for profit education*

Today, almost tens of billions of tax dollars are being dedicated to funding for profit institutions that have little interest in their clients than extracting as much from them as possible. These institutions are not what you might think they are. They’re schools. And the live off government money providing almost none of the earnings advantages that traditional schools do. Worst of all, this racket preys upon two groups: GIs returning from hard fought wars and the most disadvantaged in our nation.

These schools are often on-line companies, which for a not-so-modest price will provide a degree upon the completion of a set requirements. They have spent countless lobbying dollars to acquire accreditation and political support. And they are particularly attractive to groups our government under serves. The first is the working poor — often minorities, who cannot afford to give up their jobs to enroll in a tradition full-time school. The second are non-traditional students, veterans in particular who find that they are too old to surround themselves with 18 year olds who are emotionally only moments away from high school or perhaps do not feel particularly at home going to what are often seen as the most liberal of institutions: colleges and universities.

The state helps pay for these two groups to attend schools, and often the schools are for-profit institutions. The the case of the working and poor, federally subsidized loans help provide otherwise unable funds for education. Veterans, by contrast, have paid for their education through their service. And appropriately, the government helps pay for their education through the GI Bill.

These government programs are the lifeblood of for profit education. Despite being less than 10% of total enrollments, for-profits now claim about 25% of Federal loans and grants. On average, three quarters of the revenue of for-profit schools comes from government grants and loans. Perhaps most recognizable to readers, the Apollo Group’s University of Phoenix receives almost 90% of its revenue from the state (the University of Phoenix has almost 18,000 GIs; though the GI bill pays for their education, the degrees they earn provide little in the way of income gains). Indeed, the state is the greatest growth industry for for-profit colleges. In 2001 the Apollo group received only 48% of its funding from federal aid and grants. While these companies are claiming their work and innovation for their growth, in fact almost 100% of their growth is explained by government largesse.

What are these companies doing with the additional money they are claiming from the state? They are pocketing it. Of the additional $1.1 billion that the top three private companies raised from government programs, only 9% went to educational expenses (faculty compensation or instructional costs). By contrast, for getting more and more money from the government, the executives at these institutions are being handsomely rewarded. In 2009, their top five executives of the Apollo group made a total of $34.7 million.

The costs go far beyond the grants that the state provides. Indeed, it seems we will have to keep paying for these loans — as well those who take them on. The US Public Interest Research Group found that though for-profit colleges only make up 7% of those taking out federal loans, they represent 44% of the defaults on these loans.

The problems are only getting worse. In the last decade, government support of these institutions has increased five-fold. In 1990 less than 1% of all students went to for profit schools, and less than 10% of schools were for-profit. Those numbers are now 10% and 25% respectively. Steven Eisman, a hedge fund manager who predicted the housing collapse, now has his eyes on the next big short. Eisman estimates that over the next decade we will see $275 billion in loan defaults from students for-profit colleges.

Eisman’s measures seem a little inflated to me. But not by that much. What do students get out of these schools? And what do these schools do for students? I’m afraid the answer is, “not much.” Most students who attend schools run by the three biggest for-profit companies drop out after one year (indeed, at one school, 96% drop out!). These rates are particularly worrying as on average, students who drop out receive no earnings advantage for their year of school, yet they depart with around $10,000 in debt. Further, these schools often provide personal loans to students — loans structured to be repaid at exceptionally high rates of 4 to 8 times their initial value.

Part of the reason for profit schools have been able to claim so many federal dollars is that they have structured themselves to meet a need that is under met by our present schools. Colleges are not particularly available to working and poor students, or those students who seek to return to school in their 20s and 30s. On average, for-profit schools tend to have far more minority and poor students than traditional colleges. But providing an education to an under served population is not enough, particularly if that education does not come with the capacity to pay off the debts in the process of its acquisition. Worse — providing an education to the already disadvantaged by further disadvantaging them with debt is unjustifiable.

