Financial Management Analysis and Trends: For-Profit Schools
06/13/2012
ED 7837

TABLE OF CONTENTS

Introduction……………………………………………..………………………………………..……………………………………..3
Abstract………..…………………………………………..…………….………………………………………………………………..3
Where the money comes from: Revenue sources……………………………..….……..……………………………5
Pricing and discounting practices within institutions..…………………………...………………………………….6 Where the money goes: Standard expense categories……………………….….……..…………………………7
What is tuition discounting…………………………………………………………………...………………………………...8
Tuition discounting is attractive to higher education institutions..……………………………….………….9
Negative consequences to tuition discounting………………………………….……………..……………….…..10
For-Profit and Distance Learning Schools.……….……………………………….…………………………………...12
Trends in revenue and funding………………………………………………………….…...……………………….…….11
Gainful employment.……………………………………………………………………………….…………………………….13
Solutions……………….…………………………………………………………………………..……….………………………….14
Conclusion………………………………………………………………………………………….……….…………………………15
References…………………………………………………………………………………………………………………………….16

Introduction The most important investment that someone will make in life is education. It sets the foundation for one’s professional life and career. Education needs to be accessible to everyone who chooses to pursue it. This means that education should be accessible both in a classroom, online, digital, for both non-traditional and traditional students. Having the opportunity to earn a degree is both fundamental to a student’s success in life and increases their chances of being a well-rounded individual with goals and expectations for a profession.

Abstract
The mushrooming of student financial aid in all its forms has transformed the economics of American Higher Education. For private colleges and universities, the privatizations era has brought robust prosperity and confidence. In the public sector, privatization has meant a steady substitution of student-derived revenues for those provided by state governments. For most institutions this has meant increased exposure to market forces. The first decade of the twenty-first century has seen an intensification of these trends for the most part. The steady growth in real tuition prices has shifted the financing of higher education from state support to students and their families. This trend would have not been possible without the substantial growth in student financial aid, both in state and federal student’s loans. Student financial aid is now fundamental to the financing of higher education in the United States. The impact has been different in the private, non-profit sector than that of the public.
The United States has long had a mixed system of both public and private higher education
Institutions. Over more than 200 years, both public and private institutions have flourished,
Helping the United States to achieve the highest level of participation in postsecondary education
In the world for most of the twentieth century (Organization for Economic Co-operation and
Development, 2009). More recent decades have seen a third form of higher education institution develop and grow in the United States, the for-profit college. These institutions, which are organized as profit-making enterprises (either publicly held, through broad ownership of stock, or privately through more closely held ownership), have shown the fastest enrollment growth over the last three decades.
The sector and its enrollments are dominated by large, corporate systems. Figure 1 shows the enrollment by major sector in American higher education for selected years from 1970 to 2008. In 1970s, approximately three-quarters of the 8.6 million students attending college were enrolled in public institutions, with two-thirds of these in 4-year universities (those awarding bachelor’s degrees) and one-third in 2-year, or community colleges (those awarding non-baccalaureate degrees and certificates). One-quarter of students were enrolled in private nonprofit institutions, and only 0.2 percent were in for-profit institutions. The major trend during the 1970s was the expansion of the community college sector, publicly funded and controlled colleges that award degrees and other credentials below the bachelor’s
Degree. Spurred on by the states that saw these colleges as a cost-effective mechanism for expanding access to higher education, new community colleges were built and existing ones were expanded. Overall enrollment in higher education during the 1970s grew from 8.6 to 12.1 million, or 41 percent, with community colleges increasing their market share from roughly one quarter to one-third of all students, with concomitant reductions in the shares of both public and private non-profit 4-year institutions. The 1980s was a period of slower growth, with total enrollments increasing only 14 percent over the decade with the relative shares among the sectors staying roughly constant. The for-profit sector began to increase its market share from 0.9 percent in 1980 to 1.5 percent in 1990. Enrollment growth again slowed in the 1990s, increasing only 11 percent, with the share for the for-profit sector again growing slightly to 2.9 percent. We know that funding has fallen since then, leading to budget cuts that are reported to be heaviest in the public sector and in those private institutions that had come to be dependent on investment earnings for operating funds. Patterns of higher education finance are quite durable, and there is much to be learned from data that are contextualized through comparative and historic analyses. Sharp increases in spending in the first part of the decade among a handful of private institutions, fueled by unprecedented growth in investment revenues; Cyclical funding of state and local appropriations for public institutions: up in good times, down in bad, with spending cuts following recessions falling heaviest on the instructional function; No evidence of permanent cost restructuring in either public or private institutions, instead a pattern of cost shifting to student tuition revenues in times of economic downturn; Growing stratification of wealth separating public and private institutions, with the institutions serving the majority of students having the least to invest in their success; and a continuous shift to ever-higher student tuitions, which is the one constant across all of postsecondary education.

