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NEW YORK (MainStreet) —Taking out student loans is all too common a solution for most Americans to cover exorbitant education costs. Yet it's a practice that's disproportionately common at for-profit colleges: the College Board reports that at for-profit schools like Corinthian Colleges, Inc. (COCO) or Apollo Education Group's (APOL) University of Phoenix, 96% of graduates took out student loans, compared to 72% and 62% at public four-year and private non-profit four-year institutions, respectively. Recently, though, there's been an increased federal crack down on the predatory lending practices that have plagued for-profit college alumni.

As the Department of Education is shutting down Corinthian campuses nationwide, after the largest career-driven diploma provider failed to report student enrollment numbers and falsified job placement and attendance data, for-profit universities like University of Phoenix are increasingly coming under scrutiny for shady federal student loan practices. As a result, for-profits, which purposely overcharge federal student loans to survive, are seeing their revenues dwindle in the wake of federal discipline from ED and the Consumer Financial Protection Bureau. But though that federal reprimand may have stifled some of the success of these universities, the action has not been enough to stop the robust profits.

DeVry Inc. (DV) is one of the for-profit educators that was recently upgraded by research firm Stifel from a "hold" rating to a "buy" with its price target raised to $48; its net operating cash flow, compared to the same quarter last year, has also climbed by 47% to $150.09 million with a high gross profit margin.

The ongoing student loan debt scam may hurt for-profit universities' reputation, yet the damage is not devastating enough to stop the publicly traded behemoths in a short period of time.

Paying the For-Profit Piper

Garry O'Neal, 34, firmly believes pursuing his psychology master's degree at the University of Phoenix, the for-profit education brand well-known for its online-based programs, was one of the smartest decisions he has ever made. Since receiving his diploma in 2010, he has been employed as a youth advocate for the Department of Juvenile Services in Baltimore; however, his education has left him $80,000 in debt as he tries to feed his two children.

That's a disappointing truth O'Neal now has to deal with; now four year since he's graduated, he hasn't yet been able to afford to start making a dent in his $600 monthly loan repayment plan.

Accredited by the Higher Learning Commission, a regional committee assigned on behalf of ED and the Council for Higher Education Accreditation, the University of Phoenix delivers financially for its parent group, the education giant Apollo. In 2012, it represented more than $4 billion of Apollo's net revenue. The company also derives over 80% of its revenue from federal financial aid program funds, such as Pell grants and Stafford loan programs, according to Apollo's SEC filing.

"The business model of many for-profit universities depends upon students having federal student loans as their catchment area of students they seek to recruit," says Demitrios Moschos, partner at Worcester, Mass.-based law firm Mirick O'Connell, LLP. "[These for-profit institutions] are set up more to deal with students who have the student loans; that is not the primary focus of non-profit schools."

Despite the effectiveness of this model for the publicly traded, profit-oriented entity, Apollo's net revenue had been continuously falling in recent years, dropping to $3.6 billion in fiscal year 2013 from $4.7 billion in fiscal year 2011. This April after Apollo disclosed that ED was conducting an investigation into the company on its student recruitment, attendance, completion, placement, and defaults on loans, along with information on other corporate and financial matters, the company's shares declined over 8.8% the next day.

For-Profits Fight Back

But for-profits continue to stay afloat despite the bad press that has chipped away at revenues. That's because their success doesn't just hinge on a successful federal loan business model; the ingredients of their financial aid package structure, too, are different and more lucrative than at non-profit schools.

"For-profit schools don't balance the financial package that students get," says Moschos. "Student loans are not the only option for students who go to non-profit colleges."

According to the College Board, between 2007 and 2008, undergraduate students in the for-profit sector received nearly 75% of their grant aid from the federal government and only 7% from the institutions they attend, while private non-profit institutions, by contrast, provided less than 10% of the grant aid to their students but 75% through institutional sources, such as discounted tuition, part-time opportunities like work on-campus, scholarships and fellowships.

By providing educational opportunities to people, such as adults who have full-time jobs and those who seek to take online-based courses, for-profit schools like the University of Phoenix have created a concept to fill the demand gap left by non-profit private and public institutions of higher education.

Easy access to the schools is the fundamental driver that lures people who don't have all the prerequisites for a standard higher education but still feel interested in getting an education at for-profit schools, where standardized tests are not required for students to gain admission. Any student can be accepted as long as he is willing to foot the bill.

