Student Debt and For-Profit Institutions

June 20, 2011, 4:06 am

The debate about for-profit institutions and student debt is too often framed in ideological terms. Free-market conservatives tend to be on the side of the for-profits. They complain that critics are trying to prevent market forces from working and are apologists for the inefficient nonprofit sector of higher education. Politically liberal voices tend to weigh in on the other side, sometimes arguing that the intrusion of the profit motive into the education arena is incompatible with the interests of students.

One of us, Sandy, in her response to an invitation from the Senate Health, Education, Labor and Pensions Committee to testify on the subject, attempted to recast the debate in terms of analysis and evidence rather than ideology. What follows is the summary of the testimony she presented.

The problem of student debt among students at for-profit postsecondary institutions is not a matter of free markets versus government intervention. The market for higher education does and should rely heavily on market forces. However, it is not and never will be a textbook example of competitive markets. The for-profit sector, which has the potential to make important contributions to educational opportunity in the United States, relies on the federal government for most of its revenues.

Virtually all students borrow heavily to study in this sector. Almost half of the institutions in this sector have official student loan default rates over 20%. Some institutions in this sector successfully meet the needs of their students, but they are a dwindling portion of the sector. Unfortunately, the rapid enrollment growth in this sector does not reflect informed consumer response to a high-quality product. With more transparency and more consumer protection, the for-profit sector will be able to make greater contributions to our educational system without damaging the futures of so many vulnerable students.

There is overwhelming evidence that large numbers of students, particularly students from low-income backgrounds, are suffering great hardship as a result of the excessive borrowing required to finance their enrollment in for-profit institutions. Institutions that leave students worse off than they were when they arrived are the exception in the public and private nonprofit sectors. Unfortunately, they appear to be the norm in the for-profit sector.

The character of the for-profit sector has changed as it is increasingly dominated by large, publicly held companies that are compelled by shareholders to maximize profit. Where it exists, good will and social consciousness on the part of the officers of these companies can only go a limited distance in determining how the firms operate.

Students who enroll in institutions or programs that graduate few of their students, or that succeed in placing only a small percentage in remunerative positions in the fields for which they have been trained, are playing the lottery. Our political philosophies might lead us to debate whether or not we should prevent them from playing this lottery. But it is difficult to come up with sound principles of public policy that would support our subsidizing them to play this lottery.

Few students pay with their own money to enroll in these institutions. The independent students and dependent students from low-income families who predominate at for-profit institutions are those most likely to be making their educational choices without the advice of college-educated parents or well-trained counselors. They deserve added consumer protection, rather than maximum opportunity to make decisions with a high probability of damaging their futures.

The existence of a robust federal student-loan program is a tribute to our nation’s commitment to postsecondary educational opportunity. Higher education is the best investment most young people can make. We certainly don’t want to discourage students who are not virtually assured of success from taking the risk of enrolling. But that doesn’t mean we should encourage every student to pursue whatever educational path might tempt them.

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lizziec

This is one of the most cogent articles on this issue that I have read. Thank you for codifying the issues absent rhetoric, emotion or agenda.
Well done!
http://www.facebook.com/sbhopton Sarah Beth Hopton

Hear. Hear.
haohtt

I must disagree with lizziec, as I found evidences of ideology, rhetoric and agenda throughout the article. A few examples:
“The for-profit sector, which has the potential to make important contributions to educational opportunity in the United States, relies on the federal government for most of its revenues.” Why do the authors leave out the fact that that non-profit public institutions rely on state, local and federal government for most of their revenue? Why is there no mention of the fact that numerous private companies also rely on government contracts as a major source of their revenues?
“Institutions that leave students worse off than they were when they arrived are the exception in the public and private nonprofit sectors. Unfortunately, they appear to be the norm in the for-profit sector.” It is difficult to come up with a more ideologically biased statement than this. With more than 3,000 non-profit and 3,000 for-profit schools, have the authors truly done an analysis that separates exception from norm in both sectors? The Dept. of Education has not, Tom Harkin has not.
“The character of the for-profit sector has changed as it is increasingly dominated by large, publicly held companies that are compelled by shareholders to maximize profit.” It is true that the headlines are dominated by the same dozen or so publicly held companies. Why do the authors not mention that the vast majority of for-profit schools are not publicly traded and have no Wall-Street shareholders? What would keep them from including this important bit of information? Ideology?
“Students who enroll in institutions or programs that graduate few of their students, or that succeed in placing only a small percentage in remunerative positions in the fields for which they have been trained, are playing the lottery.” This statement is just as true for students seeking low paying/low demand disciplines offered at non-profit institutions, but the authors’ ideology is revealed quite clearly.

