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Commentary By Preston Cooper

Government Subsidies Drive For-Profit Colleges' Failures

Economics, Economics Employment, Finance

Are for-profit colleges a good investment for students? A new study by economists Stephanie Cellini (George Washington University) and Nicholas Turner (U.S. Treasury Department) says generally, no. However, students who finish usually do all right.

The results, in brief: after enrolling in for-profits’ certificate programs, students overall earn about $900 less annually than they would have had they not enrolled at all. They earn about $2,500 less than they would have if they had enrolled in a similar program at a public college. Similar results hold for associate’s and bachelor’s degree programs at for-profits, though the authors do not compare these programs to their public-sector counterparts. Only master’s degrees programs at for-profits yield a clear increase in earnings, though even that is fairly modest.

Examining the authors’ findings in more detail, though, is warranted. Particularly illuminating is the stark contrast in outcomes for graduates versus dropouts. For all four categories of credentials, graduates experience an increase in earnings after enrolling in a for-profit college. By contrast, all but one credential (the master’s degree) is a losing proposition if the student does not graduate.

The numbers for graduates are decent, though not stellar. However, it is also possible that many students who manage to get themselves over the finish line are simply more able and motivated, and would have been able to increase their earnings over time without the college’s help. (The opposite may be true for dropouts.) As I wrote last week, evidence demonstrates that college is much less effective at raising earnings than surface statistics suggest—largely due to the distinct characteristics of students who enroll and graduate.

Naturally, the next question is why so many students are enrolling in for-profit colleges if the risks are so great. Just 58% of students at two-year for-profits graduate, along with only 27% of students at four-year for-profits. The risk of dropping out, losing expected earnings, and facing a higher relative burden of student debt is great. Why does this business model continue?

One major reason is the poor market incentives created by federal student aid programs. Currently, Uncle Sam dishes out tens of billions of dollars per year in the form of Pell Grants and federal student loans, with very few strings attached. To increase revenues, all colleges need to do is enroll more students, who will pay federally-subsidized tuition regardless of whether they end up graduating.

This is why for-profits spend oodles on marketing campaigns to recruit students into their programs. The result of all this recruiting is that a disproportionate share of for-profit students are likely ill-prepared for college. Some of these students will not graduate, and even if many do, for-profit students’ average post-college earnings will go down.

These twisted incentives barely exist for public colleges, which the study found yield better student outcomes than for-profits. Nearly 90% of revenues at two-year for-profits come from federally-subsidized tuition and fees, versus just 17% at their public counterparts. As a result, these public colleges are more likely to directly lobby federal, state and local governments (which provide a combined 72% of their revenues) to raise funds rather than trying to recruit more students.

According to the study, 85% of students at for-profit colleges in the authors’ sample received federal student aid, compared to just 20% of community college students. Students simply are not as big of a cash cow for the public sector as they are for the for-profit sector. The median two-year public college spends just $123 per student on recruiting, compared to thousands of dollars for private schools. All this means that public schools (and non-profits, to a lesser extent) are under much less financial pressure to go out and recruit legions of students for whom college is not the best option.

The solution here is an increased role for the private sector in college finance. Private lenders, with their own money on the line, will have a greater incentive to weed out for-profit colleges offering students fishy deals. Bureaucrats at the Department of Education, who spend taxpayers’ money instead of their own, have no such incentive.

The weight of the evidence is slanted against for-profit colleges. But this is more a result of flawed incentives rather than the inherent evil of profits, as many critics of for-profits believe.The profit motive to create cheaper and better products is an integral part of the capitalist system that has generated amazing prosperity. With better incentives, there is no reason why profit cannot play a positive role in higher education as well.

This column originally appeared on Forbes.

Preston Cooper is a policy analyst at the Manhattan Institute. You can follow him on Twitter here.

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