« Default Rates and For-Profit Colleges- Becker | Main | The Entitlements Quandary—Posner »

06/20/2010

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Peter Cribbett

Off topic I know but I have wondered why those 'managing' the oil leak in the Gulf of Mexico don't seem to have put the market to work. Clearly, the oil companies, the government and the commentariat are flummoxed about what to do to stop the oil flow while the relief well is drilled, which still may take several months. Why not tap the ingenuity of the rest of the planet by offering a prize of US$100 million to whomever comes up with a workable solution that manages to stop the flow? The 'prize' could be paid by BP or the government and it would take but a few hours to set up a website to accept submissions. Given the accumulating damage and damage costs already in the billions, $100 million, which would likely provide sufficient incentive to get thinkers thinking, would be a very small price to pay. I notice a website has been set up asking for suggestions but offering nothing in return. With a prize, if they get no workable suggestions the effort would have cost them close to nothing.

Jimbino

I have both taught and recruited for private tech schools (like DeVri, but not) who attracted mostly high-school grads who were not "college material." While the electronics teaching was excellent, of course, the recruiting and other matters left something to be desired.

Having already worked and networked as an engineer in the high-tech industry of Austin, as a teacher at the school I was, with little effort and at no cost to my students, able to place them after graduation in good technician jobs in Austin just by calling around.

I was so successful that I was finally fired for my efforts for reasons of "competing against the school placement office." To add insult to injury, the gummint denied me unemployment compensation "for cause."

As a recruiter for a different private tech school, my job was to sell the applicant and his parents on the great career prospects offered by the school. As when I had sold Fuller Brushes from door-to-door as a youth, many times I had doubts as to the ability of the family to afford the steep tuition fees as well as of the applicant to benefit from the 2-year experience.

But since the government was footing the bill, almost without question, it would have been stupid of me to waste my time qualifying the family as to finances or the applicant as to ability to gain from the tuition.

Good teachers can't teach and a recruiter can't be forthright. The only answer to this conundrum, as usual, is to get the gummint the hell out of education.

NEH

Once again we are all confronted with the paradox of ideals (everyone should have access to higher education) and the reality (not everyone is college material and not all degrees and majors are valued the same financially). The question becomes, What do we want from "education"; educated individuals or mere technicians in demand by industry and business? The latter can probably pay off their loans. The former, good luck. Meanwhile, the money continues to drain. And as the lament goes, "I need a full time, paying job, with benefits". I've got financial obligations I've got to meet! The answer, "Go talk to the Chinese or Indians, we're all just out of work here due to our outsourcing and offshoring". Payback of loans educational or otherwise? That requires full time employment.

Jim

Wow!!! I agree once again with NEH. The basic politically driven philosophy that everyone should have a college education and everyone should own a home has once agian led to a disaster for both areas. We all know about the housing bust and now we will find out about the college bust not only in the for profit sector but in the traditional sector as well. Culturally desirable and "needed" by all and promoted as necessary by politicians, the cost has been and will continue to rise faster than inflation. So not only has the quality of college gone down, the value has gone down (everyone needs a master's degree) and the politicians will stand ready to jump in to fund ore and more of this "activity". I suggest a dirct analogy to health care. Look out, professors.

Robert Johnson

I think you have it exactly right: there is a mismatch between the goals of society and the incentives that potential students face. As a low income prospective student I have a motivation to, as you say, gamble on higher income against a possibility of the consequences that come with default. I gamble or not according to my guesses about my individual chance of success, and the costs I'll face (what do I have to lose?) if I don't succeed. In choosing between the near certainty of a future of very low income, and the possibility of a much higher life-long income, I may consider the penalties that come with default to be low. This probably explains why more students are taking that gamble than the larger society would prefer.

Kate McCann

If anyone who either worked for or attended a for-profit college in Chicago's south suburbs is reading this and is willing to be quoted in a newspaper article, please call me as soon as possible. I am writing a story about the proposed rule changes on recruiting practices, and want to speak with someone who has first-hand knowledge of for-profit schools, the tuition rates and what to expect after graduation.

Thanks,
Kate McCann
Education Reporter
The SouthtownStar
P:(708) 633-5960
kmccann@southtownstar.com

Dennis Tuchler

Why not make the schools with a high rate of student defaults guarantee all subsequent loans until the default rate falls below a particular level. That makes the school like a lender who eats the default, and therefore much more careful about whom to admit.

Prototyping

I just don't think the government can afford to spend any more money on anything right now.

Sam

So, you recognize the positive externalities associated with subsidizing education, but conclude that we should cut out low-income and largely minority applicants (which would be the effect of the “gainful employment” rule). We have a $90bn Title IV program. The question is distribution. Right now 25% of that goes to for-profit institutions that are statistically equivalent in graduation rates and defaults as community colleges and traditional Black colleges and universities.

My question is: If you believe in subsidizing post-secondary education, who should get the subsidies? Right now the Government collects 122% of the total amount of student loans it makes… is this a subsidy at all? And why do you characterize low-income and minorities who are attempting to gain and education and better themselves as “gambling”?

