Study: Attending a For-Profit College During Economic Downturn Might Be a Bad Idea
By Allie Bidwell, NASFAA Senior Reporter
Lawmakers and higher education experts looking to hold institutions accountable for student outcomes and ensure taxpayer dollars in the form of financial aid are being spent responsibly often question whether some colleges and universities may actually harm students, rather than arming them with the knowledge and skills they need to succeed after completing their programs.
According to a new working paper published this week in the National Bureau of Economic Research, students who attend for-profit institutions, particularly during a recession, are more likely to take on student debt, to borrow larger amounts, to default on those loans, and to have poor labor market outcomes, in comparison to their counterparts at public or private non-profit institutions. While previous research has made a connection between for-profit college attendance and poor outcomes, past studies have had a difficult time overcoming a selection bias that prevented them from showing a causal connection between the two—specifically because for-profit institutions tend to serve a larger proportion of students from disadvantaged backgrounds, which could in theory drive the negative outcomes.
But the new study—conducted by Luis Armona of Stanford University, Rajashri Chakrabarti of the Federal Reserve Bank of New York, and Michael Lovenheim of Cornell University—argues that there is indeed a causal relationship between for-profit attendance and lower outcomes, and that students’ enrollment choices are influenced by the availability of institutions in their local area. The authors showed a causal relationship by employing data demonstrating how the demand for college is affected by a negative labor market—such as a recession—and the supply of for-profit institutions in a given area.
This methodology overcame the selection bias, Lovenheim explained, because when the labor demand is low, people are more likely to go to college, and the types of individuals going back to school are similar. However, those students may have different options to choose from based on where they live.
“The main takeaway is that for-profits on average produce worse outcomes than comparable public colleges and universities,” Lovenheim said. “Typically in economics, we think if there’s an option that is worse and that is more expensive, that option should go away.”
Overall, the authors found that students who enroll in four-year for-profit institutions on average take out one more federal loan than public school students, originate more than $3,300 more in student loan debt, are 11 percentage points more likely to default, are 11 percentage points less likely to be employed, and have lower earnings.
“Among four-year institutions, our results strongly suggest the return to for-profit enrollment relative to public four-year enrollment is negative,” the authors wrote. “Students could earn more, take on less debt, default at lower rates, and be more likely to graduate if they attended a public four-year institution.”
Two-year for-profit students are more likely to borrow, and on average take out more than $6,400 in debt compared with those in public institutions. They’re also 21 percentage points more likely to default, and are 36 percentage points less likely to be employed (although the estimate is not statistically significant).
Lovenheim said that in terms of policy implications, the study highlights a need for better and more accessible information on college options.
“The information they’re getting is not evenly distributed across their options,” he said. “Policy can come in, in thinking about not to say we should make students go to University A versus University B, but how to get students an accurate set of information so they can make an informed decision that would be best for them.”
Another aspect, he said, comes down to the public’s interest in ensuring taxpayer dollars are spent wisely. The authors noted in the study that about 17 percent of Pell Grants and Stafford loans go to students attending for-profit institutions, totalling to more than $17 billion.
“For-profits, while private, are massively subsidized by the federal government,” he said. “There is a fiscal responsibility if we’re going to spend a lot of money on financial aid. We need to think about how this money can be spent in the most productive manner.”
Publication Date: 9/20/2018
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