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>> tonight on frontline... >> it's education for profit. >> business is booming. >> are you thinking about going back to school? >> they'll find you a loan... >> it was just such an incredibly simple process. >> give you a diploma... >> we educate the students that traditional higher education has given up on. >> but what are the costs? >> i really am at a dead end, and the student loans are going to keep mounting, and mounting, and mounting. >> the danger is a kind of a fast-food-ization of higher education itself. >> this is an online university. this is what it looks like. >> correspondent martin smith investigates... >> you've been in office now for a year. what have you done to stop this? >> "college inc."

( phone dialing ) >> hey, willy. michael. could you give me a call when you get a chance? thanks. ( phone dialing ) francisco garcia. how are you, sir? ( laughs ) what's the next step, francisco or bob, in your mind with... with michael? >> martin smith: meet michael clifford. >> i didn't see the email confirmation from them. did they confirm? >> smith: he calls himself an educational entrepreneur. >> dennis' read on it is that the regionals have just never had to deal with that before. >> smith: from his headquarters in the sleepy beach community of del mar, california, clifford is building an empire. >> was it mark twain that said don't let college get in the way of your education? ( laughs ) >> smith: he invests in failing universities, and injects them with large amounts of capital.

when they go public, he can make a bundle of money in the process. >> the regulatory environment has changed so much. >> smith: one of his schools was involved in a major 2008 ipo on wall street-- grand canyon university. you may never have heard of it, but today, it's valued at $1.2 billion. >> hello, this is michael. >> smith: a former musician who never attended college, michael clifford is an unlikely player in the rarefied world of academia. >> i was doing a lot of cocaine, drinking a lot. smoking a lot of pot from the music business, then the club scene. somebody introduced me to jesus christ by reading me the bible, and it changed my life. i became a born again christian. and then, my spiritual mentor, a guy named bill bright from campus crusade for christ international, sat me down one day, and said "you need to get into post-secondary education." and i said, "bill, i've never gone to college. i don't know what you're talking about." right, right. when i came home and told a

couple of my friends that i was going to buy a university, they all said, "are you back on crack or something?" i mean, no one buys a college. and i said, "no, no, i think it can be done." >> smith: today, clifford is part of a movement that is transforming the way we think about higher education in america. he and his investors have turned around a half a dozen colleges that now enroll close to 40,000 students. there are people who would say, look, this guy, michael clifford, he never went to college, he was a musician, he sort of drifted around, he had a born-again experience. do you have the credibility, do you have the bona fides to be determining the future of colleges around the country? >> no, i don't, but i'm doing it, and i think that's the great thing. only in america. i mean, my new book is called "how to run a college by a guy that never went to one." >> smith: and clifford doesn't act alone. he attracts some of america's biggest investors, like former g.e. chairman jack welch.

according to the wall street journal, welch invested $2 million in one of clifford's schools. >> i invest in bonds and other things. invest in all these widgets i invest in, private equity. or invest in a school. hi, i'm jack welch. it's education for profit. i like this investment more than any one i got. >> ( laughs ).=miu/b >> smith: traditional colleges raise capital from wealthy alumni and other donations. clifford's for-profit schools sell shares to investors. >> i just think that if everyone's going to fund... >> smith: clifford's latest turnaround project is a small nursing school in a hispanic section of san diego. >> we have probably invested in the neighborhood of $6 million to $7 million in the school. it will get as big as we want it to get, because the demand for bilingual nursing and other related health care programs is so great.

>> smith: clifford took over interamerican college in 2009. it's geared to serve latinos, and he plans to open a string of campuses outside military bases. the students typically hold jobs by day, and take classes well into the night to improve their job prospects. >> our typical student is... they're adult students. so, their average age might be in their early 30s. they're very career oriented. >> protein carbohydrates and lipids... >> smith: in the past, these students might have graduated high school and found a good job as a factory worker or a secretary. there was no need for more school. but with the economy changing, they are coming back to school in record numbers. they represent a huge and growing market. it's a phenomenon that leaders of america's community colleges have known for years.

in an old industrial section of queens, new york, the jobs are long gone and students are crowding classrooms. >> college is now fundamental. if you're going to work, to just simply work, to make it as an adult, you are going to need an education, because the economy is about knowledge. >> smith: but the demand is so great, community colleges can't keep up. >> there's an explosion of enrollment this year. and most of us have been turning away students. in california, i know it's tens of thousands, maybe hundreds of thousands of students who couldn't even come in. >> smith: how do you meet that demand? >> what laguardia community college has done, and other colleges throughout the country have said, "come to us, and when we're full, we're going to shut the door." >> smith: and more and more, you're having to do that. >> we are having to do that. >> smith: the failure of community colleges to accommodate the demand has given clifford and others a huge opportunity. >> many schools are not meeting the market demand.

