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For-Profit Colleges Raise Tuition to Maximize Student-Aid Revenue, Study Suggests

February 13, 2012, 12:24 pm

For-profit colleges that are ineligible to receive Title IV student-aid funds are a “sizable but overlooked” and little-studied part of the for-profit sector, and they tend to charge a lot less for their services than comparable for-profit colleges that are eligible for Title IV funds, according to a new paper published today by the National Bureau of Economic Research.

The paper, by Stephanie Riegg Cellini of George Washington University and Claudia Goldin of Harvard University, says that the higher tuition at the Title IV-eligible colleges provides evidence of the “Bennett hypothesis”—the theory, espoused by William J. Bennett, the former education secretary, that colleges eligible for federal student aid jack up their tuition to maximize the aid funds they can capture. The authors acknowledge that “unobservable measures of reputation and quality” may account for the tuition premium charged by the aid-eligible colleges, but they also point out that those colleges tend to have higher costs because of their heavy spending on student recruitment.

The paper, which claims to provide the “first comprehensive estimate” on the overall size of the for-profit sector, draws on data from five states to conclude that the total number of for-profit colleges is double the official count (which includes only aid-eligible institutions) and the number of students they serve is one-quarter to one-third higher. The aid-ineligible colleges do not tend to cycle in and out of eligibility, the paper says, and they often compete for students with their aid-eligible peers and community colleges.

With the Education Department increasing oversight of aid-eligible for-profit colleges, notably through the recently imposed “gainful employment” regulations, some of those colleges may lose their ability to receive federal student aid. If that happens, the paper suggests, students may give the aid-ineligible colleges another look.

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  • vdolgopolov

    Would it not be painfully clear, even without this study, that demand for higher education is influenced by the consumer’s ability to pay, and that this ability to pay is lower if the school is not eligible to participate in Title IV programs?

    Nearly all new unaccredited institutions are limited in their ability to charge tuition fees comparable to these of accredited institutions; and many are willing to barely break-even or perhaps even lose money in the first few years of operations while they go through the first two years of operations (which most institutional accreditors require to become eligible to seek accreditation), pursue institutional accreditation, and then agreement to participate in Title IV programs?

  • willynilly

    Of course the tuition is raised – as frequently and as high as possible.  The increases are for one reason, and one reason only – GREED.  The principals (investors) and the admininstrators want to milk this cash cow as fast and as hard as they can.  Pushing up the tuition triggers increases in student financial aid (Just a rip off of public tax resources) and allows these fraudulent schools to remain competitive in the market place.

  • http://www.facebook.com/people/Paul-Wangsvick/26717288 Paul Wangsvick

    “The authors acknowledge that ‘unobservable measures of reputation and quality’ may account for the tuition premium charged by the aid-eligible colleges, but they also point out that those colleges tend to have higher costs because of their heavy spending on student recruitment.”Recruitment isn’t the problem; these schools admit anyone with a pulse willing to sign the dotted line. More than half of these students (upwards to two-thirds) need serious remedial help. The real cost of doing business is retaining these students. When most struggle to succeed, of which most often do, they become a financial liability (from a student-aid perspective) should they fail to meet the minimum standards of qualifying for–and for-profits continuing to receive–student aid. Faculty, for example, are often expected–even explicitly told–that most students (as in 80%+) should pass the course. Any serious audit of a for-profit college would reveal that, much like an airliner overbooking an already crowded flight to maximize profit, for-profits–more than so-called non-profits–spend the majority of their resources admitting and retaining students while failing everywhere else. Thus, the increase in tuition is really about overcompensating for the rate of student failure to ensure that the school meets bottom line quarterly profit margins. Nothing earth-shattering, but the bottom line is that with this kind of business model in education emphasizing profit over student learning, that’s a recipe for disaster.

  • haohtt

    The situation that you outline is also prevalent in community colleges and lower-tiered state unviersities, where over half of the incoming freshmen require remediation.  The same strategies for retention are used at public colleges and universities.  Anyone who believes that promoting enrollments, retaining students and maximizing income is exclusive to for-profit colleges has never served as an administrator at a less selective non-profit college or university.

