Richard Vedder Comments

Richard Vedder gives 3 reasons why he doesn't like Obama's student loan takeover bill in this National Review Online post.

First, he violated basic tenets of representative democracy by tying otherwise politically unattainable education changes to the health-care bill.

Second, the bill’s student loan provisions will not save the $68 billion promised, and will move the country closer to a European-style socialism that has brought that continent stagnation.

Third, the bill proceeds from a false premise.

Community vs For-Profit Colleges

Daniel de Vise of the Washington Post reports on a new study scheduled to be released tomorrow that compares, among other things, the cost of community colleges vs that of for-profit colleges. The main findings of the study are:

1. For-profit colleges are adding capacity at a rate of 6 percent, investing $800 million to $900 million a year, compared with a 1-percent annual growth rate among two-year public institutions, whose growth is hindered by dwindling state funds.

2. For-profit colleges serve a larger proportion of high-risk students (meaning at risk of dropping out) than community colleges. Fifty-four percent of for-profit students meet three or more "risk factors" as defined by the federal government, including parenthood, delayed enrollment and lack of a high school diploma. Thirty-six percent of community college students are considered at high risk.

3. For-profits have -- arguably -- a higher success rate than community colleges. Sixty-nine percent of students surveyed by the federal government attained the degree or certificate they sought or transferred elsewhere within five years of enrollment in a for-profit college. The comparable rate in community colleges is 62 percent. Community college students are far more likely to transfer to other schools, whereas for-profit students are more likely to attain certificates and then conclude their studies.

4. For-profit colleges receive $26,700 in funding, on average, for every student who successfully completes study or transfers. Community colleges receive $25,300 per student. The funding sources, of course, look entirely different: the for-profits receive most of their funding in tuition and fees paid by students, whereas community colleges get most of their funds from state and local government.

5. For-profit students start out with a lower income than community college students but yield a greater earnings gain through their studies. For-profit students earn $14,700, on average, when they begin their studies, and see an income boost of $7,900, or 54 percent, when they leave. Community college students earn an average $20,300 when they start, and see a boost of $7,300, or 36 percent, when they finish.

6. For-profit students are less likely than community college students to report that they were surprised by how much they owed at the end of their studies. More than half of for-profit students report they were told how much they would have to borrow by their institution, according to a survey of students by the Parthenon Group. By comparison, about 40 percent of community college students said their institution provided information on debt.

Beating a Dead Horse

Here's my latest post on the CCAP blog.

(Career College Central also posted the piece)

Let's play a little game of education policy and research trivia. Read the below statements regarding the for-profit sector and try to guess when these statements were made.

Private career schools became a front-burner issue for postsecondary education policy about _______ (hint: timeframe)..., in terms of participation in federal programs and in broader discussions about consumer rights and abuses...The impetus...can be traced to one key indicator: rapid increases in the amounts defaulted by students participating in federally guaranteed student loan programs

The sudden interest in proprietary schools generated by the debate over default led to several subsequent policy discussions. One had to do with the level of debt appropriate for young people entering the labor market, another with the increasing proportion of overall federal funds for student assistance going to students in private career schools, and another with consumer rights and abuses related to admissions, advertising, and promises for employment

Now, you are probably familiar with the fact that the Obama Administration and the Department of Education are changing the cohort default rate rules to account for 3-year defaults in 2012, and that there have been discussions about tightening other regulations regarding the for-profit sector, such as the 90/10 rule and gainful employment. So it would be a great guess if you said that the above statements were made in 2009, but you would be way off because they were made during the 1980s and included in a paper by Lee and Merisotis (1990) that I recently came across.

That's right, we've been having the same policy discussion about student default rates and so-called consumer protections for around 25 years. Despite subsequent regulations including establishing limits on CDRs to maintain Title IV eligibility, the 90-10 and gainful employment rules, laws requiring career schools to publish their job placement and graduation rates, laws forbidding incentive compensation and a slew of other regulations being placed on the for-profit sector, not much has changed in terms of outcomes. It seems that all of this federal meddling has led to...an escalation of tuition and the closure of 1,000s of career schools. I'm not exactly sure this was the intended outcome.

Just to touch a bit more on CDRs, I don't find it surprising at all that research produced in the 1980s reveals the same findings that current research on default rates does, namely that:

Studies that examine the effect of institutional type on default have sometimes been viewed as controversial because, given the structure of the student loan system; institutions themselves have no direct control over the borrower to influence his or her repayment

...students from different cohorts and varying income levels showed a considerable variance in their propensity for defaulting, supporting the idea that sectoral differences in default rates may at least be partially explained by differences in borrower’s characteristics

Defaulters have, regardless of institutional sector, significantly lower family incomes at the time the loan is made

the disadvantaged socioeconomic status of students attending proprietary and two year schools was found to be most strongly correlated with the likelihood of default, and institutional practices were found to be of limited importance

Articulation Agreements Between Public and For-Profits?

A political battle is underway in Tennessee, as the profit-seeking colleges seek to be included in a state-wide articulation agreement that would allow students to transfer their credits among institutions. This article on KnowNews.com tells the story.