we have somewhere between 30 million and 50 million working american adults who have not finished their college degree. >> smith: the question is, are for-profit schools the answer? in the '90s, clifford apprenticed with the undisputed master, the architect of the for-profit model, john sperling. in 1976, sperling, a cambridge university-educated humanities professor, turned his back on traditional academia and moved to phoenix, arizona. he believed he could mass produce education and run his school more like a corporation than a university. now, his school is everywhere-- the university of phoenix. it's one of the largest

universities in the world, enrolling close to half a million students, more than the entire university of california system and all the ivy league schools combined. i traveled here knowing that the university of phoenix is wary of the media. but they had agreed to some interviews. then, at the last minute, they backed out and gave no explanation. instead, i spoke to former phoenix executives. >> it was not by accident that this university developed in the southwest and the west. that's where people go to reinvent themselves. and that's where john reinvented the university. >> smith: why did the university need to be reinvented? what's wrong with the way that universities were running up until the time that john sperling came along with phoenix? >> john saw the constraints of most... most college professors. you know, anybody who's got any new ideas in college are quickly beaten down. the academy hasn't had a real change in how it worked for almost 500 years.

>> smith: mark defusco arrived at the university of phoenix in the mid-'90s with a phd in education from usc, but he quickly embraced the phoenix model. >> phoenix, people go to school all year round. we started classes every five weeks. and instead of starting classes in september, in january, we started classes in january, february, march, sometimes two in april. if we had more students than we could handle, we'll build another site and handle some more. we built campuses by a freeway, because we figured that's where the people were. so, if you went by any major freeway in the southwest, you're going to find a university of phoenix campus. >> we put schools 20 minutes apart, because that's about as far as somebody could drive at rush hour. >> smith: to keep costs low, the university of phoenix hired teachers on short-term contracts. they did away with tenure. >> i didn't have to worry about tenure. if they weren't getting to the outcomes i needed, i just

wouldn't give them another contract. >> smith: and where it takes a traditional university months or years to get a new course approved by faculty, at phoenix, they could generate one in a matter of days. >> we would put a group of faculty members, a group of experts, into a room in a hotel for a weekend. and we wouldn't let them out until they came up with new curriculum. >> smith: the university was not bound by bricks and mortar, either. students who couldn't attend a phoenix campus could log into courses online. >> we were designing the coursework around the people who were going to use it. >> smith: the customer. >> you bet. >> smith: it wasn't long before wall street took notice, and in 1994, the university of phoenix and its parent corporation, the apollo group, went public. in an otherwise flat market, the stock took off. >> it was a very exciting time. for the first 15 quarters, we broke records and earnings every

quarter. >> apollo group, this stock has done very... >> we were filling in places that no one had ever filled in before. it was a change of an industry. and the early managers at the apollo did very, very well. >> smith: what do you mean by "very, very well"? >> they did very, very well. i mean, ultimately, there's not college professors and college administrators in this country that did as well as apollo administrators. i mean... >> smith: how much could a college administrator for the university of phoenix make? >> the sky was the limit. when i left apollo... i shouldn't say this. i shouldn't say this. >> smith: it's a free country. >> i understand. i understand. but it's boasting, and i won't say. >> smith: well, in terms of how much you made, you did very well. >> we did very well. i did better than i ever imagined. >> smith: today, phoenix founder john sperling is a billionaire, and many of his executives have reaped millions.

with money like that to be made, the business model caught fire. it's been replicated across the industry. for-profits offer a range of degrees, but focus on career training in the growth sectors-- nursing, business management, i.t., and education. it's difficult to assess the quality of the degrees. across all colleges, traditional or for-profit, there's no standard measure imposed on them. but we did talk to satisfied students. >> i love grand canyon and the community that it represents, and also the christian background. >> this school is just perfect. it's night classes. >> i'm studying merchandise-product development, and it is the coolest thing i've ever done in my life. i love it. >> smith: but i was surprised to learn how expensive tuition at the for-profits is-- five to six times the cost of a community college, and as much as twice a four-year state university.

on wall street, they're a big hit. >> from a business perspective, it's a great story. you're serving a market that's been traditionally under-served. there is a need for more education. and it's a very profitable business. it generates a lot of free cash flow. so, it attracted a lot more financiers, and that really helped take the industry to the next level. >> smith: one of the most successful was grand canyon university, the school that michael clifford came across in 2004 when it was a small, struggling christian college. >> smith: you've got $60 million invested in improvements here. >> in the next three years, yes. >> smith: today, under another former university of phoenix executive, brian mueller, the school is flourishing. there's a business school with a brand new building. >> it's looking right at you. >> smith: the nursing program has state-of-the-art facilities.

