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The rise and fall of for-profit higher education

The past twenty five years have witnessed the rise and now apparently fall of for-profit higher education. The rapid growth of for-profits combined with emerging online education led some commentators to herald the end of college. The episode, I think, offers an important lesson: for-profit colleges should not be viewed as representative of the market, but rather as the opportunistic profiteering at taxpayer expense common in a mixed economy.
For-profit institutions have long provided many types of training, like truck driving or typing. The entry of for-profits into bachelor’s and graduate education, almost exclusively provided by not-for-profit private and public colleges and universities, was indeed dramatic. Between 1990 and 2010, the percentage of bachelor’s degrees granted by for-profit colleges increased from under 1% to 7%. The founders of the for-profit University of Phoenix, the nation’s largest university, became billionaires.
The decline over the past five years has been equally dramatic. The University of Phoenix has lost over half of its enrollment, closed over 100 campuses, and seen its stock price decline by over 80%. The second largest for-profit in 2010, Corinthian Colleges, declared bankruptcy this year. Kaplan University and Career Education Corporation have also seen 50% enrollment declines.
The Higher Education Act of 1965 provided Federal assistance to students, particularly Federal student loans. To prevent the misuse of tax dollars for bogus instruction, institutional eligibility for Federal assistance was tied to accreditation by a regional or national higher education association. Although reasonable, this created an opportunity. If an institution could obtain and maintain the requisite accreditation and keep the cost of instruction below the amount students could borrow, a profit could be earned. The annual reports and stock prices of the for-profit schools reflected this. The profits, however, differed from true market profits.
Profit is a sign of progress in markets. Firms earn profits in markets only when consumers are willing to pay more than the value of resources used to supply a good or service. The profit proves the creation of value relative to other goods and services currently available. A business can expect other firms to eventually compete away their profit, but current profit identifies improvement. In a market, for-profit colleges’ cost cutting would yield profits only if the cuts did not compromise the quality of education.
Not so in a mixed economy, where government regulation and spending can be driven by political instead of economic reasons. In higher education, Federal loans insulated students from the tuition price of attendance. By the time students realized that the courses and degrees earned were not yielding the hoped for returns because cost cutting had lowered the quality of instruction, the courses were completed. Government dollars distort prices and allow businesses to make profits without creating value by providing what consumers want.
Some defenders might disagree with my assessment of the role of higher education for-profits. I believe that investigations by Congress, states, and the news media have provided significant evidence of opportunistic behavior. Of course blanket statements about dozens of institutions with thousands of employees will always be imprecise. I’m sure many people at these colleges worked very hard serving students. And the possibility exists that for-profits may have been smeared by a hostile higher education establishment and sympathetic politicians acting as accomplices.
Is there a potential role for genuine profit in higher education? Tuition has been rising much faster than inflation for decades, suggesting the potential benefit from a dose of market forces. The success of for-profit firms in education provides relevant perspective. For-profits have historically succeeded offering types of training where employers can quickly evaluate if graduates possess the desired skills, like truck driving and cooking. Non-profit universities have offered types of learning which defy easy measurement or verification. If college narrows into training a set of work skills, this should open the door to competition from genuine for-profits. And of course, entrepreneurs should feel free to prove me wrong.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at dsutter@troy.edu and like the Johnson Center on Facebook.

About Dan Sutter

I am the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

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