Interview: Mark DeFusco

What's the formula that's made Apollo [Group, Inc.] what it is?

I've had this same conversation with the folks at Apollo. I think the interesting thing that happened, there was [Apollo Group and University of Phoenix founder] John Sperling really discovering something that was different from the way education had been done for 500 years.

For 500 years, they've built universities around the faculty, as they probably should. But what John found kind of by accident was that there were adult people who were working who needed to improve their credentials, and it was nearly impossible for them to finish a degree at a traditional school.

... He had parties with his neighbors who are police and firefighters, and they were complaining [that] they couldn't finish their degree; they couldn't move up in their profession. So he wrote a grant, and it was wildly successful. He put almost 400 police and firefighters through their training and got them good education.

And he went to the president of San Jose State, where he was teaching at the time, and told them, "Listen, look how successful this is." And the president said: "Well, that's not what we do. We educate different kinds of folks." So I think John, who was an economist by training, realized that there was a huge marketplace for people who never were successful in their initial college training, or they never went through college training, and they found themselves at 25 or 30 and decided that they needed to do something and couldn't get it at [a] local college.

But he subverted the academy. He subverted faculty tenure. Some people would say he was a union buster. He sort of threw out the old model of the research university.

And I think that was the magic of this. I mean, ultimately, the academy is the last vestige of institutions in the world that hasn't really changed very much. Even the church changes, right?

"Subvert," I think, is probably the wrong word. He challenged what the academy was used for. And I think in very interesting ways, he provided education to folks that, quite frankly, never would have got an education if they had to wait for traditional colleges to catch up with them.

You worked with him?

I did.

What kind of guy is he?

He is smart. He's straightforward. You always know where you stand with him. He is clever, willing to take a chance. He always challenges people. I think the best thing about the early days at Apollo was that he forced you to take chances. He wanted us to try things differently. He wanted us to look at the world in very different ways, and I've always admired him for that. If you worked for John Sperling, you were the top of your field. And if you take a look at postsecondary higher education that's for profit, just about every important institution is run by an alum of Apollo. So he put out great leaders.

You say the early days at Apollo were wonderful. Why?

The initial public offering was somewhere in the low $90 million range. We thought, jeez.

Editor's Note: "The Company received total net proceeds, after deduction of expenses payable by the Company and underwriting discounts, of approximately $34.9 million." (Source: Apollo 1995 10-K)

Ultimately we were given kind of free rein to try to do things, to build things that had never been built before. When I was in California, we put together a training program for faculty members that, quite frankly, I thought was tremendous, because I came up in a traditional academy. And as a graduate student, they never taught you how to teach, right, ... because quite frankly, that's not what we were there for. We were there to do research. So people kind of forgot the fact that the bulk of the students never got to see the great professors.

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?

It's a good question. ... When we first started at Phoenix, we weren't dealing with students who didn't have education. We were dealing with people who had gone to college and stopped. Something was going wrong with their education. I don't know exactly what it was. It could have been their family. It could have been that they were working 50 hours a week and still trying. I personally don't know what was wrong with it.

But for that chunk of folks, college wasn't right for them, and they dropped out. So initially, when Phoenix first started, you had to transfer 60 units in. So you had two years of college before you came to the University of Phoenix.

Why couldn't these students go back to the schools they had gone to?

Think about how it is for most college students. If you build a college around the faculty, then the faculty put their 12 hours in, and your course gets closed out. Then you get to wait till fall to take the course that you need for graduation.

Well, if I have a family and I'm working, I can't wait another six months for you to open the course. And I think that's where Phoenix really had its advantage. Ultimately, students were willing to pay a premium for the convenience of being able to go to school when they needed to, at a place where they could get to relatively easy. And they would pay a premium to get their degree done in as expeditious a fashion as possible.

So they're paying a premium over --

Over the state universities, clearly. Over --

And over community colleges?

Oh, by far. By far. A huge premium over community colleges.

So they're willing to pay a lot more for the flexibility of taking a course on their time schedule?

That's correct.

Talk a little bit more, if you could, about what is wrong with the traditional schools. You say they haven't been changed in 500 years, and you've said that the model is inefficient.

... If you think about any business in America, what business would give up two months of business, just essentially close down? It's, by its nature, inefficient. So [at] Phoenix, people go to school all year round. We start classes every five weeks.

What business, if you sold as much as you could, said: "OK, that's it. We're not going to sell anymore. We'll wait until fall, and then we'll sell." There's no business in America that would work like that. So at Phoenix, we said, all right, if we had more students than we could handle, we'll build another site and handle some more.

So, in essence, the for-profits really think about the world very much differently than the not-for-profits. I'm often personally split, because I think the traditional universities are wonderful places, that people have time to think.

You went to one.

I did. I went to several. And it's a place where people have time to deliberate, and you --

And you get the summer off.

And you get the summer off. ... So one hopes that we still have such places, that we have places where people can think and plan new ideas. But my guess is that the folks who are fighting for tenure are probably not putting out the most dangerous research. They're probably not putting out revolutionary ideas that will change the world. They're probably putting out ideas that are in a very, very narrow range that's only going to be read by friends and folks of like mind.

So, in many ways, the traditional universities are not deliberating as they should. They're really a place where folks kind of get by. At Phoenix, we wouldn't get by. Ultimately, if you weren't excellent, you wouldn't last very long at Phoenix.

But you talk about the research that goes on at universities, schools. ... Many of the industries in this country would shrivel if it wasn't for the steady stream of research that they benefit from or, in some cases, fund. It comes out of our universities.

I'm all for research institutions. But let's assume that there are 200 really great research institutions that are worth talking about, if you take my premise, and each of them have 1,500 open seats every year. That's roughly 300,000 open seats out of a population of 19 million college students every year -- 300,000 versus 19 million.

There's 15,000 school districts in America. So you're figuring you're leaving 20 seats open at these very fine institutions, and then everybody else is going to -- folks that, quite frankly, are producing commodity products. So my argument is, let's make sure that we keep our research institutes fine, and we're putting out great, great research, but also, if you're going to a teaching institution, then let's make sure that you're getting very good teaching and that we're not spending loads and loads of money on producing research that, quite frankly, no one will ever read.

You referred to universities as a business. That stops a lot of people right there in their tracks. Is education a business?

... I would suggest that in the practical world that we have to pay for things and that when we get scarce resources, as we have these days, that we have to make some decisions about where we use those resources. So I would say perhaps not a business, but certainly as a steward of resources, we ought to know what we do, and we ought to use our resources where we need them most.