the basketball team is competitive. and the baseball team has a new diamond. some 40,000 students are now enrolled at grand canyon. that's a 400% increase in just a few years. but you won't find the majority of those students here. i hear it. instead, most of them are here. ah, yeah. 90% of grand canyon students are logging in online from across the country. these servers alone represent 35,000 of them. this is an online university. this is what it looks like. >> this is where... other than the people involved-- the instructors and the students-- this is where they all come together electronically. >> smith: online education is incredibly profitable. and how much capacity do you have built in here? how... how big can you go?

it allows schools to tap into a wellspring of new students and expand rapidly at the flick of a switch. >> we can easily add more servers and take several times this. >> smith: several times? so in the 100,000, 150,000? >> yes. >> smith: really? an online course at grand canyon costs from $400 to $550 a credit hour. we watched an online class at another school. we were asked and agreed not to show it, but for the most part, it's just instructor-led discussion groups. there's little in the way of video or graphics, but it is convenient. >> the times where i have to work in the morning, i can come home and do schoolwork at night, and the times i have to work in afternoon, i get up and i do schoolwork during the day. >> smith: but some critics of this model worry there may be something lost. >> the danger, obviously, is a kind of fast-food-ization of higher education itself, where a

low-cost convenience and ease of... ease of finishing become values in themselves, to the possible detriment of the things that only can be accomplished slowly and over time. >> smith: at grand canyon, most of mueller's profit comes from his online operation, but he still sees the value of anchoring his university in a traditional campus. >> there is a lot of value in the minds of a teacher in minnesota that's going to do a masters degree program. she's going to do it online. now, even though she's not coming to campus, the fact that it has a traditional campus that looks like the campus that she went to as an undergraduate, the fact that the campus is growing and flourishing and has all of the excitement around it is very... is important. >> smith: so it builds your brand. >> it absolutely builds the brand. >> not just a job search. a journey. >> smith: beyond building the

campus and installing his online servers, mueller is spending even more money getting the word out-- $25 million last year alone. >> we're all here for a purpose. find yours. >> smith: for-profit schools spend a lot on marketing. >> whatever your business card says, you're in the business of you. >> smith: their ad costs rival those of multinational brands. >> which university revolutionized education in america? >> smith: the granddaddy, university of phoenix, spent $130 million on ads in 2008. >> which university has the largest business school in the country? >> smith: that's more than brands like tide, revlon and fedex. >> why wait any longer? >> smith: what they spend on sales and marketing can rival or exceed what they spend on teaching. >> i want to be the best dad. >> if you take a look at for-profit colleges, the analysts will tell you that anywhere between 20% and 25% of the total revenue of a company is in sales and marketing, about a quarter.

in most cases, the faculty are in the 10% to 20% range. >> smith: should that make us uncomfortable? >> i don't know. why would one be uncomfortable? >> smith: well, you're spending more on getting me to come to the school than you are on the service you're providing once i'm there. >> i understand. well... >> smith: is that right? >> when i go and buy perfume for my mom, the chemicals in the bottle and the bottle itself amount to about 50 cents. the advertising amounts to $5.00 or $6.00. >> smith: but you're not selling perfume. >> what makes education so special? for-profits have to get people's attention and... and they do a very good job of getting people's attention. >> are you thinking of going back to school? >> yes. >> excellent. what are you thinking of going to school for? >> smith: in addition to lots of advertising, the industry relies on an army of sales people. >> i wish you the best of luck. >> thanks a lot. >> smith: here, recruiters are

working a job fair, trying to convince job seekers to come back to school. >> you had said something about accounting. we have an mba with an emphasis in accounting. we also have a masters in accountancy. >> the for-profits need to continually add students. when you think about it, for the university of phoenix, for example, in order to grow on top of the folks that are leaving, you've got to add the equivalent of, you know, one to one and a half ohio states per year. >> smith: the pressure to grow has raised questions about enrollment practices. >> 2004, 2005 you started to see some companies probably doing things they shouldn't have been doing. you know, going after populations... student populations that maybe did not deserve to go to school, were not going to succeed in school. they were focusing on enrollments more than the quality. >> smith: in the early '90s, a congressional investigation accused a number of for-profit schools of employing false or misleading advertising, and

using illegal recruitment efforts. while some of those schools were shut down, allegations, negative press, and lawsuits continue to dog the industry. we talked to the chief washington lobbyist for the for-profit schools, harris miller. >> smith: the industry has a black eye, has been struggling for credibility. why? >> i don't think the industry has a black eye. i think the sector's doing very well. we're growing by 25% a year, 2.8 million students attending our schools. we have some challenges because there have been some allegations that everything is not perfect. i wish it were. >> smith: but what about the pressure of wall street to have them grow? >> the pressure is to deliver a high education quality for their students. our schools know that anytime they step out of line, there's a huge risk, and there's large focus on compliance at all times, including on enrollment issues. >> thank you for calling devry university. >> smith: we wanted to find out more about how the enrollment process works. we'd heard complaints about call centers, and employees called enrollment advisors, using high

