Magazine | October 5, 2009, Issue

The Future is For-Profit

Education entrepreneurs are poised to upset the complacent higher-ed establishment

Professors and administrators at traditional colleges don’t have much interest in, or knowledge of, their for-profit competitors. Operating in an insular academic world, most of them probably don’t know anybody who has attended one.

But for-profit colleges now enroll close to 10 percent of the college population. And if industry projections are correct, for-profits will threaten the pleasant sinecures enjoyed by faculty and administrators at traditional colleges and universities throughout the country. 

For-profits are, inevitably, very different sorts of enterprises from their traditional counterparts. They make money. If they don’t, they go out of business. Many are publicly traded, and they have all the traditional private-sector incentives to control costs and satisfy customers. Those customers come largely from demographic groups that are often ignored by the nonprofit private schools and even by the public universities. Market leader University of Phoenix advertises that it serves “nontraditional, working students,” and it claims to be the top bestower of undergraduate degrees on blacks, citing a study by Diverse magazine. More than half  of the students at another big for-profit, Corinthian Colleges, have annual incomes under $25,000. 

Phoenix has 420,000 students, about 156,000 of whom are seeking bachelor’s degrees. Corinthian, which has 85,000 students, primarily offers one- to two-year programs in fields such as health care, criminal justice, and business; only 4 percent of its students obtain bachelor’s degrees. Other large companies include Laureate Education (which owns Walden University) and DeVry. Nine companies own 90 percent of the for-profit market.

While they have attractive facilities and well-equipped classrooms, schools such as Phoenix do most of their teaching online. The exact proportion of online to classroom study is unknown: Like other private companies, these schools are reluctant to give out information that may be useful to competitors, although the information they do reveal is more likely to be accurate than what you get from conventional colleges — they have to report to the SEC, not to U.S. News & World Report.

Online education no longer really sets for-profits apart from traditional schools. Traditional universities have moved into online education, too, both as a supplement to face-to-face instruction and as a way to reach students who cannot attend classes. 

The Sloan Consortium, an organization that promotes online education on traditional campuses, says that nearly 4 million students were taking at least one online course in the fall of 2007, up from 1.6 million in the fall of 2002. (There are about 18 million undergraduates in school today.) Anticipating enrollment growth, university officials see online education as a way to avoid expensive bricks and mortar. But the virtual classroom also helps pull in revenue.

There remains some question about whether online courses are as good as face-to-face instruction. The Sloan Consortium quietly concedes “the consistent finding [that] not all faculty accept the legitimacy of online education.” One attempt to blow that claim out of the water was the Department of Education’s recent meta-analysis of 51 studies of the effectiveness of online education, “Evaluation of Evidence-Based Practices in Online Learning,” which concluded that online education is in fact more effective than traditional classes. Critics such as Glenn Ricketts of the National Association of Scholars argue that the analysis may have cherry-picked available studies to paint a rosier picture than is justified. College professors are broadly skeptical of online education’s value. A 2009 study published by the Association of Public and Land Grant Universities found that 70 percent of the faculty surveyed believed online courses to be inferior to their face-to-face counterparts. 

The online-intensive University of Phoenix reports extensively on its learning outcomes (far more so, in fact, than most traditional colleges do). On the MAPP (Measure of Academic Proficiency and Progress) test, for example, Phoenix students do about as well as the average student nationwide; the company notes that, because many of its students enter with lower-than-average skills, this is a significant accomplishment.

Whatever its merits now, online education almost inevitably will be more widely available in the future. The online approach — with its lower costs and its potential for expanding revenue and reach — will create a competitive marketplace that could be fatal for some schools and could severely affect others. 

Jeff Sandefer, co-founder of an innovative business school in Texas, Acton MBA, says that the current mode of teaching at most universities — “I’m the expert; I talk, you listen” — will end. Sandefer is famous for predicting the collapse of Enron years in advance, citing its “arrogance” and “moral decay,” and he pointedly compares the higher-education establishment’s nest-feathering with the worst sort of self-dealing boardroom shenanigans. He predicts that a complacent higher-education system will not be able to survive competition from hungry entrepreneurs with better operating models. Sandefer, himself a Harvard MBA, doesn’t necessarily believe that the revolutionaries overrunning the ramparts will be for-profit schools in their present form; he has a more complex model in mind, which he calls “disaggregation.” This would involve the splintering of educational services into proliferating alternatives. At Acton, for instance, writing skills are developed with the aid of part-time coaches working mostly online, freeing up full-time faculty to concentrate on more specialized academic content. 

For now, the traditional model is largely intact. At least one closely watched for-profit company is working with the establishment: Higher Ed Holdings supplies online education to public universities — for example, teacher-education courses at Lamar University and Arkansas State. Its founder, Randy Best, says that the university faculties remain in control and his business merely facilitates the delivery of online courses. But that delivery includes, among other things, academic coaches who interact with the students. Not surprisingly, faculty reaction has been suspicious or hostile: The University of Toledo rejected Best’s services after its professors complained of losing control. Another complaint: Seventy percent of the new tuition revenue would have gone to HEH. 

Like Sandefer, Best is critical of today’s higher-education institutions, condemning their “aloofness and lack of market responsiveness.” 

But for all the for-profits’ strengths, they are far from the ideal competitive model. To provide education to working adults, especially low-income ones, they have become dependent on the federal government. Most of their students obtain federal grants and/or federally subsidized loans. In fact, some for-profits have become so dependent on federal aid that the law now prohibits them from receiving more than 90 percent of their revenue from federal sources. That the private for-profits receive so much government money perhaps seems shocking at first, but it is predictable, since most of the students they serve are of the socioeconomic class that government wants to subsidize.  

So far, the for-profits are either too small to threaten traditional schools or, as in the case of Best’s HEH, are working hand-in-glove with them. But the march of for-profit higher education is just beginning. One of the for-profits’ most important advantages is their ability to drive down students’ out-of-pocket expenses: In an eye-opening article published recently by Washington Monthly, Kevin Carey, of the think tank Education Sector, described a for-profit outfit called StraighterLine that provides undergraduate courses online for $99 a month. He gives an example of a student who, working daily at her kitchen table, completed four courses in less than two months, for a total cost of $198. According to Carey, comparable courses would have cost more than $2,700 at a nearby public university, and $6,300 at the University of Phoenix. 

StraighterLine’s business model may not prove to be a successful one; right now, the school is having trouble obtaining accreditation. But, as Carey says, if this company doesn’t succeed, another will: “There is an unstable, treacherous future ahead for institutions that have been comfortable for a long time.”

Competition — especially online competition from profit-seeking companies — is changing the landscape of higher education. Overall, we can expect to see that landscape improved — even if Phoenix and the rest leave some bodies on the field.

– Jane S. Shaw is president of the John William Pope Center for Higher Education Policy.


Jane S. Shaw — Jane S. Shaw retired as president of the John W. Pope Center for Higher Education Policy in 2015. Before joining the Pope Center in 2006, Shaw spent 22 years in ...

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