Poor rate of return on for-profit universities

Today at The Upshot, David Leonhardt has a piece showing the importance of looking at the tuition actually paid when calculating the value of a college degree. Once the value of aid is included, the return on a college degree still appears to be substantial. But that calculation might not come out the same way for proprietary, or for-profit, universities. Research indicates that the high costs incurred by students attending for-profit schools outweigh the benefits of a degree. These low returns on investment from these universities amplify rates of default and student debt, contributing to the growing national accumulation of student debt.

A paper by Harvard University professors of economics David J. Deming, Claudia Goldin, and Lawrence F. Katz finds that the marginal returns of for-profit universities are outweighed by the high rates of default and long-term burdens of student debt, compared to community colleges and non-profit universities. They determine that in 2009, 26 percent of students with $5,001 to $10,000 in cumulative federal student loans came from for-profit universities, as opposed to 10 percent of students from community colleges and 7 percent of students from four-year public and nonprofit schools.  Similarly, students from for-profits were more likely to be unemployed and experience lower earnings six years after starting college than observationally-similar students from public and non-profit institutions.

Another study by Stephanie Riegg Cellini, an associate professor of public policy and economics at George Washington University, and Latika Chaudhary, a professor of economic history at Scripps University, calculates the exact return on investment for students enrolled in proprietary universities. Cellini and Chaudhary find that students who complete an associate’s degree at a for-profit institution receive a 4-percent return per year of education. This return on investment falls below estimates of the returns of public community colleges, yielding a return estimated to range between 5 to 8 percent, and traditional four-year colleges, which yield an estimated return of between 10 to 15 percent. Incidentally, returns to for-profit universities also fall below the returns needed to offset the costs incurred by students attending these institutions.

Despite attempts to open doors to higher education for non-traditional students, research finds that degrees from for-profit institutions yield a poor return on investment. That’s also why policy initiatives to address issues of student debt and default were recently enacted. In 2011, the “gainful employment” rule implemented federal restrictions to student-aid eligibility for students attending for-profit institutions. Central to this policy was the regulation that after three consecutive years of student rates of default reaching 30 percent or more, the program would be ineligible to apply for federal aid for at least three years.

On March 24, 2014, the regulations for this policy were revised and re-introduced by the U.S. Department of Education, allotting 60 days for the public to provide feedback. In the following months, the department will finalize the regulation and a second attempt will be made to tackle the growing national student debt. Understanding the rate of return for institutions of higher education remains essential for addressing issues of default and student debt, as well as for confronting the broader ties between education and human capital.

July 29, 2014


Post-secondary Education

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