For-Profit Higher Ed in the Developing World

Inside Higher Ed has an interesting article about for-profit institutions in the developing world

Taking a page or two out of the successful Western for-profit’s playbook, Hayes stressed the importance of market research -- of knowing students’ problems and solving them, whether they are about the time or location of a course, or short-term financial pressures

Another key, he said, is branding. “A brand, if nothing, else is a promise to your marketplace,” he said. “Since education is a service, in essence, we’re basically marketing something that you can’t touch, you can’t feel, you can’t see.”

Riccardo Scavazza, vice president of operations, said that much of the growth has hinged on the success of marketing to low- and middle-income adults who didn’t have access to postsecondary education before the boom that’s happened in Brazil’s for-profit education market in the last decade. Essentially, Anhanguera and its handful of publicly-held competitors have created a market where there wasn’t one. In 2006, the IFC loaned $12 million to a Brazilian private equity firm to invest in the institution.

The Case AGAINST More People Going to College and More Government Involvement

New American analyzes Obama's push for more people to attend college and the SAFRA bill, with some great quotes by higher ed experts:

Alison Wolf, professor of public-sector management at King’s College in London:

Not only do the poor pay for the education of middle-class kids through either direct taxes or through increased costs of goods produced by American companies that must support the program through taxes, less money is available in the private sector to create businesses and provide jobs for everyone, meaning there are fewer jobs (and usually poorer paying jobs) and less opportunity for advancement for poor people.

Charles Murray, political scientist and scholar at the American Enterprise Institute: [asked who should pay for college education]

“Ideally, students themselves. If that means delaying college for a few years to save money, so much the better — every college professor has seen the difference in maturity and focus between kids straight out of high school and those who have worked or gone into the military for a few years.”

Career counselor Marty Nemko addressed the decreased investment of students and parents under a government-funded tuition program:

“The more the government and private donors (alumni, private scholarships) pay of the college tab, the less responsibly the student and family need to determine college’s cost-effectiveness. Also, every time the government increases financial aid or a private scholarship is set up, it merely allows college to raise their sticker prices more.” In other words, not only would free higher education diminish the work ethic of the students, but it would also allow for regular increases in tuition at the expense of the government, which of course would be accommodated by tax raises.

Alfred Roval, professor of education at the Regents University of Education:

“The focus on higher education gives me a little concern. That assumes that every job in this country needs a college education. That’s not the case. Some jobs don’t need one.”

Dennis Cauchon of USA Today on the preferential treatment afforded to those college graduates who pursue government positions:

“Federal workers are enjoying an extraordinary boom time — in pay and hiring — during a recession that has cost 7.3 million jobs in the private sector. The number of federal workers earning six-figure salaries has exploded during the recession...The growth in six-figure salaries has pushed the average federal worker’s pay to $71,206, compared with the $40,331 in the private sector.” Despite the discrepancy in pay that has already provided federal workers an advantage, Obama’s proposal forgives federal workers of their student-loan debt after 10 years, as opposed to 20 years for those employed in the private sector. This preference reflects President Obama’s anti-business, pro-big government attitude that he brought to the White House.

Richard K.Vedder, director of the Center for College Affordability and Productivity:

“Sending marginal students to four-year degree programs, only to drop out, is a waste of human and financial resources, and lowers the quality of life for those involved.”

George Mason University professor Bryan Caplan:

greater college attendance has the opposite of the intended effect. Caplan believes that there is little connection between the skills acquired in college and those required in life.

Sun Sentinel Attacks For-Profit Colleges

The Sun Sentinel tool a pot shot at the for-profit college sector over the weekend. I'll refute some of the claims made:

Career colleges make it easy for students to enroll with little or no money up front. Financial aid representatives help students line up loans. Even candidates with a bad credit history are not discouraged.

Students attending any type of college are able to obtain loans to finance their education with bad credit. Andrew Gillen relates this easy credit to the housing bubble that recently popped, terming it the tuition bubble.

The greatest risk, though, is not for the schools, since they receive their money up front, but to the students taking out the loans and ultimately, to taxpayers. Unpaid loans follow former students through life, can ruin their credit and lead to serious consequences, including the federal government garnishing their wages and withholding their tax refunds. Even declaring personal bankruptcy is not an option to shed student loan debt, except in rare cases.

"You want to be very careful as a consumer taking on a huge amount of debt based on the assumption that you're going to have a great job that will make it manageable to pay off,'' Asher said.

Again, this same argument applies to public and not-for-profit private colleges. The root of the problem is that the government is offering easy, non-collateralized credit to kids, many of who have never had a job and have blurred expectations of their future careers.

"Some of the schools to me, just from experience, are diploma mills,'' Rosenberg said. "They're into the dollars more than the education.''

He said he considers a degree from a for-profit school a "weeding-out factor.''

"If all things are equal with a candidate, I will go with somebody that graduated from a traditional college,'' Rosenberg said.

