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.