We've got all these schools with prestigious names, ... solid schools: Amhersts and Williams and, you know, four-year, liberal arts colleges. You say a lot of these traditional schools are in big trouble.

I think they're going to be in trouble largely because the folks who were going to these schools, there are not as many of them. And the folks that are going to them are different demographically. For instance, in the West and the Southwest, we find that we have first-generation students who are going into college that are totally unprepared. They've prepared in high schools that were not terrific, and they're studying in a second language.

So you see the remediation rates are just kind of astronomical. And traditional universities have never been good at remediation. Even community colleges are not great at remediation. So we have an interesting gap where we have students who really have a great need to be educated in order to live in a more complex world, and yet we don't pay the resources to get them to where they need, because we're paying resources for other things in terms of research and --

The schools' budgets are busted?

You bet, ... because ultimately -- this is the problem of the not-for-profit model -- because you build for the status quo, so you keep on building on the past. Take a look at most universities. They still are run as independent schools, so you don't get lots of scale in terms of purchasing. You'll have an assistant dean for every three faculty members. It's just not logical to the average American, who lives in a different kind of organizational structure, how the organizational structures of a traditional university work. It just doesn't work that way.

And so you build layer upon layer of expense. And then, when the world changes, you're not very nimble at fixing that. That's where we're starting to see issues. So the for-profits love the traditionals, because they would raise tuition every year. Every year, traditional universities were raising their tuition 7 to 10 percent. ...

Why is the cost of education going up faster than the rate of inflation?

Well, I think largely, if you don't have to make a profit, you don't worry about costs.

So there's just no accountability?

I wouldn't say accountability. There's no worry. I talked at some of these colleges that are in trouble and talked to some of the folks who are trustees. I said, "Do you know last year there were some schools that are in very serious problems?" And I promise you, the first thing they ask me, is, "Were we on the list?" ... That's kind of a remarkable thing, isn't it? I mean, if you're a trustee at a college, it's different than being a board member at a for-profit institution. A board member at a for-profit institution knows what's going on financially.

They're often a shareholder.

You bet. Trustees may or may not know what's going on with their schools, and many times, they're alumni; they want to see the school do well. But ultimately, how do you define well? How do you define that?

So we have a crisis in higher education in terms of its financial model. ... The for-profits come in. What do they bring that makes them the solution?

Let me give you an analogy. Imagine, if you will, that we're going to build our next fighter jet. Would you want a not-for-profit building your next fighter jet, or would you want somebody who takes a risk and gets paid for that risk? I think that's the analogy I like to use with higher education.

We'd have no problem with profit in all kinds of different sectors of our economy. In fact, we understand that it's the for-profit model that allows us to go and do things. So when we're going to build new pharmaceuticals, we don't mind that a pharmaceutical company makes a profit, because we know that they're taking a risk. So I think in higher education, there is no incentive to take any risk to improve if there's not a profit motive.

Because you can simply raise tuition?

Because I can raise tuition.

I'm trying to understand what it is that the for-profits are able to offer that makes them, in so many cases, for so many students -- as you would point out -- what makes them the solution?

Here's a solution. In 1991, roughly 2 percent of American [college students] were going to schools for profit. Roughly 2 percent. Next year, it's estimated that between 10 and 11 percent of American college students are going to go to a for-profit college, and the reason for it is because the for-profits pay attention to the customer. They pay attention to the needs of the student. They give them classes when they need it, where they need it. And they give them something that's useful.

The argument has always been, are we dumbing down American education? And I would say no. Ultimately, the for-profits are relying on reputation. If their degrees don't produce real results, then employers won't hire these graduates. ...

And traditional schools don't value outcomes?

Well, it's how it's measured. You know, I hear about it all the time. I talk to people in traditional colleges, and they say, "Well, we're worried about quality." And I say, "OK, well, tell me how you measure quality, and we'll talk about it." So if you ask a traditional college how they measure quality -- I don't know. How do they measure it?

And how does a for-profit measure quality?

A for-profit measures quality by couple of things. Number one, we give stated outcomes in the beginning of every course, and then we make sure we test to those outcomes. So at the end of the day, we know that if these are the 10 things that someone should learn from managerial accounting, at the end of the day, they'd better have those 10 things, because the next course depends on that. We also take account of student evaluations.

But if I go to a medical school at Harvard, I'm going to be tested on what I've learned. So how is that any different?

One of the arguments that Margaret Spellings, [secretary of education, 2005-2009,] did in the last commission, her argument was that education is getting more expensive, so at the end of the day, I want to know what a student knows when they graduate. She got nothing but arguments from traditional schools, because quite frankly, they weren't prepared to be able to tell you at the end of the day what a student knows.

Don't get me wrong, because I think in my own personal life, the [lessons] that I got that were not intended were some of the more important ones. So again, I understand that value. But as resources become more dear, we say, does everyone have the luxury to learn more than they need to learn?

People would say, look, there's courses that people take, a literature course, for example, art appreciation course, and they're not easily quantifiable in terms of outcome. You don't want to test people on, you know, who wrote which piece of literature at what date. That's not what's important. It's whether you understand the ideas. Is the for-profit university going to do as good a job of offering those kinds of courses that cannot be so easily evaluated?

Yeah, I would suggest that they can't.

Is that a loss for us as a culture?

I think as a culture it's a loss for us. That said, for most Americans, they're too busy and too tired from working all day to worry about that, I'm sad to say. I hope that the people have a chance to be exposed. But for the 75 percent of Americans that don't have a college education, who are working several jobs and are interested in making a better life for their family, I'm sad to think that they don't have time or inclination for that. ...

So let's talk about Phoenix and what you did when you were with them.

I started out in the academic affairs department of their largest campus in California, in Southern California. And I was kind of like the first academic that they hired. And I was an academic who knew my career would be over [if I] went into for-profit, so we took a chance together.

We initially put together a cadre of working full-time faculty. ... In California, when I started, we had a couple hundred teachers. When I left in California, we had 1,200 practitioner faculty.

We never called them adjunct, because we didn't like junk. These were folks who, during the day, did what they were teaching at night. So I was very proud of that, because it seems to me that a professional school, that's what you ought to have, right? I mean, you wouldn't go to a medical school where you got taught by someone who wasn't a physician.

And now, what that required was that we had to teach them how to teach, and you had to teach them how to teach adults, because adults learn very much differently than the coeds. They just had other things going on in their life. So we did it one class at a time. So instead of having five classes and running back and forth, you had one class at a time, but you put it in a short time frame. ...

So for just a few weeks, you're on one topic?

