Forbes’ CCAP Blog
By Richard Vedder
December 22, 2010; 5:00am
It has been over a year since Barack Obama and his aides threatened war on for profit colleges and universities, and arguably six months since they commenced formal hostilities. When I testified before Congress with Bob Shireman early last year, I told Shireman that he was the only guy I ever met whose very appointment to public office destroyed hundreds of millions of dollars in wealth. Shireman, a fierce opponent of for profit education, had been given an important position in the Education Department, which rightly scared investors.
Shireman eventually left, but the sigh of relief was brief. Ed Meehan of Arcady Bay Partners, a financial services firm with investments in the for profit industry, writes an occasional newsletter on that industry that I find very insightful and informative. In his December 20 letter, Meehan dates the beginning of formal hostilities (my words, not his) to June 24 when, incredibly, an alleged short seller of for profit industry stocks was allowed to trash the industry before a Senate committee (how much money did he make on that?). From that date through December 17, the value of 13 publicly traded for profit higher education company stocks fell by $7.9 billion (according to my calculations from data provided by Meehan’s newsletter), or 27 percent. So investor reaction to Shireman’s appointment gravely underestimated the damage to come from the Obama Administration’s war on the for-profits (the true damage is no doubt even greater, since a good deal of the industry’s services are provided by companies not publicly traded on stock exchanges).
Several weapons are being used by the Administration in this war, for example, a call for much increased subsidization of a major competitor, public community colleges, or a new requirement that online for profit institutions get licensed in every one of the 50 states. However, easily the most effective (and destructive) weapon is the plan to implement unrealistic “gainful employment” rules that would apply to graduates of for profit schools. Schools that have an unacceptably high proportion of graduates that are not gainfully employed would lose the right to take students receiving governmental financial assistance in the form of subsidized loans or outright grants. Since these schools serve primarily a relatively low income community of adult workers heavily dependent on financial assistance, this is the equivalent of a death penalty.
As a student of higher education economics, I have long despaired at the waste and inefficiency in the federal system of financial assistance and, indeed, believe a compelling case can be made for the federal government to get out of that business entirely. The system is Byzantine in its complexity, highly dysfunctional, and leads to undesired unintended consequences: a smaller proportion of college students today, for example, come from the lowest quartile of the income distribution than 40 years ago at the outset of the Pell Grant and student loan programs. This financial assistance money has mainly contributed to growing college inefficiency, falling productivity, and an academic arms race that has enriched some in the Academy but impoverished nearly millions of others.
Hence, the “gainful employment” rules superficially seem reasonable. I deplore them, however, for several reasons, but the overwhelmingly most important is that they apply only to the for profit schools. By one good definition, a majority of the students who have graduated from American colleges and universities (the bulk from traditional not-for-profit schools) since 1992 are not gainfully employed. Of the 20 million increase in the number of college graduates from 1992 to 2008, 12 million (60 percent) went into jobs that the U.S. Department of Labor’s Bureau of Labor Statistics says do not require any college education. For example, the number of waiters and waitresses with college degrees tripled (to one-third of a million), even though this is an occupation where large numbers (over 400,000) have less than a high school education. (For a complete study, on this topic, click here.) There are many major traditional schools where the percentage of entering fulltime students who obtain a bachelor’s degree within six years is below 20 percent –for every success story, there are four or more failures. If we are going to close down part of, say, Corinthian Colleges, why not close down the University of Texas at El Paso?
Meehan aptly calls postsecondary education “a system that serves everyone but the student.” The people attending the for-profits, by and large, are there because they want to be, and many of them are highly satisfied customers years later. Are there a large number who dropout and others who fail to get good jobs? Sure –but that is true of many traditional public schools as well. A compelling argument can be made that too many persons are going to all degree granting institutions, but the solution is not to attack a sector educating 10 percent of the students. Why are they doing this? Assessing motives is difficult, but I simply consider this another example of the socialist, anti-business orientation of the Obama Administration –they hate for profit schools just as they dislike most other American businesses.
Is this a dangerous sector to invest in? Who knows? I do think that inherently these schools are more efficient and responsive to student needs than traditional universities more interested in their faculty’s output of obscure research (well over 20,000 articles have been written on Shakespeare since the mid 1980s –surely diminishing returns have set into new interpretations of the Bard and his work). And I think a newly energized Republican majority in the House may make it difficult for the Obama Administration to continue its war –its munitions may be cut off by the holders of the purse.
Richard Vedder directs the Center for College Affordability and Productivity, is Distinguished Professor of Economics at Ohio University, and is an Adjunct Scholar at the American Enterprise Institute.
Direct link to blog: http://blogs.forbes.com/ccap/2010/12/22/an-8-billion-misunderstanding/