Distorting the Educational Market

An article in the Chronicle tells us that private, for-profit colleges are growing faster than their public counterparts. Some of this growth is being driven by the economy as many are seeking to bolster their resumes with a college degree. Military veterans make up another large portion of the student body.

Despite the dramatic growth, it's not clear that the schools are a good deal for many of their students — who are less likely to graduate and more likely to default on student loans than their counterparts at traditional schools — or a deal for taxpayers.

According to the article, students at for-profit schools get a disproportionate amount of financial aid from the federal government. For example, while 10% of college students attend for-profit colleges, they receive 20% of Pell grants, the main form of financial aid to college students. In addition, nearly 32% will default on his student loan, while only 9.8% of the students at a public, four-year college will do so.

The article concludes that the cause of this high default rate is unknown, but speculates that it may be because for-profit schools serve more low-income students than public colleges, the quality of such schools is lower, or both. Regardless, tax payers are left with the bill when students default.

As with home ownership, the federal government has declared it desirable for more Americans to obtain a higher education. To facilitate this goal, various programs have been established to provide financial assistance. As with programs and policies that encourage home ownership, many who could not otherwise afford to attend college can now do so--on the tax payer's dime. As we saw in the housing market, many incur more debt than they should, an action that is enabled by the government programs. The high default rate should not be surprising.

In the late 1970s I attended a for-profit college. Each term the school would be overflowing with new students, many of whom were from low-income families and receiving some kind of government financial assistance. Invariably, most of these students did not make it to the second term.

While I was quite satisfied with the education I received, in retrospect it appears that the school was more interested in selling dreams than an education. Recruiters could dangle the promise of a higher education coupled with government financial aid to attract those who would otherwise not attend college. I do not know the details of the financial aid, but I suspect that the school got its money (or a large percentage) whether the student graduated or not.

I do not mean this to slam for-profit schools. However, government financial aid is greatly distorting the market and providing an incentive to the schools to fill classrooms, rather than educate. Government aid provides an incentive to both the schools and the students to take actions that they would not--and in the case of students could not--otherwise. That is not a good deal for the students, and it certainly isn't a good deal for tax payers.