On one topic. And for five or six weeks you were on one topic, and you were focused. Then when that was done, you went to the next one. You designed the course so that the student knew what they were going to do every Monday night for the next three years, because you can clear out one night, right? If you're a busy professional, you could clear out one night, and your family could get behind you. We put people involved with other professionals and made them work in groups. In traditional colleges, it was every man for themselves. But we thought here, we live in a collaborative world. During the day they're working with other people. Why shouldn't they not take that same skill at nighttime?

And where did that idea come from?

It came from their original research grant. I think John Sperling found out very early on in that research grant the ways that adults learned and the way they were different than other folks.

And this is before you think of the online model?

Oh, this was way before online. Online was a natural progression, because we used to say, "Bring the college to the student," right? When we built the school, we didn't build another building next to where we already had. We built the school where the people were.

... 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, because that's where adult people were. We always said, "Build it closer to homes than their work, because at 10:00 at night, you don't want to be driving an hour." ...

And your role was what, exactly?

I was responsible for the academic affairs, so I was responsible for the students and for all the teachers. I trained the teachers. I was also responsible for outcomes, measures and evaluation. If I have a practitioner faculty, I could really, really make certain that they were doing a good job, because I didn't have to worry about tenure.

There used to be something that we called the myth of the adjunct. The myth of the adjunct was you got poor-quality people, but I'm absolutely clear that the myth should go the other way. I mean, if you have a tenured professor who's just kind of biding his time till he's going to retire, that's the dangerous one. You have to put him in class. You've got to give him his 12 units that's required with his contract. With me, I wasn't required to give somebody a contract if they weren't performing, if they didn't perform, if they weren't teaching my students.

Phoenix had always been successful on the West Coast and Southwest. When they moved to the East Coast, they asked me to go to the East Coast because there was clearly lots more colleges and universities there, and they thought it would be important to have someone with traditional academic training. And I had a Ph.D. from a name school. ...

So I went to Philadelphia. There were 95 colleges and universities in my MSA [metropolitan statistical area]. ... Ultimately we would decide where to put new locations by where we could go out and get people's attention. ... We would take a look at an area like Philadelphia and say: "All right, Philadelphia could probably hold four campuses. Houston could probably hold seven campuses." We just looked at the total number of adult students in that potential area.

Then we had very sophisticated research that would tell you where the students were that needed to get a college completion, so we wouldn't go to the most affluent part of the town. We would go to the part of the towns where people were middle class. They were probably earning between $60,000 and $70,000 household family income. We knew where they were working, so we would put our campuses there. I built the first campus in a suburban area, in King of Prussia, [Pa.,] right across from the largest mall -- got huge traffic. And we filled it up almost immediately.

The University of Phoenix had great freedom in terms of reshaping and who it hired, who it fired.

Absolutely. And here's another distinction. With traditional universities, you would wait until all the applications came in, and then some small committee would make some decisions about who would come. And it would all be this very interesting waiting process. Well, with adults you couldn't wait like that, because if somebody made an application in November, between November and September when they were going to go to school, 10 things could have happened that stopped them from going to school.

So when somebody called the University of Phoenix, we made sure that we got them into class as quickly as possible. We got them trained. They knew, their family knew what their obligations were going to be. We didn't counsel just the student. We made sure that the student's spouse came in, because this was a family decision. And so we got it done very quickly.

Now, folks kind of pooh-pooh this idea that for-profits are aggressive marketers. But if Mr. Obama wants every American to get one year of college education, then one ought to figure out how do you get people's attention, because they're pretty busy right now. So Phoenix knew how to get people's attention.

Well, talk about the marketing side of the operation. So how did you market in Philadelphia?

We did a lot of radio, and we did a lot of referral, so that when a student came to Phoenix, we would ask them, "Do you have a friend who's in a similar circumstance?," because if you bring a friend along, your chances of completing are much, much higher than if you do this by yourself. So we would ask people to bring a friend along and get their degree together. ...

So in the first year, these things were very, very productive. We made a very small investment. It was just me and my laptop. And we had 60 students almost immediately, before we had a building. We built the campus in Philadelphia. We essentially had every hotel room in the city of Philadelphia booked from 6:00 to 10:00 before I built my first site in Philadelphia.

So we really could be agile. We could move things along very, very quickly, because I had the freedom to really run the business the way that I saw fit, again, within certain constraints. I had people I had to answer to, but they relied on the professionals to make sure that the area was developed.

I think that was, again, John [Sperling]. John saw the constraints of most college professors. You know, anybody who's got any new ideas in college are quickly beaten down in a traditional college. ... [John] said, "OK, I'm going to let people who are inventive and creative find a way."

So how much could a college administrator for University of Phoenix make?

The sky was the limit, because ultimately it's in the best interest of shareholders to keep good, solid talent. And so Apollo, anyone who was talented got optioned, including my faculty. I mean, the practitioner faculty at Apollo could choose to take their salary in cash or they can take their salary in the public stock. And so many of the practitioner faculty did far better than their traditional colleagues at TIAA-CREF.

That's the big pension fund.

Yeah. But listen, first five years of Apollo, the stock split twice a year for every year, because it was growth. We were hitting our numbers. It was just a wonderful, wonderful time. So the shareholders wanted to make sure that you kept talent there, so a lot of the early folks did very, very well.

Because they were holding these stock options and stock was splitting and kept growing.

When I left Apollo -- I shouldn't say this. I shouldn't say this.

It's a free country.

I understand, I understand. But it's boasting and I won't -- no.

Well, in terms of how much you made -- you did very well.

I did better than I ever imagined.

And Wall Street was, in the same time, discovering these for-profit universities. They were very hot stocks.

They were. Still are. There's been a lull recently, largely because the regulatory environment is changing and shifting. But think about it, Martin. Where does a person make this kind of investment? I mean, when somebody's going to go to college and finish their college degree, they're probably making the second largest investment in their life, after their home.

And there's a very limited marketplace. And the government guarantees this. So in essence, you have huge barriers of entry. You have competition that is really not so nimble and has been kind of lugging along for 500 years. So Wall Street thought it was [an] extraordinarily good place to invest, because it was a change of an industry. ...

Why did you leave Phoenix? What happened?

I was recruited by a private equity firm that bought a college in the Midwest, so I went and became CEO of a system in the Midwest.

Mark, you're kind of a new bird in the education environment.

I'm a hybrid. I'm a businessman who knows about education, and an educator who knows about business.

Now, you know that makes some people really uncomfortable.

Why?

Because they think of education as not a business per se. It's not beholden to stockholders, but it's in the service business -- providing education.

... Ultimately, my guess is that every institution in America is thinking about how you pay your bills.

That's right. But the ordinary consumer may be a little uncomfortable if the people that are involved in the university are beholden to shareholders on Wall Street.