Institutions that violate laws (regardless of their tax status) and that engage in deceptive marketing, should be punished. Non-profit and for-profit should both be held accountable.
Unemployed_Northeastern

“Institutions that violate laws (regardless of their tax status) and that engage in deceptive marketing, should be punished. Non-profit and for-profit should both be held accountable.”

If that becomes the case, something like 195 of the country’s 200 law schools will fold. Their manipulation of employment statistics and deceptive marketing techniques would shame most of the for-profits.
trace_urdan

The preamble is nice but then you jump to assumptions not in evidence regarding failures by the institutions when there exists no such evidence that the programs are inadequate. No one has proven statistically or even anecdotally that low repayment correlates with low quality. This testimony is rife with false assumptions and bias. The fact that you can’t even see that is a sign of how little contact you have with the actual practice of for-profit institutions. Nice try, but no.
http://twitter.com/#!/ProprietaryEd ForProfitEd

Trace Urdan:

You are out of touch and believe the load of crap you hear on investor conference calls. There is a reason Apollo investors and others have filed suit … they were gullible and bought in just the way you have. I know for-profit colleges from the inside and they coach management on “buy in”. The large for-profit college corporation I worked for coached management on how to manifest “buy in” among the masses by any means possible. These corporations should be focusing on education students not “buy in” amongst staff. Educate and serve students well and you won’t need to spend and concentrate on getting your staff to “buy in”.

Sandy is absolutely correct with her assertion that ideology is counterproductive. It all started with Senate Republicans walking out of the HELP committee hearings rather than participating in a productive discussion. They preached that reforms were needed across “all of higher education”. Now that those reforms are coming to fruition with the credit hour and state authorization rules, they deem them as “overly burdensome” and cite letters written by non-profit education organizations. Go figure.

Ed
http://twitter.com/#!/ProprietaryEd ForProfitEd

“Why do the authors not mention that the vast majority of for-profit
schools are not publicly traded and have no Wall-Street shareholders?”

If you look at the data in terms of enrollment numbers – the majority are publicly traded and have wall street shareholders.
Who_Profits

Trace, what contact have you had with the actual practice of for-profit institutions? Have you ever taken a course or completed a program in this sector? Have you or would you recommend doing so to a good friend or family member? Studying the sector from the outside is quite different from experiencing it first hand.
http://twitter.com/#!/ProprietaryEd ForProfitEd

Do cheerleaders study the tactical maneuvers of the team they are cheering for?
Who_Profits

Interesting post but you did not provide support or proof. Nevertheless, you cannot justify bad behavior by pointing to the bad behavior of others,
Who_Profits

Low repayment correlates with the need for strict oversight…regardless of quality!
lizziec

I still contend that if you’re smart enough to gain entrance to even a Tier 3 law school, then you should be able to do your own due diligence on the market for attorneys. Should the schools tell the truth? Yes, and so should my graduate program (that the master’s degree will not make a dimwit any more employable) but at some point, after subtly making these points and asking questions of you that SHOULD elicit some deep thought, if you’re still bound and determined to borrow that money and get the master’s, I’m not going to sacrifice my job to erect a neon sign in front of you.

