For-Profit Colleges: First and Last Victims of Higher Education 'Bubble'?

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The for-profit college boom looks an awful lot like the subprime mortgage bubble. But it's the differences that can teach us how to change the market for higher education.

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In the 2000s, home prices went on an historic tear. Easy credit backstopped by government loan guarantees and securitized by Wall Street created excess demand for residential investment. "Fringey" market players like exurban developers and subprime lenders finally blew the bubble past the breaking point.

When a bubble watcher like Vikram Mansharamani looks at the market for higher education, he can't help but find parallels. Historic price increase? College inflation outpaces health care inflation. Easy credit? Total financial aid for college has doubled since 2002. Fringey market players? For-profit schools stand accused of luring low-income students into government-sponsored debt to obtain degrees of questionable value. Easy money, moral hazard, artificial demand? Check, check, check.

But the parallels between the housing bubble and education have their limits. The Great Recession started with a domino of broken promises and failed expectations. Families stopped paying back mortgages, banks wrote down mortgage-backed assets, contagion spread. In education, the domino line is shorter. If students don't pay back their loans to the federal government, the government just pays itself the difference. The only way for the market to change is for Washington to change the market.

There's really no chance that elite private and public universities "pop." There's also little chance that demand at most public and community colleges will evaporate like the market for new homes. If the education price binge comes back to bite one industry, Mansharamani says, it's the fringey for-profit colleges who will feel it first. And Washington will administers the pop.

WHY FOR-PROFITS COLLEGES SHOULD BE REFORMED ...

The 2000s saw an electrifying rise in for-profit college attendance. Bachelors degrees at for-profits grew by 418 percent since 2000, according to a new study from the National Center for Education Statistics. An astounding one in four college students enrolled in for-profit colleges last decade, Yahoo! reported. Most of these corporations make 80 to 90 percent of their revenue from federal loans and grants.

Washington is watching its investment, and it's not liking the results. A quarter of students at for-profit schools default on their student loans, which means these schools account for more than 40 percent of all defaults in the country. Although for-profit schools are legally barred from making 90 percent of their revenue from student aid programs, in February this year, 257 colleges topped the 85 percent, and eight schools exceeded the legal limit.

If for-profits' business is a boondoggle for Washington, you can understand why the Education Department is cracking down. Proposed regulation would make for-profit schools responsible for their students' debt burden and require that monthly payments be below a certain percentage of graduated students' income. Schools that fail to comply would not be able to receive federal aid, which, again, typically accounts for 80 percent of their revenue.

It's no wonder Washington is bursting at the seams with for-profit lobbyists this month. These companies found a way to turn education and government loans into a fabulously profitable industry. Suddenly, Washington is talking about changing the rules that created the windfall.

... BUT NOT UNIVERSALLY REVILED

The predation of a few for-profit universities shouldn't condemn the entire for-profit model, says Frederick Hess of the American Enterprise Institute. Creative, high-quality online educations are the best way to change the perverse incentives of universities who are making no effort to control the cost of their degrees.

"New institutions designed around the utilization of technology, either public schools or for-profits schools, have a better chance of changing the market than even a reform minded provost at a large university because of entrenched interests," Hess says. "If federal lending policy rewards getting bodies in the door, that's what they'll do. For-profits are like any other marketplace seeking to maximize return. "

Some conservatives blame federal student assistance for pushing up college pricees. Hess disagrees (Pell grants can't possibly account for the entire rise in tuition costs, he says) but he points out that Washington still provides little incentive for colleges to be cheaper. If a school can deliver high quality education at a price lower than the maximum student loan or Pell grant, it should be rewarded for providing cheap education.

"The best way to change federal policy to encourage and reward creative and productive behavior," Hess said. If Washington wants to change the way it pays schools to educate students, it can simply pass a new law. "Some for-profit schools are cutting corners, but it's fundamentally because Washington rewards them for cutting corners."


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If Washington is in any business, it's the business of supporting American values. Home ownership is important, we say, and worth supporting. So we use government guarantees to make mortgages more affordable. Education is also important, we agree, and worth supporting. So we use taxpayer money to help low-income students go to school. These are (or maybe aren't!) worthy investments. Either way they create trillion-dollar markets that respond to clear signals. That for-profit schools accept government money to maximize the churn of students isn't illegal. On the contrary, it's responding to a law that rewards schools that charge many students a high tuition. But the thing about a market that lives and dies off the government dime. You can change the market by passing a law. It's as easy as, say, popping a bubble.
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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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