Some members of Congress have joined in the crusade against for-profit colleges, and not for nothing. Some publicly traded companies are reaping billions in profits–much of it fueled by federal student aid programs–while saddling many students with burdensome debt loads and degrees that aren’t leading to the income streams many students anticipated when they enrolled. This has made it increasingly difficult for borrowers to repay their non-dischargeable student loans, as evidenced by rising student loan default rates.
It is altogether fitting and proper that policy-makers should take on the for-profit institutions that are in fact luring unsuspecting victims with false promises, saddling them with debt that can’t be repaid, looting taxpayer resources and producing dismal completion rates. We’re not here to defend such for-profit institutions, but neither do we wish to join in the public lynching.
Instances of fraud and abuse of taxpayer money should be sought out and prosecuted; however, we want to recognize that although there are some (perhaps many) bad actors in the for-profit industry that should be cut off from the Title IV gravy train, we believe the for-profit sector is being used as a red herring for symptoms that ail most of the higher education system.
In their thirst for the blood of the institutions that are preying on less than 10% of all students, Congress and other critics are often ignoring similar exploitation by nonprofit institutions that enroll more than 90% of postsecondary students. Let’s take a look at some of the claims Sen. Dick Durbin made about the for-profit education industry in a speech to the National Press Club:
Durbin: Tuition at for-profit schools is, on average, five-and-a-half times the price of community colleges, and about twice as much as public four-year colleges.
Durbin’s assertion is misleading–not exactly an apples-to-apples comparison. For-profit institutions are more expensive in large part because they suffer from a number of competitive disadvantages in comparison to their nonprofit peers. They don’t receive state aid or benefit from lavish endowments, and they have to pay taxes. They also don’t own tons of property or real estate, and generally pay higher interest rates for debt. In short, their costs of capital are higher.
In addition, the for-profit sector is subject to a labyrinth of regulations that the nonprofit sectors avoid, such as the 90/10 rule and gainful employment, which add compliance costs. If for-profit colleges faced a level playing field, their tuitions would be substantially lower, so it doesn’t make sense to attack for-profit colleges for being more expensive than nonprofits that receive massive government subsidies for operating expenses and research, and who have a more favorable regulatory environment.
Durbin: The debt piles up quickly. According to the College Board, borrowers who graduated from for-profit four-year programs had an average debt of $33,000. That’s nearly $13,000 more than public-college graduates–and $5,000 more than graduates of nonprofit private colleges.
So private colleges are good because they send borrowers away with an average of $28,000 in debt and for-profits are evil because their average borrower leaves with $33,000? Is $5,000 in extra debt all it takes to go from a valued nonprofit worthy of government support and praise to a capitalist pariah? Let’s not forget that the graduates of many private colleges leave with more debt on average than graduates of many for-profits. For instance, NYU borrowers graduate with an average of $34,850 in debt, compared with $25,221 for bachelor’s degree recipients at the University of Phoenix.
Comically, Durbin fails to note that differences in the demographics of for-profit students may also play a role in the higher average debt loads. For instance, earlier Durbin notes of for-profit enrollees, "A large number are women. Many are single parents. Many are minorities, low-income and first-generation college students. Many work in low-wage jobs. Others have lost their jobs and are trying to regain their economic footing." But he doesn’t stop to ask the question: Does the fact that for-profit students are less likely to have substantial parental resources footing the bill (in comparison with nonprofit private college attendees) play a large role in the debt load differential? It’s unclear whether, on average, any given student would graduate with less debt by attending many nonprofit colleges, all other things being equal.
Related to the amount of debt incurred is the ability to repay that debt. For-profits have been chastised for having higher federal student loan default rates than their nonprofit peers. While in aggregate it is true than more than one in five borrowers in the for-profit sector defaulted within three years, one in six borrowers in both the two-year public and nonprofit sectors, and one of 13 borrowers in the public four-year sector also did. 
And while it may be true that 18.7% of students attending a for-profit institution attend one in which the three-year default rate is 25% or greater, it should be noted that this only accounts for 1.3% of all students enrolled in postsecondary education, and 44.5% of all students attending an institution (in any sector) that has a three-year default rate of 25% or more.Meanwhile, the public sectors (both two- and four-year) enroll 50.2% of students attending an institution with the distinction of having more than one in four borrowers default on their student loans within three years of entering repayment.
Durbin: Congress should consider whether it is appropriate for federal funding to be used on slick marketing campaigns. The big for-profit colleges spend more than a quarter of their revenue on advertising and marketing.
That we have an idea of how much for-profit colleges spend on marketing because they are required by law to provide a factual account of their FASB financial records is a positive for public accountability. Meanwhile, nonprofit institutions are able to hide from the public the amount that they spend on marketing due to a lack of accountability and a great deal of discretion in how they can categorize expenses using GASB standards.
While reliable data is not publicly available, nonprofit colleges also spend large sums of money on marketing. This often includes billboard advertisements, direct mail, recruiting trips and building fancy dorms and recreation centers. A case can also be made that the significant institutional resources used to subsidize money-losing athletics and nonfunded research are also marketing costs. Both are used to enhance the brand name and public perception of a university in an effort to attract students and additional resources, not unlike the mass media marketing employed by the for-profit sector. The difference is simply in the means to achieve the end.
Lastly, Durbin, ever the hero for accountability to taxpayers, notes: The billions that students and taxpayers spend on for-profit education might not be a cause for concern–if the schools were delivering a good product.
Because most colleges don’t measure (or don’t publicize) student learning and postgraduate success, we really don’t know if any college is delivering a good product. Perhaps tellingly, the best information available about educational quality comes from commercial publications, such as the various college rankings schemes.
For the record, Apollo Group ( APOL – news – people ), the parent company of The University of Phoenix, paid $445 million in income taxes for fiscal year 2009. That’s $445 million in income taxes more than every nonprofit college in America combined. The notion that it’s mainly the for-profits that are a giant drain on taxpayer resources is ludicrous.
Again, our aim is not to defend the questionable practices of for-profit colleges, but rather to draw attention to the fact that colleges of every stripe are soaking up tons of societal resources and saddling students with excessive debt loads in the face of dubious job prospects.
The solutions to those problems–such as emphasizing college affordability by eliminating superfluous expenses and eradicating poor-performing schools that provide sparse educational value yet burden graduates with mountains of debt–are universal. All of higher education enrolls students who are unlikely to graduate, at least in part to attract the aid dollars that follow them. Dismal graduation rates reflect this. A report by the American Enterprise Institute ("Diplomas and Dropouts") indicated that the average six-year graduation rate in the U.S. is below 60%, and among "noncompetitive" and "less competitive" institutions, the rate is below 35% and 40%, respectively. And there are countless examples of institutions sporting sub-50% graduation rates, including some, such as Edward Waters College and Southern University at New Orleans, with single-digit graduation rates. With poor performance pervasive across all of higher education, there’s no reason that for-profit colleges should be the scapegoat.
Daniel L. Bennett is a research and policy analyst at the Center for College Affordability and Productivity, an independent higher education think tank. Zac Bissonnette is a reporter with DailyFinance and author of the forthcoming book Debt-Free U: How I Paid for an Outstanding College Education Without Loans, Scholarships, or Mooching off My Parent.