pressure sales tactics on prospective students. >> your call may be monitored or recorded for training purposes. >> smith: then, we got hold of this internal email from argosy university. in it, a director of admissions is writing his team of enrollment counselors. "create a sense of urgency," it says. "push their hot button. don't let the student off the phone. dial, dial, dial." tamif barker was an enrollment advisor at another for-profit school, ashford university. >> i didn't realize just how many students we were expected to recruit, and the amount of pressure that they put on you to meet these quotas, i think, challenges anybody's integrity. >> smith: in a letter to frontline, ashford's parent company, bridgepoint, says they don't have quotas. but barker says she was

instructed to make 150 calls a day, and close on at least 12 students a month. >> if your numbers started dropping, trainers would come around and start telling you to up your outgoing calls anywhere from to 300 to 450 calls a day to meet those quotas, to get those applications. they used to tell us, you know, "dig deep. get to their pain. get to what's bothering them." so that... that way, you can convince them that a college degree is going to solve all their problems. >> smith: another former ashford enrollment counselor, in a submission to the department of education, wrote: "we are forced to do anything necessary to get people to fill out an application. our jobs depend on it." >> thank you for calling ashford university. >> smith: bridgepoint says ashford has zero tolerance for unethical behavior. >> the focus is to start the

student, whether they're academically ready whether they're financially ready, they need to start class. >> smith: ray campbell worked as a financial aid advisor at the university of phoenix. once a student was recruited, it was his job to hook them up with a loan so they could start paying for classes as quickly as possible. >> if i put on my report that the student's not ready, and they don't start, i would hear it. i would constantly be pressured with "why aren't they ready? is there a way we can start them? what can we do to get them ready?" the focus was on "this student needs to start." period. >> smith: just weeks before this broadcast, the university of phoenix replied at length to a list of written questions from frontline. on the question of pressure tactics, they said: "should we find an enrollment advisor misleading students, prompt action would be taken, including termination." in the same letter they wrote: "we are committed to financial literacy."

federal student loans are the lifeblood of the for-profit schools. although their students comprise only 10% of the college-going public, they consume almost a quarter of all federal financial aid. >> the taxpayers are essentially funding this industry. something like 75% percent of their revenue comes from federal grants and loans. the university of phoenix, which is the biggest for-profit, it now gets 86% of its revenue from the federal government, up from something like 48%, nine or ten years ago. >> smith: the schools say they're providing opportunity, helping students of modest means pay for college. >> we educate the students the traditional higher education has given up on. traditional higher education has become a very sociodemographically elite group of people. if you're not wealthy or upper middle class, you're not going to get into a traditional higher education system. so the only options lower-income students and working adults have

is either to go to a community college, some of them can go to minority-serving institutions, and our option is the third option. >> smith: what remains troubling is, that on average, the debt load of for-profit students is more than twice that of students at traditional schools. >> unlike a public community college, where a small grant will usually cover most of the tuition, for the for-profit colleges the tuition requires substantial borrowing, so a student who drops out or doesn't get a high-paying job, sooner or later they have to pay the piper, and that can mean tens or even hundreds of thousands of loans that they have to pay back. >> smith: that's what happened to anne cobb. >> i had two young girls, and i was trying to find odd jobs. my ex at that time went bankrupt, so all the bills actually rolled over onto me. >> smith: in 1996, anne cobb was a 35-year-old single mother making less than $7,000 a year and living on food stamps when

an enrollment counselor from the university of phoenix helped her get a student loan. >> it was just such an incredibly simple process. i mean, it was "sign a few places here and, you know, we'll let you know, and i'm sure you'll be approved." and i said, "well, i'm not sure. i have a lot of bills. is it still going to be okay?" "oh, yeah. no problem. no problem at all. don't worry about it. just sign here." >> smith: cobb graduated in 1999 with over $30,000 in debt. over the course of a decade, with deferments, consolidations and penalties and an interest rate that has gone as high as 14%, the amount now due has ballooned to over $60,000. >> you never hear these stories. you hear the happy stories with the double car garage and the great house and everything else. you don't hear these horror stories. >> smith: cobb is not the only person with large student debt. there are many like her, and this has some people worried.

