An article in the New York Times yesterday discussed the moratorium imposed last week by the New York State of Regents on new for‚Äìprofit or commercial colleges in that state. Commercial colleges have been growing rapidly nationally, and the Times' article discusses problems that have been found with some of them in New York and elsewhere. Despite various abuses, I believe that for-profit colleges and universities fill an important need, and the moratorium imposed by New York is unwise and should be lifted.
Government-run schools dominate higher education in most countries, including the U.S. where some 70-75 per cent of undergraduates attend public colleges and universities. To be sure, private non-profit colleges and universities make important contributions in some countries, such as the University of Chicago, Stanford University, and Swarthmore College among many others in the United States, Keio University and numerous little known other schools in Japan, and Insead in France. During the past thirty years, the number of for-profit colleges and universities has grown rapidly from negligible numbers, especially in the United States but also in China and elsewhere in Asia. The Career College Association, an association of for-profit postsecondary institutions, lists over 2000 members, and that association does not even include the best-known for-profit colleges, The University of Phoenix and DeVry University. Phoenix is the largest accredited private university, and among the oldest of the for-profit universities. It was founded in 1976, enrolls 100,000 online student, even more students at 170 campuses in over 30 states, and it is publicly listed with a market capitalization of several billion dollars.
According to the Times' article, commercial colleges enroll about 7 per cent of students in higher education in NY State. This is even without the University of Phoenix, which has not yet been allowed to enroll students in that state. Other states also have rapidly growing enrollments in for-profit colleges, although I do not have figures on their enrollment shares.
What explains the boom in commercial colleges, given the difficulties in competing against highly subsidized taxpayer-financed institutions, and private non-profit institutions with considerable endowments, and exemption from property and income taxes? To me, the obvious answer is that commercial colleges are meeting a need not met by these other institutions. For-profits generally enroll lower income and older students who are disproportionately African‚ÄìAmerican and from other minority backgrounds. They offer specialized programs with classes that often meet in the evening and at other convenient times. Such opportunities are usually less available at cheaper government-run colleges and non-profit institutions.
In addition, for-profit institutions have taken the lead in providing online education that offers the greatest flexibility for working students. Students can take online courses in the evening, weekends, before they start working, or at other times that are convenient for them. Online courses do not allow direct interaction among students and faculty available in classrooms, but virtual classrooms provide opportunities to chat with other students no matter where they are located. In addition, they often provide direct and immediate access to faculty who answer questions and provide other information. No wonder that hundreds of online for-profit institutions continue to operate even after the crash several years ago of internet-based companies. Some of these online institutions offer degrees, including advanced degrees, while most offer specialized training in particular areas, or refresher courses for out-of-date professionals.
Students at certified for-profit colleges have long been eligible for federal-backed loan programs, and are also eligible for most state programs that provide financial assistance, such as New York State's extensive tuition-assistance program. Since for-profits enroll relatively many students from poor backgrounds with modest earnings, it is no surprise that their students take a disproportionate share of federal-backed loans and state grants. For example, according to the Times‚Äô article, they get 17 percent of the tuition assistance provided by New York while enrolling only 7 per cent of the students.
The Times concentrates on a few examples of corrupt practices uncovered in New York State and elsewhere. In addition, it is well known that students who went to proprietary colleges have higher rates of default on federal-backed loans than students who went to state or non-profit institutions. For-profit institutions have been accused of false advertising about their programs, very low standards for admission, and even changing student answers to make them eligible for state aid.
However, no one to my knowledge has conducted a good study that analyzes the frequency of misleading advertising, or deceptive and dishonest practices, at commercial institutions of higher education compared with state and private non-profit institutions. Many of the private and public non-profit colleges and universities are guilty of shoddy teaching, misleading claims in their handbooks and advertising about what students would learn at their institutions, taking students in PhD programs where jobs are almost impossible to find upon graduation, and other false, misleading, or immoral practices. The late George Stigler, a Nobel Prize winning economist, wrote a humorous essay entitled ‚ÄúA Sketch of the History of Truth in Teaching‚Äù (reprinted in his collected essays The Intellectual and the Marketplace) where he basically argues that if traditional universities were held to the same standard of truth as private companies, they would be subject to large and numerous lawsuits.
Some economists have argued that non-profit organizations perform better from a social perspective than for-profit firms when customers have difficulty assessing various hidden qualities of the services provided. But that argument does not seem important in comparing performances of non-profit and for-profit institutions of higher education. Students can usually quickly evaluate the type of teaching they receive, and they can also learn whether graduates of their institution get good jobs. Many students at commercial institutions may overestimate their abilities and the job market they would have upon graduation or finishing a program, but that is also likely with students who major at the most prestigious universities in subjects where few jobs are available, such as Icelandic Literature or Medieval European History.
Commercial colleges have grown rapidly in a highly competitive industry where other colleges are greatly subsidized. This suggests that they generally are filling a useful niche inadequately covered by traditional colleges and universities. Sure, lying and cheating by these institutions should be attacked by private and public lawsuits, but government moratoriums and other orchestrated attacks should not be the way non-profits are allowed to fight off new and tough competitors.