Will student loans at for-profit colleges lead to defaults? © Ariel Skelley / Blend Images / Getty Images

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Subprime for students: A default deluge

For-profit colleges are the fastest-growing sector of education, but will the federal aid that pours into these schools have results similar to the mortgage meltdown?

By The Big Money

You probably haven't heard of Ashford University of Clinton, Iowa.

In the world of for-profit education, though, Ashford is one of the most incredible growth stories of the past decade. And it's just one example of how federal education aid is now funneled to for-profit schools, which have delivered stellar profits to their owners, dismal graduation rates to students and billions of dollars in defaulted student loans to taxpayers.

In 2005, Ashford was a struggling 332-student religious school called the Jesuit University of the Prairie, founded in 1918. That year, a startup company called Bridgepoint Education spent $9 million to buy the school and renamed it. Now Ashford, together with the University of the Rockies (a tiny school Bridgepoint bought in 2007, the former 75-student Colorado School of Professional Psychology), enrolls more than 65,000 students.

Last year, Bridgepoint's two schools took in $454 million in tuition and fees from their students. If Ashford's academic reputation has not grown as fast as its enrollment, it is no surprise, considering where all that money went: $145 million was spent on marketing and recruitment, which is $25 million more than the colleges spent on instruction.

As striking as how little of Ashford's money is spent on education is how much of it comes from government grants and federally backed loans. Eighty-five percent of Bridgepoint's $454 million in revenue last year was funded with federal student aid.

Even among for-profit schools, Ashford's growth is exceptional. But Ashford's basic formula of pulling in federal aid dollars and using them to market to more students, however, is much like the template for the entire for-profit higher-education industry. Extolled as a free-market solution to rising education costs, schools such as Ashford have instead turned into a study in how to repurpose public resources for private gain.

Bridgepoint is one of several corporations featured in a striking report from the investor Steve Eisman, who is well-known from Michael Lewis' "The Big Short" for having anticipated the subprime-mortgage crash. Now Eisman has turned his attention to for-profit education.

Over the past year, there have been reporters, such as Daniel Golden at Bloomberg, who've done extraordinary work detailing the abuses of the for-profit education sector. What Eisman brings to the table is a wealth of data and a well-trained eye for the economic underpinnings of the industry and the striking ways in which it resembles the failed subprime-loan business.

Continued: 3 points stand out

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