For-Profit Colleges and the Student Debt Apocalypse

Graduates from for-profit colleges account for a disproportionate share of student loan defaults.
Graduates from for-profit colleges account for a disproportionate share of student loan defaults.

Tressie McMillan Cottom worked as an enrollment officer at two for-profit technical colleges before she went on to earn a PhD., join the faculty of Virginia Commonwealth University, and write a book, “Lower Ed: The Troubling Rise of For-Profit Colleges in the New Economy.”

Cottom says that for-profit colleges get one important thing right: They invest resources in the front-end process of helping students enroll: everything from applying for financial aid to having their textbooks waiting for them on the first day of class. But she, like many other critics of for-profit education, is concerned by the high indebtedness and high default rate of students. Those who attend for-profit colleges represent only 26% of all borrowers but account for 35% of federal loan defaults.

The high default rate is a sign of the trouble graduates have finding quality, high-paying jobs, Cottom told Karin Kapsidelis, higher ed writer for the Richmond Times-Dispatch. For-profit colleges are a varied lot. While some deliver value for the students’ investment, others are marketing machines designed to enroll students and collect revenue with little heed to results. “The profit motive changes everything. It means that instead of helping students, you’re selling students.”

The industry took off when the financial sector figured out how to make money from it, Cottom says. Wall Street underwrote for-profit educational enterprises to “monetize” peoples’ aspirations and their faith in education as the way to improve their lives.

Writes Cottom in the introduction to her book:

Lower Ed refers to credential expansion created by structural changes in how we work, unequal group access to favorable higher education schemes, and the risk shift of job training, from states and companies to individuals and families, exclusively for profit. Lower Ed is the subsector of high-risk post-secondary schools and colleges that are part of the same system as the most elite institutions. In fact, Lower Ed can exist precisely because elite Higher Ed does. The latter legitimizes the education gospel while the former absorbs all manner of vulnerable groups who believe in it: single mothers, downsized workers, veterans, people of color, and people transitioning from welfare to work.

Bacon’s bottom line:

No question, the high default rate is a huge problem — student indebtedness is creating a new class of Americans who have little hope of paying back their tuition and, as the law stands now, little chance of discharging their debts through loan forgiveness or bankruptcy like overextended homeowners can do. But I am concerned by how many people, including, Ms. Cottom, it seems, blame the problem on for-profit institutions and the profit motive.

As the Kapsidelis story points out, for-profit colleges account for 35% of all federal loan defaults. But 65% can be traced to non-profit colleges! The driving force behind high defaults isn’t the for-profit status of the school, I would suggest, but the socioeconomic status of the student. Students from poor families are more likely to drop out and default on their debt than students from better-off families. Historically Black Colleges and Universities (HBCUs), which are non-profit, have high default rates, too, as do institutions that cater primarily to lower-income whites and Hispanics.

For-profit institutions are motivated to accept marginal students in order to fill seats and generate revenue. But guess what, so are many non-profit institutions. They, too, have expenses to cover, salaries to pay, and bonds to finance.

The problem, I would suggest, isn’t for-profit versus non-profit, it’s the erosion in lending standards. Anyone who wants a student loan can get one. Because the repayment risk is transferred to the federal government, the college (be it for-profit or non-profit) has no skin in the game. If a college student is unprepared for college, defaults after dropping out, or fails to find a job, the institution suffers no ill consequence. Why would we expect any other result?


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11 responses to “For-Profit Colleges and the Student Debt Apocalypse”

  1. TooManyTaxes Avatar

    Does the distinction between for-profit and nonprofit colleges make sense anymore? What is the difference in economic terms between profits and surpluses? There are, of course, tax differences, but what’s the difference between a student paying tuition that produces a profit at School A and a second student paying tuition that produces a surplus at School B?

  2. LarrytheG Avatar

    well if the “profit” and the “surplus” are paid employees… then like any
    other “product” there is a “value” and “quality” low or high…

    and this is the premise behind the US Govt College Scorecard

    that lets you compare both non-profit and for-profit schools for cost, grad rte and salary.

    For instance, here are the 35 for-profit schools in Virginia

    the best one costs 21600 and the entry level salary 56K
    and the worst: 16K and 22K in salary

    of course.. it’s probably only a matter of time before this scorecard
    is taken down…. given the new leadership at the Fed Dept of Ed.

  3. LocalGovGuy Avatar

    What % of total student loans are held by for-profit students? The 35%/65% ratio means nothing unless we know what % of total loans is held by for-profit v. non-profit.

    Anyone who defends the “for-profit” higher ed sector really is deluding themselves and helping perpetuate a very ugly aspect of higher ed. The reality is that community colleges in almost every community in America offer superior skills-training and/or academic curricula compared to these for-profit “schools” at a fraction of the cost.