In an address to the 28th National Conference on Higher Education in 1973, Jack Jones suggested that the public image of proprietary institutions is based largely on the lowest common denominator, implying that the entire sector is identified according to the misdeeds of a few bad apples that are part of a much larger and healthy orchard. In a 1974 paper, David A. Trivett likened this personification to “basing the image of all colleges and universities on knowledge about Harvard or Oxford. Sure, some of these schools are bad apples, but not all of them. There are also some scumbag public and not-for-profit schools out there. How about we judge a school by its merits, rather than its association or ownership status.

Spellings on Obama's Pell Grant Policy

Former Secretary of Education Margaret Spellings speaks out on the recent student aid bill that provides Pell Grant increases, in a Chronicle of Higher Education article:

Ms. Spellings said, such increases should be accompanied by assurances that the money is going to college-ready high-school graduates.

"This idea that that's the way we do it now—that we take kids who are not capable of doing college work and give them money so they can do it—who's for that? Nobody. That's stupid," the former secretary said.

Ms. Spellings said she was particularly dismayed by the Obama administration's abandonment of a pair of grant programs for low-income students—Academic Competitiveness Grants and Smart Grants—that the Bush administration created with Democratic support.

The programs were "administratively burdensome, granted," Ms. Spellings said. Their failure, however, "frankly was a testament to how broken the interface is between high schools and colleges," she said. And now the Obama administration appears to be saying: "Let's get rid of the solution because we can't fix the problem," she said.

Responding to Uninformed Critics

Daniel Luzer has a post up on the liberal Washington Monthly College Guide blog that indicates his support for the gainful employment 8% debt cap proposal on career colleges. I responded with information that will be useful to readers:

The gainful employment 8% cap is a terribly flawed proposal. Financial aid expert Mark Kantrowitz put out a policy paper arguing that it is unrealistic and way too strict and that even traditional and professional schools (if subject to the same rule) would have a hard time complying with it.

I did an analysis on what the max debt that could be borrowed for 10 occupations that are expected to be among those with the greatest employment growth in the next 10 years, and coincidentally the career colleges train people in. For comparison, I computed the max debt that a law student could borrow...$44k (and that includes any undergraduate debt).

Latest on Gainful Employment

Kevin Kuzma has a good article up at Career College Central discussing the latest news in gainful employment (which isn't much):

Recent comments from members of Congress, and even from the Department of Education itself, are giving investors hope that the government may soften its proposal to penalize schools whose students graduate with large loans and low- paying jobs. The issue comes under the guise of "gainful employment," which fundamentally questions how well schools prepare their students to get jobs that can cover their educational debt.

Education Secretary Arne Duncan testified in front of the House Education and Labor Committee March 3 that the department is "by no means wedded to any one direction" on the rule. "We don't want to be overly heavy-handed,"

Congress does have a say on the upcoming reauthorization of the Elementary and Secondary Education Act, though, which some believe could put Duncan in a tight- enough spot to make concessions to ensure passage of that bill.

An Education Department official said the office is working on the language and couldn't comment further

Must Reads

Pat Callan:

For colleges and universities and their advocates in Washington, the message being sent by the public is clear. Spending time and money explaining why higher education is essential to the nation’s future is not the answer. Our data show very plainly that the American people get it when it comes to the need for higher education. But those same data also depict a public that is quickly becoming increasingly skeptical of the leadership and management of colleges and universities.

Supreme Court rules unanimously in favor of borrower over lender in dismissing student loans in United Student Aid Funds v. Espinosa case

Must Reads: 3/23/10

For-Profit partnerships with community colleges?

If we provided capital and marketing and distance learning assistance to a college, could they attract people to a fast-track type program where students can get off the waiting list immediately and graduate in two years? The only catch is that they have to pay a slightly differentiated tuition. I think older students, in particular, understand the opportunity cost of something like this and that waiting a few years just isn’t valuable to them

In this age of scarce resources and burgeoning enrollments, we’re just not going to get money from our state,” Sbrega said. “I think public-private partnerships like this one are the wave of the future. This is an outstanding example of what can be done through these partnerships. I wouldn’t be surprised if it’s replicated around the state and the country.”

Kevin Kuzma:

the question about career college integrity has gone on for at least three or four decades now. The question lost its luster a long time ago. The answer isn’t likely to come in the Times or any other publication where the journalists were educated at four-year schools and have a fundamental misunderstanding about the way the sector operates. The only truth I can find is in our sector’s longevity. Those are the numbers that count.

Kaplan Survey Finds That Grading Leniency Can Influence Student Choice of Professor:

Although grading leniency is a consideration for many, within the RateMyProfessors category options, peer opinion seemed to be the greatest influencer, with “Prior student comments about the professor” as the element most often cited by Kaplan survey respondents (77%) as the factor they most consider in choosing classes. “Overall quality of a professor” was the second most considered factor (70%), and “engaging teaching style of professor” was third (66%), followed by “easy grading reputation.”

Must Reads: 3/22/10

Herald Tribune:

The fact that so many students choose private, for-profit colleges and universities simply reflects the effective job these institutions are doing, not that for-profits are in any way abusing taxpayer funds.

