Face it: America’s experiment with for-profit colleges has failed

We owe it to them to fix the system.
We owe it to them to fix the system.
Image: AP Photo
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It doesn’t really get much more clear than this.

The Obama administration’s decision to effectively forgive the student debts of tens of thousands of students who attended schools run by the now-bankrupt for-profit education company Corinthian Colleges may be the first step to admitting that America’s experiment with for-profit higher education is a giant mess.

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For taxpayers this is a painful lesson. Students attending schools operated by Corinthian Colleges took out some $3.6 billion in Federal student loans. So theoretically taxpayers could be forced to eat all that debt as a loss. (Though its unlikely every last loan will qualify for relief.) And the costs could climb, as the Department of Education has opened the door to offer further forgiveness for students of other schools who claim they were misled into taking out excessive debt to attend for-profit schools.

Still, let’s hope a lasting realization sinks in with the sting. There are terrible incentives inherent to a for-profit education system kept afloat on an endless river of government loans. For anyone who paid attention to the financial crisis, the situation seems reminiscent of run-up to the housing bust, in which shady mortgage brokers encouraged people to load up on debt to buy houses. When those loans ultimately went bad, the US taxpayer had to step in to keep the financial system and the economy from collapsing. Might the bankruptcy of Corinthian be a turning point similar to the bankruptcy of Lehman Brothers during the crisis?

At any rate, the problems are not strictly confined to the Corinthian Colleges catastrophe. Here are a smattering of troubling findings surrounding the for-profit education sector as a whole.

  • “Students in for-profit colleges, especially the 2-year colleges, borrow approximately four times as much as they would have at a 2-year public college.” (Research in Higher Education)
  • “While enrolling nearly 10% of all students in accredited higher education institutions, it [for-profit education] secures some 24% of all Pell Grants—the main federal grant-in-aid for low-income students.” (European Journal of Education)
  • Students at for-profit institutions have significantly higher default rates on Federal student loans than in other sections of higher education. (Journal of Economic Perspectives)
  • Six years after entering for-profit programs, students have higher unemployment rates and lower earnings than comparable students from other schools. (Journal of Economic Perspectives)
  • A 2010 report based on an undercover tests of 15 for-profit colleges found that four colleges encouraged fraudulent practices and that all 15 made deceptive or otherwise questionable statements to GAO’s undercover applicants. (GAO)

So the question is, if these schools are such a rotten deal, why do people go? The answer seems to be a combination of aggressive marketing and program flexibility.

Many of the students who attend the for-profit schools have jobs and families that make it nigh-on impossible to attend a conventional higher education institutions, which have rigid class schedules and other requirements.

This is important. While as a whole the for profit-sector has been a rotten deal for students and taxpayers, the existence of the sector shows a real demand for flexible, tertiary education for populations who are traditionally under-represented at US colleges and universities.

In other words, the solution isn’t to turn away from public funding for higher education. Rather, taxpayers should take some of the money they’ve been inefficiently sending to the for-profit sector, and channel it toward America’s underfunded public higher education system. There, the emphasis should be on emulating some of the flexibility of the for-profit sector while offering the quality of non-profit schools. That should boost graduation rates and employment prospects, and result in taxpayers getting stiffed a lot less in the future.

But that’s not what’s happening. State funding for public higher education has declined, and there is interesting evidence that suggests the funding cuts to public colleges and universities essentially channel students to the for-profit sector.

This is a terrible waste of taxpayer money. It should stop.