No, they shouldn't. In fact, [it] should be [the] other way around.

I'm not saying they should be uncomfortable. I'm just interested in your take.

If I am a consumer, I want to know that the person I buy from has something to lose, so that when Toyota makes an announcement and they have a problem with their car, I know that somebody has something to lose there, and they're going to make it right because they have something to lose.

If I send my kid to a college where the physics professor doesn't really make a difference whether they're great or not great, they're going to have a job next year, I think I'm less sure about the quality end, because that person really doesn't have anything to lose.

And where would you like to see your kids go to college?

I hope [they] go to one of the elite colleges.

To one of the elite colleges?

I do.

You don't want them to go to a for-profit school where there's accountability?

That's correct. And I'll tell you why: because there's still a very interesting gating system in this country. When somebody comes into my office -- I do it myself -- I look at the résumé. I read that they went to Harvard, and I read that this competition went to SUNY. I immediately have a perception in my mind of both people, even though it may not be the least bit true. It's just how I think. And I think that's how Americans think, that when somebody graduates from an Ivy League, that has a meaning. Somebody graduates from the local state institution, [that] has a different meaning. And I want my children to have advantages as well, yeah.

If you had a choice between a big state university and University of Phoenix, where would you want your kid to go?

I'm going to refer you to the Chronicle of Higher Education -- put out a wonderful piece this week on for-profit education. And the writer essentially spent lots of time going into different institutions, and she was absolutely clear. She said, "If my kid wanted to go into one of these specialized programs," then she would be perfectly comfortable sending them to a specialized program.

What if you want your kid to get a generalized, liberal arts education?

I want my kids to be overeducated. I want them to learn things that they don't need. I think that is a luxury, and that's a privilege that we've had in this country for a number of years. Sadly, though, lots of folks don't have that luxury.

They don't have that luxury. But the criticism, as I understand it, of the for-profit universities is that they are selling an education that the marketers, those people that call them up or make the ads, are selling as the equivalent of a four-year liberal arts or state university education.

If there's over 8,000 institutions, and there's 200 elite institutions, I would suggest that it's the equivalent of any number of those other 8,000. My analogy would be, you know what? I'm here in New York. I can get a quick lunch down the street or I can go to the finest restaurants in the world. And some days I choose to go to the finest restaurants in the world, and some days I just choose sustenance. ...

Do you believe that the best interest of the students and the best interest of the shareholders are aligned?

Oh, absolutely, because the for-profit institutions couldn't stay alive, couldn't grow if they weren't producing good outcomes. And shareholders are making a bet that the product that is being offered is a good, valuable product.

The rap is that they're not getting that good of an education, that they are a population that is susceptible to aggressive marketing.

I would say if you were going after adolescents and teenagers, someone fresh out of high school, then perhaps that's the case. Listen, the average age at Phoenix when I was there was 34. If you believe that a 34-year-old person who's paying their bills every day can be easily convinced to spend three years out of their life working like crazy, then God help us. ...

When you were at Apollo, when you were at Phoenix, that was the typical student. But as times went on, Phoenix started serving a much younger clientele, if you will.

Yeah. And that had to be a requirement of their strategy, largely because they [need to] achieve such large numbers.

And they needed to continue to grow to satisfy Wall Street.

I believe so. I mean, ultimately, when you think about how a school the size of Phoenix has to grow -- their last earning calls [stated] that they had a student population in excess of 400,000 students.

A lot of students.

If you think about it, it's more students than every school in the Big Ten [put together]. It's just an enormous number of students.

... The difficulty is that before you can grow, you're going to have to replace them, because those students are graduating. And so you are assuming that if it takes two to three years to graduate, that you're going to have to replace roughly a couple hundred thousand students every year before you grow one bit. So they simply had to go into lower age brackets to meet the marketplace demands. And quite frankly, what they found was that the community colleges were stressed like they were never stressed before, so this provided a wonderful alternative to a community college.

But this is where this argument comes up, I think. I mean, straighten me out. But if I've got to find 200,000 students just to keep level, and then I want to grow because Wall Street wants me to grow, and I have to go after a younger clientele and maybe I even have to drop standards in order --

I don't think they're going to drop standards, because ultimately, that's the kiss of death.

OK. So they keep the standards up. But this is where people worry: Are they marketing aggressively to a less-than-educated audience of younger and younger students who may not know what they're signing up for? Is that a risk?

I don't believe it's a risk, and I'll tell you why. The folks who are watching your show are probably well educated, and they probably don't know very many people who don't have a college education.

We'd better say something smart here then.

So we're going to say something smart. But here's the deal. Seventy-five percent of Americans don't have a baccalaureate degree. It's been that way for 30 years. So if Mr. Obama is right and Americans need more education, the question then becomes, how do we convince the folks who don't really know about education why it's important, and how do we make it easier for them to actually get what we need?

And so my sense is that Phoenix will never drop standards because, ultimately, that's what their future is. Their future is the ability to transform a student into something that's more valuable for their employers. That's how the students pay their bills back. If they drop that, then they're going to be dead. That kind of reputation gets out very, very quickly.

And the evidence of that is they've had a 25-year history of continued growth and success, and there's graduates all over the place. And they should be proud.

You should go to a graduation at Phoenix. It's a magnificent thing. People are graduating for the first time. I mean, there's a lot of immigrant families; their families are so proud. And we used to get more students at graduations, because people realized that it's not so far away.

Let's go back to your days at University of Phoenix at Apollo, and tell me how you would design courses.

This is, again, a magic thing, because a traditional institution takes years for you to figure out a new curriculum, because you have to send it to committee; the committee argues about it; they have five or six different readings; they decide whether it's something that's useful.

At Phoenix we said, "This is something that's useful." Now there's 20,000, 30,000 faculty members -- they're going to find an expert in just about anything. And so you essentially go into your inventory of experts, you go out and find the five or six of them that are absolutely expert, and they design a course that talks about what's the most important things for each of these constructs and provide learning objectives.

So when you went to Philadelphia, was this already done?

The curriculum is already designed. So in essence, you had a wonderful standardized curriculum, Martin. If you think about how uneven some of the courses are at a traditional institution, because in the traditional institution, you're really dependent on the faculty member.

And that's probably right. But the faculty member may tend to focus on one thing, one area that they've been researching recently, and they miss a whole bunch of different areas. If you're an adult student, you've got to get through that stuff in five weeks. You don't have time for war stories or what I'm dabbling with right now, because in another five weeks, I'm going to need that education that I got the last five weeks.