Where the money comes from: Revenue sources

Net tuition revenue: Total revenue from tuition and fees, excluding institutional
Grants.
State and local appropriations: Revenues received through state or local legislative
Organizations (except grants, contracts, and capital appropriations).

Private and affiliated gifts, investment returns, and endowment income (PIE): Private
Gifts include revenues received from private donors, affiliated entities, or from a private
Contract for specific goods or services provided by the institution that are directly related to instruction, research, public service, or other institutional purposes. Investment revenues are from interest income, dividend income, rental income, or royalty income. Endowment income is generally income from trusts held by others, and income from endowments and similar funds.
State and local grants and contracts: Revenues from state or local government agencies
For training programs or similar activities that are either received or is reimbursable under a contract or grant.
Federal appropriations, grants, and contracts: The total amount of revenue coming from federal appropriations, grants, and contracts.
Auxiliary enterprises: Revenues generated by, or collected from, auxiliary enterprise operations of the institution that furnish a service to students, faculty, or staff, and that charge a fee related to the cost of service. These are generally self‑supporting activities such as residence halls, food services, student health services, and intercollegiate athletics.

Hospitals, independent operations, and other sources: Revenue generated by hospitals
Operated by the postsecondary institution. Revenues associated with the medical school are not included. “Independent operations” include revenues associated with operations independent or unrelated to instruction, research, or public services and generally include only revenues from major federally funded research and development centers. “Other sources” include miscellaneous revenues not covered
Somewhere else.
Pricing and discounting practices within institutions

Pricing versus revenues, AY1998–2008 (in 2008 dollars)

Public research sector 1998 2003 2007 2008 1998–2008 change
Sticker price $4,315 $5,099 $6,433 $6,518 $2,202
Gross tuition revenue $6,128 $7,335 $9,053 $9,283 $3,154
Net tuition revenue $5,195 $6,036 $7,411 $7,563 $2,369
Tuition discount rate 15% 17% 18% 18% 3%

Public master’s sector
Sticker price $3,624 $4,176 $5,189 $5,314 $1,690
Gross tuition revenue $4,421 $5,108 $6,208 $6,363 $1,941
Net tuition revenue $3,999 $4,507 $5,492 $5,607 $1,608
Tuition discount rate 10% 13% 12% 12% 2% Community colleges sector
Sticker price $1,806 $2,009 $2,350 $2,343 $536
Gross tuition revenue $2,365 $2,784 $3,219 $3,242 $877
Net tuition revenue $2,202 $2,577 $2,983 $2,992 $790
Tuition discount rate 11% 10% 10% 11% 0%

Private research sector
Sticker price $21,966 $25,079 $27,945 $28,527 $6,561
Gross tuition revenue $21,556 $24,729 $27,272 $27,739 $6,183
Net tuition revenue $16,343 $18,203 $19,586 $19,836 $3,493
Tuition discount rate 24% 25% 27% 27% 3%

Private Master’s sector
Sticker price $15,625 $18,160 $20,472 $20,952 $5,327
Gross tuition revenue $14,989 $17,188 $19,085 $19,352 $4,363
Net tuition revenue $11,853 $13,043 $14,224 $14,332 $2,479
Tuition discount rate 23% 24% 25% 26% 3%

