Phi Beta Cons

More On For-Profit Colleges

Linda Gorman of the Independence Institute writes again on for-profit colleges, specifically to the point that for-profit students have higher default rates:

The suggestion that student loan default rates can be used to judge the success of the for-profit/non-profit model would seem to be subject to one major caveat.

Are the for-profit colleges enrolling a riskier demographic with poorer overall job and credit prospects than the four year colleges? If so, in order to systematically compare default rates it would be necessary to somehow adjust for the differing demographics and career aspirations of the groups entering the two types of schools. And for the possibility that there is larger variation in default rates from the bottom of the for-profit quality rankings to the top than there is in the non-profit sector. This is akin to the problem of figuring out how much a 4 year college adds to incomes given that we don’t know how the students choosing specific major vary. A couple of years ago, for example, one of the for-profit DeVry Universities had a standing offer from a Fortune 500 employer for every graduate of one of its technical programs. The same could not be said of a local for-profit cooking school.

Normally a market system would deal with different default risks by accurately pricing the risk and charging more to those who present with a higher risk of default. Higher default rates are far less important if risk is adequately priced. For example, credit cards have higher default rates than secured loans, but no one uses their different default rates to argue that credit card companies are less successful than lenders who require collateral.

The real problem here, as economist John Goodman points out, is that the first thing that government does when it gets involved in loan markets is “eliminate the ability of the market to price risk accurately.” “Witness,” he wrote, “the market for student loans . . .”

I would certainly be in agreement about government involvement removing the accurate assessment of risk.  Ms. Gorman explains some of the higher default rates, but the fact that the for-profits are “enrolling a riskier demographic with poorer overall job and credit prospects than the four year colleges,” and using taxpayer money to do so, continues to count against them, in my view. And even more significant is the fact that the amounts of loans taken out by the for-profit students are twice and several times higher than those for non-profit private and public colleges, respectively.    

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