Dozens of For-Profit Colleges Could Soon Close

A new study offers a look at what happens when schools shutter.

Dozens of for-profit colleges could be forced to close in the next several years. This week, the Obama administration published a list of schools and programs that are at risk of losing access to the federal loans many of them depend on to survive.

More than 800 vocational programs the department reviewed (at for-profit schools, private nonprofit schools, and public community colleges) failed to show that their graduates were able to find decent jobs, meaning the former students have annual loan payments that are more than 30 percent of their discretionary income and more than 12 percent of their total earnings.

Not insignificantly, virtually all—98 percent—of the programs that do not meet that bar are for-profit schools. Not a single community college appears on the list. If schools that have been flagged by the government don’t begin to turn things around within several years, they stand to lose aid, and, in many cases, would likely shutter as a result.

And now, in what one of the authors says is coincidental timing, a new study paints a picture of where the students who are affected by the closure of for-profit schools might go by examining how a similar period of increased regulation of the industry played out in the past.

In an NBER working paper entitled “Where Do Students Go When For-Profit Colleges Lose Federal Aid?,” the researchers Stephanie Cellini, Rajeev Darolia, and Lesley Turner (professors who study public policy and economics at George Washington University, the University of Missouri, and the University of Maryland, respectively) looked at students who attended for-profit colleges in the 1990s. Back in the ‘80s, the number of for-profit schools was expanding and the government created a rule aimed at sanctioning schools where a lot of former students defaulted on their federal loans. It was a scenario not unlike today. More than 1,200 for-profits faced sanctions in the ‘90s, according to the researchers.

The researchers found that when schools were threatened with the loss of access to federal aid, the percentage of Pell grant recipients (low-income students who depend on federal grants and loans to pay for their higher education) who enrolled declined by about 53 percent in the following five years. Interestingly, enrollment at neighboring for-profit schools also fell, even if they weren’t sanctioned, perhaps because the reputation of the entire sector was damaged by the sanctions.

That might sound dire; but it turns out these students weren’t dropping out of college completely. The researchers found that the post-sanction declines in enrollment at for-profit colleges didn’t actually reduce aggregate educational attainment. In other words, the students enrolled in community colleges within the county. And with community colleges costing a fraction of what two-year for-profit colleges cost, federal student-loan borrowing and default rates also declined. In fact, the researchers estimate that 70 percent of the students who stopped borrowing because they switched to a different school would have defaulted on their loans had they remained at the for-profit colleges.

This would seem to push back at the idea, put forth by the for-profit industry, that the rules around how and which schools gain access to aid hinder student achievement. A disproportionate percentage of first-generation, veteran, and minority students enroll in for-profit colleges, and the industry has long argued that constricting its reach would harm these students.

Yet the new data released by the administration and this working paper seem to suggest that these students, on the whole, fare okay when such regulations exist, particularly when they have a chance to enroll in schools that are less expensive and have the same (and in many cases better) employment outcomes.

It’s important to point out that it’s still too soon to know how students who attend the just-named schools will fare. But it wouldn’t be unreasonable to expect to see similar patterns take shape in the coming years.

Right now, for-profits can get up to 90 percent of their revenue from federal aid, and the working paper cites studies that have shown that when the schools have access to federal aid, they charge significantly more than similar programs without access to aid. Likewise, when the amount of money the government puts toward Pell grants rises, researchers have found an uptick in the number of for-profit colleges opening, particularly in areas with lots of low-income students who have access to those grants.

But just as sanctions in the ‘90s had an effect on the for-profit industry’s reach, the Education Department estimates that there are fewer than 29,000 vocational programs subject to the regulation today, down from more than 37,000 in 2014. For instance, the for-profit giants ITT Tech and Corinthian Colleges shuttered their campuses after the Obama administration slapped them with federal sanctions. And last month, the agency that accredited the schools also lost its recognition from the Education Department as a valid accreditor, meaning the other schools it authorized will need to find a new agency to avoid losing their federal aid.

Still, it’s also worth noting that there are some variables today that could ultimately make the landscape look very different than it did in the ‘90s.

For one thing, Donald Trump is about to be president, and he and the people he’s tapped to lead his administration have pushed back at what they view as cumbersome federal overreach. The administration could try to repeal the rule, or it could simply fail to enforce it. During a call with reporters this week to discuss the new data, U.S. Education Secretary John King declined to speculate on how Trump’s team might handle the regulation, but acknowledged that the next administration could choose to “revisit” the regulatory process. That’s clearly something for-profit investors are banking on; after Trump’s election several for-profit colleges saw their stock prices rise.

Secondly, the community colleges that former for-profit students were able to enroll in back in the ‘90s were frequently less crowded and less cash-strapped then. Today, some community colleges have interest from more students than they are equipped to handle, and a number of states have rolled back funding for public education. According to the Center on Budget and Policy Priorities, funding for two- and four-year colleges is almost $10 billion lower than it was before the recession.

The researchers acknowledge this, but their suggestion that states would be wise to increase funding for community colleges during periods of heavy regulation is perhaps unrealistically optimistic. (Stephanie Cellini, a professor at George Washington University and one of the authors of the paper, suggested during a phone interview that the possibility—largely absent in the ‘90s—for colleges to deliver education online might limit some of the potential for issues around capacity.)

Ultimately, it’s too early to tell what the for-profit sector will look like in the coming years. And the new data suggests there is real reason to be cautious about enrolling in a number of for-profit schools. But Secretary King also said during the call that higher education is still a wise investment. It’s just important to understand which programs are worth the money, and which are, as he put it, a “liability.”