Private bachelor’s sector
Sticker price $16,257 $18,629 $20,663 $21,148 $4,891
Gross tuition revenue $15,598 $18,284 $20,317 $20,724 $5,126
Net tuition revenue $10,751 $12,253 $13,297 $13,515 $2,764
Tuition discount rate 35% 32% 34% 34% -1%

Where the money goes: Standard expense categories

Instruction: Activities directly related to instruction, including faculty salaries, benefits, office supplies, administration of academic departments, and the proportion of faculty salaries going to departmental research and public service.
Research: Sponsored or organized research, including research centers and project
Research. These costs are typically budgeted separately from other institutional
Spending through special revenues restricted to these purposes.
Public service: Activities established to provide non instructional services to external
Groups. These costs are also budgeted separately and include conferences, reference
Bureaus, cooperative extension services, and public broadcasting.
Student services: Non instructional, student‑related activities such as admissions,
Registrar services, career counseling, financial aid administration, student organizations,
And intramural athletics. Costs of recruitment, for instance, are typically embedded within student services.
Academic support: Activities that support instruction, research, and public service,
Including: libraries, academic computing, museums, central academic administration
(Dean’s offices), and central personnel for curriculum and course development.
Institutional support: General administrative services, executive management, legal
And fiscal operations, public relations, and central operations for physical operation.
Scholarships and fellowships net of allowances: Institutional spending on scholarships
And fellowships net of allowances does not include federal aid, tuition waivers, or
Tuition discounts (which since 1998 have been reported as waivers); it is a residual
That captures any remaining aid after it is applied to tuition and auxiliaries.
Plant operation and maintenance: Service and maintenance of the physical plant,
Grounds and buildings maintenance, utilities, property insurance and similar items.

Auxiliary enterprises, hospitals, independent, and other operations: User‑fee activities
That does not receive general support. Auxiliary enterprises include dormitories, bookstores,
And meal services.
It is so important that we have an understanding of where funding comes from and how it is spend. Although every institution handles their funding differently, they all have similar spending allocations and student funding. Some institutions get their funding from private donors and state funding, where as others.
What is tuition discounting?
Tuition discounting is a very controversial subject that will continue to be so for many years to come. In order to understand tuition discounting and its positives and negatives, it is important to understand what it is. Some references to “tuition discounting” sometimes imply questionable motives on the part of colleges and universities that are viewed as manipulating or fixing tuition prices to benefit the institution, and in the interests of institutional priorities not necessarily consistent with the well-being of students. Discounts to published tuition and fee rates are most often provided to students whose financial resources are inadequate to allow them to enroll without some form of assistance.
The practice of tuition discounting or price discrimination is when an institution charges different students different prices for the same educational opportunities. This is a long-standing feature of private higher education institutions. A perfect example of tuition price discrimination is one that happens every day by both private and public institutions. This is when universities charge higher prices to out-of-sate students than to state residents. This has been done for years by all universities, and for many they feel that this is unfair and that tuition should be the same across the board for all students whether they are in –state or out-of-state. Typically the awarding of institutional discounting has been based primarily on the financial need of the students. This aid provides grant money to students who lack the resources to pay the listed price in order to enable them to attend the institution.
Tuition discounting is attractive to higher education institutions: Tuition discounting is not only used for students who cannot afford to attend an institution but it is also used for athletes. This is probably the biggest tuition discounting that is done in universities. Non-need-based aid, based on criteria such as athletic abilities, also has a long history. Financial aid “leveraging” may be used to alter the profile of students attending the institution. This is done usually to improve the perceived academic profile of the institution, to increase the net revenues, or to simply fill empty seats. Non-need-based aid may be awarded to students who do in fact have financial need, but it is often given to students who have the ability to pay but are unwilling to pay the full published price to attend the specific institution. Need-based financial aid generally is the desirable practice. The problem about tuition discounting is that it centers primarily on strategic use of institutional grant aid for the purpose of competition with other institutions. The National Postsecondary Student Aid Study (NPSAS) conducted a study which showed that in the lower-priced private colleges and universities, a disproportionate amount of institutional aid is being distributed to middle-and upper-income students, suggesting an increase in non-need-based aid. The differences however, only show partial function of institutional policies. Both the public and private sectors, tend to enroll higher-income students and to have larger endowments offer tuition discounting. The study also showed that more affluent students are eligible for need-based aid at more expensive institutions, and the institutions in which they enroll are more likely to be able to meet the need of their students. This also shows true for students who are athletic and do not have an athletic scholarship to attend the school. This is a form of recruitment for the school to offer tuition discounting to students who wish to play ball or other athletic activities for the institution. Many schools award scholarships based on academic criteria to students who have financial need and think of them as merit-based. Many schools ration their scarce need-based aid funds through preferential packaging, awarding more generous grant aid to the students they are most eager to enroll or who are deemed most in need.