This is a totally different scenario than the many, MANY low-SES, first-generation college students who are manipulated on a regular basis by the promise of the “degree” and what that represents (e.g. moving into the middle class).
haohtt

Agreed. So that means that Harvard and Tulane medical schools (whose graduates currently have a 71% default rate), should need strict oversight. If the current gainful employment laws were exercised in any measure of consisitency, these schools would lose eligibility for federal aid, since it will take graduates many, many years to pay off the massive student debt. Yes, I know that this argument sounds silly, since physicians have such great earning potential, but, remember, the silly gainful employment rules only take the first few years after graduation into account, so medical students will have MUCH greater debt than a business grad from a for-profit and will be just as unable to pay it off in a timely fashion.
trace_urdan

Ed — It’s all about the students. Graduating students with a certain profile is difficult regardless of whether they are studying at community college of for-profit institution. So a focus on outcomes will restrict inputs. This might be a good thing — but we’re not having that debate honestly. Senator Harkin and the left want to demonize for profits and praise community colleges and HBCUs, but the outcomes are the same. The only difference is that taxpayers foot the bill in the latter case and students are on the hook in the former case. If we want to raise standards for higher education, we should discuss the pros and cons explicitly and hold that standard across all institutions. The conversation is dishonest and it began with an ideological perspective that assumes that profit in education is systemically corrupting. This is nonsense. It also assumes that shareholder add no value to the process. This is also nonsense. These are ideological views and they started with Tom Harkin who refused to allow a balanced perspective at his hearings. He polarized the debate — not the Republicans.
cwm4c

Exactly as we rightly ripped Naomi Schaefer Riley yesterday for her opinion piece on tenure without citing any data, Sandy Baum and Michael McPherson provide nothing here other than opinion and anecdotes. Neither article is anything more than that–good or bad. Nothing wrong with that, so expect the same firestorm.
wattssal

In today’s economic and political environment, educational institutions are particularly vulnerable to letting “margin” considerations overtake their “mission.” Organizations that succumb do not pass the “trueness” test, a characteristic of authentic organizations that I cover in my book “Navigating Integrity.” There are some for-profit educational institutions that are demonstrating the capability to walk the fine line; readers might be interested in “The Company We Keep” at http://www.alwattsintegro.com/
Unemployed_Northeastern

Do you have a cite for the Harvard and Tulane default rates?
briantomlinson

Great article! It is too bad that the education level some students receive do not match the high cost they must spend to get that education.
wmahoney52

My neighbor’s daughter wanted to become an nurse. She had a choice between a community college and the for-profit school route. I advised them, since I do financial aid, of the downside of borrowing a lot of money to attain her goal. The single father told me that there was no way to get into the community college route without taking years because there were so few spaces. Also, they needed to borrow some funds to help with everything but the public college does not participate in any federal loan program so they can protect their Pell money. All that does is prevent access. If they were participating in loan programs, they would have the same worries as everyone else does about defaults but instead they just restrict access to those who need it just as much as those who need Pell.

Then there’s me. I finished high school in the bottom half of my class and was in the bottom of the economy, family-wise. My 5 siblings and I lived in the projects for a while and always lived pay check to pay check – from our single mother My counselor never mentioned going to college once, even the local JC, as they were called back in the day. Instead I joined the military, used my VA benefits to go to college, and now I pay more in taxes annually than all of my benefits and BEOG funds combined. This leads me to the point that somebody just has to take a chance on people. Not all will make, due to life getting in the way, but those that do can really make a difference and lead a better life.

Are there bad for-profits, sure. Just like there are bad public and private colleges. Creating transparency should be good for all colleges and all students. But a dream for a better life is hard to fight with facts and figures about the “average” student or graduate.

