• November 24, 2014

Forget Gainful Employment. For-Profits Should Restructure Instead.

Forget Gainful Employment. 
For-Profits Should Restructure Instead. 1

Tim Foley for The Chronicle

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close Forget Gainful Employment. 
For-Profits Should Restructure Instead. 1

Tim Foley for The Chronicle

Problems with for-profit colleges are receiving a great deal of attention in education news, and most of the conversation revolves around increasingly modest federal "gainful employment" rules that judge college programs based on their graduates’ debt levels. The Association of Private Sector Colleges and Universities is aggressively lobbying lawmakers to further weaken the standards to protect continued federal student-aid payments to member institutions of the trade group.

Much of the criticism of for-profit universities can be traced to a simple conflict between priorities in American education and corporate governance in the United States. Corporate boards are primarily beholden to shareholders, who ultimately decide how a corporation behaves, and this almost exclusively results in attempts to maximize short-term profits. This is an acute issue in education because the ultimate standard for an educational institution should be educational quality, not profit maximization.

Traditionally, most brick-and-mortar educational institutions desired a finite student-body size, a number that is relatively consistent over time, and based more on the availability of qualified instructors than any other factor. Since new universities are relatively rare, this led to an excess of demand for higher education as more and more students attempted to earn degrees. As four-year and community colleges filled up, for-profit universities ventured into general higher education with a fundamentally different business model, preferring constant growth.

For-profit institutions developed an "all are encouraged to join us" model, involving easy entry and aggressive recruitment of new students. The rise of the Internet and online education eliminated geography as the last barrier inhibiting institutional growth, which caused for-profit institutions to experience the fastest growth in higher education in the last decade.

Today, leading for-profit universities are massive in both number of students and amount of federal loan money received, dominating top-10 lists. They also lead the pack in dropouts, student-loan defaults, and percentage of overall income received from federal sources. The ferocity with which their association lobbies against the most modest gainful-employment and default rules is telling. While those institutions correctly point out that they often cater to unconventional and at-risk students, those are reasons to encourage more regulation in the sector, not an excuse to relax standards. This vulnerable population is not well served by the institutional shareholders that hold large equity positions in the companies and primarily focus on short-term profits.

An unlikely opportunity for significant for-profit educational reform is popping up in many states in the form of corporation law. A new type of corporation, called a benefit corporation (B-Corp), has recently been written into law in many states, including Delaware (where a number of for-profit education companies are incorporated) and Arizona (where the Apollo Education Group—the parent company of the University of Phoenix, the largest for-profit educator—resides).

B-Corps make it possible to have a double or triple mandate, with corporate charters pledging to balance profit-seeking behavior with social or environmental benefits (or balance all three). That corporate design makes it possible to insulate socially conscious companies from abuse by shareholders demanding to see short-term profitable behavior that may damage long-term or socially beneficial goals. A B-Corp that protects student interests while still allowing the pursuit of profit is the perfect structure for companies that want to be involved in general higher education.

We propose that for-profit universities change their corporate charters to reincorporate as B-Corps, and specifically state student success as a legal priority. While this idea may seem preposterous to some of those in the industry, educators who are unwilling to legally balance student outcomes with profitability would send a strong signal to both regulators and the public that their students do not come first. The current structure of most for-­profit universities creates a direct conflict of interest between student success and investor success.

Instead of relying on cohort-­repayment or gainful-employment rules, versions of which have been determined as arbitrary and therefore unenforceable in past court rulings, the Department of Education can institute a simple binary test to determine future eligibility for federal lending: Does an educational institution put its students first?

If the answer to that question continues to be "no" in states that allow B-Corps, continued access to federal student loans should be denied (and the same regulations should apply to institutions that purposely move their operations to states that do not allow B-Corps).

An obvious criticism of this proposal is that investors would not vote for such a change. While this is likely to be true in the current for-profit-university debate, where the industry’s association has succeeded in defining regulations as arbitrary, investors would almost certainly vote for a proposal that would allow a company to continue receiving federal loan money if the new standard was a binary test of whether student interests were valued first.

This requirement would also discourage limitless growth and therefore reduce the considerable risk that some of the largest for-profit educators present for the Department of Education in the form of loan-repayment guarantees for current students of institutions that are shut down. Forcing large for-profit institutions to close would result in the immediate forgiveness of billions of dollars of federal loans (we estimate about $18.5-billion outstanding for current students of the 10 largest for-profit institutions), while forcing them to reform would result in continued operations and a reduction in size to a more reasonable and sustainable model.

Another criticism is that current boards already have the ability to consider social objectives. While this is legally true, current large for-profit institutions are not balancing student interests, making a requirement necessary. Restructuring as B-Corps would reduce investor power in the decisions of for-profit educators, something that is long overdue in today’s climate of federal-loan abuse by those institutions.

If legally putting students first would cause profits of an educational institution to fall so much that operations were no longer worth it, then that is simply not an institution that should continue to operate. If putting students first would cause the value of an education company to drop significantly, then that company was probably engaged in some unscrupulous behavior, and the loss in value for investors would be the natural result of a company behaving badly. If putting students first resulted in no significant loss of value, then we would successfully make the legal mission of for-profit educational institutions the same as their stated mission. Despite continued aversion to getting smaller, the largest for-profit universities would be able to reduce total size very easily, as they rely heavily on adjunct labor for class instruction.

Requiring for-profit general-­higher-education companies to operate as B-Corps would not solve all of the problems in for-profit higher education, but it would eliminate the unacceptable payments from the federal loan programs directly to corporate shareholders with little accountability for student outcomes, as happens now. Operating an educational institution is a privilege and a great responsibility, and those that are not willing to put students first should be gradually wound down with little public concern beyond the costs of eliminating those institutions.

Eric Best is an assistant professor of emergency management at Jacksonville State University. Joel Best is a professor of sociology at the University of Delaware. This essay is based on their new book, The Student Loan Mess: How Good Intentions Created a Trillion-Dollar Problem (University of California Press, 2014).

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