There are two major types of for-profit schools. The first type operates as a business, receiving fees from each student it enrolls. The second type is known as an educational management organization, or EMO. EMOs work with school districts or charter schools, using public funds to finance operations. The majority of for-profit schools in the K-12 sector in America function as EMOs, and have grown in number in recent years.
EMOs function differently from charter schools created in order to carry out a particular teaching pedagogy; most charter schools are mission-oriented, while EMOs and other for-profit institutions are market-oriented. While supporters argue that the profit motive encourages efficiency it has also drawn controversy and criticism.
Between 1998 and 2000 a Boston-based company named Advantage Schools saw its revenue increase from $4 million to approximately $60 million.. Between 1995 and 2000 the Edison Schools' yearly revenues grew from $12 million to $217 million. In 2000 Edison Schools projected that by 2006 it would manage about 423 schools with 260,000 students, giving it revenue of $1.8 billion.
For-profit schools rely on attracting students rather than compelling attendance and therefore tend to be more responsive to parents' wishes, rather than simply following what the Government wants, and are especially flexible and responsive to the needs of adult learners. If parents do not like the service being offered, they can take their children elsewhere.. They also encourage policies that address bottom-line academic performance, as they do not have to listen to Government targets, but can deal instead with what consumers (learners) want. The schools' drive to attract new customers pushes them to innovate and improve at a faster rate than traditional public schools.
For profit schools are also more likely to serve "lower-income, minority, and first-generation college students", as the schools are concerned with money, and discriminating against disadvantaged students would mean the school would lose their income.
State power and influence over universities, by regulation or the restriction of funding, can threaten academic freedom, soemthing privately-funded schools are protected from.
Proponents of for-profit schools claim that market operations governing the school promote effective decision- and policy-making. By their example, for-profit schools have the potential to encourage reform in public institutions. Thus, for-profit schools theoretically benefit children, parents, investors, and those who rely on public education.
One problem with for-profit schools is that, being quite new, there have been few systematic examinations of them. The few existing reports show mixed results. This is not unexpected in an emerging market where competition has not yet determined the most successful system.
Opponents say that the fundamental purpose of an educational institution should be to educate, not to turn a profit. In 2000, Bob Chase, president of the National Education Association, stated: "Educating children is very different from producing a product."
Others claim that because for-profit schools have never been a mainstream idea, no complete blueprint for running a for-profit institution really exists, which could lead school administration to make costly errors. For example, in order to maximize profit, valuable services and activities are often eliminated. Extracurricular activities such as sports teams or volunteer clubs are left with little or no budgeting in order to keep costs low. This loss of non-academic activities might hurt a child's ability to enroll in some colleges or universities later on. The two largest EMOs in operation today, Edison and Advantage, claimed to have high school juniors completing college-level coursework, but recent studies have shown that many of these students are performing at or below the 11th-grade level.
The same profit motive can also lead to weak admission and academic standards, misrepresentations made to prospective students to induce them to enroll, and cost savings realized at the expense of education. Several of the largest for-profit education schools have been alleged to have suffered from these situations, including the University of Phoenix (a division of Apollo) and also ITT Technical Institute.
Many for-profit institutions of higher education have national accreditation rather than regional accreditation. Regionally accredited schools are predominantly academically oriented, non-profit institutions. Nationally accredited schools are predominantly for-profit and offer vocational, career, or technical programs. Many regionally accredited schools will not accept transfer credits earned at a nationally accredited school.
In the 2005 Congressional discussions concerning reauthorization of the Higher Education Act and in the Secretary of Education's Commission on the Future of Higher Education, there have been proposals to mandate that regional accrediting agencies bar the schools they accredit from basing decisions on whether or not to accept credits for transfer solely on the accreditation of the "sending" school. They could still reject the credits, but they would have to have additional reasons.
The American Commission Career Schools and Colleges of Technology (ACCSCT) wholly supports the proposed rule. In fact, it and other nationally accrediting institutions and have been lobbying for it for some time. The ACCSCT claims regionally accredited schools will not accept nationally accredited schools credits for purely arbitrary, prejudicial and/or anti-competitive reasons. It further states that, since the Department of Education recognizes both national and regional accreditation, there is no reason for regionals to differentiate between the two and to do so amounts to an unwarranted denial of access.
The American Association of Collegiate Registrars & Admissions Officials (AACRAO), which sides with the regional accreditors, claims that national accrediting standards are not as rigorous and, though they might be well-suited for vocational and career education, they are ill-suited for academic institutions. AACRAO alleges that this proposed rule is unnecessary and unjustified, could threaten the autonomy and potentially lower the standards of regionally accredited schools, and drive up their costs. Furthermore, it states the proposed rule is an attempt by the for-profits' "well-funded lobbyists" to obscure the difference between for-profits' "lax academic criteria for accreditation" and non-profits' higher standards. AACRAO claims only six percent of American students attend for-profits and only four percent attempt to transfer to non-profits. Eduventures, Inc, a Boston research firm, states that nine percent of all U.S. college and graduate students attend for-profit institutions.
Admission representatives at Crown College (Tacoma) and Florida Metropolitan University allegedly made various misrepresentations concerning the transferability of their credits to entice students to enroll in those schools.
Several of the larger for-profit schools have sought and received regional accreditation, including Capella University, University of Phoenix, DeVry University, Strayer University, Kaplan University, Walden University, and American InterContinental University, among others.
There have been some spectacular failures of for-profit schools, including Business Computer Technology Institute (BCTI) and Court Reporting Institute (CRI). These two schools allegedly violated numerous federal statutes, were funded mainly from federal and state loans and grants given to attending students, and then closed, abandoning many of their students.