  • haohtt

    Very true.  This is not news.  Any study of the history of any newly accredited non-profit higher education institution will demonstrate what you have pointed out.  Pre-accreditation tuition is extremely low, as the school cannot otherwise compete with accredited schools.  As soon as either national or regional accreditation is achieved (thus making the institution eligible for federal funding), tution increses immediately and markedly.  To make this appear to be exclusive to for-profits is not honest.  

  • http://www.facebook.com/people/Paul-Wangsvick/26717288 Paul Wangsvick

    I don’t doubt you at all. But with for-profits, what I find particularly disdainful is that they make no bones about overtly describing students as customers and speaking of retainment strategies in faculty meetings in a “profit-oriented only” context. Community colleges and lower-tiered state universitities are guilty of the same criticisms to a certain extent, but the emphasis of the aforementioned, in my experience, at least makes “some” effort to promote student learning as central to—not irrespective of—the mission statement of higher learning in general and to the college in particular.

  • adjunctivitis

    George Washington University: $44,148 Tuition and Fees

    Harvard:  $36,305 for
    tuition

    Strayer: $12,720 for tuition
     

    The authors of the study work at schools charging at least three times as much as this for-profit.

    I completed this analysis in 3 minutes. 

  • haohtt

    Since I have worked in all three of those settings (public community colleges, public universities and private-sector universities) and have attended hundreds of faculty meetings, my experince has been different than yours.

  • haohtt

    Of the 100 highest tuition universities, none are for-profits. 

  • lizziec

    Several have commented on community colleges as being “as bad” as the for-profits in admitting unprepared students, but as a veteran educator and administrator at community colleges and with experience teaching in several online, for-profits of the national, publicly-traded variety, let me spell out some of the most obvious differences.

    At community colleges, yes – we let them all in, however; everyone must take a placement test, and the selection of courses will be determined based upon their scores on the basic academic readiness tests in college reading, basic writing and mathematics (there are 2 parts to the math: basic arithmetic and algebra). Based on the students’ weaknesses and need for remediation, they are placed in to real, semester-long (15-week kind of semester) classes that are basically re-teaching high school level skills. The retention rate in these classes is abysmal, but I believe it is due to several factors: some students are simply too far behind to become “college students” and they realize this and move on; some students were motivated to go to college if it meant they get to jump right into wearing scrubs and buying a new stethoscope but aren’t so interested when they realize it actually takes work to prepare to enter those programs; still others aren’t mature enough to go to college at the time but may be better at a later point in their lives.  I’m sure there are other reasons as well, but let me be clear: these are no “sprinkling” of concepts on students for 5 or 6 weeks then turning them out into the regular programs of study, which is what happens (from my experience) in a number of the for-profits.

    Complain as you may about the community colleges, but the students who arrive on their doorsteps and are functionally illiterate are given a real opportunity to turn that around. That it doesn’t work in great numbers is not all laying at the feet of the faculty and administration of the community college, just as it is not wholly laying at the feet of the for-profits when their students fail to stay in school, BUT there are major differences.

    In the for-profits that I have taught for off and on (and you can only do this for short periods of time, then you need to go do penance somewhere by serving in a soup kitchen or something), this is how the remediation issues are addressed:

    An “Ability to Benefit Test” (ATB) is allegedly administered to all incoming students. My cynical self tends to believe this is a front for testing to see if the student is eligible for Pell Grants and can qualify for loans, so the “beneficiary” is likely the corporation, but let me try not to snark too much and get off course. 

    If the student passes this alleged assessment of their ability to benefit from a quickie, online college experience, they are then placed into a single, 6-week class that is supposed to remediate their reading, writing and critical thinking to a point where they can be successful in an accelerated college environment.  Now – English and Reading professionals, please jump in here: I’m pretty sure that your random adult who came from a poor K-12 school system, and a high likelihood of poverty …

    (please see the research on the education gap and the disadvantages poor students come to
    Kindergarten with as compared to their middle and upper-middle class peers in terms of exposure to words, and being read to, alone)

    …is NOT going to be able to address all of those deficits in a quick 6 week, online course to a level that will support them – successfully - in a program in health care, business, or information technology (they may be able to flounder through criminal justice – I’m not that familiar with that core curriculum).

