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Wednesday, August 1, 2012

For Profit Colleges -- Taxpayer Funded Ripoff?

Education as Industry.  Have we come full circle?  The original idea behind public education was, after all, simply to turn out students that would be good factory workers.  Proponents likened public education itself to a factory, with students as the finished products.  With the rise of the government-sponsored for-profit education "industry," the actual education of students has become a secondary consideration -- all that matters is profit.  And with government funds involved, the idea that the free market will somehow make everything alright simply doesn't apply.  When the government is throwing money at a problem, the only question for the "capitalists" is how much you can grab -- by complying with the letter (and rarely the intent) of the government program, and lobbying the government to ensure that the program stays in place or grows.

Senator Harkin released a report a couple of days ago that nicely illustrates the unintended consequences of government-sponsored student loan programs.  The result is exactly what you would expect in a "free market" society where everyone acts in their own self-interest.  There is a pot of money (the federal student loan pool), and the way to grab your share of it is obvious -- start (or expand) a for-profit university, and then recruit a bunch of students -- including the homeless, the out-of-work, the poor, the mentally ill, and the just plain unmotivated -- get their tuition money, and then let nature take its course.   The tuition is paid, so it doesn't matter if they graduate -- nearly half of the students never do. And since this is a for-profit business in a capitalistic society, the CEO can name his own price.  But never forget -- these are CEO salaries that are paid by taxpayer funds. 

Here are the key points from the Tamar Lewin's New York Times article on the subject:

"According to the report . . . taxpayers spent $32 billion in the most recent year on companies that operate for-profit colleges, but the majority of students they enroll leave without a degree, half of those within four months.  "
--Note that a Washington Post article from December 2010 (discussed below) described this as a "$30 billion industry" -- sounds like the price keeps going up (i.e. 32 is more than 30, AND the "industry" presumably has some source of income other than taxpayer money).  One thing I'm not seeing an answer to is the question -- if they are loans, aren't students supposed to pay them back?  I.e. is the $32 billion figure just the amount that covers defaulting students?  For students who are paying the loans back, the program shouldn't cost anything, should it?  Would be interesting to know what the "real" total being lent is.
Interesting that the money is spent on "companies that operate" the colleges, not the colleges themselves.
Quoting Harkin:  
“In this report, you will find overwhelming documentation of exorbitant tuition, aggressive recruiting practices, abysmal student outcomes, taxpayer dollars spent on marketing and pocketed as profit, and regulatory evasion and manipulation . . . .  These practices are not the exception — they are the norm. They are systemic throughout the industry, with very few individual exceptions.”
The for-profit colleges reacted by complaining that they have been "unfairly targeted."  There's actually a kernel of truth in that -- it would have been nice if not-for-profit colleges could have been studied as well, since the student loan programs have also doubtless distorted tuition costs, recruiting practices, and student outcomes there as well.  But first things first -- we know that the non-profits aren't paying their CEOs millions of dollars a year (although if I had to guess, a lot of the administrators of non-profits are overpaid). 
"Many Republicans see such colleges as a healthy free-market alternative to overcrowded community colleges, offering useful vocational training and education to working adults who will not attend more traditional institutions."
--Sorry, it's not the "free market" when your whole industry is funded by government largesse.  Same with the pharmaceutical industry (explanation elsewhere -- patents, though necessary, are indisputably government largesse).  Here are some more takeaways:
  • Enrollment tripled from 1998 to 2008, to about 2.4 million students. Colleges owned by publicly traded companies and private equity firms account for 3/4 of the students.
  • In 2010, the colleges studied had nearly 10 times as many recruiters as career-services staff members (32,496 to 3,512).
    • I wonder whether this "industry" has an appreciable effect on unemployment statistics.  It clearly provides at least 32,496 plus 3,512 jobs.  And my guess is that full-time students don't count towards unemployment, so some percentage of the 2.4 million enrolled students (those that are full-time) might otherwise be counted as unemployed.
  • On average, the for profit education companies spent 22.4 percent of revenue on marketing and recruiting, 19.4 percent to profits and 17.7 percent to instruction.  
    • The report doesn't say what is normal for a school, but 17.7 % for instruction seems very low.  And 19.4 percent profits!  Any economist will tell you that something is VERY wrong here.  You don't get profits -- much less 19.4 percent -- in a competitive marketplace.  Here, the "profits" simply reflect how much of the governmental pie you are able to "grab" without paying it to its intended beneficiaries -- the students, and society, that is supposed to benefit from a better-educated citizenry and workforce.
  • CEOs got an average of $7.3 million; but Robert S. Silberman, Strayer Education's CEO, made off with $41 million (including stock options) in 2009.  The Washington Post article discussed below makes it clear that over the years, John Sperling skimmed over a billion dollars off of this government-funded racket.
  • $8 million on lobbying in 2010; $8 million more in the first nine months of 2011.
  • In most cases, more than 80 percent of revenue comes from taxpayers.
  • The rule is that at least 10 percent of revenue must come from sources other than the Department of Education. Veterans' benefits count toward the 10%, so the companies are aggressively recruiting students from the military.
  • The pot is getting bigger.  The Apollo Group (University of Phoenix) got $1.2 billion in Pell grants in 2010-11, plus $210 million from the G.I. Bill. But 2/3 of Apollo’s associate-degree students don't graduate.
  • Associate-degree and certificate programs at for-profit colleges cost about four times as much as those at community colleges and public universities.
  • The for-profits set tuition at almost exactly the maximum expected federal aid for a student.
  • The report includes alarming anecdotes and emails that make clear that it's all about the student loans (Alta Colleges:“so we can grab more of the students’ Stafford.”)
  • Students are misled -- recruiters tell students that the cost will be $4800 per term, but fail to mention that there are five or six terms a year rather than the usual two or three.  The students don't necessarily care, since they are using federal money anyway (although they should, since they'll have to pay it back).
  • "At many schools, students learned only after the fact that their credits would not transfer to another college or university or qualify them for the professional licensing they sought."
  • 96% of for-profit students take out loans, compared to 13% at community college and 48% at public universities.  Although for-profit students are only 13 percent of college students, they account for 47 percent of loan defaults.
  • "Colleges with very high loan default rates in the two years after graduation (now changing to three years) lose their eligibility for federal student aid. As a result, the report found, many of the for-profit colleges try to move students having trouble with repayment into deferral or forbearance until they are past the years the government monitors."
    • would be good to know how "high" is high enough to disqualify them.  In any event, its kind of sad that they can dodge the problems simply by delaying them.  I.e. by picking two or three years, that simply provides a roadmap that enables colleges to avoid the consequences.
-- Interestingly, as far as I can tell, the Washington Post has not yet reported on the Harkin report, although it's only been two days.  I did find this article from December 2010, which seems to be a fairly straightforward account of some of the problems, but which also mentions that the Washington Post Co. -- along with Goldman Sachs -- was (at least at the time) a major investor in what it calls the "$30 billion [for-profit education] industry."  The article itself (which spans 5 pages) paints a somewhat flattering portrait of billionaire for-profiteer John Sperling, but also quotes Harkin about some of the problems with the Pell Grants.  One theme of the article is that George W. Bush's administration loosened restrictions on for-profit colleges, whereas the Obama administration has been trying to tighten them.   Another example of Republican de-regulatory hypocrisy -- it's not "deregulation" when you're loosening restrictions on government handouts to billionaires.

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