For profit companies that provide education show us two things: our education system is systematically failing the most disadvantaged. These people need a system structured to help them. For-profit schooling seems to do little than profit off the disadvantaged by taking tax dollars used to try and help them. We must have the will and moral drive to do more.

* An explanatory note: My most recent attempt at public sociology failed. Basically the magazine that asked me to write a series was sponsored by a for profit eduction outfit. And I wrote something very critical of for profit eduction. Rather than trash the thing, I thought I’d post it here. It’s more of an editorial style than any other blog post. But I wasn’t going to spend more time reworking it…

9 thoughts on “for profit education*”

  1. This is pretty interesting. Some random comments/stories. Comments: (1) Decreased funding for and rising tuition at public community colleges is probably contributing to this trend. (2) Lots of people drop out of college. More drop out than finish, in fact. It would be relevant to compare with the drop-out rates at public schools serving non-elite students. It isn’t fair to compare them to the selective schools which, as you know, are increasingly serving primarily the affluent.(3) The loan and GI bill angle is a good point and one I had not thought of.

    Two stories. One, a young man who is part of my extended family network has a 5-digit student loan for pilot school, co-signed by parents who are also being dragged down financially by the loan. It wasn’t entirely insane as a job idea, as he was planning to live in Hawaii due to a spouse he has since divorced, and saw island-hopping as a prospect in a limited job market. I’m not sure how far he got in it or exactly at what point he paid, but even if he had completed the program (which he didn’t) he could not get a job as a pilot because airlines require pilots to have college degrees or at least a couple of years of college and he’s a high-school dropout with a GED and zero college. I just looked at the web site for a pilot school (not necessarily the same one) and it looks like it is a pay-in-advance operation. I could get to the information that airlines generally require that pilots have college degrees through a “pilot eligibility” link, but this is definitely not prominently displayed in the come-on about why you should be a pilot.

    Story two. I listened to a discussion among several African-American who were all taking master’s level courses at the University of Phoenix. All are currently employed full time in decent jobs (and are already college grads) but want to do better. They chose U of P because they could do it while working full time, and all talked about being happy with the education they were receiving and resenting claims that the education they were getting was inferior. They emphasized that the school is accredited by the same accrediting agency as any other school which, they thought, was evidence that the education was the same. (I kept my mouth shut.) So far there is no evidence about whether it will help their careers, although I know that a lower-prestige degree is not as helpful as a higher-prestige degree. I have no independent information about the content of what they are learning and doing with U of P compared to what one would do in a comparable program at, say, my university. Schools have different prestige levels and the prestige effects your job-getting chances, but it is pretty hard to compare schools on what is actually happening in instruction. I reflected that we don’t actually know that lower-prestige schools teach any less than higher-prestige schools.


  2. Shamus, I’ll agree its corporate welfare through and through, but how does it differ from nonprofit universities? They receive much of their funding from the state as well and have little incentive to respond to consumer demand. I only point this out because you seem to think the problem is unique to for-profit schools.

    Wouldn’t the outcome be different (for nonprofit and for-profit schools alike) if students had to pay for their own education even if it was with private loans? Lenders would only lend to people who studied something that would bring them a decent return (sorry English majors). Students would make sure to get the most bang for their buck in terms of both studying hard and picking the right school. Universities would need to supply students with courses that actually teach them marketable skills or risk losing profits which would no longer be guaranteed by the state.


  3. Josh: the problem with the “students pay” model is that it reinforces intergenerational social inequality. The idea of a high-tuition high-financial aid model is that you extract tuition money from families able to pay and use financial aid redistribute education to families less able to pay. Of course, that has problems because of the hierarchical rankings of schools, so in general the affluent and the non-affluent are going to different schools. Public funding of all higher education is another redistributive model with its own advantages and disadvantages.


  4. Josh and OW: one of the problems of this “student-pay” model is the one OW outlines. Ideally speaking, universities ought to serve to reduce intergenerational transfer of wealth, not exacerbate it.