"The recruitment is commission-based: [enrollment managers and admission officers] are paid by how many prospective students are enrolled into the course," says Kevin Hoult, a former instructor who taught information technology at the Business Continuous Training Institute, a for-profit school that had been accused of federal loan fraud and improper recruiting practices in Vancouver, Wash., and was shut down afterward by the Department of Education. While teaching there, Hoult noticed that the only academic requirement for the students there was a high school diploma.

Taking the Graduate Record Examination is standard operating procedure to gain admission to graduate-level education programs in science and arts at non-profit universities. Yet the GRE wasn't a concern for O'Neal to pursue his psychology master's program at the University of Phoenix. He simply signed up and started his debt spiral.

For-profit schools see students as a conduit to receive federal aid dollars. But, Hoult said, "it would be harmful for those innocent students who would earn little support from schools once they were enrolled."

Moschos told MainStreet that for-profit schools have no interest in the academic success of their students; rather "they are so consumed by the business requirement and need to make a profit for their shareholders," he said.

Shoddy Moral Compass Meets Misguided Business Roadmap

That drive to provide a return for shareholders can be at odds with for-profits' ultimate goals: partaking in surreptitious lending practices can come back to penalize these companies and hurt their profits in the long-run.

In order to appease shareholders, Apollo had settled numerous lawsuits during the past several years when its shareholders sued the company for covering up its predatory student loan activities, a practice that had damaged the company's returns.

Right after Apollo revealed the ED investigation this April, law firm Pomerantz LLP filed a security class action law suit to the U.S. District Court for the District of Arizona on behalf of the leading plaintiff against the company's violation of the Securities Exchange Act. The allegations charged that Apollo had misled its investors about the manipulations of illegally recruiting students and overcharging federal financial aid programs, which caused the company's declines in market value.

The Arizona-based education giant currently employs nearly 15,000 non-faculty employees and 29,000 faculty members and enrolls over 250,000 students across its online and in-person programs. A series of recent accusations concerning the high dropout rates of Apollo's student programs, including the University of Phoenix, has led the enrollment growth to become sluggish. The company's most recent earnings report indicated that a 15.9% decrease in total enrollment at University of Phoenix has contributed to a 15.5% decline in the company's revenue.

Furthermore, despite the fact that for-profit schools have been trying to keep students enrolled since they are more dependent on federal aid than non-profit colleges, their dropout rates have been climbing over the past few years. At the University of Phoenix, 60% of its students dropped out within two years. With investors demanding market returns, schools are tempted to accept students and then do whatever it takes to keep these students enrolled and taking out more loans.

Default In Our Stars

But how can for-profit universities keep the machine running with impunity? That's the controversy at the center of the high default rates at these schools. Senator Tom Harkin, chairman of the Health, Education, Labor and Pensions Committee (HELP), mentioned his findings in his report in July of 2012 regarding the for-profit education industry, after spending two-years investigating for-profit schools, particularly Apollo.

His report disclosed that Apollo has one of the highest default rates in the country, along with a list of for-profit education companies, including Bridgepoint Education Inc. (BPI), Corinthian Colleges, Inc. (COCO), DeVry, Inc. (DV), Education Management Corp. (EDMC), ITT Educational Services, Inc. (ESI) and Career Education Corp. (CECO). It mentioned an internal email from an associate vice president at Apollo that the company expected "the lifetime default rates for Associate degree students entering repayment in 2006 to be 77.7% and to be 55.8% for students entering repayment in 2007."

Default rate is a crucial indicator for a university to demonstrate whether it is capable of serving its students and helping them secure jobs. A high default rate implies a school has problems with program quality, retention, student services, career services and reputation in the employer community. A three-year default rate of greater than 30% will result in a loss of Title IV funds, federal funding that's accessed by the FAFSA application. In order to avoid that loss, Apollo launched a series of "default management programs" by masking the true default statistics, which, according to Harkin's report, didn't really help the loan defaults issue; instead, the company placed student loans on deferment and forbearance, which allowed Apollo to account for those loans as performing and not in default.

Harkin's report also disclosed that these for-profit universities, including Apollo, paid default management contractors to counsel students into repayment options that ensure that students default outside the three-year period, in which ED monitors default. That's the get-around instruction that O'Neal has been told to follow. After three years since his graduation, he was able to prolong his repayment, yet he still has to face his deadline—this coming November.

