Phi Beta Cons

The Right take on higher education.

Re: For-Profit Colleges


In addition to Robert’s post below, Linda Gorman of the Independence Institute responds to my comment on the for-profit colleges:  

If for-profit colleges are basically money transfer operations, then so are non-profit colleges.

In economics, the data and theory suggest that the main difference between for-profit enterprises and non-profit enterprises is that for-profits run more efficiently since shareholders get to take home any residual and have an incentive to increase that residual by minimizing costs and maximizing their revenues.

Non-profits have different incentives. Since there are no shareholders, there is no incentive to maximize profit. There is an incentive to maximize revenues, but rather than minimizing costs, the people who run the non-profit typically take the residual by upping their benefits—less stressful work, nicer offices, bigger benefits, more staff support, and so on. Costs increase to match the revenues and the denizens of the non-profits unceasing lobby for more just like people in the for-profit sector.

Making loans to a not very talented music major at a non-profit Big State School isn’t much different than making loans to someone who wants to go to a for-profit school that teaches “culinary arts.” In both cases, the taxpayers have been required to spend their money on something that no private investor is likely to support, the students have been lured into debt, and there are other, less expensive, ways of imparting the skills than an academic degree. In the non-profit case the people who staff the bloated non-profit higher education world benefit. In the for-profit case the shareholders of the school benefit. The students might have been far better off in a world that emphasized on-the-job training.

Both Robert and Ms. Gorman make good points, but I have noted that the main defense of the for-profit colleges tends to be that whatever the criticism, the non-profit colleges do the same. I don’t think that is a sufficient answer for a number of reasons that I would need more time to address. But one thing I will mention is that student loans for the for-profits tend to be twice as high as for the non-profit private colleges and several times higher than for the non-profit public colleges; plus, the default rate is higher for the for-profits. So, it seems to me that far from the funds being handled more carefully in order to yield returns to the investor, it is possible that they are being handled rather profligately, perhaps to produce those same returns?


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