And they would say these were the course objectives, and these were the exercises that would get you these course objectives, and these were the assessment records of how you could tell if someone actually knew it or didn't know it. And then we would package that, and we would get it to every single faculty member who's going to teach that, because again, remember that these were practitioner faculty. They didn't really have the time to go out and develop brand-new course material, so we would get them the very basics.

And send them a package, send them --

Send them a package and say, "This is the outcomes of the course that we really want you to get and that the students are going to need for the next class."

And this is what you're going to teach?

This is what you're going to [teach]. We get the faculty very, very detailed course design, and then the faculty had liberty to really be flexible with how they worked around inside that course material. But they were inflexible to deal with the outcomes. The outcomes were something that they had to get to.

And those teachers would get a good salary, maybe more than they would get at a traditional school?

I would say no. I would say that they would get a reasonable salary. The folks that teach at traditional universities would call it piecemeal. They got paid for the courses they taught, and they didn't get paid for anything else.

So they picked up a little bit of extra money teaching at night for University of Phoenix.

You bet. So if they taught three or four classes a year, they spend 15 weeks out of their life on a Monday night, and they probably earn $4,000, $5,000. If they bought the stock, they would do better.

And they were offered stock options?

Oh, absolutely. We love the faculty, because, you know, the nice thing about the faculty being involved in the stock option was they held. Faculty knows when the product is good and when it's not good. So faculty were not nearly as speculative as Wall Street. So they were pretty good smoothers for us.

And how did you monitor the quality of [the faculty]?

We had course outcomes, and we would look at the test course. There was a faculty mentor for every faculty member, somebody who would go in and see faculty in for every single class.

And that person worked for management?

They worked for me. And we always used it as a resource. Again, at Phoenix, there was no promotion in tenure, so we just wanted to get better. We didn't have any axes to grind; we just wanted folks to be able to be a better teacher next time.

And every once in a while -- you know, teaching at night is a lonely thing -- so somebody would come into the class; they would tell people what they thought they were doing well; they would ask them some questions; they would think about different alternatives. So we would always have an opportunity for people to be observed. And then at the end of every course, the students got to evaluate their faculty. And in many ways, it's kind of like hotel feedback. The students were typically very, very candid. ...

And then you could hire and fire accordingly?

Well, we just wouldn't use them again. Yeah, we did very little firing. We had them on short-term contracts.

Right. I can just see the Tenured Professors Association of America twisting in the wind right now listening to that.

Well, you know what? Ultimately they should. I mean, listen, I'm all for tenure. I wish more people were doing dangerous research to deserve tenure.

But you think that there's too many people that have tenure that just don't deserve to teach?

I think there's too many people that have tenure that once they get tenure, they retire. Tenure ought to be an opportunity for you to go out and explode with new ideas. But many people, they get tenure, and that's it. They retire on the job.

Online happens. Tell me about what was your first thinking about that when it came on the horizon.

I was skeptical. I really was. But you know what? We've done distance education forever, right? There's been kind of distance education for rural people forever. But it's usually been kind of strange education, right? TV or paper and pencil --

Sunrise semester.

You bet. Online was really a natural progression for Phoenix because they were thinking of how to do anytime and anyplace education.

All I have to do is log in.

I log in. But that wasn't the case. In fact, the online students were far more engaged, because unlike a lecture hall, you had to participate. That's how you knew somebody was in class, right? I mean, they had to be involved. I was in large lecture halls, I'm sad to say, and I would sit in the back, and sometimes hung over, and you can't do that in online.

And so online was getting really tremendous results, because everybody had to participate. ... So again, what would seem counterintuitive sometimes happens. I mean, the online students were real. ... They asked me to teach online, and I was awful.

Why?

You know, I think most of us teach the way we learned. I was fortunate enough to have lots of really terrific teachers, and they stood up in the front, and I wrote down as fast as I could. And so I was a pretty lousy teacher in the Phoenix model. I mean, there was not much room for lecturing at Phoenix. And so it's kind of counterintuitive. But the good news was, I had thousands of really terrific teachers that really were exceptional in this model, and they were much finer teachers than I ever was.

How did the business model of being online differ from the classroom model?

Ah, it's a magical model, because the margins for online education were just astronomical. Because when you think about the biggest expenses, you've got your buildings, which are 12, 15 percent, and your faculty. Again, we only had practitioner faculty, so you were talking about very, very substantial margins. The business was just kind of remarkable.

And what we're beginning to see is, there's lots of other folks that are in traditional colleges [who] are trying to get into it. The problem is, you have to have the whole picture. You can't just do one part of it. ... But their online education is really with their own students. It's their own students sitting in their own dorm rooms taking an online class, not in the classroom across the quad.

That doesn't give you the model of low overhead costs.

Because you already have the overhead.

So you guys are already very popular with Wall Street when you're teaching in classrooms. What happens when you come out with this online at University of Phoenix?

There were two things that really made the economic model the finest economic model that anyone really has heard about in the last 30 years. The first was online. You already had a model that was fairly profitable, and became even more profitable when you went online. At first online was a couple thousand students. Now there's a couple hundred thousand students that are taking classes online.

And then the second was in the early part of the last decade when online leads came about. So your student acquisition costs really got lots cheaper, because you had very inexpensive online leads for people who were spending lots of time online. It was a perfect, perfect match.

So you could go after them on e-mail or on online ads?

You bet. So for a number of years, anytime you went online, Phoenix would pop into your face. But they were the right students, because they were the people who were early adopters of online. They knew how to use online, so it was the perfect match.

And that drastically drove down the marketing costs?

Like you couldn't believe. So the marketing costs for radio and TV was somewhere in the neighborhood of a couple thousand dollars for a student acquisition, and these online leads were in the neighborhood of $10, $20 a lead. So that was a huge, huge boom.

Very exciting time, too.

It was an exciting time. But again, it was not without its consequence, because what they found early on were these were probably not the right students. The perfect student is not the guy who's, "Ooh, that's a good idea; I think I'll go to college." Ultimately it does take some contemplation; it does take some preparation. When I brought a family in, and I told the student what it was going to take for them to graduate in two years, we weren't feeding them lines, saying it's going to be easy. We made sure the family knew that this was going to be a miserable -- (laughs) -- two years of your life, right? And there were going to be times when your kids wanted to talk to you when you really couldn't.

If you're online, and you're doing an online lead, that's a harder counseling. So Phoenix had a couple years there where the success of their model ended up having some difficulties in the backend, and it was harder to counsel a student about the difficulties of actually getting their degree. I think they're much, much better at that right now.