They exist purely on the demand of the marketplace and use the Pell grants to teach a group of students who are not particularly well served by traditional schools -- adult learners with job and family responsibilities, often without family financial support and many times the first in their family to attend college.

George Will:

Doubling down on dubious bets is characteristic of compulsive gamblers and federal education policy.
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But how does one fulfill -- or know when one has fulfilled -- Obama's goal of "college and career readiness" for every child by 2020? That gauzy goal resembles the 1994 goal that by 2000 (when, Congress dreamily decreed, every school "will be free of drugs and violence") every child would start school "ready to learn." Is "college and career readiness" one goal or two? Should everybody go to college? Is a college degree equivalent to career -- any career? -- readiness?

If such readiness is not measurable, this is another airy puff of legislative cotton candy, similar to NCLB's guarantee that every teacher will be "highly qualified."

Abundant evidence demonstrates that money is not an Archimedean lever for moving the world of education.

Kaplan University:

“The trends for online education continue to rise. Many people are looking for alternative education methods where they can be home with their family or continue to work a full time job, while get the schooling and enhanced preparation needed for advancing their career.

Keith Hampson discusses the state of competition in higher education:

Demand for higher education has never been greater (allowing for fluctuations in birth rates)

The power of suppliers, in this case academics, is increasingly low. We continue to produce PhD’s for which there are no jobs in academia. Adjuncts continue to be available, despite the remarkably low pay.

The barriers for new competitors to enter the market remain great.

Competition on price is far from intense. Tuition levels have risen faster than inflation for several years.

The majority of enrollments in online courses and programs is with local institutions. The arrival of the long-predicted global market in online higher ed is still in its infancy.

EduBubble discusses the idea of college grads receiving food stamps.

Argument Against Making the Pell an Entitlement

My colleagues Andrew Gillen and Richard Vedder at CCAP have an excellent piece up on the CCAP blog, arguing against making the Pell Grant an entitlement:

the Pell grant is the preferred approach for the government to provide federal aid, and expanding this program is defensible even in times of fiscal stringency. But making it an entitlement and setting it to increase at the rate of inflation (or more) is a huge mistake.

Student Loan Refrom Bill...Tied to Healthcare Reform?

From the Chronicle of Higher Ed this morning comes news of the final language of the student loan reform bill

Congressional Democrats and the Obama administration on Thursday outlined their final agreement on legislation to overhaul the government's student-loan system, with the savings providing annual inflation-adjusted increases in the Pell Grant and billions of dollars in additional aid for higher education.

The final agreement also includes $255-million a year to help historically black colleges

The agreement also includes $750-million over five years for College Access Challenge grants, which support states and other governments in efforts to prepare more low-income students to enroll and succeed in college

despite suggestions last week that money for community colleges would be cut altogether, the bill includes $2-billion over four years to help two-year institutions

also includes $1.5-billion over 10 years to finance the Obama administration's proposal to increase assistance to borrowers eligible for income-based repayment of a federally subsidized student loan by limiting their mandatory monthly payments to 10 percent of discretionary income, down from the current 15 percent, and by forgiving their loans entirely after 20 years, instead of the current 25 years

eliminates $9-billion that had been approved in the House version to reduce the interest rate on federally subsidized loans in 2012-13 and subsequent years. That rate is now due to drop to 4.5 percent for the 2010-11 academic year and 3.4 percent the following year, but then rise to 6.8 percent after that

compromise reached Thursday also eliminated a provision in the House version to spend $8-billion on early-childhood-education programs

But here's the kicker:

accompanying agreement on the health-care legislation

What If We Applied Gainful Employment to Law Schools?

Here's my most recent post on the CCAP blog:

Yesterday, I posted some data on the maximum amount students pursuing careers in the 10 fast-growing occupations could have borrowed if the Department of Education's (ED) proposed metric to define gainful employment were retro-acted prior to 2003. Then I read an interesting blog by Brandon Platt over at Career College Central in which he suggests that a:

growing number of law graduates...can’t find the employment they felt they were promised, or even...able to find employment and begin paying back [their] loans at graduation

This got me to thinking about all of the horror stories about law school graduates having six figures of debt and unable to find job, and what the ED's proposed metric for gainful would imply for law schools. So, I returned to the BLS site and collected occupations data at the 25th percentile for lawyers in 2003 and 2008 and applied the same methodology that I used yesterday to calculate the max debt that a student could borrow for 3 years of law school.

In 2008, the 25th percentile earnings for lawyers was just under $75,000, an inflation-adjusted increase of 2.3% from 2003. Given this earnings figure, and assuming a 6.8 percent fixed loan rate (which is very conservative considering that many law students take out private loans with much higher interest rates), I calculated that the maximum total debt a law student could borrow would have been just under $44,000, or 2.3% more than he/she could have borrowed in 2003 after adjusting for inflation. Given the ED's proposal, this would also include any debt incurred as an undergrad, unless the student managed to pay it off before starting law school. FYI, the average law school tuition was just under $28,000 in 2007-08.

