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For-Profit college plunge makes Sperling rail at Obama

Dec. 28 (Bloomberg) -- Students seeking to move up in life by getting a degree from a for-profit college are being trapped in a growing underclass of education debtors. Under U.S. law, their loan obligations can rarely be discharged in bankruptcy, making them more onerous than credit-card debt or subprime mortgages taken out before the housing bubble burst. Bloomberg's John Hechinger reports. (Source: Bloomberg)

"I certainly would never recommend them to a young student over a community college," David Breneman, a professor at the University of Virginia in Charlottesville and former dean of its school of education, who has studied the University of Phoenix, said in an e-mail. "For older adults with jobs, I think they provide a valuable option. For younger students without prior college experience or a job, I think they provide little value added."

Nelson declined to comment. Axia's conversion to an online program was driven by student demand, said Mark Brenner, an Apollo spokesman.

Because most of its students were low-income and qualified for federal grants and loans, Axia fostered Phoenix's dependence on its biggest source of funds, the Education Department. Phoenix derived 88 percent of its revenue from federal student aid in the year ended Aug. 31, up from 48 percent in fiscal 2001.

Reliance on federal funds is "a bad business model," Iowa Senator Tom Harkin, the chairman of the Senate education committee, said in a telephone interview. "You get the maximum return by recruiting the lowest-income students, and getting rid of them as soon as possible."

"I've been accused of being against private enterprise," Harkin said. "This is not private enterprise. Ninety percent of their money is coming from the taxpayer."

Phoenix executives trained under Sperling fanned out across the country, implementing Axia-like online programs for taxpayer-funded low-income students.

Founded in 2004 by a former Phoenix vice president named Andrew S. Clark, Bridgepoint Education Inc. had 77,179 students on Sept. 30, up from 1,063 at the end of 2005. Almost all took classes exclusively online. Bridgepoint, based in San Diego, had $521 million in revenue in the first nine months of this year, up 62 percent from the comparable period a year earlier, according to the company's filings. Its flagship Ashford University derived 86 percent of revenue from federal aid in 2009.

Former Apollo Group president Brian Mueller is CEO of Phoenix-based Grand Canyon Education Inc., which had 42,300 students on Sept. 30, of whom 91 percent were enrolled online. Grand Canyon had 8,422 students at the end of 2005.

Todd Nelson, the former CEO for Apollo, now holds the same title at Pittsburgh-based Education Management Corp., the No. 2 higher-education company by enrollment, with 158,300 students in October. New York-based Goldman Sachs, Wall Street's most profitable bank, owns a 39 percent stake in the company.

The sector also attracted Washington Post Co. Once known primarily for preparing high-school students for the SAT college-entrance examination, the company's Kaplan unit derived 63 percent of its revenue in the quarter ended Oct. 3 from its higher-education division. Kaplan has 112,000 students, of whom about 70,000 attend online.

Jack Welch, former chairman and CEO of Fairfield, Connecticut-based General Electric Co., is an investor in Chancellor University in Cleveland, which named its online master's degree program in business administration after him.

Sperling and his industry got a boost from the election in 2000 of George W. Bush, who in 2002 named the former Apollo lobbyist Stroup to oversee higher education.

Congress had passed a law in 1992 that cracked down on trade schools in such fields as hairdressing and truck driving, which garnered federal aid by siphoning off students from welfare and unemployment lines.

The law banned colleges from paying recruiters on the basis of how many students were enrolled and capped the percentage of revenue that the institutions could receive from the government.

To deter fraud by correspondence schools, for-profit colleges that provided more than 50 percent of their courses or enrolled more than 50 percent of their students for distance education -- meaning that professors and their students are in different locations -- were prohibited from receiving federal aid.

The Bush administration diluted these restrictions, starting with the incentive-compensation ban. In 2002, officials put into place 12 exemptions, or "safe harbors," allowing for- profit colleges to pay recruiters on the basis of enrollment as long as it wasn't the sole criterion. The government also reduced the penalty for colleges' violations of the incentive- compensation law to fines, from suspension or loss of eligibility for student aid, according to an Oct. 20, 2002, memo issued by William Hansen, then deputy secretary of education.

Hansen, who left the administration in 2003, then lobbied for Apollo from 2006 to 2009, according to the Center for Responsive Politics, a Washington research group. Now president of Eagan, Minnesota-based Scantron Corp., a collector of student-performance data, Hansen declined to comment, as did Stroup, senior vice president at Scantron.

Apollo's use of Hansen as a lobbyist was unrelated to his lowering of penalties for recruitment violations, said Brenner, the company spokesman.

Led by John Boehner, then chairman of the House education committee, Congressional Republicans scrapped the 50 percent limit for online courses in 2006.

"We are dealing with antiquated regulations that may have been well-intentioned when put in place but today are simply a burden," Boehner said at a 2004 hearing on the issue.

Sperling's childhood ingrained sympathy for the underdog. He grew up in rural Missouri, the sickly child of a drifter who beat him often. His father's death, when Sperling was 15, "was the happiest day of my life," he wrote in "Rebel With a Cause" (John Wiley & Sons, 2000), his autobiography. "It still is."

After graduating from high school, Sperling joined the merchant marine, where he read widely in his spare time. He earned a bachelor's degree from Reed College in Portland, Oregon, followed by graduate study at the University of California at Berkeley. There he met Virginia Sperling, his second wife.