In other words, you were getting students that weren't continuing, or students --

Yeah, I used to refer to them as guests. The difference between the student and the guest -- the student comes, they pay their bill, they finish their assignment. The guest kind of sneaks in, they look around, they last a couple semesters, and then they leave. We used to spend too much time on guests and not enough time on students. ...

And so I think Phoenix is doing a much, much better job right now because they realize that it doesn't make sense in their financial model to get the wrong student. It doesn't make sense if the student's not successful, because you end up spending all your resources on folks who don't give you cash flow.

Don't give you cash flow?

Again, I don't want to sound cynical, but here's the deal. The best students are the ones who are going to be graduating, all right, because they provide you the longest cash flow streams. So to get a student to be successful is your main goal.

So the student's interest absolutely [lays with] the for-profit model, because you end up with the longest revenue streams when your students are succeeding. If they're not succeeding, they're dropping out, you're spending all your time and resources on folks that are not really students. So in essence, it really is in the best interest of the shareholders for the students to be successful and for Phoenix to make every investment required to make sure that student is successful.

To make every investment required? What does that mean?

Well, if I'm teaching at UCLA, I have 150 kids in my class. I don't care if it's 150 or 110 or 30. I really don't care, right? In fact, it's sometimes better if I have less students, and it's easier if I have course --

Less papers to grade?

You bet. But at Phoenix, it makes better sense if I can provide all the resources required to make sure that that student can get themselves through the class. So at Phoenix, that's any number of different things. They have remedial writing. They have a writing center where a student can, in essence, send their papers in before they submit it to their faculty to get critiqued.

But don't I care, if I'm in a traditional school, about the revenue stream continuing for four years?

Well, it depends on who I am. Who are you? Are you a faculty member?

Well, if I'm an administrator I care, right?

Uh-huh.

So you're saying that without the faculty member and the administrator having a common interest, you've got a problem?

You bet.

So one of the things that strikes me when looking at this business is also the beauty of the fact that the federal government insures all the loans.

It does. This industry would not have grown without the student loans.

And that makes it a very low-risk business for the owners of the [for-profit] universities?

That is correct. That's correct.

I don't mean it as a criticism. I'm just trying to get the facts of it.

No, there would not be the for-profit industry without subsidized student loans. There would not be, because ultimately the folks who are inhabiting these for-profit schools wouldn't have the wherewithal to pay for college education. That's the magic of federal student loans. That's the magic of this country, thank God. The folks who traditionally wouldn't have access now have access.

How does that go with what you said earlier about, you know, you don't innovate unless there's a risk?

There is risk. The risk is that I can't grow it next year, right? There is risk that the traditional colleges will catch up, but I don't think it's a substantial one.

But as an administrator of a for-profit, I don't have to put a lot out there up front. I don't have to raise that much capital to get off the ground.

That's correct.

That seems like I can realize a really good, healthy profit without putting a lot of money in up front. Is that a temptation for people to get into this business that don't have the best interests of the students in mind?

No. And we've gone through cycles of this, right? Anytime there's lots of federal money, you can find people who cheat. Even defense contractors go to jail. I mean, in every business. So yeah, there's been times throughout the history of for-profit education -- the '70s were awful. ... We saw another rash of that again in the late '90s.

But if you take a look at the for-profit institutions that trade publicly on exchanges, the worst possible scenario would be to have some kind of regulatory news hit the stands, so it is imperative for them to be absolutely clean in their business practices. And so my recommendation is that they're not going to take any regulatory risk for a little bit of extra profit. You know, they could lose everything for a little sneeze in some regulatory issues that you've seen just recently.

People don't have a lot of faith right now in financial regulation in Washington.

I understand. And for good reason, I suppose. There's good news, however, in education, because there is more than one regulator. In every state, there's state regulation, so the state keeps very, very close eyes as a consumer watchdog, somebody who watches out for consumers. So the state regulators are important.

And then institutions are also accredited by educators. So depending on what part of the country you live in, you'll have a different set of educators who come in and in essence make certain that there's reasonable education that's happening. You can't receive Title IV without the blessing of academics.

And then finally, the Department of Education acts as underwriters, so they certainly make certain that the taxpayers are protected in terms of underwriting student loans.

So there's a lot of regulation?

For the for-profits, that just keeps the barbarians off their gates. That's another reason why investors love this industry, because there's high barriers of entry, and good solid regulations make it very different for new entrants into the marketplace.

Is education a business?

I believe so. Listen, I love the fact that education as an institution is kind of the last bastion of quiet places in the world. We don't have quiet places. I get off the plane, my cell phone goes on, so 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. So for the vast majority of folks who don't get that privilege, then I think it's a business.

What about all these stories that we keep hearing about students getting an education at University of Phoenix or DeVry or ITT [Technical Institute] or Kaplan [University], getting out and saying to reporters that they don't think their education is worth what they thought it was going to be worth, and they have a lot of debt to pay off?

I think there's loads of folks in this country that have had an education, and they get surprised, right? I mean, they get surprised, not just --

You mean at a traditional school?

At any school.

But that doesn't make it right.

I don't mean to make it right. What I'm suggesting is that this is only one part of a whole range of things. I mean, ultimately my outcome is not to be the farm team. I don't want to get just a job. But you know what? For many people, that's how they judge the value of their education. "Was I able, at the end of all this hard work, to be able to get a job that pays me enough to pay back my loans?" And I think that's a fair measurement.

And what do you say to those who say that they can't get a good job, and they've got loans that they can't pay off?

I would say that that's a tragedy for everybody. When I was running schools, that's what kept me up at nights. The worst possible scenario is for someone who was going to make $10 an hour to get $50,000 of debt and not be able to pay it. That's what kept me awake at night.

And so for most educators, at least the folks that I work with, they want to make sure that they give them the education so that they don't have to worry about that.

But you don't deny that these are real cases?

I think there's been cases throughout history where people have gotten a college education and been disappointed.

But you don't think it's a problem that's particular to the for-profit education space?

Not anymore. I think in the early days that was more problematic.

The stories just keep coming. The University of Phoenix and all the for-profit university administrators say, "You know, these are anecdotes, and you can always find an anecdote." But they seem to keep coming. There seem to be a fair number of students who can't find work and are saddled with a lot of debt.

Let's put it in perspective, however. The University of Phoenix has 420,000 students. If 1/10 of 1 percent of their students had a problem -- which I would suggest is probably a fair reject rate; I mean, the hotels would be happy with that kind of reject rate -- that number's going to be fairly high in terms of real anecdotes, largely because of the volume. And the for-profit schools have clearly taken far more volume than they've had just simply 10 years ago. There's almost 2 million for-profit students in America right now.

