Who benefits from huge federal subsidies to US for-profit colleges?

And the loan can be too. Jeff Kowalsky/EPA

A number of high-profile cases have put for-profit higher education in the US under the spotlight in recent months. In July, Corinithian Colleges, one of the largest for-profit providers in the country, agreed to sell 85 of its campuses and close another 12 after a number of investigations into its finances and marketing.

This followed a case brought by the Consumer Financial Protection Bureau’s against ITT Educational Services, accusing it of predatory student lending. Each institution has over 70,000 students and annually receives over US$1 billion in federal financial aid.

Public policy debates surrounding for-profit higher education are less about whether it can actually be profitable – because many providers are doing well – than about who profits. But what is forfeited when the higher education system subsidises these for-profit colleges, also known as proprietary institutions?

40 years of expansion

For-profit higher education has dramatically expanded in the last 40 years in the US. Between 1970 and 2009, enrollment in for-profit, degree-granting institutions grew by more than 100-fold to 1.85m students, nearly 10% of all enrollments. This was compared to a 2.4-fold increase in not-for-profit higher education. From 2000 to 2009, degree and non-degree-granting enrollments tripled in the for-profit higher education sector, versus a 22% increase in not-for-profit higher education.

Before President Barack Obama’s election, for-profit higher education received bi-partisan federal support, evident in the continuation of rules that underwrite a business model dependent on federal subsidy.

Under the 90/10 rule, introduced in 1992, for-profit institutions cannot receive more than 90% of their revenues from federal student financial aid – that does not include federal aid for veterans’ benefits. But many of the largest for-profit providers such as the University of Phoenix, Kaplan, receive over 80%. The sector as a whole receives 73.7% of its revenues from this source. These “for-profits” really are “for (federal) subsidy” institutions.

Higher debt and lower results

All this has come amid reduced public funding for public higher education and widening gaps between escalating tuition and limited grant aid that has contributed to massive student debt (over 1$ trillion) and default. In this context, is near-full federal subsidy of for-profits a prudent use of public monies?

Students in two and four-year proprietary institutions are far more likely than those at public two and four-year non-doctorate and doctorate-granting institutions to take out student loans, and more likely to accrue higher debt.

Completion rates for BAs are much lower in four-year for-profits than public universities, as are levels of satisfaction with academic programmes.

Employment outcomes are poorer. And, controlling for individuals’ characteristics, students at for-profit two-year and four-year colleges are 26% and 16% more likely to default than those going four-year public colleges.

Such economic and educational outcomes are even more problematic given that proprietary institutions enroll disproportionately high numbers of low-income and minority students. There is a substitution effect – at the public purse’s expense. For-profit institutions have increased their share of poor students, from 13% in 2000 to 19% in 2008, as the proportion of such students in public four-year institutions decreased, from 20% to 15%.

Tightening of controls

To be sure, there is great diversity in the for-profit higher education sector. Yet, almost all the growth is in for-profit chains such as the University of Phoenix and Laureate International Universities that operate across many states or even countries, with most enrollment online.

The focus of recent government actions and proposed regulations relate not just to the sector as a whole, but also to some of its biggest for-profit chains. One of the Obama administration’s initiatives is an effort to promulgate a “gainful employment” regulation, denying federal financial aid to for-profit institutions (and not-for-profits’ vocational programmes) that have high default rates or average graduate employment insufficient to repay student loan debt.

That stems from the existing data on debt and default and from concerns about institutions’ fraudulent reporting, marketing, and recruiting.

The initiative is an executive action by Obama, so doesn’t need to pass through congress. The Department of Education is now preparing to implement the regulations after receiving comments from across the sector.

Impact on the public HE sector

More than such abuses, and the direct costs of publicly subsidising proprietary higher education, there are indirect costs and effects too. For-profit institutions not only take monies out of a financially strapped public sector, they also drive public universities towards privatising practices of “academic capitalism”. These include escalating tuition, spending relatively more on marketing, recruitment, management, and (often failed) revenue-generating initiatives, and less money on instruction.

So who profits, even if some for-profits fail? Private shareholders, not public stakeholders. That profit is extracted at the expense of the public purse, and particularly of the least advantaged populations.

Perhaps most destructive, though, is a privatised system’s forfeiture of responsibility and commitment to the broader public interest over the interests of the would-be private firm. That pattern is now too often heard and seen in the discourse and practices of managers at public universities too.


This article is part of series on for-profit education. Read the other articles in the series here.