Obama's Income-Based Repayment Plan

Fox 5's Melanie Alnwick did a story on Obama's Income Based Repayment Plan yesterday in which I offered some comments:

There is also an interesting argument going on -- that college tuition is experiencing a bubble, much like we saw in housing. The more loans that are available, the more money students have to spend. That, the theory goes, leads colleges to raise tuition and buy for all sorts of things that don't go directly to education.

"It's comparable to rearranging the furniture on the Titanic," says Daniel Bennett of the Center for College Affordability. "It makes it look nicer but it doesn't take care of the problem."

Bennett agrees with President Obama's statement that colleges need to do their part to bring down cost.

The video from the story is above, which includes sound bites from The CATO Institute's Adam Schaefer, who espoused that:

When you look at wages and benefits compared to the equivalent job in the private sector, they're doing far better with much greater job security

"Not everyone is going to go to college, not everyone is going to gain anything from going to college, and there's no reason we should have a regressive tax on plumbers and tradespeople that didn't go to college to fund other people's education

The latter part of Schaefer's comments are relevant to career colleges, which prepare many of their students for vocational careers in the private sector. This means that Obama's IBR Plan would not be as beneficial to in that it offers elimination of debt for public sector employees after 10 years of repayment. Meanwhile, tradesmen will be left subsidizing the public sector employee's compensation and their education. This is the type of policy that is very discriminatory in that it favors one group of people over another.

News Highlights: 01/29/10

New Cross-Sector Analysis on Student Success Study from Imagine America Foundation (HT: CHE)

Students who attend for-profit colleges have comparable and often higher retention and graduation rates than those at other institutions, according to the findings of a study released on Wednesday by the Imagine America Foundation, a nonprofit organization that provides research and support for career colleges.

Inside Higher Ed:

As part of the negotiated rule making process under way this week in Washington, the U.S. Department of Education released a revised draft of regulations intended to determine whether vocational programs and most offerings at for-profit institutions prepare graduates for "gainful employment." In a plan first released this month and discussed on Monday, the department proposed that it would require that students' annual debt repayment load not exceed 8 percent of their average incomes. Several panelists had questioned the department's statutory authority to introduce a debt-to-income ratio and others voiced concerns about the new administrative burdens the proposals would create for institutions. Department officials decided to keep the 8 percent rule in place, one telling the panel that the department would never suggest a regulation that "we don’t think we have the legal authority to do." The department did, though, offer a bit of a concession, proposing that it would take on many of the responsibilities of calculating and carrying out the rule.

Also back on the table Wednesday was the issue of incentive pay for admissions and financial aid officers, which -- though it seemed to progress Tuesday -- again lagged with Elaine Neely, of Kaplan Higher Education, and Margaret Reiter, a consumer advocate, delivering suggestions for greatly differing revisions. Both issues will likely surface again Thursday, as panelists aim to reach agreement on all 14 of the rules related to the federal financial aid program under reconsideration by midday Friday.

Rep. Timothy Bishop (D, NY) introduced the Diploma and Accreditation Integrity Protection Act to Congress today, a bill that is intended to

reduce and prevent the sale and use of fraudulent degrees in order to protect the integrity of valid higher education degrees that are used for Federal employment purposes

Is For Profit Education a Success or Failure?

There has been some interesting discussion recently related to the success or failure of the for-profit sector, prompted by Charlotte Allen's essay for Minding the Campus in which Allen described the sector as

plagued by high levels of student debt, high loan-default percentages, dismal graduation rates, and third-rate reputations that lead some employers to reject their graduates automatically

Allen's assertion that the for-profit sector is plagued by high debt levels and default rates, and low graduation rates is only one side of the story. Jane Shaw correctly asserted that:

Profit-seeking entrepreneurs always look for niches that others are not yet serving successfully — in this case, working adults, some with families and many with low incomes, who want education or degrees. For-profit schools are addressing their demands.

The truth is that this sector provides educational opportunities to an under-served segment of the population - low income, minority, and first generation students who likely did not perform well enough in high school to get into a tradition 4-year college. Many of these students tried the community college route before enrolling in a proprietary school, but they were not satisfied with the service that they received. The fact that such students would have lower levels of success and higher levels of debt than middle income, high achieving students should come as no surprise.

Now Allen, Shaw and myself are all advocates of free markets and would very much like to see the market-funded sector flourish by developing models that deliver high-quality education in an efficient manner, but Allen appears more skeptical about this prospect than Shaw or myself due to the "corrupting influence of federal money," suggesting that for-profit colleges are more focused on increasing enrollments than boosting the value of their degrees.

I agree with Allen's statement that the free pool of money provides an incentive for colleges to engage in economic rent-seeking, as open access to government funded student loans has greatly distorted the college education market. It allows colleges to charge as much as they can get away with, and this is certainly not limited to the for-profit sector, as Shaw notes that

Public universities and nonprofits do not exactly have clean hands on this issue. They depend on students who use federal aid, too

In fact, I hypothesize that the problem is exacerbated in the for-profit sector by the 90/10 rule, which requires that institutions obtain at least 10% of their revenue from non-federal aid sources. What this has in effect done is permit for-profit colleges to set their tuition higher than the total grant and loan limits - well above the equilibrium price in which they are able to offer courses.

However, I disagree with Allen's assertion that all market funded schools are more focused on boosting enrollment than enhancing the value of their educational offerings. Allen seems to singularly focus on the University of Phoenix, which is the largest and most visible for-profit institution, however, it is only one of more than a thousand profit-seeking colleges, many of which are performing similarly to highly regarded public and private not-for-profit institutions in terms of student outcomes such as loan default rates and graduation rates. Grand Canyon University, for example, has a 3-year cohort default rate less than 3%, with Walden University and American Public University sporting similar rates. In contrast, Ohio State University has a CDR of 5.5%.

The truth of the matter is that there are some wonderfully innovative things happening in the market funded sector that have the potential to reshape the landscape of American higher education. With time, the sour apples will be rooted out and the remaining entities will shine brightly. This is why I contend that for-profit higher ed will eventually be deemed a success.

Creative Commercial from Kaplan University

HT: Kevin Carey

NegReg Article

Here is a link to my latest article in Career College Central discussing the implications of the Department of Education's Negotiated Rule-making Committee.

Welcome to the Market Funded Education Blog

Having been involved with researching higher education and related policy with The Center for College Affordability and Productivity since spring of 2008, I've become increasingly interested in the market funded (aka for-profit, career college and proprietary) sector of the industry and decided to develop a blog that is devoted exclusively it. The goal of this blog is to provide readers interested in the sector with insightful analysis and news, especially that related to the legislative and regulatory environment. I hope that you will find this blog interesting and useful. I welcome any comments from readers and will gladly engage in dialogue that is relevant to the posted topics.