The Agenda

John Bailey on Public Support For-Profit Education

At Rick Hess’s Straight Up, there’s a new post summarizingOdd Man Out,” a new AEI survey by John Bailey on public sector support for private sector innovation. Bailey’s basic point is that while policymakers have embraced the use of grants, loan guarantees, tax credits, and other measures to incentivize for-profit firms and to encourage consumers to embrace new technologies in many domains, they’ve rarely done so in for-profit education. 

Though I’m sympathetic to many aspects of Bailey’s analysis, and more broadly to the notion that for-profit educational providers have an important role to play in improving the quality and cost-effectiveness of K-12 education, many of the examples he cites will give critics pause, e.g., in the military and intelligence space and in alternative energy. Bailey acknowledges these potential qualms:

Many government “innovation” programs often place government in the position of picking winners and losers. Winners are usually picked through bureaucratic processes rather than by new idea–chasing venture capitalists whose technical and investor expertise helps allocate scarce capital to the most promising ventures. In these cases, politics often influence decisions, rather than rigorous analysis and due diligence. …

Darryl Siry, the former chief marketing officer ofTesla Motors, noted in Wired magazine that venture capitalists are accounting for several factors when valuing a company, including how much more capital the company will need to get to market or another investment transaction that would provide a return for the venture capitalist. US Department of Energy loans and loan guarantees have amounted to free leverage for the investor’s bet, with little to no downside. The upside is multiplied and the downside remains the same because the most the equity investor can lose is the original investment. As a result, the agency’s programs have distorted the capital markets, as venture capital firms now prefer to back a company that has received a loan or loan guarantee, rather than a company that has not. In other words, the Department of Energy is influencing private sector decisions and selections—perhaps unintentionally,but nonetheless, the result is still the same. The Department of Energy’s loan-guarantee program has both supporters and detractors no matter where it focuses investments. If it backs untested projects to provide financing where private investment is lacking, it gets criticized for putting taxpayer funds at risk. If the program backs established and proven technologies, it is criticized for competing with banks and distorting the marketplace.

Nevertheless, Bailey believes that the benefits of fostering private sector innovation in education outweigh the potential costs. My own view is that the emphasis should be on neutrality between for-profits and nonprofits to the extent possible, not least because there is a straightforward sense in which nonprofits also generate “profits,” the main difference being that nonprofit “profits” are deployed somewhat differently. 

Whereas other federal policy areas seek to attract private-sector entities to bring their entrepreneurial thinking to various social issues, federal education policy often establishes barriers that result in discouraging private sector involvement. ARRA authorized the $650 million i3 fund to “accelerate the creation of an education sector that supports the rapid development and adoption of effective solutions.” The competitive grant competition was structured to provide grants that expand the implementation of, and investment in, innovative and evidence based practices, programs, and strategies. Secretary Duncan said, “We’re looking to drive reform, reward excellence and dramatically improve our nation’s schools.” There was a caveat, however. Instead of casting a wide net to identify successful solution providers, Congress limited eligibility to only local education agencies (LEAs) or partnerships between a nonprofit organization and one or more LEAs. The US Department of Education further narrowed the definition by also restricting the eligibility of subgrants to only LEAs and nonprofits. This essentially tilted the competition toward nonprofit entities, even if for-profit entities provided similar services.

This seems like a straightforward case of hobbling for-profits unnecessarily. The straightforward reason for the exclusion was presumably to persuade public providers that the measure didn’t represent a threat. 

Another example is the Obama administration’s regulations related to for-profit higher education institutions. These for-profit colleges play an important role in our diverse system of higher education by offering flexible course schedules and pioneering the use of online technologies to meet the unique needs of working adults, single parents, and other nontraditional students. Critics of for-profit colleges, however, are quick to point out that while they account for only 10 percent of students enrolled in higher education, these students receive 23 percent of federal student loans and grants and are responsible for 40 percent of all student loan defaults.

The administration’s regulations evaluate programs essentially based on the “gainful employment” of students through a series of tests and formulas to ensure that the debt a student assumes is reasonable relative to how much he or she can expect to earn upon graduation. Protecting students and taxpayers from low-quality programs and unwieldy debt burdens should be a priority, but these are issues we face across the entire system of higher education. Many community colleges struggle with low completion rates, yet are exempt from the administration’s proposed regulation. Even Harvard Medical School would fail to meet the proposed loan repayment standard. If the administration sincerely wanted to protect students and taxpayers, then it would apply the gainful employment test to all institutional programs, regardless of their tax status.

I have yet to hear a remotely convincing reason why nonprofits shouldn’t be subject to the same “gainful employment” regulations as for-profits. Yet that is different from suggesting that the public sector approach to for-profit education should resemble its approach to for-profit green energy and defense contractors, etc.

Bailey is aware of the potential downsides.

To be clear, an entrepreneurial education landscape is not one in which the government or foundations simply pick winners and losers. Rather, it is one in which these entities help remove barriers to entry for quality providers and think deeply about the impact their policy or philanthropic decisions will have on the broader educational marketplace and potential investors or entrepreneurs in the field. Absent that, venture capitalists and investors will simply seek out other sectors that have more supportive policy and regulatory environments for their investments. At a time of declining state and federal revenues, policymakers should be stimulating, not stifling, the influx of private capital to our education system.

While we can agree that “a crucial part of creating a thriving ecosystem is for government to strive to provide a level playing field for providers,” this is actually a very high bar to clear, as public K-12 institutions enjoy a large amount of implicit, embedded, inherited support. Even trying to match this level of support would have to involve loan guarantees and other subsidies that could prove a magnet for corruption. 

Let’s allow for-profit providers into the mix, e.g., allow parents to spend funds in K-12 Spending Accounts on for-profit providers of supplementary educational services, allow for-profits to establish cyber charters, allow vouchers to be redeemed by for-profit schools, etc. Getting this far will be difficult enough.