But let me give you a challenge. The for-profit institutions, in most cases, are very happy to publish all kinds of statistics about their retention rates, their graduation rates and their placement rates. In fact, all of the nationally accredited schools do that.

Not so with traditional education. So if you go to the University of Tennessee and you ask them, "Well, where do your students get jobs, and how many of them are employed and unemployed?," we don't get similar kinds of statistics.

So my argument is figure out what we're going to measure. I don't know what we should be measuring. I'm not certain that getting jobs is the measurement, although I think it's probably a fair one, especially if you have a big loan --

Especially when you're talking about the kinds of educations that are provided [by] the for-profits. They're anywhere from learning a trade to learning a highly specialized skill, such as nursing or EMT [emergency medical technician].

When I was running schools, one of the most important things that we invested in was to make certain that a student had contact with their employers while they were students so that they weren't going out and getting a job just when they graduated, that they had contact throughout.

And the second thing I always made certain of was that I was providing the kinds of employees that the employers actually needed. We had councils of folks who would gladly come back to the schools and tell me, "This is not so good; you should add this."

So we would always keep a check on that, because I knew that I had two constituencies. I had the student, but I also had the folks who were going to employ that student. I don't think you get the same kinds of efforts in traditional colleges. I think we're starting to see a little bit more of that now, but for-profit colleges have been doing that for 50 years.

From all that I see, you're correct, that they don't want to measure outcomes, but they also don't market the same pitch that the for-profits do. They don't say, "Come to our school so you can be a Phoenix, so you can rise from the ashes, so you can get a job in this field or this field or this field." The University of Tennessee or Rutgers or whatever it is, they say, "Come and get an education," but they don't make those direct promises that the University of Phoenix makes.

I think it's a little more of an implicit promise. I don't know if there's any for-profit institution -- in fact, I think the regulatory bodies don't allow us to make promises or guarantees of employment, because we just can't do that. But I think we can increase the probability that somebody's going to be able to get better pay. And the Department of Labor statistics bears this out, that ultimately somebody's going to end up earning a whole lot more when they improve their education.

No, I have no question that you do, in fact. I mean, it would be a disaster if you didn't have more of the graduates getting better jobs. The question is whether it's a fair comparison with the state schools or the elite schools.

Well, then again, I'll give the challenge, then what do we measure for them? What is it? Do we evaluate whether the people of the state of Tennessee are getting what they're paying for? Right? Obviously the taxpayers are writing a check every year. How do we measure if they're accomplishing what they say they want to accomplish?

That's a fair point. I take your point.

Yeah.

That's a question for those administrators that run the state schools, and for the governors.

Yeah. I'm looking forward to hearing their answers.

So am I. (Laughs.) What was the budget that you had in Philadelphia for faculty versus what you had for marketing and, you know --

Yeah, this is public information, but the media advertising and the faculty were about equivalent, about the same. So I understand that there's some issues with that, but the question is that when I'm new in an area, ... there's 93 other universities and I'm the new guy, I have to work hard to get the people's attention.

... That was advertising, but on top of that, you have call centers and sales force.

Financial aid. There's --

So all those services dwarfed what you were spending on faculty.

That's correct. Ultimately, if you take a look at for-profit colleges, the analysts will tell you that anywhere between 20 and 25 percent 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 percent range. So yeah, I think you're correct.

Well, should that make us uncomfortable?

I don't know. Why would one be uncomfortable?

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. Is that right?

Well, let me focus on a different analogy. 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 or $6.

But you're not selling perfume.

Well, again, that's what I'm saying. Ultimately, I don't understand why there's a problem with education, and we don't have a problem with other parts of the economy. What makes education so special?

You're spending more on marketing and lead generation than you are on the service that you provide.

In just about every industry in America -- my Nikes cost a couple of bucks to make, and the advertising costs -- God knows what it would cost.

And the guy that makes them over in Thailand or wherever hardly makes a penny.

I understand.

But this is a college.

I mean, that's why the faculty are nervous, I suppose. I understand the analogy, yeah.

Well, but this isn't something people are unaware of in all industries, whether it's perfume or Nikes or whatever, but I don't think most people would think that's the case in a college.

In a traditional college.

Well, whether traditional or online, they're not so comfortable with that model of spending more on marketing.

I truly understand. I mean, I would be uncomfortable if my hospital spent more on advertising than they did on their doctors. I understand what you're getting at, and the way that for-profit colleges answer that is that we're trying to get to specific kinds of objectives, and we can get to those kinds of objectives with the model that we've been using. And we've been successful at it for now 25 years.

But I understand. I mean, we like to see professionals paid a professional rate. I don't want my pilot [earning] $13,000 a year. I don't want to fly on those regionals either. So I truly understand the analogy.

I don't know if it's the same analogy for education. I think for-profits have to get people's attention, and they do a very good job of getting people's attention. I think that's the hardest part with the vast majority of the population that don't have a bachelor's degree.

I hear you saying two things here. I hear you saying that you understand the analogy and you share some queasiness about it. You don't want your hospital to spend more on marketing than they do on the procedure that they're putting you through. ... Well, why doesn't the same --

Apply for colleges?

Yeah.

Well, because I think what the colleges are selling is in a very real way different; that there is an outcome that we're trying to get to, and that we deserve to get some profit if we're efficient in getting to that outcome, and that we check very carefully if we get to that outcome. And in many cases, any number of different professionals could get you to the same outcome.

But a hospital could say the same thing. Why are you uncomfortable if the hospital that you go to spends more on advertising than it does on the doctors?

Well, because I want to make certain that the doctor who's got his knife in my chest is the very, very best that he could be. And so yeah, I understand that analogy. It's an interesting one.

Can this industry continue to grow at the rates it's been growing? And for how long?

Well, the world is far more complicated than it was when I was first born and when my father, God bless him -- he's celebrating his 85th birthday. I mean, the world that he came into was very different. And the knowledge requirements, not just here in the States but all over the world, is more tedious. And we're going to have to get better at it.

So my sense of it is as the world gets more complicated, then we'll need to be more educated. So if we don't grow here in the United States, we'll grow elsewhere. And we're already beginning to see that. Just about every one of the for-profits that traded publicly are doing something internationally. DeVry has a medical school. So again, we're starting to see this. I mean, 25 percent of Americans have a bachelor's degree, and we're the top of the game, right? The rest of the world is not nearly where we are right now, so --

So there's a lot of untapped potential.

You bet. I think there's another 100 years of growth in this industry. And hopefully we'll get better at it. Will everybody get an elite education? Sadly, no. But will everybody get more than they had the day before? I certainly hope so.

