For-profit colleges have a long history of manipulation behavior aimed at preserving the flow of Title IV funds to their schools while providing their students with a poor education. After the quadrupling of undergraduate enrollment in for-profit colleges from 2000 to 2010, Obama-era regulations led to the closure of some high-level schools and one slight drop in inscriptions in general. Today, four years of deregulation by the Trump administration and the COVID-19 recession have created a “Perfect storm for the resurgence of the for-profit sector”. The new Biden administration must prioritize the regulation of for-profit organizations in order to protect students and taxpayer dollars.
For-Profits are more expensive and less efficient
There is a huge amount of evidence that for-profit colleges generate higher debt and poorer labor market outcomes for students compared to other forms of post-secondary education.
For-profit colleges enroll only 10 percent of students, but they account for half of all student loan defaults. 71% of students in for-profit colleges borrow federal loans, compared to just 49% of students in 4-year public schools. The average amount borrowed by for-profit college students is nearly $ 2,000 more than the amount borrowed from public schools for 4 years. These loan differences not explained by demographic differences among student populations; instead, they are mainly caused by the fact that the average tuition fees at a for-profit college are over $ 10,000 higher than that of a public community college.
Do the labor market outcomes of for-profit college students justify the higher spending? The simple answer is no. On a wide range of parameters, for-profit colleges underperform their peer institutions. When controlling for socioeconomic differences between students, study after study finds that the incomes and employment rates of for-profit college graduates are lower (or at best similar to) those of public and non-profit college graduates. Even when compared to high school graduates who did not pursue post-secondary education, there is no evidence that for-profit college graduates with associate’s degrees have higher incomes.
Some have argued that for-profit colleges might be better equipped to offer short-term certificate programs that train students for specific industries, so they should not be compared to traditional public colleges that primarily offer courses. 4-year diplomas. However, even though we only look at the results of certificate-issuing institutions where most certificate programs are 18 months or less long, we still find that for-profit colleges perform very poorly. 90% of all for-profit institutions issuing certificates a majority of their graduates earn less than the average high school graduate six years after entering the program. The for-profit college system offers poor results at a high cost.
For-profit organizations target black and Latino students
The history of for-profit colleges is incomplete without a racial perspective. Black and Latino students make up less than a third of all college students, but they make up almost half of all who attend for-profit colleges. This is the result of predatory recruitment tactics targeted on Black and Latino communities. Between 2017 and 2019 only, nearly 24,000 federal fraud complaints have been brought against for-profit companies for lying about employment statistics and graduate earnings.
Many of the poor outcomes we see among for-profit students are even worse for the black and Latino student subgroup. Almost 60% of black students who took on student debt to attend for-profit school in 2004 defaulted on their loans in 2016, compared to just 36% of their white peers. For-profit colleges, more than any other type of institution, leave students in the position of going into debt without having a degree for it. Among borrowers, black and Latino students are much more likely to drop out of for-profit schools.
Trump cut major regulations
Unfortunately, the Education Department under Trump has cut back many regulations put in place during the Obama era to protect students and improve the for-profit sector’s performance. Last year, the Department of Education repealed the paid employment rule, which stipulated that institutions could be excluded from federal financial assistance if a significant portion of their graduates are not earning enough to pay off their debt. The Trump administration has also weakened borrower defense rule, which established a student debt cancellation process for students who have been swindled by their schools. In 2018, the Ministry of Education modified the information displayed on the College’s scorecard, a government website created to inform prospective students about the costs and performance of different schools. Data comparing the incomes of graduates from each school to the incomes of high school graduates have been suppressed, making More difficult students to make informed choices. Given the disproportionate amount that for-profit colleges spend on recruiting and the predator nature of their recruitment tactics, the government must step in to provide prospective students with reliable information.
Biden administration must move beyond Obama-era regulation
There are two general approaches to reforming the for-profit sector. The first is a phased approach. In its first 100 days, the Biden administration must prioritize reinstating improved versions of Obama-era regulations to enact incremental changes. Here are several steps the administration could start taking on day one:
- Reinstate a revised paid employment rule: This rule is important because it holds institutions accountable for the performance of their graduates, which more closely aligns the incentives of students and for-profit colleges. For institutions whose graduates do not achieve a certain debt-to-earnings ratio, federal funds should be cut. However, since the rule was written under the Obama administration, it does not “failing to hold institutions responsible for the 40% or so of students who do not graduate.” A new rule on paid employment should be extended to also take into account the results of non-graduates.
- Change the 90-10 rule: The 90-10 rule states that no more than 90% of for-profit college income can come from Title IV programs. This ensures that institutions are not entirely dependent on federal grants and can be successful in attracting at least a few students who are willing to pay the full price for their education without federal assistance. However, federal funds from the GI Bill and other programs managed by the Department of Defense does not count towards the 90% limit for federal revenues. This gap has led for-profit colleges to aggressively target veterans. A modified 90-10 rule should ensure that funds from Department of Defense and Veterans Affairs grant programs are counted in the 90% of allotted revenue that may come from federal programs.
- Improve the College’s scorecard: The College’s scorecard has become less transparent over the past 4 years. It should be improved to clearly include data on graduate earnings relative to high school earnings as well as loan repayment rates for each school (which the Trump administration started adding in March). This site is an important tool for consumers and it should be used to combat deceptive marketing strategies.
- Implement institutional risk sharing: Many experts argue that institutional risk-sharing policies would better align incentives for-profit colleges with those of students. These policies require schools to pay the Department of Education a percentage of outstanding student loan balances with negative results. These policies should be accompanied by incentives for the enrollment of at-risk students so that risk sharing does not have the negative effect of dissuading institutions from accepting higher risk students.
The Biden administration should act quickly on these issues and move beyond the level of regulation that existed during the Obama years. The policies listed above could improve the for-profit college sector by ensuring that federal funds are used only for effective programs and by helping students make informed decisions about their educational path.
The second approach to reform is more focused and forceful. There is enough evidence of poor performance in the for-profit sector to justify removing the entire industry from eligibility for federal funds. Sherrod Brown and Elizabeth Warren Non-Profit Student Act proposes to do just that. This approach is more viable than ever now that Democrats have took control of the Senate.
The for-profit college sector has failed to prove its worth time and time again. Issues of racial inequality and the cost of higher education are at the forefront of current political debate in the United States. Now is the time for the Biden administration to prioritize repairing the for-profit sector to make America’s higher education system better and fairer.