What this little comparison tells us is that the ED's proposal is unrealistic and way off base. A better idea than implementing some arbitrary metric that even the preferred public and not-for profit sectors could not pass, would be to require colleges to collect and publicize student outcomes data, such as job placement and average earnings, as well as program completion and loan default rates, so that students have enough information to make intelligent decisions.

Must Reads

Brandon Platt:

So what does professor Pardo have to say about the changing economy and education? “If these programs keep growing, you’re going to wind up with more and more students who are graduating and can’t find meaningful employment. They can’t generate income needed to pay back their loans, and they’re going to end up in financial distress.”

But according to the New York Times, this isn’t a statement about the growing number of law graduates that can’t find the employment they felt they were promised, or even the 32% of students at Professor Pardo’s own school that aren’t able to find employment and begin paying back those loans at graduation. It’s about the career college sector – amazing given the outrageous level of oversight and regulation that exists, but that the Seattle University School of Law and thousands upon thousands of other institutions don’t have to follow. If almost any career college had the placement rates of the Seattle University School of Law, they would be approaching major sanctions and loss of their essential Title IV status.

George Leef on Universities and Economic Development:

very few profs are engaged in work that's even remotely connected to innovation in goods, services, and processes. Moreover, since knowledge knows no borders, the location of schools is irrelevant.

higher ed can help employers — for example, in worker training and management consulting. The free market already has plenty of options for companies looking for assistance in those areas. Why do they need to turn to universities?

Schools can "develop and manage property in a number of roles." Okay, but why are nonprofit institutions better at managing property than are individuals and firms that operate under the profit motive?

since the U.S. already has a glut of college grads doing fairly low-skill jobs, we need to doubt the hype about college being ever more important.

Anne Neal and Anette Meeks on the declining quality and burgeoning costs of public higher ed in Minnesota:

too many state institutions have poured money into the Ph.D. equivalent of candy -- hiring administrators -- while neglecting their true purpose: delivering a quality education in the classroom. Unless they change their ways, their pleas for protection in the midst of budget cuts will understandably fall on deaf ears.

Implications of Gainful Employment Proposal

Here's my latest post on the CCAP blog:

The career college sector is engaged in a fierce battle with the Department of Education (ED) over its proposed definition of gainful employment, which would create a debt payment-to-earnings ratio that would effectively cap student debt payments at 8% of expected earnings for career college students. It would do so be using the median debt payment of a program's previous 3 years of graduates in the numerator, and national BLS wage data for the 25th percentile income of the occupation for which the program prepared students to enter in the denominator. Programs with ratios exceeding 8% would be given the boot from the Title IV funding programs. This proposal has been met with extreme opposition from the industry, has been denounced by a Congressman, and was described as severely flawed by financial aid expert Mark Kantrowitz.

While I generally agree that the proposal would be extremely harmful and am fundamentally opposed to this type of implicit government price control, I decided to do some analysis to determine what the actual effects would be on 10 occupations for which the career colleges train students (all of which are on the BLS's list of 30 occupations with the biggest projected growth in employment for the next decade) to enter if the policy was retro-acted a few years. I first looked at the 25th percentile income for these occupation for both 2003 and 2008. I then calculated the max student debt for these occupations, given the ED's proposed definition, assuming a 6.8% fixed interest rate (the current direct lending rate). Then, I adjusted all figures into constant 2008 dollars to account for inflation. The results are in the below chart.

What I find is that, if the 8% ratio was retro-acted, students pursuing 7 of the 10 growing occupations above would not have been able to borrow as much to pay for their training in 2008 as they were able to borrow in 2003, in real inflation-adjusted terms. Students pursuing training in the other 3 occupations would not have much more ability to borrow in 2008 than they did 5 years prior. If any college's graduates were to finish with less real (inflation-adjusted) debt today than they did 5 years ago, then that college deserves a carrot for excellency in cost containment, not a brutal beating with a stick.

Since most students borrow money to pay for the education, limiting the amount that they can borrow also limits the professions that they are able to enter, especially for the lowest income students. It may even shut off routes for people to enter a given profession, as many colleges will be unable to offer training programs at a price that allows them to be in compliance with not only gainful employment, but also the 90/10 and cohort default rate rules, and will ultimately stop offering such programs. While this will likely appease some critics of the industry, the end result will be a reduction of educational options and access for low income and minority students, and a shortage of qualified employees to fill the demands of the labor force. Both results are negatives for the economy.

Dana College Joins the For-Profit Sector

Dana College, a financially struggling liberal arts college in Nebraska, announced that it has reached an agreement with the Dana Education Corp, a team of

senior higher education administrators who bring to Dana a deep understanding of higher education from an academic and regulatory perspective. DEC’s leadership team also includes individuals with experience in student recruitment and admissions as well as general administration.

Not much will change at the college other than the ownership structure and the financial backing needed to achieve its mission:

Dana College’s mission, accreditation, programs, faculty, campus and facilities will be unchanged. Dana College degrees will carry the same weight and respect that they always have, and Dana College expects to continue to participate in the same athletic conferences and organizations. All faculty positions will remain in place.

