It’s that time again. You will be shocked to learn that non-profit higher education institutions are waging war on for-profit competitors. As the for-profit sector has mushroomed, it has experienced serious problems, including dismal borrowing-to-credential ratios. This is a serious issue that should be addressed by reforming the formulas the federal government uses to support less-affluent college students, regardless of whether they attend for-profits or non-profits. Yet somehow that obvious proviso — treat all schools equally — is getting lost in the shuffle, possibly because non-profits have a large and powerful lobby that is not defined as a lobby: the hundreds of thousands of articulate, politically-active people who depend on non-profit higher education to make a comfortable living.
Matthew Denhart summarizes the Vance Fried argument:
In a new policy analysis released last week by the CATO Institute, CCAP Faculty Fellow Vance H. Fried argues that non-profit higher education institutions actually turn considerable profits off the backs of undergraduate students. How can a non-profit be profitable? Fried explains that the profits are not overt, but rather are realized when the revenues gained from providing an undergraduate education exceed the costs associated with providing that service. The profits are not paid to investors, but rather take the form of unnecessary expenses “on some combination of research, graduate education, low-demand majors, low faculty teaching loads, excess compensation, and featherbedding.”
The difference isn’t that one sector generates profits while the other does not. Rather, it’s about whether the profits are explicit or not.
I recommend reading Rick Hess on this subject. His focus on the needs of nontraditional students is particularly important.
This is one of those perfect storm issues: the kind of people who disproportionately drive ideological formation in this country are also the kind of people who either work for (and profit from) or have a sentimental attachment to traditional non-profit higher education. This makes the fight against the incumbent protection racket in this domain an even steeper climb than it is everywhere else.
There is a difference between "economic" profit and "accounting" profit.
All organizations, public and private, for profit and not-for-profit, need to make an economic profit - the net difference between revenues and costs. Those that fail this test either fail or need constant infusions of cash from donations or both.
"Accounting" profit is a concept of following rules. One of the conceptual rules defines a "non-profit" or "not-for-profit" organiztion. After one subtracts out the costs from revenue, one gets the bottom line. It is called the bottom line as in the economic model:
......revenues
minus costs
------------
surplus revenues or economic profit as the bottom line
In a for profit organization - the surplus revenue can be used by the owners to reinvest in the organization or for other purposes as they see fit. Yet a non-profit organization has no owners, per se. They operate from a charter from the state and get tax preferences to do good.
Yet, that simple accounting model is adjusted to reflect the non-profit nature of the organization. A non-profit organization must have ZERO accouting profit, by definition. Thus, any surplus revenue must be moved to another line.
In a well run, efficient, non-profit organization that surplus revenue would go to whatever reason that the organization was chartered to do. This is mission driven.
For example, if the organization is to feed the hungry - they would provide more meals to more people. It is possible to provide a better meal.
Sometimes this cause additional costs - more labor, more transportation, etc. Sometimes this can go to endowments as a rainy day fund to pay for times when the prospects are less sunny.
Yet, too often the surplus revenue is transferred to another line - directly to excess costs. The directors ond/or employees caputure this sruplus revenue to get better accommodations or salaries and this lowers the efficiency of the organization.
This rise in administrative costs theorectically can turn away donors or the tax preferences of the state. Yet that rarely happens.
Reply to this commentLinkReport AbuseI am a professor at a traditional private NFP university (so I'm sure there is some bias in my perception here). Out of curiosity, I enrolled in an online version of one of the classes I teach at a local for-profit university.
I know this is not a large sample size, but the absolute lack of quality control, personal engagement, and instructor feedback was appalling. And even at a significantly lower cost than the class at my college, this was not at all worth the money. (not that there aren't some poor classes at my college, but, as my college emphasizes undergraduate education and caps all classes at 25 students, these are a significant minority).
After doing some research I find that most for-profits pay a prof from a traditional university about $7500 to produce a template for a class, and then pay $2000 or so to non-Ph.D. "online instructors" to execute a class for about 50 online students. That's an economy of scale that keeps costs down and profits high, but at the expense of most of what college is about.
I guess if someone just wants to get a cheap credential without learning anything, the local for-profit college makes sense. Otherwise I get a sense of "you get what you pay for".
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