Apollo had worked with the General Revenue Corporation (GRC), a subsidiary of the student loan collector Sallie Mae, and i3 Group, a student loan default management provider, to "cure" students who are approaching default by manipulating the late stage delinquent student borrower population. But interest still accumulates during the period of forbearance or deferment; this makes for a hefty addition to the principal of the loan. Thus, students usually end up paying more with the accrued interest.

Survival Through Inertia – And Marketing

And so the for-profit system endures – extending its tentacles of influence through continued marketing.

O'Neal told MainStreet that going back to school for further education wasn't his intention, but after he did some preliminary research on the University of Phoenix, he thought it was a "reputable school with flexible schedules" that would be helpful for him to pursue his future career goals.

"I saw their [University of Phoenix] commercials on TV and their ads online, so I called and asked them a few questions, and then I decided to go there," he said. It seems all too simple a vetting process for a program that would cost nearly $30,000 a year on tuition, yet O'Neal bought it hook, line and sinker.

As for-profit universities are increasing their tuitions, they have also been focused on expanding their marketing influences to build up their brands. It's easy to find posters and ads about for-profit schools on your commute to work every day, sending out overpromising messages.

Public troubles of for-profit universities can hamper their ability to invest in their continued success; the collapse of Corinthian Colleges, for example, drove it to reduce its first-quarter advertising spending by 25% year-over-year, from $201.83 million in 2013 to about $151 million in 2014. Still, for-profit universities contribute over half of their spending to paid advertising costs, according to Educational Marketing Group, to continue to attract more students and carry on the vicious cycle.

Lack of Regulation Creates Unstable System

Unlike food and drugs, education can seem harmless to promote, but legislative agencies, like the Federal Trade Commission, apparently don't have enough jurisdiction to regulate how to endorse higher education or set limits on advertising spending.

That's in part because pro-profit universities have been enhancing their relationship with the government through lobbying activities. According to OpenSecrets data, from 2013 to 2014, Apollo has contributed $331,648 to presidential campaigns and congressional candidates, slightly behind non-profit universities like University of California, Stanford University and Harvard University and just ahead of the University of Texas and Columbia University. From 2004 to 2013, Apollo's total lobbying expenditures had reached $7.49 million. Moreover, education brands including DeVry, CCI, Bridgepoint, Education Management Corp., and Career Education Corp. are also on the list of top political contributors from the education sector to line the pockets of special interest groups and keep their businesses and loan practices unfettered.

Plus, in addition to this shady system of federal loans, pro-profit universities are finding new ways to turn a profit by leeching off of tax-payer-backed benefits.

Affected by the government's recent reported shutdown, they have been finding new approaches to keep their revenues growing. According to a newly published report from Harkin, these federal fund suckers collected the highest amounts of Post 9/11 GI Bill Funds, a type of education fund that caters to veterans; the schools involved included Apollo ($272 million), Education Management Corp. ($163 million), ITT ($161 million), DeVry ($132 million) and Career Education Corp. ($79 million). The report also noted that Corinthian collected $63 million in Post 9/11 GI Bill funds last year, up from $22 million between 2009 and 2010. "It's a political problem at heart and truly a systemic problem, because the government has become captured by all of this easy credit and there is little regulation, and there is no political will to solve this problem," says Matthew Reischer, a lawyer and the founder of LegalAdvice.com. "The government has incentives to provide for students to go to school regardless of the performance of the school."

In the short term, it seems like a good way to solve the problem, yet in long term, it exacerbates student loan problems, Reischer said.

Moschos told MainStreet, the key factor is that the business model of for-profit schools cannot be sustained without the federal student loan program; that's why shutting down these schools – with Corinthian's recent closure for instance – doesn't seem an ideal solution to avoid the massive student loan bubble inflated by cheap credit. It may help current students' get their debts forgiven, yet for students like O'Neal who have graduated, it is still tough to pay off debts.

O'Neal thought about going back to University of Phoenix for his doctoral degree, yet that would make him gain an extra $20,000 in debt. When asked why he would still do that despite the fact he is already in such grave debt, he told MainStreet, "I know [the University of Phoenix's] recruitment process has a lot of problems, but the education I had from there was really helpful to me." In the meantime, he is also thinking about finding another job – this time, in consulting.

The machine that enabled his debt-saddled life is still running; despite the crackdown on for-profits, they're still attracting more O'Neals, still signing them up for federal student loans. O'Neal's deferment is soon to be up, but for the University of Phoenix, he'll have already avoided default – and thus succeeded from their standpoint.

"Either way, this November is my deadline," he said. "I have to make a decision."

-Written by Amy Xie for MainStreet