“We are pleased to have found a partner that believes in Dana and its place in the community. Dana will now have new financial resources needed to thrive and highly experienced higher education administrators to complement the current staff. We believe DEC will help Dana maintain and strengthen the college’s mission and continue to serve well the diverse populations that have been the hallmark of Dana College’s institutional culture,” said Dr. Janet Philipp, President of Dana College.

Inside Higher Ed's Scott Jaschik has more on the story.

Uncovering the Implications of Student Cohort Default Rates

I have a new article, "Skewed Statistics: Uncovering the Implications of Student Cohort Default Rates", in the March 2010 edition of Career College Central, in which offer an analysis of the Department of Education's recently release 3-year CDR's, and the potential policy implications for the for-profit college industry.

Stop Subsidizing Institutions...Give the Money to Students

Here's my latest post on the CCAP blog:

Public colleges like to go around telling sympathetic listeners (especially legislators) that they are forced to jack up tuition charges because state subsidies are declining. Colleges and their sympathizers espouse the confusing rhetoric that the percentage of their revenues coming from state subsidies has declined, while failing to mention the reason that subsidies have declined as a percentage of their budget: because their rate of SPENDING has outpaced the rest of the economy over the past several decades. This is a much different story than saying, as Neal McCluskey and others have demonstrated: that public subsidies have generally been constant when adjusted for inflation and enrollment over the past 25 years.

The public has generally lived up to its bargain of subsidizing colleges in order to keep tuition affordable so that low and middle income people can get a postsecondary education. It is the colleges who have failed to live up to their end of the deal by engaging in a spending spree and empire expansion, mostly with taxpayer money, that has caused a surge in tuition. When organizations or people in the private world demonstrate an inability to manage their finances in a responsible manner, creditors cut them off. For those who sympathize with providing affordable access to college for the less-fortunate Americans, there is a solution that avoids turning off the spigot altogether: Stop subsidizing the institutions directly and instead subsidize the STUDENTS in the form of a voucher, grant or scholarship (whatever you want to call it) that follows the student to whatever college they choose to attend, regardless of ownership status.

That's right, empower students and their families to vote with their feet where the subsidies should be directed, rather than do so through the political process. This is akin to giving low income families food stamps to buy what they want rather than giving them bags of rice and beans. Schools eager to attract recipient students would then be much more likely to allocate their resources to areas important to students. The end result would likely be greater diversity in institutional models, with one extreme being a low cost online provider, the other the conglomerate country-club campus, and many variations in between.

We currently have institutional diversity to some extent, but the majority of public colleges are moving in the direction of the elite county club campus, making it less and less affordable for lower income students to afford to attend. So let's nudge them along to becoming fully privatized and elitist by cutting off their institutional subsidies and instead empower the students with the subsidies. My guess is that more institutions will move in the opposite direction, towards more value-based models focused on education. This would at least give students the choice in how they spend the taxpayer's money, and provide a glimmer of hope that it will be used more effectively. Doing so would also improve policymakers' ability to target funds to specific objectives, such as improving access to low income students or adult learners.

Must Reads: 03/17/10

Dan Lips of the Heritage Foundation argues that public college be required to post much of their course content online for the public to access, describing technology as an integral part in bursting the tuition bubble.

Tim Ranzetta of Student Lending Analytics suggests:

make public the accreditation reports with job placement and wage data. Instead of schools just getting students to sign disclosures that there are "no guarantees," how about getting them to sign a disclosure that they were made aware of placement rates and wage rates (and let's throw in completion rates, average debt and default rates too). Heck, if I had a school with data to brag about, wouldn't I voluntarily provide it to applicants anyway? Wouldn't this disclosure be a good way to avoid the he said/she said class action lawsuits which seem to be popping up with increasing frequency.

People Capital extends its first peer-to-peer loans that:

matches students looking for loans directly with potential lenders, including individual lenders, and takes financial institution brokers out of the loan-finding equation.

Here’s how it works: Students sign up on the site and put in their loan requests. Lenders, meanwhile, sign up on the site and put up at least $1,000 for loans in a People Capital account. They then can bid on the various loan requests from students and assess various students’ risk and ability to repay with the help of People Capital’s proprietary “Human Capital” score, which combines variables like SAT scores and grade point averages to determine a student’s future income potential and ability to repay.

Gainful Employment

Financial aid expert Mark Kantrowitz released an excellent analysis of the potential negative impact that the Department of Education's proposed definition of gainful employment would have on the for-profit sector last week. He concluded that it is severely flawed, specifically:

The 8% debt-service-to-income threshold is so strict that it would preclude for-profit colleges from offering Bachelor’s degree programs. It would also eliminate many Associate’s degree programs at for-profit colleges. Even non-profit colleges would find it difficult to satisfy this standard if they were subjected to it.

The 90% loan repayment rate would be the equivalent of requiring colleges to have a two-year
cohort default rate of less than 2.3% for students who graduated. This loan repayment rate is
unattainable for most colleges (not just for-profit colleges) as it represents a much harsher
standard than the current cohort default rate requirements.

