Higher education is a mess. Disproportionate rising costs, slashed public education budgets and arguments over what to afford in the face of out-of-control public spending merge with falling incomes and inadequate job growth to create huge angst and debate over where we go from here. The present model appears to be broken. Is it fixable and if so, how do we fix it? Or do we chuck it completely and simply adopt another model? With the present distrust of government, perhaps we should just leave higher education to the private sector?
Youngest and I sat watching The Big Bang Theory the other evening when The University of Phoenix, a for-profit university, ran a commercial. In the ad, a contented looking African-American woman was driving through a homogeneously corporate parking lot in search of a space. As she drove, the voice-over announced that the University of Phoenix was working in conjunction with other major American corporations to provide the skills needed by Americans to earn a good and productive living. The list of corporations was impressive – Microsoft, Avis, Google, McDonalds, Cisco, Adobe – and one that most would associate with the upscale white-collar jobs desired by most. It was a provocative message that resonated to the higher ed themes that concern us most: what jobs are out there to provide for me and a family and how can I make a decent-enough wage to repay the debt that I’m going to incur? This would presumably be what Secretary of Education Arne Duncan referred to as a "…very good debt to have" in April, 2012.
Before we start to entertain the notion that the private sector is the best provider of higher education, let’s consider some statistics thus far:
- In September 2012, the federal Department of Education released results showing that the three year student loan default rates were 13.4%. Bur of this, the default rate for loans to student at for-profit institutions came in at 22%, or more than one-fifth of all loans to students in that sector; the default rate for students in public institutions was about 11%. While there’s no word on this sector breakout, the most recent data is that the overall student default rate has climbed to greater than 15% as of October 2012.
- For-profit institutions have been involved in multiple investigations and settlements for illegal or unethical practices, such as deceptively marketing to veterans to gain access to generous veteran educational benefits. See also here, here, and here.
- The graduation rate of for-profit institutions is only 28%, less than half of that at public universities.
Let’s shift outwards, from the private-sector education system to the private sector in general. The private sector is entirely that – private – and exists to enrich the owners and members of the private sector. The private sector generally consists of any for-profit business and can range from Joe’s Shoe Repair to Exxon. In the case of for-profit universities however, the private sector consists of large corporations, capital holding companies and some exceptionally wealthy individuals. So who owns the for-profits? There are hundreds of actual for-profit institutions, but we’ll look at four for our purposes: University of Phoenix; Kaplan University; DeVry University; and ECPI.
- University of Phoenix is owned by the Apollo Group (NYSE), and the principal shareholder is John Sperling, now a billionaire.
- Kaplan University is a subsidiary of the Washington Post (NYSE), among whose principal shareholders are Aberdeen Asset Management, Berkshire Hathaway and ING Investment Management.
- DeVry University is part of Bell & Howell, a wholly owned company of Versa Capital Management in Philadelphia.
- ECPI is a smaller, regional for-profit operating in the southeast US, principally in the Tidewater region of Virginia and the Carolinas; it is owned by the Dreyfus family and the founder’s son, Mark, is currently the President.
Most of these entities exist to maximize Return on Investment and Equity, nothing more and nothing less. While I can’t speak for the family-owned institution, there’s no effective oversight of the entity that might be provided by a Board of Directors that’s tasked with specific responsibilities and is able to help parse out those instances when profit might compete with the original charges of the founding charter. Frankly, for the great majority of for-profits, there is no other original charge in any founding charter.
If you follow, many of the actionable complaints about the for-profits are in the area of admissions. Fines have been levied and paid by multiple for-profits because of deceptive advertising; pertinent rates – graduation, employment – were falsified and loan programs misrepresented in order to gain enrollees. The intent of the actions has been to gain access to the loans that were easily available via lax standards, and you don’t blow a trillion dollar loan bubble by upholding underwriting standards. There are existent study programs in the for-profits and there are certainly graduates, but the reality is that many marginally qualified students were enrolled without the infrastructure in place to assist them once they were there. But even after the student left, the school was able to keep the money and the responsibility for that money was still left to the student.
Does that also happen at the public sector and non-profit sector? Sure. But the difference is that the institutions in the public and non-profit sectors are subject to a more rigorous accreditation standard than are the for-profits. There are also public and not-for-profit charters that provide some measure of guidance beyond the simple profit motive and Boards that are both composed of a more diverse group of people, as well as being closer to an effective oversight level than the Board of a major corporation that owns a for-profit institution as a division. Given these aspects, the moral hazard promoted by a monetary policy of easy availability and low interest rates is lesser than for that of an entity for whom profit is the principal and overwhelming measure.
There is a niche for institutions that cater to non-traditional students and entities like the University of Phoenix grew out of an effort to fill that niche and do so profitably. Profit by itself isn’t a bad thing, either. But the absence of any effective oversight and more importantly, an exceptionally easy monetary policy that invites moral hazard, led to a morphing of a niche into something that has saddled the nation and its citizens with inexcusable results. The private sector should stick with the niche, but the bulk of the education of our young people should be left with the public and non-profit arenas.