At institutions that train students for careers in areas like health care, computers and food service, enrollments are soaring as people anxious about weak job prospects borrow aggressively to pay tuition exceeding $30,000 a year.
The Apollo Group — which owns the for-profit University of Phoenix — derived 86 percent of its revenue from federal student aid last fiscal year, according to BMO. Two years earlier, it was 69 percent.
For-profit schools have proved adept at capturing Pell grants, which are a centerpiece of the Obama administration’s efforts to make higher education more affordable. The administration increased financing for Pell grants by $17 billion for 2009 and 2010 as part of its $787 billion stimulus package.
Two years ago, students at for-profit trade schools received $3.2 billion in Pell grants, according to the Department of Education, less than went to students at two-year public institutions. By the 2011-12 school year, the administration now estimates, students at for-profit schools should receive more than $10 billion in Pell grants, more than their public counterparts. (Those anticipated increases may shrink, depending on the outcome of wrangling in Congress over health care and student lending.)
The market works; the for-profit schools are good at what they do, increase their student enrollments. Arguably they’re better than many conventional institutions of higher education because they utilize modern mass marketing techniques which hook into cognitive biases. If you’re a halfway intelligent student and you see an advertisement for an institution of higher education on a subway, you know to take that as a signal that that institution is definitely one to avoid (this could be turned into a Chris Rock joke). Those who lack the requisite class savvy and are less intelligent don’t take the same lesson, and in fact are the ones who may make an impulsive decision to matriculate based on an advertisement.
But problem here is the fact that these institutions receive massive public subsidies. Grants are a direct subsidy, but subsidized student loans also come with a cost, students can’t discharge them in bankruptcy (the lower interest rates naturally have to have trade offs or the loans would not be forthcoming to 18 year olds). The ultimate aim of providing public funds toward higher education are the presumed investments that this makes in human capital, which earns returns in greater tax receipts through economic growth driven by innovation and increased labor productivity. The theoretical spillover effects are presumably large. But in this case the main beneficiaries are likely the intermediaries, the for-profit institutions which provide trivial marginal utility to many students while charging for nearly worthless credentials. The downside risk of failure to repay the loans are taken up by the students (there is no way that the largest Pell Grants can cover the tuitions which are the norm at these institutions).
The bigger issue which is masked by the fixation on subsidizing higher education are the failings in primary and secondary education. A disproportionate segment of the students who matriculate at for-profit institutions seem to academically weak, and a bit low on the totem pole in the ability to plan far into the future (high real time preference*). The profit motive ideally drives firms toward excellence and efficiency, but in this case it seems quite likely that the excellence and efficiency is not educating students but coupling gullible individuals with massive debt obligations which they have no liability obligations toward. In other words, maximizing individual firm utility at the expense of the aggregate. The costs are distributed broadly, the gains more locally.
Note: A concurrent issue is that of graduate educational debt (or, earnings f orgone in the case of those who are in programs where debt is not necessary). This highlights that the problem in decision making isn’t just low individual intelligence, but he values and ideals which our society holds up. In particular, excessive optimism as to where any given person will lay on a distribution of outcomes. Most law school graduates will not work in “Big Law,” and most people who enter Ph.D. programs will not gain a tenured position in academia.
* Someone willing to take up debt and forgo labor force participation obviously is willing to have a general notion of planning for the future. But it seems that many of those who are enticed by advertisements on television for “technical institutes” and the like are more attracted by the notion of large later paychecks in the future, and have only a poor grasp of what the probability distribution of real outcomes is going to be.