    Perhaps more profoundly (or perhaps less so): university study is not and should not be just about preparation for paying work. “Marketable skills” is emphatically not the point of a serious academic education. We make (or ought to) future doctors, nurses, lawyers, accountants, CEOs, and white-collar criminals take English, philosophy, math, biology, and so on not (only) because these skills are useful in their future careers but because studying and understanding these subjects makes them better citizens, spouses, parents, caretakers, people. This is a public good not for any simplistic reason but because it is a cognitive good–just about by definition, students can’t know what skills they “need” until they are provided with the cognitive understanding of how to evaluate those needs!


  5. OW: Doesn’t that just assume the reason why most lower-income individuals aren’t going to college is because of a lack of financial resources? I have no doubt that this is true in some (many) cases, but the government financing of educational aid is a failure as a model – but in this case, the failure costs millions of dollars. In a lot of ways, it probably hinders the development of alternative market or civil society models. I think we jump to quick when we perceive a “market failure” and use it as a justification for political intervention which, in reality, probably does not work any better. I’m just saying that we need to be able to think outside the box on education.

    Andrew: Why the “one-size-fits-all” approach to education? The way I see it, you’re advocating that we impose some idealized bourgeois value system on a whole range of people who 1) may not want it or 2) have little room to learn it because their opportunity costs are too high. Do you really think that people who went to college are “better citizens, spouses, parents, caretakers, people” than those who haven’t attended?


    1. I’m not a soc of ed expert, but my understanding is that there is a general finding that educational elites tend to replicate themselves under all funding models, so I agree that public funding isn’t a panacea. The people who study this stuff dig into it in a lot more complicated ways than is appropriate in a blog comment exchange. But I’d hardly call advocating a market solution an example of “outside the box” thinking. Market, market, market is today’s orthodoxy. Even if you are an advocate of vocational training as an alternative to the liberal arts education (which I am, too, actually), it is hard to imagine that charging a working class person $20,000 – $30,000 a year for a vocational program is a good program if your value system includes expanding the possibilities for a financially-viable lifestyle for folks who don’t want to go to college. In my view, the public money for vocational education should go to publicly-funded voc ed schools.

      I don’t think the government funding of educational aid is necessarily a failure. The question is whether the insufficient government regulation of private vocational educational schools taking public money for financial aid is a failure. And also whether it is more efficient or more generative of equality to spend our tax money on publicly-funded voc ed schools (and colleges) with low tuition or to spend our tax money on financial aid for private schools.

      The thing about unregulated schools is they collect the money up front but can have low costs and make large profits if most students don’t complete the program. I worked as a correspondence school instructor for the University of North Carolina in the 1970s. Students paid a fixed fee for the course whether they completed it or not, but I was paid by lesson completed. About 90% of the students did no more than 1 or 2 of the 20+ lessons. The people who paid for the course and quit were subsidizing the people who stuck it out and got the credit. UNC wasn’t trying to make a profit, it was trying to meet expenses, so the correspondence courses were cheap.


  6. I don’t think it’s one-size-fits-all, I think there’s a lot of room for variation among educational models. Frankly one of the great successes of the American educational system is precisely the wide variety of institutions that exist. My objection is to the idea that “marketable skills” is the right metric for measuring educational success. That’s a terribly narrow, constraining view of the reasons for education.

    If people don’t want it, that’s up to them, though I’d argue that most people should want it. If opportunity costs are too high, that’s precisely why this is a public good and deserves special treatment through government provision. And yes, I emphatically do think that, in general, a quality college education makes people “better citizens, spouses, parents, caretakers, people” than those who haven’t attended.


  7. “The way I see it, you’re advocating that we impose some idealized bourgeois value system on a whole range of people who 1) may not want it or 2) have little room to learn it because their opportunity costs are too high.”

    For what it’s worth, I’ve met many many people who have achieved money, success, even fame, and they still do regret they never had the chance to receive a university education. I’ve seen it so often that it can’t be just a coincidence.


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