Miguel Villarreal

Sam - even if your statistic about default rates being the same at community colleges and for-profits is true - the fact that for-profits cost 3-4 times as much as community colleges do mean that the impact of for-profit defaults on the government as a lender is accordingly 3-4 times worse on a per-student basis.

Sam

Miguel - I was under the impression that tuition costs between 2-year college degrees was roughly equivalent. A quick check on my local commmunity college v. a local Devry confirms this. Do you have other information that I can look at?

Transor Z

Harvard might not be the best example right now, Your Honor. Recall that the IRS is currently auditing Harvard and a few dozen other higher ed institutions with an eye on their tax exempt status:

http://www.thecrimson.com/article/2009/4/23/hmc-tax-concerns-aided-federal-inquiries/

http://www.boston.com/business/articles/2010/01/12/irs_auditing_harvard_in_review_of_nonprofits/

S

Posner says it best when he realizes no big interest group has a stake in shrinking the industry. I can easily imagine a 2025 where the University of Phoenix has 100 times as many campuses as it does today.

The interesting part of this unfortunate situation is that we get to see the kind of growth a sector can exhibit with the right government subsidy. What if we were able to apply the same government subsidy to primary education, i.e. loans for k-12 for profit education. Assuming that consumers of these loans would be allocating their debt to the primary schools most capable of getting their children into good secondary schools we might see an improvement in primary education.


Miguel Villarreal

Sam, according to the Senate's report via the NYT:

the average tuition at for-profit colleges is $14,000 a year, compared with $2,500 at a community college and $7,000 in-state tuition at a public four-year college, the report found.

Chuck Matthews, SPHR

I am one of the market influencers. As a HR exec, I have always had a problem with the motives of educational institutions that depend upon profit to survive.

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Those who truly treasure the past will not bemoan the passing of the good old days, because days enshrined in memory are never lost.

Sam

All educational institutions depend on profit to survive, regardless of their tax status. I just spoke with a friend working for the financial aid department at a private college in Washington and he is routinely frustrated by their admissions people accepting students he knows won't be able to pay their debt. It's a competitive market - again, regardless of tax status.

Miguel, it would be good to see a net cost to the taxpayer. In-state public universities and community colleges receive subsidies above and beyond the Title IV program - something for-profit institutions don't receive.

Jack

I worked for a non-profit company focused on subsidized housing. We made a lot of money, we just spent a lot too. Non-profit universities seem to operate under the same principles, but we shouldn't confuse their motives with true do-gooders. For-profits are run for shareholder benefit and subject to market forces. Private universities have similar constituencies and must balance the same issues.

David Hoopes

Well, one thing is for sure. Any college education is really expensive. I work in the Cal State system. Our college as been squeezing out costs for 5 years. This school is running on fumes. But, it's still costs more per year than most people can afford (by costs I mean the costs to operate the school not what we charge students).

Michael Young

"The colleges are also very profitable, so most of them will be able to survive with lower tuition—which is a bit of a puzzle, since one expects competition to drive the average price of a product or service down to cost (including an allowance for profit, viewed as the cost of equity capital)."

Here's my hypothesis to explain this: the consumer-students using these colleges don't value price in the way you would expect; hence, they won't respond to price differences the way you would expect. To the extent that consumers aren't motivated by price, then, to that extent, it's not surprising that you would not see price competition; if offering a cut rate won't get consumers in the door, then why offer a cut rate?

What you *do* see (at least in tv commercials) is competition in the "it's easy!" category-- the offered programs becoming shorter and shorter, and promises of easy and convenient classes abound. Demand is apparently driven by offering less product. (As some wag once said, "Education is the only product where you *don't* want to get your money's worth.")

In other words, the market is broken because of irrational consumers who don't demand a real education and to some extent don't care about the costs.

sesli chat

I think you have it exactly right: there is a mismatch between the goals of society and the incentives that potential students face. As a low income prospective student I have a motivation to, as you say, gamble on higher income against a possibility of the consequences that come with default. I gamble or not according to my guesses about my individual chance of success, and the costs I'll face (what do I have to lose?) if I don't succeed. In choosing between the near certainty of a future of very low income, and the possibility of a much higher life-long income, I may consider the penalties that come with default to be low. This probably explains why more students are taking that gamble than the larger society would prefer.

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Pandora Bracelet

As a low income prospective student I have a motivation to, as you say, gamble on higher income against a possibility of the consequences that come with default. I gamble or not according to my guesses about my individual chance of success, and the costs I'll face (what do I have to lose?) if I don't succeed. In choosing between the near certainty of a future of very low income, and the possibility of a much higher life-long income, I may consider the penalties that come with default to be low.

Van Gogh

interesting what you got goin on here. could you share a few pointers maybe? im sturggling to get my blog even off the ground. you have my email if you don't want to post it here for everyone to see

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Well said, such a person should be a good sentence, or the future will be more rampant.will be happy to be proved wrong with this I have to admit to a raised eyebrow with this as well.

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