In Defense of For-Profit Colleges

by Neal McCluskey
Too many taxpayer dollars go to gild the whole ivory tower, not just the for-profit sector.

Unless you follow education policy closely, you probably don’t know who Representative John Kline is. But just a few weeks ago, lefty talk-show host and comedian Bill Maher declared the district of the Minnesota Republican his top target for flipping from red to blue. Why? First and foremost, because Kline chairs the House Education and Workforce Committee and gets donations from, apparently, the worst villains this side of the Joker and Lex Luthor: for-profit colleges.

After running through a parade of horribles perpetrated by Kline — opposing Obamacare, Planned Parenthood funding, etc. — Maher stated that Kline is at his worst on higher education, especially because he “is the champion of for-profit colleges, which they used to call diploma mills, but that’s back when you at least got a diploma.” Then he really zinged the schools: “These are not real colleges. Real colleges have leafy quads and libraries, and hippie professors who turn nice Christian kids into bisexual atheists.”

Maher is not alone in attacking proprietary schools. For the last several years, Senate education committee chairman Tom Harkin (D., Iowa) has hunted the for-profit sector as if it were his white whale, holding slanted hearings, issuing a damning report, and generally railing against the colleges. Similarly, the U.S. Department of Education has been pushing “gainful employment” regulations, due to be finalized in the coming months, specifically targeting for-profit schools. And then there are state attorneys general, and the Consumer Financial Protection Bureau, who have launched several splashy investigations into proprietary colleges.

So are for-profits truly awful? At least, do they perform worse than the thousands of putatively nonprofit institutions sporting the leafy quads and Christian-flipping profs that Cornell grad Maher and so many others seem to think essential to higher education?

There are certainly reasons for concern.

A major one is the sector’s high federal student-loan default rate. According to the most recent numbers, 19 percent of students at for-profit schools had defaulted within three years of entering repayment, versus 13 percent at public institutions and 7 percent at private, nonprofit institutions.

Their completion rates aren’t stellar, either. According to the federal Digest of Education Statistics, the latest six-year completion rate for people in four-year programs is a cringe-inducing 32 percent. Finally, there’s the cost: According to the College Board, which produces annual reports on college prices and aid, the average cost of tuition and fees at for-profit institutions was $15,130 last year. That was 70 percent higher than the state-resident price at an average four-year public college, though only about half the cost of a four-year, nonprofit private school.

All this looks pretty bad for for-profit colleges. But here’s the thing: Public and not-for-profit private schools also produce atrocious results. This is especially true when you try to pinpoint students with demographics similar to those at for-profit schools: generally older, lower-income people who were less likely to be on a college-prep track in high school.

Consider completion rates again. When you compare for-profits with public colleges with noncompetitive admissions — the schools most likely dealing with similar types of students — for-profits equal or outperform them.

The six-year graduation rate for open-enrollment public schools is the same as for proprietary four-year programs: 32 percent. For African Americans, the for-profits beat their competition. Twenty-one percent at for-profits completed their programs within six years, compared with 18 percent at open-admissions public institutions.

The numbers are starker when you look at two-year institutions. For-profits see 63 percent of students complete within 150 percent of the time a program is supposed to take. For public two-year institutions, the figure is a minuscule 20 percent. Among African Americans, the difference is 53 percent to 11 percent.

There are problems with these data — they include only first-time, full-time students who finish at the institution where they started — but they are the best available, and at the very least they strongly suggest that for-profits do as good a job or better of moving their types of students to graduation than do public colleges.

But do the resulting credentials translate into increased earnings?

Again, there are no broad, systematic data on outcomes, so it is impossible to control for all the factors needed to isolate the effects of schools versus student characteristics. However, one study using federal data, conducted by the Parthenon Group but funded by embattled Corinthian Colleges, suggested that enrolling in a two-year-or-less for-profit program generated greater short-term gains than did doing the same at a two-year public institution. For-profit students saw a $7,900 jump in annual earnings versus $7,300 for those who graduated from community colleges, though from a baseline of just $14,700, versus $20,300 for community-college students.

Perhaps a more powerful indicator of success than questionable earnings data is that enrollment in proprietary schools has grown at a pace eclipsing that in the other higher-education sectors. According to the most recent data, between 1992 and 2012 enrollment at for-profit schools grew nearly eightfold — from 230,269 students to 1,808,898 — while at private nonprofits and public colleges it rose by only a third.

Apparently, for-profit schools are providing something many people want, and unless you assume people are shockingly irrational, that is an important sign of relative effectiveness. And again, you have to see for-profit schools in context to understand their draw.

Proprietary schools are typically unadorned operations found in strip malls, office buildings, and online, offering flexible schedules and frequent enrollment periods. They are intended to be places where you can get the skills or credential you need, quickly, because you’ve got kids and a job to worry about. Meanwhile, traditional colleges are geared toward, well, traditional students: just-out-of-high-school kids whose primary job is to go to school.

Okay, maybe “job” is misleading. More than just the leafy quads of Maher U, today these institutions offer amenities ranging from first-run movie theaters to rock concerts to recreation facilities differing from a Carnival Cruise only in that the college is on land. On land, that is, unless you are on a “Semester at Sea,” sunbathing at the University of Missouri’s “Truman’s Pond,” or floating through Texas Tech’s $8.4-million “leisure pool” complete with a meandering “lazy river.”

Of course, college prices have infamously skyrocketed as traditional students have demanded more amenities and as schools have grabbed for cash.  And who has furnished much of the inflationary fuel? The very politicians who devote so much energy to attacking for-profits. According to the College Board, inflation-adjusted federal student aid leapt from $38 billion in the 1992–93 academic year to $170 billion in 2012–13, a blistering 347 percent increase.

And just because they are called “nonprofit,” don’t think traditional schools don’t bring in far more money than it costs to educate most undergraduates. According to a Cato Institute analysis by Oklahoma State University professor Vance Fried, once donations and state subsidies are factored in — two huge revenue streams that for-profits don’t have — public research universities make profits of around $11,000 per student, and private, nonprofit schools nearly $13,000. The only reason this isn’t called “profit” is that, rather than sending it to investors, schools keep it in the form of higher salaries, more employees, new amenities, and so on.

Which brings us to perhaps the primary reason that for-profits have been under such focused assault: They make great scapegoats for politicians whose huge subsidy programs are a major cause of rampant price inflation and fruitless college enrollment. Rather than address their poisonous but popular aid programs, politicians point to those who dare openly seek a profit and declare, “There’s the witch!”

But ignoring the real problem won’t make it go away. And contra Bill Maher, the problem isn’t too many leafless, quad-less, for-profit colleges. It is far too much taxpayer money throughout the ivory tower, and there’s nothing funny about that.

— Neal McCluskey is the associate director of the Cato Institute’s Center for Educational Freedom.

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