>> the concern is that they're bringing in students who can't succeed or graduate, loading them with debt, and the for- profit college is not the one that is on the hook. it's you and me. it's theaxpayer. it's the federal government. >> i know you're worried about the complexity of it, but a plan to split the baby makes a lot of sense to me. >> smith: michael clifford is always in search of his next big deal. >> he'll never get an opportunity like this anywhere in the rest of his life. period. >> smith: we're on our way to a meeting for his latest potential acquisition. >> well, i'm going to push gary hard today. ( laughs ) >> smith: we wanted to see what it takes to revive a failing college. >> thank you, sir. call me if you need anything. thank you. >> smith: what is it that you do that turns a school from a distressed operation to a successful one? >> well, what i feel i do is i bring the three "m"'s: money, management, and marketing. money, management, and

marketing. that's what it takes, combined with passion, to turn around the schools. >> smith: clifford has found a school in oakland, california, that has fallen on hard times. ( choir singing ) patten university is like many small colleges across the country who have seen their endowments disappear during the recession. president gary moncher wants to save patten. but without an immediate influx of cash, patten may not make it through the year. ♪ love you more than anything. >> patten is at the crossroads. with the economic turndown, we lost almost 50% in our assets. i mean, literally dropped from $10 million equity to $5 million. and the future didn't look very bright. so the question is, are we going to be passive and see what

happens? or are we going to try to be proactive? ( bells tolls ) >> smith: despite its dire predicament, patten still has one very valuable asset, something called regional accreditation. >> for the most part, a regionally accredited school is considered a higher quality school. >> smith: like the harvards, yales... >> harvard is regionally accredited. but so is devry. so is university of phoenix. same type of accreditation that the ivy league schools have. so if you can find an underperforming traditional school with regional accreditation, that's a very valuable property. >> we had to do appraisals on what regional accreditation is worth for wall street, and the independent appraisers came up with a number that a school was worth $10 million, because it costs $10 million, ten years, and a 50/50 chance of success to obtain regional accreditation. >> smith: so that accreditation is a very valuable thing? >> it is. once you have accreditation you qualify for the student loan program.

( bell tolls ) >> smith: and that's what clifford needs. accreditation is the key to unlocking federal financial aid funds. >> i heard about patten university from one of the regional accrediting executives, who said, "we really like this school. we're very concerned about its future financially. would you go talk to them, michael?" and i kept looking at patten, going what can i do with this school? i kept working on it. and then it hit me like a ton of bricks that it was the perfect fit for the dream center. >> smith: dream center is a non-profit christian mission associated with the angelus temple, a mega-church near downtown la. ( upbeat music ) since its founding in 1994, the dream center has been a hit with christian teenagers from across southern california. michael clifford is on its board

of directors. the dream center is housed in a former hospital that acts as a 24-hour rehab facility and shelter for ex-convicts, drug addicts, and prostitutes. but, if clifford can make his deal with patten, dream center will also include a fully accredited dream center college. >> we are now in process of working towards this fall launching dream center college because of michael's hard work. ( cheers and applause ) >> if we take a prostitute off the street, or an ex crips, or bloods member, we bring them into our programs and we start an education process. >> smith: let me make sure i understand. so the gang member, the former gang member or prostitute or whoever it is that comes to you, a homeless person, can get a college loan for an education. >> absolutely. >> smith: and it's not just the people in the shelter that clifford's interested in, it's the social workers, too. >> we did a lot of market research, and we believe that

there's a gigantic market for us in los angeles of the 19 to 25-year-old who would like to get a degree but would like to help people hands on. >> smith: so you're going to be able to connect both the people that are providing-- the social workers-- with... with a loan and get them on a degree path at this dream center university. and you're going to be able to take some of their clients-- the former gang members and prostitutes-- and get them a college loan. >> exactly. >> there he is. hey, michael. >> hey, gary. >> hey, michael. how are you? >> smith: in the dream center conference room, i sat in on a meeting with clifford and patten's president as they tried to work out the final details of their deal. >> what are the big barriers to the deal? let's put the turds on the table. >> here's kind of like-- if i can simplify it, michael. i like the fact that you get right to the bottom line. i can't think of a more exciting opportunity for patten to be involved in this work. we just need to move on in some way that makes sense to you. >> absolutely. well, it always takes more money and longer time.

i mean, if we think it's going to cost two million, it's going to cost five. if we think it's going to be two years, it's going to be in five years. it always is that way, you know? >> smith: it's an unusual deal in one respect. clifford wants to keep patten and dream center non-profit. >> i think it's two or three million bucks in the first twelve months is what i'm hearing. >> smith: but clifford's negotiated it so that if he can't find enough charitable donors, he can bring in investors and take dream center college for-profit. >> we can always go raise capital for a for-profit, strategic alliance between the two of them. >> i don't really understand how it all works, with investors coming in, and why would investors invest in this and not the apollo group? and it's a start up company, and what's the payback? >> in reality, this is a $3 to $7 million project. >> i'm very thankful that patten has the opportunity that it has at this time, but i'm very concerned about education as a business for-profit, and that's

