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How Bad Are For-Profit Colleges?

Senator Harkinís investigation discloses serious problems but misses the core problem.

By George Leef

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August 14, 2012

For several years, Senator Tom Harkin (D-Iowa) has been making headlines with his investigation of the for-profit college world.  Those headlines have revolved around his Health, Education, Labor and Pensions committee’s findings that some for-profit colleges earn large profits by taking advantage of unsophisticated people, talking them into enrolling and signing up for Pell grants and borrowing money, then taking classes of dubious value.  The for-profit colleges pocket the money but the students rarely learn much and seldom complete a degree.

You can read the committee report here. It is quite lengthy.

Over the last twenty years, the for-profit college sector has grown enormously.  What appears to have triggered that growth is not a great wave of consumer enthusiasm for those schools. Instead it was the realization by executives at the for-profit schools that there was lots of money to be made by cashing in on federal student aid money.

Just as the “gold in them thar hills” drew prospectors to California, the easy money to be had by recruiting students drew companies into the college industry.

Senator Harkin, who at one time seemed to be gunning for the entire for-profit sector, said in his statement accompanying the report that some of the for-profit schools were useful in helping “more disadvantaged and nontraditional students attend college.” He went so far as to single out a few, including Strayer Education and Walden University, for praise. Nevertheless, he said, much of the federal government’s “investment” in higher education is wasted at for-profit colleges.

Although the report has been criticized by some commentators as being exaggerated to score political points (Richard Vedder of CCAP and Cato Institute’s Neal McCluskey among them), it is impossible to deny that Harkin has turned over a rock and we can see a lot of nasty things crawling around. The report documents cases where school recruiters gave out misleading information about accreditation, graduation rates, total costs, and employment prospects. (Except for accreditation, the same charges have recently been leveled at law schools.)

And apparently the old car salesman’s tactic of getting the customer to think only about the seemingly reasonable monthly payment rather than the total cost has been imported into the for-profit education industry. Gullible students aren’t always informed that they will be liable for all they borrow, indefinitely. Their student loan debts can’t be discharged in bankruptcy and can’t be reduced by repossessing their degree or course credits, unlike the situation facing a car buyer who can’t make the payments.

Moreover, the investigation found that recruiters for the for-profits use the same kind of pitch that salesmen for time-shares use to pressure possible buyers: “You have to decide now!”  Turning education into an impulse purchase is at best unseemly.

Harkin’s report also helps to confirm the Bennett hypothesis--although that certainly was not its intention. The investigation revealed that some of the for-profits set their tuition at exactly the amount of the federal grants and loans the students are entitled to and raise it when more government money becomes available. The schools are obviously gaming the system to extract the maximum revenue.

There is a glaring imbalance in the report, however. It analyzed the infamous trio (i.e., waste, fraud, and abuse) solely in the for-profit sector, when non-profit higher education is saturated with them too. Non-profit colleges and universities also recruit students who have doubtful academic ability and motivation, with the idea that good careers await them if they get a degree. They try to fill up their coffers with as much government grant and aid money as possible and many have very low graduation rates--exactly the charges Harkin makes against for-profit schools.

Perhaps Senator Harkin only looked into the for-profit sector because he has been misled by the common perception that if a college (or other kind of organization) is officially “non-profit” it must be on the side of the angels.  Oklahoma State professor Vance Fried debunked that idea in a paper showing that non-profit colleges actually earn profits, but they’re consumed by lots of unnecessary spending. 

Both for-profit and non-profit higher education have a disease, a disease with the same cause: government subsidies. The senator believes that federal student aid is needed for our national “investment” in education, but he ignores the fact that government investments of all kinds, including non-profit college education, usually turn out to have high cost to benefit ratios.

Harkin’s report sets out an array of solutions to the problems he has identified, but they all involve the opiate of the politicians, namely regulation.

First, he wants to “enhance transparency” by having federal bureaucrats “collect comprehensive student outcome information” and “establish a uniform and accurate methodology for calculating job placement rates.”

Second, he wants to “strengthen oversight of financial aid” by tying eligibility for federal funds to “meeting minimum student outcome thresholds” and prohibiting schools from using federal money for marketing and recruiting.

Third, he wants regulations that “create meaningful protections” for students, such as setting up an online complaint clearinghouse and enforcing “minimum standards” for various student services including remediation, career counseling, and job placement.

Our confidence that additional regulations will stop the shady tactics of for-profit colleges ought to be pretty low in view of the report’s discussion of the clever moves those schools have made to evade one of the current regulations. Under the “90/10” rule, schools may not collect more than 90 percent of their revenues from federal student aid money. However, many of the for-profit schools have figured out how to technically comply while, as Harkin says, “defy(ing) the goal and spirit of the regulation.”

Won’t new regulations lead to the same sort of cat and mouse games? We must assume they would.

Furthermore, because non-profit schools also lure in weak students who will probably derive little benefit from courses just to fill up their coffers, we ought to consider a universal solution rather than more regulations on the for-profit sector.

That solution, the one that cuts the Gordian Knot, is to end federal student aid.

Federal student aid helps to drive up the cost of higher education for everyone. It entices many young people who simply need better basic skills and occupational training into expensive college programs that can put them into a deep debt hole. And, as Harkin’s report shows, it is federal aid money that motivates the educational scams.

Without federal grants and easy loans, students would have to spend their own money, family wealth, or funds they might borrow privately. (For students without good academic profiles and career prospects, there probably would be no loans available.) Having to pay for post-secondary education without government aid would lead to a number of changes, all for the better.

First, since they would be spending their own money, students would look more carefully for good value. If, as if often the case, what they actually need is occupational training rather than the traditional Bachelor of Arts degree, they will search for that. Such programs already exist (here’s one), and more would no doubt be created to fill the demand.

Another change: employers would stop looking to government to do job training for them. They would either set up training programs themselves (such as Siemens) or help to pay for prospective employees to learn the required skills at schools specializing in that. Keep in mind that employers need capable workers just as much as workers need to have skills. Government subsidies are unnecessary for that market to work.

There would be many other changes too, but I’ll close with this one: Without federal student aid that’s easy to scoop up, the dubious, deceptive, fast-buck sorts of “college” would wither on the vine.

 

 


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