‘The For-Profits Care More for Their Students’

Inside Higher Education has just released its second annual survey of college presidents on their views about major problems and challenges facing higher education. Over 1,000 presidents responded to the survey, from all types of schools, including over 50 for-profit institutions. To me the most interesting finding is that public and private schools have somewhat different top-level issues they ponder, and that the for-profit schools are clearly more student-centered in their concerns than the not-for-profits, a marked contrast to what to some is conventional wisdom. Before discussing the differences however, it is important to note that for all three groups (public four-year schools, private four-year schools, and for-profit schools) whose data I examined, “potential cuts in federal student aid” was either the most important or second (of 14 listed) most important issue. There are two possible interpretations of this. The conventional wisdom is that college presidents are extremely concerned about student affordability and access, and cuts in federal aid threaten that access. A second, admittedly more cynical but I think more accurate interpretation, was suggested by Education Secretary Bill Bennett some 25 years ago, and addressed in a symposium at Minding the Campus February 20. Higher federal student financial aid translates into higher tuition fees, which, in turn, means more money for universities. More student financial aid means more money for universities. Taxpayer money is transferred not to students (in some meaningful sense) but to universities–a stealth form of federal higher education subsidy. The evidence is strong that this second interpretation is probably closer to the truth. Stephanie Riegg Cellini and Claudia Goldin nicely demonstrated that empirically recently in a study for the National Bureau of Economic Research, showing that schools where students were eligible for federal assistance responded with bigger tuition hikes after federal financial assistance increased than schools where students were ineligible for such aid. And my colleague at the Center for College Affordability and Productivity Andrew Gillen demonstrated it using both simple economic theory and logic (along with some empirical observation). Bill Bennett is right. I appeared on his radio show recently, and the reaction from listeners suggests many agree with the Bennett Hypothesis. But even more interesting to me was the difference in the concerns of private versus public school presidents. For the 228 presidents of public four-year schools, the other two major concerns were “declining state support” and “budget shortfalls.” Because I think the concern over student financial aid cuts is, in effect, also a budgetary concern, I would say that all three of the top concerns of state university presidents related to finances and budgets. Not only does money matter to these persons, it is almost true that “money alone matters.” Let the Market Work This is in contrast to the 372 private not-for-profit presidents included in the survey. Aside from the common concern about cuts in federal student aid, they were most concerned about “rising tuition/affordability” and “increasing competition for students.” As I see it, these reflect greater sensitivity to markets in general and the customer in particular. And these schools, on average, are more tuition-driven. At some of the schools, tuition and other fees are 70 or more percent of total revenues. Thus, if students balk at a college on cost grounds, its existence is imperiled (obviously, this is not true for wealthy highly selective admission schools, but those schools are certainly a minority of the total sample). The same applies for “increasing competition for students” which, to a private college president, leads itself to greater tuition discounting and/or provision of greater amenities like luxury dorms and recreation centers with huge climbing walls–both of which are costly. Price and quality competition are more important than in the public schools that are more insulated by subsidies from market forces. What about the presidents of the for-profit schools? Aside from the universal concern about potential cuts in federal student aid, their biggest concerns were about “student assessment and educational outcomes,” as well as “increased competition for students.” Alone among the groupings of presidents, the for-profit providers had very strong interests in student outcomes. Successful students are, on average, happier and financially more successful, so they spread the word about the fine educational offerings of the relevant school. They are good for business. As Adam Smith stated so beautifully 236 years ago, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest.” The for-profits are totally dependent on market forces for their fate. Nearly 100 percent of their income comes from fees paid by customers (to be sure, a very substantial portion of this income comes from government-run student loan programs). The incentives, therefore, are to make the customer happy, to focus with laser-like intensity on what it takes to create a class of consumer who extol the virtues of the school. Those incentives are muted (as Smith predicted) at endowment-laden schools which have 10 applicants for every place in the entering class. They are muted also at state schools where tuition dollars pay a small minority of the school’s bills. The market-driven schools focus more on outcomes, while other schools are more obsessed with inputs. Critics of for-profit higher education like Senator Tom Harkin have it backwards: it is the for-profits that care the most for students, and push them to learn, because it is in their self-interest to do so. The bashing of this sector by the Obama Administration and its allies is, therefore, all the more unfortunate. From all of this a general rule of college presidential behavior emerges: the more a school is exposed to the forces of demand and supply in a competitive marketplace, the more it is likely to focus its efforts on improving the quality and satisfaction with the learning experience. That is the primary reason why I believe true educational reform must involve exposing higher education more to market force.