    1. djrippert Avatar

      So … why are the “for profit” colleges still in business?

      1. LocalGovGuy Avatar

        Marketing is the answer to your question.

        Virginia has two of the best community colleges in the entire nation in NoVa and Piedmont. Both offer certificates of useful skills for a very reasonable price. Here is just a sample of NoVa’s:

        It makes zero sense to pay one of the “for profit” schools a multiple of those prices.

        There was a time when community colleges weren’t so ubiquitous and they didn’t have very good instructors. But nowadays it seems like there is a great educational opportunity for those who aren’t pursuing a 4 year bachelor’s degree.

  4. LarrytheG Avatar

    re: ” The reality is that community colleges in almost every community in America offer superior skills-training and/or academic curricula compared to these for-profit “schools” at a fraction of the cost.”

    How can that be? These are govt-affiliated institutions that we all know are bureaucratic-ridden wasteful enterprises that suck up public dollars to provide clearly inferior products and services that the free market will always do better at?

    the reality is for-profits are an ugly mixed-bag with a good number not only not good values but some outright fly-by-night and not superior at all by virtue of the claim they are “free market”. The “free market” is “wild wild west” without rules and even with rules – no real guarantees of performance without govt-established standards and accountability. Too many For-profit schools are the snake oil of 21st century education “market”.

    Note this same “free market” dogma is mindlessly blathered about other things like health care…, transportation, pipelines, grid electricity and k-12 education.

    The simple truth is that anything “free market” is, without govt rules, not required to provide the buyer with anything other than promises.. and even the provision of “rule-of-law” pits high-power company legal resources against individuals who typically don’t have anywhere near the financial resources to make it an equitable legal process.

    If “free market” folks have their way – the govt-funded College Scorecard will be shut down from “interfering” with the “market” also… and “free market” k-12 “choice” schools without transparency and accountability will also be financed with tax dollars – again on the premise that “free market” is “better” and govt rules are harmful.

    1. LocalGovGuy Avatar

      There are some things that the market does better and some that the public sector does better.

      As to skills training, I don’t think it’s a close call. Community colleges are simply more cost-efficient and effective at this task than their for-profit counterparts.

    2. djrippert Avatar

      I am in Manhattan tonight and Larry would feel right at home. It’s snowing.

      Let’s do a little bit of debugging of Larry’s snowflake logic. The reason Edupocalypse joins Boomergeddon as yet another Jim Bacon’s paranoid catch phrases is because it represents systemic risk. Why does it represent systemic risk? Because the brainless government backs the loans. Apparently, the public sector (in the form of government) isn’t a very good bank since it is building a potentially catastrophic financial bubble by not vetting the borrowers. Why don’t the students borrow from banks? Oh right – the banks aren’t dumb enough to make those loans. That’s right – the very banks that that made sub-prime loans by the boatload then packaged and repackaged those loans into subprime weapons of financial mass destruction … even those guys aren’t dumb enough to make these loans. No, that level of incompetence can only be achieved by government.

      That get me thinking … we have Edupocolypse and Boomergeddon … there has to be a way to make a new Bacon financial paranoia catch phrase with catastrophe. Taxastrophe?

  5. LarrytheG Avatar

    re: ” As to skills training, I don’t think it’s a close call. Community colleges are simply more cost-efficient and effective at this task than their for-profit counterparts.”

    In theory – instructors who can be fired for poor performance and not have lifetime tenure would , in theory, be less expensive and better performing – i.e. lower tuition.. and competition rewards the institutions that provide the best value for the lowest cost.

    so if this “theory” does not “work” for education.. why would it work for health care or other products and services that are supposedly done “better” by the private sector “free market”?

    why doesn’t it “work” for Higher ED? You’d think the private sector would positively cream those bloated overpriced public higher eds.

    1. djrippert Avatar

      Given the size of UVA’s slush fund it’s hard to consider my deal alma mater anything but a “for profit” business.

      1. LarrytheG Avatar

        can you think of ANY for-profit school that you’d believe is superior to UVA and it’s slush fund?

        My bet is that most folks would take a degree from UVA over most any “official” for-profit school… no?

        all this griping about UVA and tuition and slush funds.. and at the end of the day- what percent of people would choose a for-profit school over UVA?

        really odd… for-profit does not have “tenure”.. nor lavish pension benefits.. etc.. they should be able to deliver a much better value… right?

        In theory – for-profits should be able to beat the socks off of any state-funded bloated higher ed, right – at least if you believe the folks that say the free market is way better than the govt…

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