Private interest + Government Cheese = for-profit education racket

In Hard Times, Lured Into Trade School and Debt:

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.


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but subsidized student loans also come with a cost, students can't discharge them in bankruptcy

No longer true. The new Obama administration program:

Take a loan from taxpayers, have no obligation to pay it all back as long as you don't earn a lot. And it's all forgiven after 25 years. Or, if taxpayers pay you directly, your debt is nullified in mere 10 years. Everyone, please feel free to be completely irresponsible with other people's money. Borrow as much as you want to pay for any kind of worthless degree.

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

This applies not just to diploma mills but to every university, good and bad. 95% of degrees in humanities do nothing to increase one's chances of gainful employment, yet the departments awarding these degrees exist, prosper and grow. This happens because they are heavily subsidized by taxpayers.
If you pay taxes, you indirectly paid two guys (one in private, another in public university) to write a book entitled "Hip Hop and Philosophy" in which, according to other guys whose living expenses you partially cover, "they show that rap classics by Lauryn Hill, OutKast, and the Notorious B.I.G. can help us uncover the meanings of love articulated in Plato's Symposium", "step aside Socrates, Kant, and Sartreânew seekers of philosophical wisdom are on the scene", "Rakim, 2Pac, and Nas can shed light on the conception of God's essence expressed in St. Thomas Aquinas's Summa Theologica; and explores the connection between Run-D.M.C., Snoop Dogg, and Hegel."

By Nanonymous (not verified) on 13 Mar 2010 #permalink

This applies not just to diploma mills but to every university, good and bad

in general i agree. i happen to think the the effect is stronger in for-profit, though to be fair most students are still in the non-profit sector.

Interesting post Razib. I have always wondered how for Profit trade schools thrive, when students can receive the same training, at a significantly lower cost, from a community college. For that matter, when fee waivers and grants are taken into consideration, a student can actually make money while attending a Community College. The lesson, I suppose, is that one should never underestimate the power of advertising.

what is the usefulness of all of these woman's Studies, black Studies, gay Studies, minorities Studies etc. programs in state universities? how they are providing for money spent?
"for-profit institutions which provide trivial marginal utility to many students while charging for nearly worthless credentials. "
are ALL other than for profit universities provide worthy credentials? there are bad schools and there are good ones Thus to assault all industry is unfair and stupid

3. the real reason of assault on for profit education is that this industry is NOT unionized and therefor it is a fair target for current administration

I'd advise anyone to steer clear of private colleges. In Vancouver there have been several private language schools that have taken peoples' money and then just shut down in the middle of the course. The students and teachers arrived to find the place locked up--the management gone. The teachers never get paid, and the students never get their money back. They are mostly run by people from China I think.

I don't understand why anyone would go to a private language school because the public colleges offer all sorts of ESL courses.

I spent a year working at a for-profit culinary school. A 6-month (full-time) program at this school cost as much as a year at, say, Harvard or MIT. Was it worth it? Hard to say. It's true that that's a lot of money to spend for a career where most workers do not make very much money--even less than in publishing! I think the kids were, generally, getting good training, in the sense of being prepared for work in a restaurant, which is more than just learning to cook. Some of the graduates of this school have been quite successful--some names you'd recognize. It would probably be easier for graduates of this school to get work at high-profile restaurants than someone just walking in off the street--but this does not necessarily translate into better pay. You're still, as the article implies, starting at the bottom. A fair percentage of the students--maybe a quarter of each class--were not kids, but adults, people looking for a career change. Most of the students were really interested in cooking and food. Some were just there because they couldn't figure out what else to do with themselves (hmmm--just like a real college, I suppose!). Some of the kids were really quite talented--I can tell you this is not a place to work if you want to lose weight! So I'd say--you do get something for going, it's a lot of money, and a big risk it won't pay off financially. As with many things in life, your mileage may vary.

I find this post quite humorous. The author repeatedly labels University of Phoenix students as "less intelligent". Yet this post has numerous typos and grammatical errors. Pot calling the kettle black?

University of Phoenix students "less intelligent"? I would like to see the average SAT score of Univ of Phoenix students, but then it'd likely turn out to be a small N as not too many of them took it in high school (sotto voce: not college material)...