simply speaking to a personal bias. >> so we need to make sure, though, the issues on financial aid and all that are buttoned down. >> smith: clifford would like to get this deal done soon. >> what's happening is the currently regulatory environment is very different than it was one year ago. >> smith: he's worried that the political winds in washington are shifting. >> you cannot assume that the doe or the regional accrediting bodies are going to act like they did a year ago. it's extremely hostile out there toward changes. you know, we just don't want any blow-ups. ( gavel pounds ) >> thank you, mr. chairman, and thank you very much for holding this hearing. >> smith: last fall, for the first time in eight years, the house committee on education held a hearing about the for-profit schools. >> it seems to me, the student's a bit of a pawn here. >> smith: with $20 billion of federal student loans and grants funneled to the industry each year, congress is considering stepping up its oversight. >> i'm asking, what happens to

the student out there? >> smith: they're hearing troubling stories about some of the schools' aggressive recruitment practices. >> recruiters at two separate proprietary schools helped prospective students obtain invalid high school diplomas. >> smith: we went to talk to president obama's new secretary of education, arne duncan, to get his take on the for-profits. >> i don't think there's anything inherently wrong with a for-profit educating students where they are providing them with a great education, where they're being honest about it, where there's value for the investment, and long term you want to see those players do well. but, where there is high-pressure tactics, where there are deceptive tactics, where there is dishonesty, we have to challenge that in a very serious way. >> smith: the government has been involved in a number of lawsuits in recent years. one of the biggest was against the university of phoenix and dealt with a rule concerning something called "incentivized compensation." it stipulates that schools

cannot pay enrollment counselors based solely on the number of students they recruit. >> the concern is that they are bringing in students who can't succeed or graduate just so the recruiter can make more money. if you're paid based on how many people you enroll, you'll enroll pretty much anybody. >> smith: with no admission of wrongdoing, phoenix avoided a trial last year by settling out of court with the government and two whistleblowers for $67 million. ( dog barks ) a number of former students from other schools are also filing suits. >> i believed a lot of lies that were told to me, and it wasn't until after the fact that i'm finding out it was anything but the truth. >> smith: sherry haferkamp was looking to get a masters degree in psychology when she talked to an enrollment counselor at argosy university, in north dallas, texas. >> the guy i talked to was personable. he seemed like he really wanted to get to know me.

we had a really good conversation. and then he said, "you know, instead of applying for the masters program, go ahead and apply for the doctorate program. they've got two spots available. so, you better apply right now." and so i was thinking, "heck yeah, i'm going to hurry up and apply." just the thought of, "oh my goodness, i could be a doctor in psychology, that'd be great." i went ahead and i applied. >> smith: according to haferkamp, argosy told her that the degree was going to be accredited by the american psychological association. >> they told me that i had nothing to worry about, and "the only reason why we're not apa accredited is because we are new to the dallas area." >> smith: in fact, argosy, dallas never did obtain apa accreditation. haferkamp has now joined with 17 other former argosy students and filed a lawsuit claiming she was defrauded. in a letter to frontline, argosy's parent company, edmc, says, "argosy, dallas continues

to aspire to apa accreditation and rejects any charges of fraud." haferkamp has since moved to maryland, where she can't hang a shingle without an apa accredited degree. >> i really am at a dead end. i don't know which way to go. and the student loans are going to keep mounting and mounting and mounting. >> smith: haferkamp is now sinking in over $100,000 of federal student loans. this debt is almost impossible to escape. >> if you default on a federal student loan, you will be hounded for life. >> smith: barmak nassirian is a washington representative of traditional colleges. >> it is the most collectable kind of debt there is. it is non-dischargeable in bankruptcy. they will garnish your wages. they will intercept your tax refunds. they will sue you in court. there is... you become ineligible for federal

employment, you become ineligible for any other kind of federal benefit. increasingly, many states piggy-back those prohibitions. so it is... it is... it ruins you. >> what was i doing before just hang around at home quick money jobs. >> smith: everest college is part of corinthian colleges inc., one of the biggest players in the for-profit market. everest held out the promise of a bright future to three nursing students. >> they said that we were going to be making $25 an hour, and... >> $25 to $35, they told me. so i was like, okay. and they're going to find us a job. >> they're going to find us a... >> they're going to place us because they have a lot of connections, and they're big. so, i was like, "okay, this is a good... this is good. >> why shouldn't we? >> why shouldn't we, huh? >> smith: they each paid almost $30,000 for a 12-month program. >> i got my license in december of '09, and i've been on countless interviews.