The thresholds are based on median debt at graduation, meaning that half the students will have
debt above the threshold. Affordability cutoffs should be based on excessive debt, such as
cumulative debt above the 90th percentile.

The proposed use of Bureau of Labor Statistics wage data is biased toward lower income data and
is biased against Bachelor degree programs because of an “averaging down” effect. The use of
this data will disproportionately harm minority and female students because a Bachelor’s degree
conveys a greater increase in earnings for these students even though the median income is lower than for White and male students. The lack of regional adjustments would discriminate against colleges located in states with lower average income and higher unemployment rates.

The proposed linking of programs with specific occupations precludes for-profit colleges from
offering programs in the liberal arts or fields of study that are not career-specific.

The loan repayment rate calculations count borrowers in income-contingent and income-based
repayment as though they are actively repaying their loans even though roughly half are making a
zero monthly payment.

The proposals would apply the requirements for affordable debt only on graduates from for-profit colleges. If it is Congress’s intent to limit debt by college graduates, similar standards should also be applied to non-profit and public colleges.

The debt-service-to-income threshold effectively establishes borrowing limits based on field of study and degree program, but does not give the colleges the controls needed to enforce these
limits. Current subregulatory guidance precludes colleges from establishing lower loan limits.

Congressman Kline Discusses Gainful Employment

The NY Times Fiercely Attacks Career College Sector

Peter Goodman attacked the career college sector in a NY Times article with the typical allegations of aggressive marketing and high student debt levels. He ended the 3 page rant with the following:

For-profit schools have ramped up their own lending to students to replace loans formerly extended by Sallie Mae, the student lending giant.

These loans are risky: Career Education and Corinthian recently told investors they had set aside roughly half the money allocated this year for private lending to cover anticipated bad debts.

Financial aid experts say such high rates of expected default prove that graduates will not earn enough to make their payments, yet the loans make sense for the for-profit school industry by enabling the flow of taxpayer funds to their coffers: they satisfy federal requirements that at least 10 percent of tuition money come from students directly or from private sources.

“They’re making so much money off their federal student loans and grants that they can afford to write off their own loans,” said Ms. Asher of the Institute for College Access & Success.

Perhaps these "financial aid experts" and the Obama Administration (I'm assuming this includes Bob Shireman's old outfit at the ICAS, which has been one of the most vocal critics of the for-profit sector) should consider that it may in fact be government policies, the so-called 90-10 rule, that have led the sector to charge tuition above the max level of federal loans and grants, in order to comply with the law. Without it, institutions would likely not have to charge as much tuition and students would therefore not be subject to taking on as much debt. If 1/2 of all private loans are expected to be written off as bad, then it would actually be more profitable for Career Education and Corinthians Colleges to set their tuition lower so as to avoid making the excessively risky loans in the first place.

CCA President Harris Miller also responded to Goodman's article.

Should the Government Get in the Business of Career Networking?

Here's my latest post on the CCAP blog:

A new report from the Center for American Progress seems to suggest that the federal government needs to invest in a social networking (or career navigation) platform to help those with low skill and little education to learn about opportunities for development and training in one central place. The authors of the report indicate that there are currently many small pockets of information and programs available to help those in need find opportunities, but that they are too widely scattered - making it difficult for individuals to find help in re-training or career advancement.

Building a network, along the lines of LinkedIn or Careerbuilder, that organizes all of the available programs and opportunities for people in need of retraining in one place sounds like a pretty cool idea. But why does it have to be a government-financed and controlled project? Why not leave it to the the private marketplace that has brought us the likes of Myspace, Facebook, LinkedIn, Careerbuilder, Twitter and Monster - all very successful networking sites. Would it not be better for the private sector, subject to competition and the prospect of failure, to invest in developing such a system? It could even be a non-profit organization funded with private money from foundations or wealthy donors. Either would be a better option than a government-controlled system, which would not be subject to competition or failure, and would be an additional liability for taxpayers.

One other thing that bothered me in skimming through the report is that it mentioned many outlets for people in need of career navigation, including community colleges, labor unions, public workforce systems and community-based organizations, but failed to mention the career colleges - a private source for career development and enhancement. Career colleges play quite an important role in vocational and career training in America, so why exclude them as a source of re-training and career enhancement? Maybe the career colleges will band together to do just what the authors of this report suggest: build a central network of career development and enhancement opportunities at their schools, since they likely would be able to bring it to market sooner.

Must Reads: 03/11/10

Art Hauptman on the 4 alternatives for public colleges to pare back during a recession.

1. Capping enrollments and cutting costs
2. Changing the mix of enrollments
3. Increasing tuition fees for existing students
4. Increasing enrollments while maintaining current tuition fee levels

Michael Platt on ED's Gainful Employment plans:

Instead of the public sector being incentivized to create jobs and create a trained workforce, the government will wield their unfair advantage, crippling the private sector, and then become a competitor to the private sector.

Harris Miller describes how career colleges are good for the economy.

Decreasing America's Well-Being?