Lastly, Sandy Baum has been preaching to my spoke of the higher ed wheel for many years and is much appreciated.
morrisville

I was disappointed by the lack of evidence cited in this article–better data would help. What a shame that the comments reveal exactly the ideological nature of the question in the absence of good data. In my opinion, the question of for-profit or not for-profit is of less consequence than the question of to what degree our citizenry should be educated, and how this should be paid for.
czander

The private For-Profit schools top the list for the highest executive
compensation. Apollo operates the for-profit University of Phoenix. Its founder
and executive board chairman John Sperling’s total compensation, excluding
stock-option exercises, was $6.4 million in 2009. In 2010 Sperling’s
stock-option gains will total $38 million. This university claims to have the
country’s highest enrollment and in reality is the country’s largest recipient
of federal student aid. In 2008 it received $3.2 billion from the government.
It has also received the highest number of federal lawsuits, in 2004 it paid
nearly $10 million in enrollment abuse fines and in 2009 it announced it was
putting aside $80 million to cover addition enrollment abuses. Abuses include
tying recruiter’s salaries to meeting enrollment numbers and using pressure
tactics to enroll students which includes lies and false claims about classes,
professors, transfer credits and financial aid. This problem is pervasive among
the for-profit schools where strategy focuses on profits over education. Only 9
percent of students enrolled in Phoenix graduate within 6 years and student
debt is the highest of all colleges and universities averaging $25,000 to
$35,000 with the highest default rate and Kaplan another for-profit that gets
billions from the government has an almost 70 percent dropout rate.

It is very clear the accreditation agencies are asleep
at the wheel.
lizziec

For those of you wailing and gnashing your teeth about the lack of research and citations,…please brush up on your critical reading (and thinking) skills here. In the 2nd paragraph, read with me now:

“…Sandy, in her response to an invitation from the Senate Health, Education, Labor and Pensions Committee to testify on the subject, attempted to recast the debate in terms of analysis and evidence rather than ideology. What follows is the summary of the testimony she presented.”

If you want the full dissertation, go look up the testimony. THIS IS A SUMMARY!

The constant nit-picking without basis to “prove” bias, or lack of factual assumptions is by itself amazing and says much about the core for-profit issue as does the “manage-the-message” posture that has gripped this nation to all of our detriment.

Anyone with the ability to analyze trends, patterns and discern BS from a glossy, 4-color brochure knows that there is a problem in the for-profit sector that far exceeds the issues plaguing the non-profit sector. We are not even talking apples and oranges here but apples and O-rings.

The non-profits have their own issues, no doubt but we are not “afraid” of the for-profit sector, and we are not intimidated by your numbers because by and large we know that for all of our warts and issues, if employers and this nation had to rely solely on the “products” you turn out, this country would be in an even bigger mess than it is already.

Save the for-profit sanctimony for yourself in the mirror each morning or for your shareholder meetings. We’re bored with it.
http://www.facebook.com/people/Amy-Lynn-Hess/673128022 Amy Lynn Hess

Just please don’t forget that there are so many more who are not publicly traded. We’re caught in the crossfire.
akaprofessor

I was going to post a comment, but you said it for me. Thanks, lizziec, for telling the unvarnished truth.
lizziec

no problem!
lizziec

True – the ire on these discussions most often is directed to the large, corporate for-profits and it is unfortunate that the smaller and dedicated groups of for-profits get lumped into this mess. You have my sympathies, but your evil cousins cause all their own problems
fdonoghue

Yes, very well done! It sounds as though several of us are reaching the same conclusions. The gainful employment rule, though, should it ever be expanded and enforced, would put our whole higher education system under the microscope. Someone graduating from a non-profit public university with a degree in elementary education can easily owe $50 or $60,000 in federal loans, and will likely make a salary of $35K. It’s tough to start your career underwater. I agree with Lizzie’s point below–at least the hypothetical student I’m describing would have been intellectually prepared for college, but the money issues are a serious problem, and they’ll only get worse. Ohio State just announced that it will have to raise tuition by 3.3% next year. Every increase hurts.
rwejd

“There is overwhelming evidence that large numbers of students,
particularly students from low-income backgrounds, are suffering great
hardship as a result of the excessive borrowing required to finance
their enrollment in for-profit institutions.”

Agreed. How much value are the for-profits delivering? The latter sector has various players that need to get their act together – *really together*, and not fudging through “messaging” and other tricks that seem to promise transparency, but don’t deliver. These schools are using *my taxpayer dollars* to deliver a service. If they can’t deliver a service that makes my taxpayer dollars show a positive return on social investment – instead of a drain on personal futures – they they *need to go away*, and I mean go away *fast*. I do not want to see the bad players in this sector given a 2-5 year “pass” until they get their acts together. Do it now, or get legislated out of existence, if that’s what it takes.