So we've got a new administration. It's been around now for a little over a year. What do you think of the Obama administration when it comes to higher education and for-profit schools? Is he a friend of your education?

My industry? That's yet to be seen. I think right now, a year ago, Congress passed the reauthorization of the Higher Education Act, which was a very, very important chunk. It caused worry, not just to for-profit higher education, but [to] all of higher education, because, quite frankly, they hadn't raised the amount of money that students could borrow in real dollars for almost 20 years. So Congress, in August 2008, passed, really, a sweeping reauthorizing of the Higher Ed Act. And I think that was very important.

In the last year, they've been talking about some very real changes, about how to interpret those laws. And some of them have been worrisome to Wall Street because they just don't know what it's going to look like. So I think time will tell whether Mr. Obama is a friend of for-profit higher education. But my sense is, if I was a betting man, I would say that it's not going to hurt for-profit education, because frankly, we need it.

I mean, if 10 percent of the students in America are training at for-profit higher education, what happens if the industry fails? What happens to these students? Where do they go next? They're certainly not going to go to the community colleges. There are certainly not going to be loads of classrooms available at the state schools; they're cutting back. And so my sense is if Mr. Obama is serious about his challenge that that, frankly, will be nearly impossible to do very much.

Now, one of the things that has been of the most concern is about the aggressive marketing that we talked about earlier. And years ago, as part of a legal settlement from the Department of Education, the department put out a very, very clear, safe harbors about what schools could and couldn't do and what they could and couldn't say to students.

You couldn't put recruiters on a quota system, or you couldn't reward them for --

You couldn't reward them for grabbing students or you couldn't reward them for selling financial aid. They were very, very clear.

But you know and I know that there's lots of ways to get around that.

Yeah, and I think every industry tries to find ways to manage the expectations of regulatory matters, but in that case it was very clear about what you could and couldn't do. And I think the one problem that we're starting to see in the current rule making is that the department doesn't want to make safe harbors; they want it to be more nebulous, and that's of concern both to the schools and to the investors who invest in the schools.

All businesses want clear guidance from Washington. That's what you're saying?

Exactly. Tell us what we can do and what we can't do and we will be certain to follow the rules. I think the good news is that you really have professional management now. You have some of the finest management that I've seen, and I've been in the industry now for almost 30 years. And we've got just great folks managing the biggest schools, and our students deserve that.

Are these stocks a good buy?

Right now they are. They've been trading low because of the regulator uncertainty, and the fundamentals of the business haven't changed. They're still cash machines. They're still easily duplicated, and they're still producing product that, quite frankly, consumers want. So I think that's kind of the best of all possible worlds. And when you have this regulator overhang, it makes people scared. So I think there's still lots of upside.

A lot of bargains.

I still invest in this.

[One new rule affecting the industry is that] you can only borrow up to 12.5 percent of what your first year's salary will be.

This is a new rule?

A new rule -- "gainful employment."

And what do you think of it?

I think that in principle it makes lots of sense, but I think they're doing it upside down. If we lived in a real free economy, then it would make sense, right, because ultimately, if there was a nursing shortage, what you would do is you pay nurses more and you make more nurses.

But we don't live in a free economy, right? I mean, we have a nursing shortage, and we try to import them from the Philippines. So ultimately you could end up in some very serious difficulty if schools were forced to not train folks, and there would be a gap. It seems to me that the better way of doing this would be to give students loans and then forgive loans for those professions that don't make nearly as much.

Forgive the loans? That means the taxpayer is going to subsidize you as the educator.

Me and other schools. That's right, because --

But it seems that if I sign up for a course and it's going to put me in X dollars of debt that I should have some chance of being able to pay that off in a reasonable amount of time. And if you know that you're marketing a course at a college that's going to put me into a kitchen of a restaurant and I'm never going to make enough money to put a dent in my debt load, that you shouldn't be allowed to do that. Does that make sense?

But here's the problem. Then you don't get exceptional people, because in essence, what happens is that you end up designing your product to the lowest common denominator. You have to reduce your costs. I understand the notion in principle. If I have a culinary school and somebody's going to start as an entry-level prep chef at $15,000 a year, why should they pay $30,000 a year to go there?

Why should you aggressively market them to get a big loan?

And here's why: because ultimately at that same school, there may not be 50, but there may be 10 of the finest chefs that will ever come. So the question is, how will you ever produce really exceptional people in any real field? Most people who cut hair are going to make $20,000 a year, but there's going to be a few of them that are going to do very, very well.

So how do you get the best in any profession if you don't have an opportunity to distinguish between really, really terrific and just OK? And I think that's the problem with the gainful employment [rule]. So while in principle I think it makes very good sense -- I told you, the thing that kept me awake at night was that somebody was paying back a debt and they couldn't afford it. I mean, that's horrible.

It seems that if it's all about the customer and not just the shareholder that you should want to protect the greatest number of students from being saddled with too large of a debt load. You're talking as if the concern is society and whether society's going to get the 10 best chefs. But if you're protecting the student, if that's the customer, then it seems reasonable --

Well, the Department [of Education], I think, is not interested in protection so much as underwriting, right? I mean, ultimately, what's the risk to the taxpayer that a student is not going to be able to pay back their loan? And I concur because I'm a taxpayer, too.

Well, it's a huge burden for the student, and often they can't get out of these loans. They're very hard to shrug off.

I understand that. But here is the rub: An adult student can make that choice, I believe. If it's a kid fresh out of high school, I understand that ultimately, how does an 18-year-old make a decision about --

You know, we said that about homeowners, that they know what they're getting into.

That's true.

They didn't.

No.

And not only did they get screwed --

Yeah, all of us did. I understand. It's an interesting conundrum right now. And [the late Sen.] Ted Kennedy [D-Mass.], God bless him -- I liked his solution. Kennedy, who was at this a long time and ran the education committee, knew that every time he increased student lending, colleges increased their tuition.

So he thought that the more interesting way to do this was to give students everything that they needed to graduate, whatever profession, and then the student would pay back a certain percentage of their salary over a course of a number of years. And so the economy, the larger market, would make determinations on how much you would pay.

So if you were an investment banker like me, and you were making a lot of money, you would pay a larger amount for your student loans because your investment paid off better. And if you were cutting hair and you were getting less pay, you would pay back less. And I thought that was a wonderful notion. I think it's easier in practice to enforce than what they're trying to figure out in Washington right now. But boy, I loved that idea.

It sounds like socialism to a lot of people.

I understand. I understand. But you know what? If you believe in capitalism and that markets correct themselves --

You shouldn't be so afraid of socialist solutions?

You shouldn't be afraid that, ultimately, that the market will correct itself.