"We were beatniks and we loved it," Virginia Sperling, 84, said in a telephone interview. "We lived in a co-op. We were all sort of outcasts."

Sperling earned a doctorate in economic history from Cambridge University in Cambridge, England. He now funds scholarships for Reed graduates to study at Cambridge, according to Reed's website. Reed and Cambridge will receive donations through Sperling's will, Helburn said. "He has great affection for his alma maters," she said.

Raising a family held little appeal for her ex-husband, said Virginia Sperling, a dancer and art dealer, who is Peter Sperling's mother.

"He was so driven," she said. "He always felt that a family would be a distraction. His theory is, you can't be a genius and have a family."

Nor did the academic career on which he embarked after Cambridge fulfill him.

"When we were at a party, he would often grab me by the arm and say, ┬┐My boy, there's not a group on the face of the earth more boring than the professoriat,'" said Tucker, the former Phoenix executive.

Sperling led a faculty strike at San Jose State University in San Jose, California, in 1968, and the action's failure cost him the presidency of a union at California public universities. The following year, he and his students celebrated Earth Day with a protest against air pollution. They bought a new Ford Maverick automobile and buried it in a grave they dug on campus.

"John was unlike any other professor," said John Murphy, who was a San Jose State student and later worked as a Phoenix executive from 1977 to 1997. "He was actively engaged in bringing the university to the community. He didn't mind getting his hands dirty."

Training that Sperling ran for police officers and teachers about juvenile delinquency proved so popular that he turned it into the Institute for Professional Development, which offered adult education under a contract with the University of San Francisco.

Sperling made the institute a for-profit corporation because, after his ouster from the union presidency, he was "quite wary of creating another nonprofit organization some board could yank away from me," he wrote.

The Western Association of Schools & Colleges, the accrediting body for California, complained that San Francisco's faculty hadn't been consulted about the program. Faced with the threat of losing accreditation, the university cut ties with the institute in 1977. Sperling decamped to Arizona, with different accreditors, and established his own university.

There, Sperling barely staved off legislation giving control of private higher education to the state's public universities.

Phoenix's quest for acceptance was "was one nasty, brutal, bare-knuckled fight," said Murphy, 64, a screenwriter and producer who is writing a history of the University of Phoenix during his time there. "Everything we did drove traditional education into absolute apoplexy. We didn't know on Friday if we'd be open for business on Monday."

At the urging of Phoenix's vice president for product development, Sperling started an online campus in 1989 and stuck with it through unprofitable years.

"He persisted when virtually all of the institution was opposed to the idea," Tucker said.

Once his gamble on for-profit higher education paid off, Sperling bet much of his newfound wealth on other interests. He invested more than $10 million on 20 state-ballot questions from 1996 to 2008, seeking to treat rather than incarcerate marijuana offenders and legalize the substance for medical purposes, said Ethan Nadelmann, executive director of the Drug Policy Alliance in New York, who worked with Sperling on the proposals. Fifteen of the measures passed.

Sperling had less luck achieving a "second green revolution" that he envisioned for deserts in poor countries. In 2001, after a disagreement with the government of Eritrea, he pulled out of a joint venture to raise shrimp in Red Sea water and use the runoff to grow a crop tolerant of salt water, Eric Rey, a consultant on the project, said in a telephone interview. Sperling now is majority owner of Arcadia Biosciences Inc., a Davis, California-based developer of technologies to reduce greenhouse-gas emissions, said Rey, the company's CEO.

Sperling also shuttered an anti-aging clinic that he had opened in Phoenix and hoped would beget a for-profit growth industry. The Kronos center, which sought to slow degeneration associated with old age, charged patients thousands of dollars for comprehensive assessments that insurance rarely covered.

The Apollo founder owns Polipoint Press, a Sausalito, California-based publisher that put out books this year advocating a public option for health-insurance buyers and likening the Republican right to the Taliban. The press also published "The Great Divide: Retro vs. Metro America," a 2004 manifesto -- coauthored by Sperling -- advising the Democrats to reduce defense spending and end corporate welfare.

"I'm one of the few surviving liberal economists, and he's more liberal than I am," Carl Hunt, one of Sperling's coauthors, said in a telephone interview.

Reluctant to lose his beloved dog, Missy, Sperling funded pet-cloning research by Texas A&M University in College Station, Texas, and now-defunct Genetic Savings & Clone Inc. While GS&C's successor, BioArts International in Mill Valley, California, succeeded in cloning the late Missy in 2007, it stopped replicating dogs in 2009 because of black-market competition from South Korea and unpredictable results, such as a clone born greenish-yellow instead of the expected white, according to the company's website.

The duplicate Missy lacks its predecessor's personality, Sperling's ex-wife said.

"The dog he paid millions to clone, he takes her to the park at the Presidio, she seems like a disappointment," Virginia Sperling said. "She's not as lovable as the original."

As pressure from Washington on for-profit colleges mounts, Sperling has cut back other enterprises to fight for his main business.

"A disproportionate amount of his time in the last 9-12 months has really been back on Apollo," said Josh Rosen, president and chief financial officer of Southwest Solar Technologies Inc., a Phoenix-based startup in which Sperling, its chairman and sole funder, invested $40 million. "As the political environment has gotten more challenging, that has taken up more of his bandwidth."

He's "not the least retired," Joan Hawthorne wrote under her Candida Lawrence pseudonym in "Vanishing" (Unbridled Books, 2009). "He'll run his company until he drops."

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