The changing dynamics of economic inequality and for-profit universities

Last month, the U.S. Department of Education announced their final “program integrity rules” that will govern universities and colleges receiving federal aid, including tuition paid through government grants and loans. The regulations, which will take effect in January 2015, include new “gainful employment” measures intended to asses how many of a school’s graduates find good jobs. Holding schools accountable seems obvious, especially considering the difficulty many young people have finding work. These rules, however, are likely to disqualify about 1,400 educational programs from receiving federal funds — 99 percent of which are programs run by for-profit schools — and are now being challenged in the courts by a trade association of for-profit schools.

How these changes will affect individual students and for-profit institutions is not yet known. That’s why the Washington Center for Equitable Growth awarded one of its 2014 grants to Ryan Sakoda and Shayak Sarkar, both Ph.D. candidates in Economics at Harvard University. Because no national data currently exists to study these kinds of reforms to federal student aid, the two researchers will study California, which in 2011 passed legislation imposing institutional eligibility standards for its state- based student aid. Between 2012 and 2013 the number of schools in California rendered ineligible for state funding rose to 154, impacting about 14,500 students who planned to attend these colleges. Sakoda and Sarkar plan to test whether these changes caused ineligible institutions to lower their tuition prices, change their instructional expenses, or experience changes in the demographic composition of their incoming students.  They also plan to analyze whether and to what extent these policy changes impacted individual students’ choice of educational institutions, or their decision to pursue post-secondary education at all.

For-profit, or propriety institutions, are the fastest growing higher education programs in the country. They market themselves as vocational and career training program for students in the United States, which, unlike other countries such as Germany and the United Kingdom, has no formal apprenticeship program. They also purport to fill an important gap, providing opportunities to underserved students seeking a higher education, especially minority, poor, and older students who might not be admitted to more traditional schools.

Yet research by David Deming, Claudia Goldin, and Lawrence Katz of Harvard University find that for-profit schools leave students with disproportionately high debt and default rates, which results in an increased burden on taxpayers. The reason: many for-profit schools rely on government aid in the form of federal and state student grants and loans for the majority of their revenue. These schools then use the increased funding to  increase their tuition by about 75 percent. The three authors found that, when measured six years after initial enrollment, students earn less than similar peers who attended non-profit or community colleges.

What’s more, according to a report done by the Senate Committee on Health, Education, Labor and Pensions, some of this money flows toward extensive marketing and recruitment, totaling an average of 23 percent of the school’s total budget, versus only 17 percent for actual academic instruction. An undercover federal government audit by the General Accountability Office, the non-partisan research arm of the U.S. Congress, found that many of these schools target marginalized populations and veterans, sometimes using highly aggressive and even fraudulent tactics.

Anyone who’s stayed up late watching TV has seen the commercials: The mother who inspires her children by getting her degree, the middle-aged man starting a new life in healthcare administration after being laid off from his manufacturing job, or the young woman who is able to fulfill her childhood dream of becoming an astronaut after attending a well-known for-profit school. These are inspirational stories, but many for-profit schools do the exact opposite of what they promise. Instead of being a means to improve students’ opportunities and economic security, some produce students with too much debts and too few skills. These students are disproportionately African American and Hispanic students, furthering the persistent racial divide in higher education. Through understanding how for-profit schools respond to regulation, there is an opportunity to expand access to quality education to all who seek it.