The Unacknowledged Value of For-Profit Education

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Originally run as a Manhattan Institute Policy Brief.


The growth
of student-loan debt has raised a vexing question: Is a college degree still a good
investment? No segment of American higher education has faced greater scrutiny
than for-profit colleges and universities.

 

For-profits differ from traditional institutions in important
respects. They are accountable chiefly to shareholders, who expect a return on
their investment; their stocks are usually traded publicly; and they face no
restrictions in setting executive pay. In addition, their admissions standards
generally are much lower than those of comparable nonprofit schools. While
for-profits only accept students with a high school diploma or equivalent, they
are otherwise nonselective. The average acceptance rate for for-profits in
2007-08 was slightly above 74 percent, the highest of any sector and roughly 5
percentage points higher than public universities. Most important, for-profits’
academic goals are distinct: they explicitly seek to equip students with
vocational skills. To that end, they emphasize technical training over the
liberal arts. 

For-profit
business schools flourished across the United States in the nineteenth century.
Though the industry faced serious competition from nonprofit colleges and
universities in the early twentieth century, it has recently seen substantial
and sustained growth, far outpacing that of traditional institutions. Scholars
have estimated that the entire for-profit industry comprises 7,549 institutions
and educates 2.47 million students. From 1998 to 2008, for-profit enrollment
grew 225 percent, and postsecondary enrollment as a whole increased only 31
percent. Additionally, the share of all students attending for-profits has
increased: from 2000 to 2009, the percentage of all students attending for-profit
colleges grew 6 percent. Not surprisingly, for-profits account for a
significant percentage of the degrees granted in the United States: in 2008-09,
they produced 18 percent of the country’s associate’s degrees, 5 percent of its
bachelor’s degrees, and 10 percent of its master’s degrees.

 

The Promise of For-Profits


The most promising aspect of for-profits is their ability to
accommodate those students who, for whatever reason, cannot thrive in a
traditional institution. The student-body makeup at for-profits, report Harvard
scholars David Deming, Claudia Goldin, and Lawrence Katz, underscores their
success in attracting underrepresented demographics: “Although African
Americans account for 13 percent of all students in higher education, they are
22 percent of those in the for-profit sector. Hispanics are 15 percent of those
in the for-profit sector yet 11.5 percent of all students. Women are 65 percent
of those in the for-profit sector. For-profit students are older, about 65
percent are 25 years and older, whereas just 31 percent of those at four-year
public colleges are and 40 percent of those at two-year colleges are.”

 

For-profits
also attract students from socioeconomic groups typically not found in great
numbers at traditional colleges and universities. Some 75 percent of students
attending for-profits are financially independent of their parents, meaning
that they are 24 or older, married, responsible for dependents, veterans, or
“wards of the court.” In contrast, only 36 percent of students at public
two-year colleges in 2007-08 were dependent. The figures are lower for other
types of institutions.

 

The dependent students at for-profits are generally poorer than
those attending any other type of institutions: whereas in 2007-08, some 54
percent of dependent students at for-profits had incomes below $40,000, only 35
percent of students enrolled in public nonprofit two-year programs did. The
same figures for students enrolled in public four-year programs and private
nonprofit programs were 25 percent and 20 percent, respectively.

 

For-profit colleges attract nontraditional students because those
colleges can accommodate the students’ unique needs. Many students cite the
no-frills nature of for-profits in explaining their decision to attend. Given
that for-profit students are often both poorer and more financially independent
than their peers at traditional universities, they often must work and care for
their families while pursuing their degrees. For-profits serve these students
well because students can enroll in as many courses as their other commitments
will allow. For-profits’ academic offerings also appeal to these students: they
do not offer liberal-arts programs but rather teach technical skills for
specific fields–and thus can quickly train students whose time is more limited
because of work and family commitments.

 

The technical training that for-profits offer underscores the
industry’s greatest strength. For-profits can easily change their program
offerings based on market signals; accordingly, they provide training in fields
in which employer demand for skills is increasing. Indeed, for-profits
recognized burgeoning opportunities in “phlebotomy, x-ray and ultrasound
technicians, practical nursing and even registered nursing” and increased their
offerings of associate’s degrees and certificates in these fields much more
than other institutions did.

 

For-profits are more successful than community colleges at
retaining students who enroll in shorter programs: one estimation model shows
that for-profit students are 9 percent more likely to obtain certificates and 4
percent more likely to obtain associate’s degrees than students who begin these
programs at community colleges. Furthermore, they are more likely to stay in
such programs and less likely to take makeup classes after their first year. This
suggests that though four-year for-profit programs do not offer substantial
dividends to their graduates, students who attend for-profit colleges for
shorter periods without interruption are relatively successful.


Recent Problems and Sanctions


Still, controversy persists. Many argue that for-profit colleges
care less about student outcomes than they do about the funds available through
federally backed student loans–and these concerns are not wholly without merit.

