By offering adults an education that is faster, cheaper, and better than the likes of Kaplan, Phoenix, or Capella, the nonprofit Western Governors University just might eat their lunch.
Western Governors, by contrast, found its model particularly well suited to degree programs that feed directly to an official test of proficiency, such as the Praxis national teachers’ exams. Such external tests dovetail naturally with the school’s system of competency assessments, and in some cases are essentially folded in among them. For example, before he graduates with his MBA in human resources, McKinnon—the North Carolina expastor— will have to pass the national human resources management certification exam. In an online education sector plagued by accusations of low quality, Western Governors can show that its degrees are backstopped by the official guardians of various professions. (It also helps that WGU students tend to score higher than the national average on such professional exams.)
Western Governors attracted students at a steady clip through the mid- and late 2000s—but so did everyone else in the online degree bazaar. The economic crisis of 2008 and the ensuing waves of unemployment were pushing ever more Americans into the market for “retraining,” where a gold rush was on. As public television’s Frontline pointed out last year, some of the for-profits were spending more money on advertising than retail giants like Tide detergent and Revlon cosmetics. Western Governors enjoyed better press than its competitors, but as a nonprofit institution with a modest marketing budget it remained a relatively quiet presence.
Then, in 2009, with the arrival of the Obama administration, the earth began to shift under the for-profits’ feet. After a decade of regulatory inactivity under Bush, Washington began to focus a widening beam of scrutiny on the industry, whose business model had increasingly come to consist of vacuuming up federal student loan dollars with little regard for the academic success of the students who brought them. In 2010, for-profit schools derived three-quarters of their revenue from federal grants and Title IV loans. Though for-profits accounted for just 9 percent of the nation’s enrollments, they attracted 25 percent of the available federal aid money— and wore out plenty of shoe leather doing it. News accounts, most notably by Bloomberg’s Daniel Golden, described for-profit college recruiters bringing their hard sell to casinos, homeless shelters, and military barracks that housed veterans suffering from traumatic brain injury. To many observers, their practices were reminiscent of nothing so much as the tales of subprime mortgage brokers circa 2007, hustling lower-class Americans into adjustable rate loans for houses they couldn’t afford. (See “The Subprime Student Loan Racket,” November/ December 2009.)
2010 was a year of reckoning for the industry. In April, President Obama’s deputy undersecretary of education, Robert Shireman, gave a speech comparing for-profit universities to the Wall Street firms that had brought down the economy, and the stocks of Apollo (Phoenix’s parent company), DeVry, Strayer, and others dove promptly. That summer, Senator Tom Harkin of Iowa, the chairman of the Health, Education, Labor, and Pensions (HELP) Committee, called a series of withering hearings stressing the for-profits’ dropout rates, their accelerating loan defaults, and their degrees’ shoddy performance in the job market. Among those who testified was the hedge fund manager Steve Eisman—who had served as the bluff, de facto hero of Michael Lewis’s nonfiction account of the financial crisis, The Big Short, because of his prescience about the subprime mortgage market. “Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive as the subprime mortgage industry,” he began. “I was wrong.”
The chief regulatory threat to the for-profits coalesced in the form of something called the “gainful employment rule.” The federal Higher Education Act states that, in order to be eligible for federal aid money, career-oriented schools must “prepare students for gainful employment in a recognized occupation.” And so the Education Department set out to define “gainful employment” as a ratio of student loan debt to income. If students weren’t earning enough in the workforce to service their debts after leaving a school, the idea went, then the school should not be eligible for aid. The very premise of the rule shook the foundations of the for-profits’ business model. Their stocks dropped to four-year lows. New enrollments started to plunge as waves of bad press reverberated through the market, and as schools began reengineering their models away from the old boiler-room recruitment schemes. The entire industry was suddenly pitched against a ferocious headwind.
Western Governors, however, continued to grow. The school’s enrollment was verging on 25,000 students— up from just 500 in 2003—and its yearly revenues had climbed from $32 million to $111 million. And if 2010 was the worst of years for the for-profits, it was among WGU’s best—not least because of a remarkable announcement made by Indiana’s governor, Mitch Daniels, that June. With the stroke of a pen, he declared that he was creating a new state university: WGU Indiana.
With a decimated manufacturing sector, high unemployment, and college completion rates trailing the rest of the country, Indiana was desperate to graduate more students. (Hand-wringing about the value of a college education aside, the numbers are clear: bachelor’s degree holders earn $20,000 a year more, on average, than high school graduates, and enjoy 50 percent lower unemployment.) Daniels saw WGU as a way to expand the state’s raw higher education capacity, and also to catch Hoosiers who had dropped out of college years ago, giving them a clear route to finishing their degree as working adults. In practice, the creation of WGU Indiana was a wave of the legal wand; it simply meant that students could apply state financial aid toward a degree at Western Governors. But the deal also gave the school the credibility of state backing, along with some free TV spots featuring Governor Daniels himself. Enrollment in the state immediately shot up to twenty times the rate in the rest of the country. And for its part of the bargain, Indiana paid almost nothing. Startup costs for the venture were covered by the Gates and Lumina foundations.
A few months later, the state of Washington signed on to a similar deal, creating WGU Washington. Rumors of talks with more states followed.
Suddenly, WGU had begun playing a role not unlike the one it was designed to play. The economic crisis of 2008 reduced public universities to exactly the circumstances that members of the Western Governors Association had feared in 1995: with state budgets in high distress and populations surging, many universities are capping enrollments, and most are passing more and more of their costs on to students. Western Governors was launched with a set of $100,000 down payments from the states in the Western Governors Association, plus an infusion of $20 million from the federal government and $20 million from industry donors in the private sector. Thus, for a little over $40 million—or the price of a nice new building on a single campus— Western Governors is providing states with a low-cost means to satisfy demand for higher education. “WGU was developed by states, for states,” said a very pleased Mike Leavitt in a recent interview, “for just exactly this type of circumstance.”
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