    So you have pressures to retain students, combined with a preponderance of ill-prepared students, and faculty who teach in sweat shop environments (threats are the order of the day – retain or else; grade this way or else;… I feel so sorry for the people who are having to stay in these environments just to pay the rent).

    You end up with functionally illiterate students being passed through superficial programs, with poor curriculum and faculty who are caught between grading as the work warrants, and being assigned additional classes in the next go-round, and what you end up with is a lot of students with a TON of debt, and not much better off in the learning department than they were when they entered flim-flam-U.

    To the contrary, at the local community college, if you do not pass the remedial courses your testing indicates that you need, you can NOT matriculate into programs, and therefore, the MAX you may spend on this little venture would be the equivalent of 12 credits at community colleges where across this country, many are still at or below $100/credit.  In other words, it’s not life-ruining.

    Community colleges have their issues, certainly; but let’s not confuse their issues with the wholesale selling of broken dreams and debt-slavery that is happening at too many of the large, publicly-traded for-profits. There is no comparison, period.

  • rkitchner

    Your comments in support of community colleges are not without merit, but the flaws in your reasoning and logic undermine your position. Perhaps the weakest statement of many that you make is your attempt to suggest that your opinion is sufficiently profound as to represent the end of the discussion, to wit., “There is no comparison, period.” To that I would suggest that there is plenty of room for comparison, and refusing to acknowledge as much simply reflects a closed mind, not a closed arguement, comma . . .

  • lizziec

    I wasn’t submitting it as a research piece nor for your review and critique. I believe that I, on several occasions, indicated that I was writing from my experience.

    In my experience, there is no comparison.

  • lizziec

    Without comparing those outcomes, this is an empty statement,  I have an Ivy League graduate degree and I paid a lot for it (and am still paying) but it has opened countless doors for me and opportunities that I promise you are not available to graduates of most of the national, publicly-traded for-profits.

    Anecdotally, in the places I inhabit professionally, the CVs list institutions that include the likes of  Univ of Chicago, Brown, Yale, Stanford, Penn, UC Berkeley,… and I’ve yet to see an executive bio on the web page of the non-educational institutions with which I work that lists a Feenix, or similar degree.  Did we pay a lot for those educational experiences? You bet we did, but that alone cannot be used as a measure of the value. You must look at outcomes, overall.

    I’m sure that there are people who fail out of these places and complain about the price they paid, or others who graduate but were dolts when they were admitted and their “doltdom” is preventing them from being hired (not their education), but on the whole, there is no comparison here, either.  There may be SOMEDAY, but we are a Llllllllllllllllllllllllllllllllllllong way from that day.

  • betterschool

    As we have said, there are several thousand non-degree, non-title IV FPs. An interesting dimension not explored by this paper is the structure, longevity, and size of the non-Title IV FPs. (I would suggest that our most frequent and strident commenter read the paper this article refers to; she will see the irrelevance of her perpetual recitations of the same generalizations.) These institutions are surprisingly uniform when compared with the very diverse totality of higher education. Most operate in a single community and are well integrated with that community. Most operate at a single campus, or perhaps have added a learning center over the years. Most offer a narrow range of programs, many offer only a single program group (e.g., cosmetology). Most have been operating in their community for decades and enjoy a solid reputation with their students and graduates. One study we conducted showed roughly 50% program overlap between these institutions and the local community colleges. The overlapping program areas tended to be those in which the community colleges turned away large numbers of qualified applicants each term. Close cooperation between community colleges and these schools was the norm. We saw many examples of creative synergy. We never saw the hostile attitude demonstrated by ‘lizziec’ (whom I presume is a community college teacher). 

  • kver6926

    I guess my biggest concern is the fact that you are lumping all for-profits together as the devil to the field of education. Many proprietary schools have felt like the red-headed step child, but many are, not only benefiting students and the field, but deeply care for the welfare of their students. Many schools many daycares setup, have funds put asisde for students that can be used for gas, I, personally, have picked up students from their homes and taken them to school when they didn’t have a ride. Can you tell me of any community colleges or teachers that will do to those lengths to help the students?