 

Some reports show that many for-profit colleges misrepresent
alumni employment figures to potential students while providing low-quality
academic offerings. Criticism of the industry is growing. New
York Times
 editorials
have depicted for-profits as mere “profit centers” and “generally a bad deal
for taxpayers and for the underprivileged students they often recruit through
deceptive means.” Senator Tom Harkin (D-Iowa), chair of the Senate Health,
Education, Labor and Pensions Committee, lambasted the industry as rife with
fraud and “manipulation.”

 

Like those at nonprofit institutions, students at for-profit
colleges are typically eligible for aid–generally loans–through Title IV of the
federal Higher Education Act (HEA). That aid, in turn, is a principal source of
income for virtually all postsecondary schools. However, students at for-profit
colleges default on those loans at a much higher rate than students in either
public or private nonprofit institutions.

 

In 2008, 25 percent of students at for-profit colleges defaulted
on their loans within three years, compared with a rate of 7.6 percent for
private institutions and 10.8 percent for public institutions. These default
rates increased from 2006 to 2011. Moreover, students at for-profit colleges
default at rates disproportionate to their numbers: though they constitute just
12 percent of all those in the higher-education industry, they make up half of
those who cannot pay back their loans.

 

For-profits’ graduation rates are also worse than those of their
nonprofit peers’. Completion of bachelor’s degrees is significantly lower at
for-profits than at other institutions: though in 2002, 57 percent of all
bachelor’s students obtained their degrees within six years, only 22 percent of
students at for-profits did, compared with 65 percent at nonprofit private
schools and 55 percent at nonprofit public schools. Moreover, the disparity
between white and minority students’ completion rates is larger in the for-profit
sector than in any other. Finally, for-profit students have a greater
likelihood of being unemployed than their peers.

 

In response to these troubling figures, the U.S. Department of
Education in 2011 promised to hold for-profits to the letter of the so-called
gainful employment language in the HEA. Henceforth, federal aid to students
attending a particular institution would be contingent upon its student-loan-repayment
rates. In the department’s view, for-profit programs led to “gainful
employment” if at least 35 percent of students were paying back their loans and
if the annual sum repaid was not above 30 percent of students’ discretionary
income, or 12 percent of total earnings.30 If institutions did not meet these
standards for three years within a four-year period, they would no longer
receive federal funding. Moreover, those institutions that the department
believed were providing inferior opportunities would then need to request
permission from the department to create new “educational programs.” Though the
D.C. District Court invalidated the loan-repayment measure on the grounds that
the desired percentage of students repaying their loans was “arbitrary,” the
Department of Education pledged to find more acceptable figures. At that time
(June 2012), however, only 5 percent of programs at for-profits would not have
met the “gainful employment” standards.


Going Forward


How should policymakers approach for-profit colleges? Any proposal
should seek to encourage the positive aspects of for-profit colleges–dynamism
and the appeal to nontraditional students–while forthrightly addressing their
more problematic elements.

 

Certainly, the federal government should stop subsidizing
substandard institutions. As noted above, for-profit colleges rely on federal
funding for their continued existence. Strip that away from institutions that
fail to produce measurable positive results, and the lower-quality colleges
would be hard-pressed to stay in business.

 

Still, many students who depend on federal aid to support their
education would no longer have an opportunity to earn postsecondary degrees. A
more gradual approach, with the Department of Education reducing the amount of
Title IV loans that it grants by 10 percent each year, might be better. This
approach would give families enough time to carefully reconsider their
educational options. Alternatively, the Department of Education could cap the
amount in Title IV loans that it provides to for-profit colleges each year,
thus forcing administrators to reduce unnecessary spending. Doing so would
signal that federal support is not unlimited and might encourage for-profits to
cut back on nonessential spending.

However, even this gradual approach would put for-profits at a
competitive disadvantage: it would push students toward nonprofit institutions,
where they can expect more abundant aid. This raises an important point. Thus
far, the federal government has targeted for-profits specifically. However, if
the Department of Education is concerned about loan repayment, completion
rates, and employment statistics, it should also scrutinize traditional
institutions with regard to these outcomes. It should not matter whether a
student is delinquent in paying back loans from a for-profit, nonprofit, or
public college. The government subsidizes students at all three types of
institutions and has an interest in ensuring that its investments are used well
everywhere.

 

The federal government can make its commitment to worthwhile
higher education clear by ensuring that any regulation of for-profits, or
alteration to the student-loan system, is applied to nonprofit colleges and
universities as well. This would avoid raising suspicions that new federal
measures aimed solely at for-profits are motivated by politics rather than
concern for student success. The goal should be an approach that treats
for-profit and nonprofit colleges identically, so as to make all consumers in
the higher-education market more cautious about their investments. That would
make it easier for students to choose the programs that best suit their
circumstances and that provide the skills that they need to prosper.

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