem itself." And even Phoenix critic Breneman has said, "Where UOP does compete with traditional institutions, competition will generally be beneficial to students and there is no reason to decry that outcome. On balance, the education of working adults has been strengthened and improved by the existence of UOP, and the nation is the better for it."

Phoenix students know they're not getting the best education money can buy. But they might be getting the best education their money can buy.

Katherine Mangu-Ward is an associate editor at Reason.

(This is a corrected version of a story printed in the July 2008 issue of reason. The job title of University of Phoenix President Bill Pepicello was in error, as was the terminology used to describe the university's defeat in a January 2008 civil trial.)