  • executive_janitor

    The title of this works- it got our attention; unfortunately it is only partly true our friends at ED – built in a requirement for FP schools to ensure their tuition had room for cash payments – as the max loans kept going up – and students kept asking for max loans (FA directors can’t w/o just cause deny loans to applicants). The cycle is that students ask for max loan, pay part for tuition, and take the other in living allowances; and then don’t regularly make their cash payments.  Our federal government built this system.  The FP schools have been around before Title IV, grew with the expansion of these loan programs, and now fight every week to remain in compliance and to keep offering a service to thousands of people who flock to these education and training providers.  There are all types, publicly traded, small owner groups, and NON TiV FP operators (meaning they operate on grants or cash).  I’ll concur with “better schools” comments – many small markets are served by focused  and mission-oriented “community career centers” who have >>historically<< done a much better job than our public community colleges. In my 20 years in higher and HIRE education (including +200 accreditation site visits around the US),  I've seen more dreams fulfilled than dreams quashed or people debt-laden; my reality is that career college students 'like' the feel, look, and experience at their local community career center better and that is whey they attend these fast-paced, focused programs.  And this is why they eschew the side arm folding metal chairs with ashtrays attached and down-trodden faculty at public community colleges.  Have things changed? YES!  I 've seen our local, public community colleges take great strides; yet the student-focused mission ( to graduate and gain employment) is not evident to me – it does not feel that way to me.  When I walk into a high performing career school – I feel the passion, sense the student success, and know that outcomes are being met and student needs are met.  I found my passion, careercollege.blogspot.com; also, I am a grad of the  GWU.

  • haohtt

    Your experience can certainly be represenative of a community college and a for-profit institution for which you have worked, but your habit in your blog posts of generalizing your experience to all for-profits vs. non-profits does not hold up.  First of all, more non-profits than for-profits use the Ability-to-Benefit test.  Just do a simple Google search and most of your hits will take you to community college sites.  Second, you seem to admit that math and English remediation courses appear to be ineffective, whether they are 6-week or, as you put it, “real” 15-week semesters or whether they are offered by a public or private sector college.  Although you talk about “poor curriculum and faculty” at for-profits, there is no data that shows that students at for-profits receive inferior education and your arguments do not to suggest that the student who graduates from a two-year public college has any better education than two years of your “Flim-Flam U.” Oh, yes, the tuition difference. Those education costs are the same–it is just that you and I are paying for the bulk of the public education bill and, unlike Title IV funds, which students are legally obligated to repay, our gift of public funds does not.

  • bmcbull

    Seriously, most for-profits are talking about less than competitive student loans when they talk about “aid.’  This is a ponzi scheme at its worst and it cries for more aggressive regulation.

  • lizziec

    presuming, like assuming, is dangerous (and inaccurate)

  • lizziec

    How many employers are going to hand hold like that? good grief!

    Are you really “helping students” with that kind of behavior or are you enabling the dependent behavior that likely keep these students in their dismal circumstances…

  • thetruth11

    executive_janitor had it right, but let me be more precise: The DOE requires non-federal loan revenue to be at least 10% of total revenues (the so-called “90/10″ rule).  This is intended to show “skin in the game” and was originally supposed to be a proxy for academic quality (i.e., you wouldn’t put in 10% if the education wasn’t worth it).  Unfortunately, the government keeps raising the absolute level of aid available and the schools have no ability to cap what students borrow.  The perverse impact, therefore, is to force schools to raise prices to a level 10% over what students can (and will) borrow from the government. As it is, you can’t lower prices without disqualifying yourself for T4 eligibility!
     
    Ironic, but the DOE is actually driving (forcing!) rising tuitions at FP schools and preventing competitive pricing.  Remove 90/10 and you’d see prices drop across the board… 

  • kver6926

    That is part of helping the student to get back on their feet. These things are done to help them when they are in trouble. The students helped are now employed and working. They needed help. Proprietary schools see that need in their demographic and go the extra step. I don’t know of any community college that sees that need and helps the student.

    For-profits see the student as an asset not just to the school, but to the workplace when they finish. By providing that assistance, they have helped numerous students to becoming more than just a “paycheck” or a “number”. Everyone needs help now and then and these schools fill that need.

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