For Profit or For Students?

For-profit colleges are expanding enrollments at a rapid pace, but it is questionable whether these revenue-seeking universities give adequate consideration to students’ welfare, retention/graduation rates, and overall economic well-being alongside their bottom line profits.

A new post by Judith Scott-Clayton, a professor at Columbia Teachers College and new weekly contributor to the New York Times Economix blog, explores the merits of for-profit colleges, arguing that in many ways these schools are more efficient at seeking funding opportunities for students and adopting new teaching technologies. These schools procure more Federal dollars per student and employ more cost-saving technologies, in the classroom and online, than their non-profit public and private competitors.

However, the real question is not a matter of efficiency, but instead concerns students and the taxpayers funding Federal loans and grants consumed by for-profits. Are the relative merits of profit-oriented schools, including their comparative advantage in securing Federal funding, being used to improve the return on investment for students or for their shareholders? On the macro level, does the growth of for-profit higher education promote new risks in the economy, as drop-out and loan default rates continue to increase?

The relative efficiency or effectiveness of for-profit schools is not necessarily what has been driving record enrollment rates, which were up 25% just over the past year. The Great Recession has pushed many students and unemployed folk towards higher education, as better credentials often mean better job prospects. With the unemployment rate for those holding a bachelors degree at 4.2%, there are incentives to enroll. In fact, applications and enrollments for colleges are up across the board, perhaps meaning the overflow from more selective schools is being crowded into the fast-growing for-profit institutions.

Though increased enrollment appears to imply increased opportunity, many students are in higher risk of drop-out and loan default when choosing a for-profit college. The for-profit education sector is in large part to blame for the sharp rise in student loan defaults, accounting for almost half of total defaulters. In the graph below, the Department of Education has concluded that despite only having 12% of total enrollments, for-profit schools disproportionally account for 48% of total student debt defaults. Since for-profits are so effective in securing Federal loans and grants for their students, this means that the schools are in essence receiving an indirect subsidy from the government and taxpayers, while leaving students in the red.

While an increasing number of students enroll in for-profits and take on large amounts of student debt, they also increase their risk of drop-out. A report published last year by the Education Trustshows how devastating dropout rates are, with only 22% of students enrolled at for-profit four-year universities graduating within six years, as compared to 55% and 65% at public and private non-profit universities, respectively. Many students enrolling in these institutions are left without credentials and burdened with debt, yet the schools are able to retain their profits made from students’ tuition.

The increased prevalence of for-profit universities, with their dangerous combination of drop-out and default, may be aggravating a looming student debt crisis. Overall, the volume of loans in default grew to $50.8 billion in 2009, up 30% from the year before. As more students enroll in risky for-profit schools, these rates are likely to increase, perhaps leading to another consumer debt crisis similar to the foreclosure fiasco.

Although many are well aware of these alarming facts, our elected officials appear to continue favoring the implicit tax dollar handouts to for-profit colleges. The spending bill recently passed by House Republicans even blocks the Department of Education from enforcing a new rule that could limit for-profit schools’ access to Federal money. While arguments can be made that profit-seeking schools give wider access to higher education, it seems that the profit motive and shareholder loyalty are overtaking concerns for the well-being of students and the economy at large. Instead of allowing Federal dollars to support for-profit education, the money ordinarily received by these schools should be used to increase the capacity of public higher education and provide “finish line” grants to those facing financial struggles in their final year of study.

As the Obama administration seeks to increase enrollment, graduation rates, and investment in higher education, policy makers need to consider redirecting their funding towards students and not into the pockets of shareholders by subsidizing private profits.