Monday, December 12, 2016

Are For-Profit Colleges Fraudulent Crocks or Simply Misunderstood?

I need a reprieve from thinking about the upcoming Trump presidency and blog on something less controversial instead, or at least relatively so: for-profit colleges. Intuitively speaking, I would think that a for-profit school would work better than a non-profit school or a public school. The reason for that thought is the idea of profit motive, or that firms operate in a certain way in order to maximize profit. People start up businesses for other reasons, but one of the primary reasons, if not the primary reason, is to earn a profit, and this is because self-interest has strong predictive power. The idea of profit motive is not libertarians being selfish (by the way, libertarians are not more selfish than others) or so-called "evil capitalism": it's standard microeconomic theory. Part of that profit motive is being able to deliver the best good or service at the lowest rate possible relative to the quality of the good or service. At least that is how it works in theory.

However, there are some, like John Oliver (see above), who contest that theory. For naysayers of for-profit schools, they are not simply ineffective. They are also downright immoral. How bad are for-profit schools? If they really are that bad, how should we deal with them? There are certain metrics to compare for-profit schools with public schools or non-profit private schools. Let's take a look at some of them:

Post-Graduation Earnings: A May 2016 paper from the National Bureau of Education (Cellini and Turner, 2016) shows that there is an average decline in earnings after attendance. However, the average is skewed by the number of people who drop out of a for-profit college, not to mention that the study is not particularly longitudinal in nature.

Last month, the Department of Education released graduate earnings data for those who completed certificate programs in public schools versus for-profit schools. The Department found that graduates of public undergraduate certification programs earned $9,000 more annually than for for-profit. The DoE method is slightly flawed in that according to its Beginning Postsecondary Students (BPS) Longitudinal Study, 70 percent of for-profit schools graduate from these programs, while only 45 percent of public school attendees graduates.

On the whole, those who graduate from a for-profit college earn, on average, 4 percent more per year attended than high school graduates who never went to college, according to a Brookings Institution 2015 study. Assuming one graduates from a for-profit college, there is long-term payoff, much like graduating from college in general. This does assume that one graduates, which brings me to my next point.....

Completion Rates: As previously stated, for-profits have a higher completion rate for undergraduate certification programs. For two-year and four-year programs, not so much. The Brookings Institution points out that 60 percent complete for two-year programs and a low 35 percent for four-year programs. For two-year programs, for-profit colleges fare better than two-year public colleges, whereas they do not for four-year institutions. However, given that 81.5 percent of for-profit students are enrolled in four-year schools, the disparity in completion rates for four-year schools is more pronounced. On the whole, completion rates for for-profit enrollees are lower.

Indebtedness. The Brookings Institution released a report in Fall 2015 about indebtedness. In 2011, students from for-profit schools borrowed 25 percent of loans while only representing 9 percent of enrolled students. In 2014, 25 percent of borrowers were from for-profit schools while representing 16.7 percent of the student loan debt (p. 25-26). The findings about indebtedness are paradoxical. For-profit college students are more likely to take out loans. On the other hand, the amount of debt owed is on average smaller. Although there is smaller debt, those who attend for-profit colleges have less access to non-loan aid, which increases their reliance on student loans and makes it more difficult to pay off the debt. This is shown through the default rate. While making up for a quarter of borrowers, those who attended for-profit colleges account for 35 percent of defaults in 2013, which is thankfully lower than the 44 percent in 2011.

Tuition: The College Board puts out statistics on tuition (see below). There's no nice way to put it: for-profit colleges have a higher tuition rate than public colleges. While the tuition and fees are higher, there is argument that the higher tuition is worthwhile. Cato Institute scholar Neal McCluskey postulates that in spite of the higher tuition, for-profit college provides more flexible scheduling, better student services, and more focused training.

Postscript: Comparing charter schools to public K-12 schools was much more straightforward. On average, charter schools outperform public K-12 schools. However, it is more difficult to render a verdict on for-profit schools. Part of the reason can be attributed to poor-performing schools, like we saw during the Corinthian College scandal. Just because an institution or business is for-profit does not mean it is going to succeed. Figuring out what success looks like becomes murkier when government regulation muddies it all up. What do I mean by that?

It starts with the federal government subsidies. I have brought this up before, but when the demand for a good or service is artificially boosted, price also increases. This goes beyond basic microeconomic theory. In July 2015, the Federal Reserve Bank of New York released a report saying that for every dollar that is spent on a subsidy for a student, the tuition goes up by 60 cents. This effect is more pronounced for those in private institutions, e.g., for-profit schools. The National Bureau of Research also put out research in February 2016 concluding that government subsidies accounted for 78 percent of the tuition increases from 1987 to 2010 (Gordon and Hedlund, 2016).

But wait, it gets weirder because the government does not treat for-profit schools the same way it does for-profit schools. If anything, there is greater regulatory scrutiny. The effects of government subsidies gets further distorted with what is called the 90-10 rule, which states that a for-profit college receive no more than 90 percent of their funding from the federal government. Both public schools and for-profit schools depend on federal government subsidies. Public schools can at least rely less heavily on federal government subsidies and lean more on state funds. For-profit colleges don't have that luxury, and thus have to recruit more students, which would explain why this U.S. Senate report found that for-profit colleges spend 22 percent of its revenue on advertising. This 90-10 rule creates perverse incentives, e.g., high levels of advertising, because more students means more money from the federal government.

The effects of the 90-10 rule are even further distorted by the "gainful employment" rule, which was implemented by the Obama administration in 2015. This rule was created to stop for-profit colleges from abusing the 90-10 rule by requiring that "for-profit schools that receive federal funding ensure their graduates have high earnings relative to the debt that they have accumulated." This is a perverse incentive because it encourages for-profit colleges to help the students with the highest potential to graduate, which would have even more adverse effects on completion rates.

Can I say that for-profit colleges are preferable to public colleges? Given the distortionary effects of federal government subsidies and other regulations, it is hard to ascertain without broad, systemic data that provides apples-to-apples comparisons. The evidence is skewed based much more on the perverse incentives than it is the supposed evils of profit-making. We don't live in a world in which the government has little to no influence on for-profit colleges. The federal government has a huge sway over for-profit college operations. For-profit college enrollment growth shows that demand has not slowed down. We even see the growth of for-profit colleges in such countries as Sweden, Australia, and the United Kingdom. Given that the President-Elect owns Trump University, I wouldn't be surprised if government policy ends up being friendlier towards for-profit colleges than the Obama administration has been.

What I do know is that neither public college nor for-profit colleges have statistics that are worth bragging about, and given the current statistics, it looks like for-profit colleges overall underperform in comparison. What would be more interesting to see is how for-profit colleges performed if these regulations were removed and if they had more limited access to federal government subsidies. It would be nice to see what would happen if private lenders had a greater role because they would have a greater incentive to weed out shady for-profit colleges. That would be a fun social experiment to watch unfold, but until reforms are made, let's just say that I'm glad the days of attending college are behind me.

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