they all ask if i've ever been in a hospital, and i would have to tell them we never set foot in a hospital. ever. we went to a museum of scientology for our psychiatric rotation. >> our pediatrics rotation, we went to a daycare. >> oh yeah, that was our peds. we went to a daycare. >> smith: despite graduating, and getting licenses, all three women have since struggled to find jobs, claiming they didn't have the right training. in fact, they were given no practical experience in hospitals as they say they were promised, only in nursing homes and health clinics. we asked corinthian colleges about this. they responded by letter stating that the nurses' course provided "thorough and appropriate training." and that "students were fully informed that sites were subject to change at any time." the women want their money back, and along with ten others in their class, are considering a

lawsuit. >> smith: let me ask you about these nursing students at corinthian. we talked about the nurses with harris miller. they have $30,000 in debt. >> right. >> smith: what can they do? >> well, the government can basically wipe that out. i mean, the government has the ability to... if these allegations are correct, and these students were misled, the government can do a lot of things if they're true. >> smith: we asked secretary duncan about the nurses' claims and what miller had said. he said if they determine that the allegations are correct, the government can wipe out their debt. is that true? >> i don't know if we have the ability to wipe out their debt. and again, that's the wrong answer. the right answer is to stop that bad practice. >> smith: well, clearly, that would be a good idea to stop that, but i was surprised to hear from the chief lobbyist to sort of pass this off and say, "well, the government can wipe that out." you can't wipe that out. >> no, sir. >> we are very concerned about

the amount of debt that students are taking on, whether that be federal student loans as well as private loans. >> smith: student debt is a big concern in congress today, conjuring fears of a looming default crisis, reminiscent of the sub-prime mortgage debacle. it's not a small matter. outstanding student loans across all college sectors are roughly equal to america's total credit card debt, about $750 billion. > it sort of reminds me of where we were two years ago with liar loans and no-doc loans in the housing market, where people started accepting people who couldn't prove their income, couldn't prove employment, but we sold them a $450,000 house. >> smith: but the for-profits maintain their business practices are sound, and they don't have a loan default problem. >> we have a school, a welding school where the default rate is less than one half of 1%. and in the gao report, mr. scott and his colleagues reported that they found many schools in our sector with very low default rates, including even a few in inner cities.

so clearly... 90% of the students are in adequate loan repayment. so, apparently, they are finding ways to repay their loans. >> smith: you're saying 90% of the students are paying back their loans on time? >> they're not... they're not in default. right. >> smith: so, 10% are in default? >> 10% or 11%, the last official figure. some are higher, some are lower. that's the average. >> we constantly hear declarations of good news. all of the official stakeholders tout what strikes one as impressively low default rates. well, of course, the reason is because we are not counting all of them. in federal financial aid, because of very heavy lobbying by institutions, default is defined as non-repayment within a very narrow window of currently only two years from the first date that you entered re-payment. so if you can push defaults outside of that window, they go away. they don't exist. they don't count.

>> smith: nassirian believes the default rate at for-profits could be as high as 50% and consider it another way. according to current government figures, for-profit students are much more likely to default on their loans. they represent just 10% of all college students, but nearly half of all defaults. they have about 10% of the students. they have about 44% of all student defaults. that sounds like there's a bigger problem than just a few bad apples. >> it's something we need to watch. >> smith: are you? >> yes, we are. >> smith: i mean, you've been in office now for a year. what have you done to stop this? >> we have some work to do, and we have not... the clear answer is we haven't stopped it. we have challenged some folks. we've had some actually... i wouldn't say... we've had some pretty significant financial settlements, and we're going through a process now and we're thinking through what additional steps we need to take. >> smith: in a cramped

conference room packed with wall street investors and lobbyists, department of education regulators are attempting to negotiate new rules to try to stem the growing number of defaults. one of the most contentious is a proposed rule on something called gainful employment, which requires that upon graduation students should be able to find employment sufficient to pay back their loans. >> it's sort of a direct test of whether for-profit colleges actually fulfill the role that they say that they serve. >> if you're being sold a bill of goods, if you're told you're going back to train to be a policeman, and it ends up you're being trained to be a minimum wage security guard, there's a problem with that. if you're being told you're training to be a nurse and taking out loans that, you know, associated with that potential income salary, and you're actually just going to be just drawing blood, there's a problem with that. >> smith: the gainful employment test, if passed, will apply only to for-profit schools and some vocational programs at other colleges.

>> the for-profit colleges, i think this makes them very nervous. they're worried. because they know that many of their members are charging a lot of money, that many of their members have students who are defaulting en masse after they graduate. they're afraid that this rule will cut them out of the program. but in many ways, that's the point. >> yeah, exactly. it's the largest accrediting body, so it took the hit because it's so big. it has 1,600 schools. >> smith: back in his west coast offices, clifford is feeling the pressure from regulators as well. today, he's having to calm a nervous investor. >> you know, it's a bump in the road and unfortunately, it's a slap in the face to george and jennifer, and the people who have been working so hard. >> smith: his chancellor university-- the school purchased with help from jack welch-- has come under scrutiny. >> chancellor is under a close watch. when we see a problematic

institution being acquired and being changed, we put it on a very short leash. >> smith: sylvia manning is the new president of the higher learning commission, the regional accreditor that oversees chancellor. under her leadership, the commission is taking a harder stance against accreditation buying. >> we've elevated the scrutiny tremendously. it is really inappropriate for accreditation to be purchased the way, you know, a taxi license can be purchased. every so often an institution can't or won't measure up and accreditation is withdrawn. >> smith: for jack welch, this is just the price of doing business. >> we're not going to stop educating people because we're afraid of some bureaucrat nailing us with a dotted "i" and a crossed "t." there's always a risk. you can't be afraid to go into a business because of regulation risk.

