For decades, regulators have had only limited success in taming a for-profit college industry that routinely defrauds students, inflates prices, and produces devastatingly bad outcomes for student loan borrowers. But recently, instead of promoting complex regulatory schemes, some policymakers have offered a simple solution: take away for-profit colleges’ federal subsidies. Today, Rep. Pramila Jayapal (D-WA) and Sen. Sherrod Brown (D-OH) introduced the Students Not Profits Act to remove for-profit colleges from eligibility for federal student financial aid. A ban on federal subsidies is currently the only solution that truly confronts the power imbalance that has built up in the for-profit education sector and also ensures sustained improvement in affordability and equity for all students.
To understand why a ban on subsidies for for-profit education is important, it’s helpful to have a little background on the industry—and its relationship to the federal government. For-profit colleges represent a relatively small slice of our nation’s higher education system—just 5 percent of students attend these institutions—but they eat up a disproportionately large share of federal grants and loans for college. About 13 percent of Pell Grant dollars go to for-profit institutions, and almost a third of for-profit colleges derived between 80 and 90 percent of their revenue from federal sources in 2014. And students who attend for-profit colleges are far more likely to incur significant debt.
The substantial investment of federal dollars in for-profit colleges is problematic for three reasons. First, it subsidizes institutions that maximize extraction, offering educational programs that are of very low cost to the institution at very high prices for consumers. The very worst for-profit institutions even engage in fraud and misrepresentation to maximize profits. Second, it subsidizes programs that have exceptionally poor outcomes—both in terms of students’ likelihood to complete an educational credential and their ability to repay their debts upon leaving school. Third, it allocates federal money toward for-profit colleges that have targeted populations that are already marginalized by our higher education system: students of color and low-income Americans.
As my colleagues Nell Abernathy, Darrick Hamilton, and I wrote in New Rules for the 21st Century, the markets-first neoliberal thinking of the last five decades has instilled in many policymakers an inherent distrust of government solutions, as well as an unfounded assumption that markets will be most effective in solving public problems. In this frame, regulation seems like the best option for dealing with the scourge of for-profit colleges. But in that same paper, we offer a different framework for understanding how to think about the best way to deploy government investment and influence in areas like education: analyzing how concentrated private power affects a particular market and how public power—government power—can most effectively be deployed to meet people’s most fundamental needs.
Looking at for-profit education from the perspective of power clearly shows why the government’s subsidize-and-regulate approach hasn’t worked. The rules and incentives that have resulted in a concentration of power in the economy writ large have had a powerful effect on for-profit education. Current tax policy incentivizes wealth hoarding by those at the top of the economy, including colleges’ corporate executives. “Shareholder-first” orthodoxy incentivizes publicly traded colleges to invest in ways that maximize shareholder profit over value for customers and tie corporate compensation to share values. Lax enforcement of antitrust and consumer laws incentivizes colleges to consolidate market power under huge umbrella companies and market their programs aggressively. And the limited regulation of private equity incentivizes private investments in for-profit colleges that are aimed solely at profit, decimating both schools and students’ prospects in the process. Taken as a whole, these incentives drive for-profit colleges to find the most expedient ways to draw in students and federal dollars, and they make it exceedingly difficult to craft a regulatory scheme that steers the schools toward focusing on students’ and taxpayers’ best interests.
Of course, regulation sometimes works. Between 2010 and 2016, a sustained push by policymakers and advocates to investigate and rein in the industry resulted in a substantial drop in enrollment and widespread college closures. But as The Century Foundation’s Bob Shireman points out, effective regulation in this space is cyclical: “federal money stokes scandals, regulations are adopted in response, the regulations are then relaxed, and the scandals repeat.” That’s because for-profit colleges have been able to convert their economic prowess into an enormous amount of political power. For-profit colleges leverage our government’s susceptibility to corruption and influence peddling by hiring influential former legislators as their lobbyists, making campaign contributions to key policymakers, investing in think tanks who support their point of view, and even funding “astroturf” campaigns to mimic grassroots advocacy for their positions.
As we argue in New Rules, tackling concentrated private power in the economy and our government is essential to building a stronger economy—and doing so could really change the incentives and practices at for-profit colleges. We can take some big swings at the incentive structure that governs for-profit colleges, and we can sever the link between financial power and political influence.
But even then, subsidizing for-profit colleges would not make sense, because it is not an effective use of public power. The federal government has two main goals in higher education: ensuring universal access to college for all who want it and eliminating the effects of discrimination in postsecondary education. Subsidizing private providers in the market is an exceedingly difficult way to do this. The government must ensure quality and equitable access without much direct control over either, while fighting against the market’s incentives to do neither. Further, the government must find the appropriate level of subsidization in a field where the cost of providing quality education is unclear, and for-profit providers have a strong incentive to inflate prices and extract profits. The government’s goals are far better served by offering a “public option”—through a set of public colleges that are accessible to all, that seek to overcome the history of discrimination in higher education, and that set a floor for quality in the higher education market.
The case against federal subsidies to for-profit colleges is compelling. But two main barriers stand in the way of a ban. First, the notion that a market-based approach is better, more effective, and somehow more just than public provision is deeply embedded in our political culture. Second, for-profit colleges still hold substantial political power. These obstacles are substantial, but not insurmountable. Overcoming them starts with leaders who are willing to speak up and make a principled case for a better economy and society.