Abuse of public trust in the non-profit sector is egregious, period. Some schools do better than others, but there are many very suspect players, seemingly more interested in their stock market performance than how effectively they are benefiting the students.

That said, I would also like to see this kind of analysis applied to non-profits. btw, don’t see this as taking for-profits off the hook. We need more relevant, more affordable and more accessible/functional post-secondary education in this nation, and students shouldn’t have to go into debt to get it. The non-profit sector needs to seriously consider major restructuring, and w eall need to consider more innovative ways to transfer knowledge as education. The current regime is not working; in fact, it has become in some ways as dysfunctional as the for-profit sector in delivering value for dollar. K-12 and traditional, non-profit post-secondary structures require serious overhaul and/or replacement.
rwejd

also note this. Why? THis is also true in other state systems, with high priced administrators all over the place. Why? Same goes for “chancellors” and the duplication of high priced administrators in K12. It’s absurd, especially given the fact that students coninue to find themselves in more debt, year over year.

As UC president, Yudof will receive a compensation package valued at
$828,000 in the 2008-09 year, compared to a current package estimated at
$790,000 at the University of Texas. (These figures do not include
standard retirement plan funding for future retirement benefits for
university employees at both institutions.)

The UC compensation consists of the following elements:

an annual base salary of $591,084 (compared to current annual cash
compensation of $528,860 at the University of Texas). The UC salary
falls below the midpoint salary ($606,200) set for this position by the
Board of Regents and below the median salary ($644,900) of leaders of
similar public and private universities used by the California
Postsecondary Education Commission for comparison purposes.

as an exception to policy, supplemental pension funding amounting to
$228,000 in 2008-09 and varying somewhat each year thereafter. This
funding, in combination with normal UC Retirement Plan benefits, is
intended to produce a UC retirement benefit comparable to what Yudof
would have expected to receive at his present employer. (The University
of Texas presently provides Yudof $250,000 per year in supplemental
deferred compensation in addition to his base salary and normal
retirement benefits.)
an automobile allowance of $743 per month or $8,916 per year;
university-provided housing, as a condition of employment;
reasonable lodging, transportation and other business-related expenses
associated with university business prior to his relocation, along with
reimbursement of actual costs for packing and relocation of household
effects and library;
consistent with past practice, if Yudof assumes a UC faculty position
immediately after his tenure as UC president, the university will
arrange for the relocation of his personal belongings, and he will be
eligible for a Mortgage Origination Program loan in order to purchase a
primary residence;
use of administrative funds for official entertainment and other purposes allowed by policy; and
standard health, pension and senior management benefits, and standard sabbatical, sick leave and vacation accrual.
rwejd

I’ve seen for-profits from the inside, in depth, from the very top. Please spare me and the rest of the world your unfounded hyperbole. Some for-profits are genuinely trying to do a good job; some of those are hobbled by the fact that they have to answer to stockholders; others have one or two divisions going bad and are trying to make corrections as fast as they can. Still others don’t give a damn about anything other than “internal economies”; the latter groups are the ones that need to be put down, and put down now, because they are causing too much pain to the students they enroll.

Another angle: that the for-profit industry ever got a toehold is perfect evidence to support the contention that the non-profit sector has failed in a big way to deliver education to *all*, at reasonable prices.
sailor208

For-profit education has great potential. However, the realities are: Students who pay for their education expect to receive something – a graduation certificate. On the other hand, institutions that thrive on revenues expect profits/returns (we see this in the public institutions too). Faculty are in the middle. If a student cannot perform, admin sees this as “failed teaching.” If underperformers pass, industry (the real world) eventually degrade their image of the institution – as in not providing a quality eduction. Thus two observations: One, for-profit institutions should (must) be accredited. Two, nationalized competency exams should be required of all undergraduates.