>> we're working very hard to prove that we can instill the academic rigor and quality of education for the students that the school had not been delivering for many, many years. >> smith: cause you don't want to see that accreditation get pulled when you're... >> correct, but we... >> smith: ...halfway down the road? >> we won't work with a school unless the regulatory authorities want us to work with the school. i mean, wall street says, "hey, we put our money up, we own this business. it's ours, and we're going to run it." the regulation community says, "these are entities that are part of the public trust. they were non-profit, you've converted them to for-profit, but they still have a public mission to educate our society." and that's where the big tug-of-war has been, but life's too short to be at war with everybody. and i don't believe the regulators are our enemies. >> smith: this tug-of-war between regulators and investors has put wall street on edge. short sellers have entered the fray, betting education stocks

will fall. >> check out apollo group. after the close, the earnings came out. they were a penny better than expected, but they might face a million and a half in liabilities in some open-ended report released from the department of education. >> smith: the industry is fighting hard against the regulations. washington lobbyists have descended on capitol hill with donations in hand. and they are starting to have an effect. in march, 18 congressmen and women from both sides of the aisle signed a letter to secretary of education duncan urging him to soften his proposed gainful employment rule change. >> it shouldn't surprise anybody that a tremendous amount of money goes into lobbying here. the one requirement here for all of the rest of their practices to ensue, is that billions of dollars of federal money flow with no accountability, no oversight, and minimal regulations. and for that to happen, they need to pay attention to washington, and they do.

>> every american will need to get more than a high school diploma, and by 2020, america will once again have the highest proportion of college graduates in the world. >> smith: soon after he took office president obama pledged as much as $12 billion to expand america's community colleges. this year, after a fierce debate in congress, the amount was slashed to just $2 billion. it appears that if the president wants to get more americans to go back to school, he's going to need the for-profit sector. >> the obama administration realizes that the for-profit colleges are going to have to continue to grow in order for the administration to meet its college graduation goals. they're almost getting to the point where they're too big to fail. there'd just be too many students left out on the street with nowhere to go. >> what happens to these students?

where do they go next? they're certainly not going to go to the community colleges. they're certainly not going to be loads of classrooms at the state schools. they're cutting back. the for-profits make it easier for them to actually get what they need, so why shouldn't they make money on it? i mean, ultimately that's part of what the american dream is all about. >> smith: but is education a business? >> i believe so. listen, i'm happy that there are places in the world where people sit down and think. we need that. but that's very expensive, and not everybody can do that, and so for the vast majority of folks who don't get that privilege, then i think it's a business. >> smith: just last week, a senior department of education official promised more scrutiny of for-profit schools. their stocks fell. but in los angeles, michael clifford's dream center college

is accepting students for the fall of 2010. for now, it remains a non-profit. a plan to build a for-profit online program has not been finalized. meanwhile, clifford's busy expanding interamerican college. he's renamed it united states university. >> hello. oh, i'm right in the middle of a meeting, but you're so important that i had to drop everything. ( laughs ) very difficult, very difficult, and they want a... >> there's more to explore on our web site, where you can watch this program again online. >> to make it as an adult, you are going to need an education... >> read the extended

interviews... >> the academy hasn't had a real change in how it worked for almost 500 years. >> these are entities that are part of the public trust. >> and it's a very profitable business. >> we constantly hear declarations of good news. >> more on for-profit universities... >> are you thinking about going back to school? >> yes. >> excellent. >> online education... >> this is an online university. this is what it looks like. >> and the issue of gainful employment and more. >> i wish you the best of luck. >> thanks a lot. >> then join the discussion at pbs.org. >> next time on frontline world... in southern africa, it was supposed to harness the energy of children to bring fresh water to their villages. now, five years later... >> this play pump hasn't produced any water for six months. >> what went wrong with the play pump? >> we would all love there to be a magic bullet. that's not the way it works. >> the politics of trying to

help. this story and more on the next frontline world. >> frontline's "college inc." is available on dvd. to order, visit shoppbs.org, or call 1-800-play-pbs. captioned by media access group at wgbh access.wgbh.org >> frontline is made possible by contributions to your pbs station from viewers like you. thank you. with major funding from the john d. and catherine t. macarthur foundation. committed to building a more just, verdant and peaceful world.

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