How the Financing of Colleges May Lead to Disaster
Rana Foroohar has an interesting review in the NY Review of Books:
Game of Loans: The Rhetoric and Reality of Student Debt
by Beth Akers and Matthew M. Chingos
Princeton University Press, 181 pp., $26.95
Diploma Mills: How For-Profit Colleges Stiffed Students, Taxpayers, and the American Dream
by A.J. Angulo
Johns Hopkins University Press, 203 pp., $29.95
Lesson Plan: An Agenda for Change in American Higher Education
by William G. Bowen and Michael S. McPherson
Princeton University Press, 163 pp., $24.95<
Solving the Student Loan Crisis: Dreams, Diplomas and a Lifetime of Debt
by Cryn Johannsen
New Insights, 132 pp., $11.95 (paper)
Capitalizing on Crisis: The Political Origins of the Rise of Finance
by Greta R. Krippner
Harvard University Press, 222 pp., $45.50; $22.50 (paper)
Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy
by Cathy O’Neil
Crown, 259 pp., $26.00
When the financial industry—banks, hedge funds, loan companies, private equity—gets too involved in any particular activity of the economy or society, it’s usually time to worry. The financial sector, which represents a mere 4 percent of jobs in this country but takes a quarter of all private sector profits, is like the proverbial Las Vegas casino—it always wins, and usually leaves a trail of losers behind. So perhaps alarms should have been raised among both financial regulators and educational leaders when, two decades ago, for-profit colleges began going public on the NASDAQand cutting deals by which private equity firms would buy them out. Apollo Group, the parent company of the University of Phoenix, was one of the first, becoming a publicly traded corporation in 1994, at a time when the university had a mere 25,000 students. By 2007 the university had expanded to 125,000 students at 116 locations. This was growth pushed by investors who viewed students as federally subsidized “annuities” that, via their Pell Grants and student loans, would produce a fat and stable return in the form of tuition fees.
It’s an issue that’s been front and center in recent months, not only with the scandal surrounding Trump University and the recent closure of the ITT chain of for-profit colleges, but also the news that Bill Clinton was, during five years, paid a total of $17.6 million to serve as an “honorary chancellor” of the for-profit college company Laureate International Universities. The sector has been raking in money for some time now. Throughout the roaring 1990s, for-profit college and university enrollment grew by nearly 60 percent, compared to a mere 7 percent rise in the traditional nonprofit sector.
As one Credit Suisse analyst looking at the $35 billion industry put it, “it’s hard not to make a profit” in the for-profit education sector. The stock prices of for-profit colleges and universities (FPCUs) reflected that; they rose more than 460 percent between 2000 and 2003 with much support from public subsidies. Their promotional budgets rose, too—Apollo recently spent more on marketing than Apple, the world’s richest company.
But education, sadly, did not benefit. As A.J. Angulo outlines in his detailed history of the for-profit sector, Diploma Mills, that’s because such schools spend a large majority of their budgets not on teaching but on raising money and distributing it to investors. In 2009, for example, thirty leading FPCUs spent 17 percent of their budget on instruction and 42 percent on marketing to new students and paying out existing investors. Is it any wonder, then, that investigations into the industry from 2010 to 2012 found that while it represented only 12 percent of the post-secondary student population, it received a quarter of all federal aid disbursements and was responsible for 44 percent of all loan defaults, many of them by working-class students who either couldn’t afford to graduate or, once they did, found their degrees were largely useless in the marketplace? As one critic of the system puts it in the book, “There is no way to escape being a slave to the quarterly report. Quality education and higher earnings are two masters. You can’t serve both.”
All this has huge ramifications not just for the victims of the for-profit sector (many are now waging successful lawsuits for debt relief) but for higher education as a whole. For-profit colleges and universities don’t exist in a vacuum. Their rise has happened in tandem with a fall in state funding for public education, budget squeezes at nonprofit state colleges, rising college fees (according to Bureau of Labor Statistics data the price of college and textbooks has tripled since 1996), a growth in student credit availability and debt, stagnant wages, and a rising sense of hysteria—sometimes justified, other times not—that the system of higher education in America is broken and must be fixed.
Certainly all these factors have been huge issues in the 2016 presidential campaign, propelling the unlikely success of Bernie Sanders during the primaries. One of the most memorable moments of the Democratic National Convention came during Sanders’s speech, when young delegates wept as he endorsed Hillary Clinton. She has, in turn, been under political pressure to take up his banner; her platform now includes a mandate to make in-state tuition free at public colleges and universities for all Americans whose families make up to $125,000 a year.
Thoughtful people can disagree on whether college should be free, and if so for whom, but it’s a timely and important question. As Harvard academics Claudia Goldin and Lawrence F. Katz made so clear in their 2008 book, The Race Between Education and Technology, economic growth and national competitiveness are predicated on education staying ahead of technology, thereby enabling workers with higher and higher skill levels to be more productive. Economic growth basically depends on productivity plus demographics. Since the 1980s this link has been broken, as educational attainment in the US has faltered—over the last thirteen years, the US has ranked third from the bottom among OECD nations in gains in education attainment beyond high school.
One result, according to Goldin and Katz, as well as any number of other experts who study the topic (see William G. Bowen and Michael S. McPherson’s Lesson Plan, for instance), is slower economic growth. . .