Negative consequences to tuition discounting:
The bigger question here would be is tuition discounting dangerous to an institution’s financial well being? 1. Discounting may unintentionally reduce student accessibility and affordability. 2. Institutions that pay for discounting by shifting funds from instructional and student services may impede their own efforts to improve student retention and attainment. 3. Some colleges may be courting fiscal danger because of the discounting practices.
Tuition discounting may work for some colleges and they can continue to grow and thrive under their tuition discounting policies. But to be truly effective, tuition discounting should simultaneously attract students and increase revenue for institutions. Expanding access for lower-income students will succeed only when a school ensures that enough financial aid is available specifically for that purpose. Discounting does not always increase student quality and for all the claims that tuition discounting and merit aid are useful tools in helping schools compete to attract the best students, most research proves otherwise. Tuition discounting and merit aid doesn’t seem to make a difference in scores or the types of student’s that enroll. “You’ve got to try to keep financial aid as a relationship to the total revenue coming in. Some schools are providing 40 percent or higher, and that’s a dangerous spiral. They have fewer revenue dollars to use for programs, even with a large endowment.” Ron Matchley, president, Bryant College.
For-Profit and Distance Learning Schools Two of the largest growing financial money makers in education are for-profit and distance learning schools. For-profit schools have been in existence for years, but their gain in profit truly did not start until the 1970’s when the Higher Education Act was put into play and students were able to get government funding to go to a non-traditional college. This act did away with any limitations that for-profit schools had for students in enroll. With federal funding and the ease of being able to go to school for less than 2 to 4 years and get job ready training while in school students were enriched with the glamour of for-profit institutions and what they could offer them. For-profit schools quickly grew to a million dollar industry and by the year 2009 went from millions to billions of dollars brought into the schools for profit. For-profit schools became the largest educational institutions in the industry. The schools targeted non-traditional students who were older, worked, and had families or other commitments that prevented them from going to a traditional college. They needed a school that would get them job ready in the shortest time frame so that they could support their families. Today’s for-profit schools have decreased in enrollments and size. This is due to several factors which include changes with congress, gainful employment, and stricter guidelines with admissions, Financial Aid, and Placement. Although pro-profit schools still run the industry they are scrutinized more within the federal government and federal funding has once again become harder to get.
The biggest single trend affecting higher education finance has been the incremental privatization of finance, spurred by the erosion of state and local funding for public institutions. (ACSFA, 2002.) More and more adult learners are choosing to use online or distance learning to get their degree. This type of education offers students the flexibility to attend college while working fulltime. They are able to do this from anywhere they have access to the internet. Students are able to choose a vast variety of programs and schools which to do their choice of study. Because of these reasons there are more and more online schools. Online education has been on the increase in the past very years. There are more and more funding that has become available for students who choose to participate in distance learning. This has also started a trend with traditional colleges who are now starting to offer some of their classes online.
Trends in Revenue and Funding
In recent years the trend for for-profit schools has been and up-ward one. This is due to the high percentage of students who have to use federal funds to attend school. On average 94% of all students who enroll in for-profit school’s use federal funding to pay their tuition. Compared to the 35% of students who enroll in non-profit schools and about 70% of the students who enroll at private universities, this amount is extremely large. This is one of the main reasons why the federal government has enacted the 90/10 rule to safeguard against for-profit institutions from relying only on the federal financial aid for their revenue. If any college goes above their 90% in a two year span then they lose their federal financial aid. Today, after several potential management "revolutions" (Keller 1983; Rourke and Brooks 1966), colleges and universities have a variety of management tools available to help control costs, once the leaders and administrators have decided to do so. Some institutions successfully have adopted various information, analysis, and accountability methods to improve their planning and management abilities (Baldridge and Tierney 1979). However, there is no single strategy for successfully managing costs. Furthermore, the management revolutions might have been only partially successful, although the current fiscal crisis should stimulate increased interest in these tools and techniques.
This is the reason that most for-profit schools have a clause that states that the student must pay 10% of their financial aid out of pocket or with a personal loan. The reason this is done is so that the loan default rate for students stays at a lower level. Is this a plus for the student and the institution? The answer to that question is all too often no. Because most students who attend career colleges cannot afford to pay out of pocket so they go into default with the school and get dropped. Or they are not allowed to graduate until they clear their debut with the school.

