The Beltway For-Profit Witch Trials

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In mid September, the Congressional duo of George Miller and John
Tierney joined their Senate colleagues Tom Harkin and Dick Durbin and the
Department of Education in what might be described as the ongoing Beltway Witch
Trials, where the alleged witches are the colleges that are legally organized
on a profit-making basis. Messrs. Miller and Tierney proposed a new line of
assault to rein in these alleged evil doers that they have creatively named
the College
Student Rebate Act of 2012
. The objective of the proposed
legislation is to exert political control on how private sector colleges
allocate their financial resources, as the bill calls for a cap of 20 percent
for expenditures on “advertising and promotion activities, excessive
administrative expenses including executive compensation, recruiting, lobbying
expenses, or payments to shareholders.” Expenditures on these activities
exceeding the cap would need to be refunded to students and/or the government.

Rep. Miller told the Huffington
Post
that since “for-profit colleges tend to get a great deal of
revenue directly from the federal government…how schools spend this money must
be carefully examined.”Examination is one thing, but what the bill would really
do is enable politicians and unelected bureaucrats to limit the ability of
private firms to attract customers and strengthen their brands, compensate
their managers for successful performance, protect themselves from additional
onerous regulations, and reward owners for their investments. The bill would
seriously inhibit the incentive structure necessary to promote private investment,
innovation and growth in an industry greatly in need of improved efficiency. 

The bill is simply the latest installment in a series of attempts to
rein in the growth and success of the for-profit tertiary education market.
Economic data illustrate the success of the private sector colleges. Between
1986 and 2008, the market share of for-profit colleges increased nearly
fourfold: from 2.4 to 9.2 percent; and the sector managed to compete for 21
percent of all Pell Grant and subsidized Stafford Loan dollars in 2007-08.
Economic theory might suggest that the firms comprising this sector have been
successful by putting on their entrepreneurial hats and finding ways to satisfy
unmet demand. Other economic data — namely higher average student debt and
default rates among for-profit colleges — paint a drearier picture of the
sector. These data have often been coupled with horror stories of for-profit
colleges preying on na

Daniel Bennett

Daniel L. Bennett is a Research Professor at the Baugh Center for Entrepreneurship and Free Enterprise at Baylor University.

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