Milton Friedman was once (probably more than once) asked:

how the US can take advantage of the diversity of its population in order to maintain the well-being of all its citizens

He responded that the answer is straightforward:

by reducing the role of government

How does this apply to education? Well, most people believe that education provides people with the opportunity to improve their lives. That it gives them the freedom to explore their interests and to pursue a better life. It is somewhat ironic that the government is neck deep in financing education, and increasingly more involved in matters other than financing it (regulations, curricula matters, labor relations, etc).

According to the Friedman's school of thought, the increasing role of government in education is leading us in opposite the intended directioin of increasing the well-being of people through education. This is not to say that I advocate that schools be given a free lunch (ie - public subsidies with no strings attached). I just find it paradoxical that the same schools who advocate that education is the key to increasing the well being of people and society are also champions of obtaining more and more taxpayers funds.

Must Reads

The NY Times Room for Debate forum features education experts discussing the future of online education.

Kevin Carey outlines his ideal Race to the Top for hijavascript:void(0)gher education.

It seems the US is not the only place where college grads are struggling to find jobs...China is a hotbed for unemployment among its college grads.

Yasheng Huang:
The Chinese educational system is terrible at producing workers with innovative skills for Chinese economy. It produces people who memorize existing facts rather than discovering new facts; who fish for existing solutions rather than coming up with new ones; who execute orders rather than inventing new ways of doing things. In other words they do not solve problems for their employers.

Student Protests

Check out my latest article for Minding the Campus, where I applaud students for their mass protests yesterday, but argue that they are pointing fingers in the wrong direction. It isn't state governments that they should be accusing for tuition inflation. Read the essay to find out which direction they should be directing blame.

Must Reads: 03/05/10

Bloomberg article on for-profit acquisitions of non-profit institutions and their regional accreditation status.

Buying accreditation lets the new owners benefit immediately from federal student aid, which provides more than 80 percent of revenue for some for-profit colleges, instead of having to wait at least two years. Traditional colleges are also more inclined to offer transfer credits for courses taken at regionally approved institutions, making it easier to attract students nationwide.

More vigilance by the Education Department and accrediting groups is likely to slow enrollment growth and the share prices of higher education companies that rely on acquisitions, said Clifford. While publicly held postsecondary education companies rose 29.9 percent in the 12 months ended March 3, they lagged behind the S&P 500, which increased 60.7 percent over the same period, said Jeffrey Silber, an analyst for BMO Capital Markets in New York. The shortfall reflected investors’ fears of tighter federal regulation of for-profit colleges, Silber said.

Regional accreditation is worth $10 million to a for-profit acquirer, Clifford said in a telephone interview. That’s how much it would cost to start a regionally accredited college, a process that can take 10 years and has only a 50-50 chance of success, he said. On top of the $10 million, buyers typically pay $23,000 to $50,000 per enrolled student, making the purchase of Daniel Webster a bargain, Clifford said.

“As a for-profit venture, we have the resources to invest in the student experience and the very best faculty, and we want to provide a high quality business education.”(Jack Welch)

Michael Platt at Career College Central

As with the automotive industry, this administration keeps throwing money we don’t have at failing businesses like the community college system, and trying to fix the problems by charging the taxpayers more money, in this case through increased tuition. And let’s be fair here ... our government owns and run these businesses. There is no other reasonable way to look at it.

Must Reads: 03/04/10

George Leef's post-debate comments:

If we want to get serious about improving our economy’s productivity, there are many, many things that would help. Governments massively divert resources away from productive, competitively determined uses and into unproductive, politically determined uses; they interfere with efficiency with innumerable laws and regulations; they drive away investors and entrepreneurs with high taxes.

The list of changes that would make the American economy stronger is extremely long, but putting more people through college is not among them.

Higher Ed experts urge Duncan to tackle transfer policies.

If we expect to improve student success, it is time to examine the process by which sending and receiving institutions manage the transfer function to ensure an easier and less costly progression by students.

Kevin Carey on the non-transparency of accreditation.

New Study Criticizes Voluntary Accountability in Higher Education

Andrew Kelly (AEI) and Chad Adelman (Education Sector) authored a study that is highly critical of the self accountability systems (U-CAN, VSA), and was released this week. The report suggests 2 major policy implications:

1)Transparency About Costs and Outcomes Must Be Mandatory, Not Voluntary

2)Collect Data That Clarify Institutional Distinctions, Not Blur Them

The Politics of Failure

The College Guide blog posted a piece discussing the politics of failure - essentially big talk from the Department of Education about the need for change, with little follow through. I posted the following comment on the blog:

Easy to say, difficult to do. The higher education community is vehemently opposed to change and uses its strong lobby and political allies to wage a war whenever it feels threatened. Its stance is understandable, as it has a pretty sweet going for it: tons of money flowing in from the taxpayers with very little interference. As Mrs. Spellings said, the college's attitude is "give us the money and leave us alone".

Video from Education and the Economy Debate

Above is web video of the national debate on education and the economy held last Friday. If you want to catch the debate on TV, please check the PBS broadcast schedule here.

National Debate on Education and the Economy

I posted a review of Friday's debate at the National Press Club in Washington DC on the CCAP blog. Check it out.