Gainful Employment The United States Department of Education implemented new rules and regulations for all for-profit schools stating that they must offer job placement to all students. These were done due to the fact that a large percentage of students were defaulting on their loans because they were unable to find employment after graduation. In 2007 the default rate for students was over 40% and the federal government issued out over $16 billion in loans to students who attended for-profit schools. This becomes a large issue with the Department of Education. For-profit schools now must provide all students with graduation and job placement percentages. The school also has to report these numbers to the Department of Education and maintain a 70% job placement rate and a 30% graduation rate. They also are enforcing new laws which prohibit non-qualifying students from receiving federal funding and that only eligible students receive aid.
Solutions
There are limited funding solutions for schools that are for-profit to maintain their 90/10 rule. With ten percent of their funding having to come from outside sources, they have to rely on cash funding, scholarships, and outside grants in order to stay within the rules of the federal government. Because of these strict laws, for-profit schools will be forced to decrease their federal financial aid dependence and with the economy in a constant downward spiral this will slowly put a strain on for-profit schools finances and student population. Finding alternative funding solutions can help subsidize some of the costs such as enrolling American Indians, military and veterans, and recently graduated high school students who can use tops. “ TOPS "Taylor Opportunity Program for Students" is a program of state scholarships for Louisiana residents who attend either one of the Louisiana Public Colleges and Universities, schools that are a part of the Louisiana Community and Technical College System, Louisiana approved Proprietary and Cosmetology Schools or institutions that are a part of the Louisiana Association of Independent Colleges and Universities.” Reaching out to other businesses for grant funding and scholarships can be another way. Schools can also offer continuing education classes for post graduates who need to keep up their certifications. Offering cash only online courses can be another large cost reducer for the school. Encouraging students to utilize private loans and offering interest free in school loans work well with some schools, even though this can be somewhat of risks for the school if the student does not pay the loan back monthly. The rise could be attributed to more student services and programs to meet governmental social policy and health and safety requirements, and the expanding use of computers in all kinds of administrative functions (Chaney and Farris 1990).
Conclusion
For-profit schools have a formidable challenge and lots of hard work ahead of them to maintain their credibility for financial aid. They also have a major uphill climb to maintain their financial growth. Keeping in line with the rules and regulations set by the Department of Education will keep most institutions honest and eliminate the offenders. This will also force them to focus on retention and the financial challenges of their students. For-profit schools need to constantly make sure they are maintaining their 90/10 and keeping up with their accreditation for each program to stay legitimate and remain creditable in the eyes of not only the government but the public and all prospective students who walk through the door. In my opinion, coming from a for-profit school although it is and will continue to be a large challenge for school’s to meet their 90/10 to keep their accreditation, it is a challenge that they embrace and a goal they work toward every day. Because everyone has a passion for what they do they all welcome the challenges and achieving them.

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