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Dan C

For Profit colleges reflect the failure of our secondary schools - students who graduate high school without job skills and without the ability and/or skills to attend more traditional colleges.

Community colleges frequently compete for these students, and I would suspect that community college administrations and staff fully support restrictions on for profit schools.

I would also expect that many of the troubles that the State of New York is finding in for profits schools are the same problems that most community colleges face.

I would also look at the impact of the changes in welfare regulations on enrollment in these for profit schools. i.e. the requirement that recipients work or attend school can encourage scam schools. Neither the students nor the school have an interest in education, they are just playing the system.

Arun Khanna

We need minimum standards for SAT and ACT scores for for-profit (and non-profit) universities that want to get government subsidized student financial aid packages. Otherwise, for-profit universities with low or no standards can end up being a public burden (by graduating students who cannot repay their college loans).


I am pretty sure I've heard some on this blog question the non-profit status of some church or religious groups. The same questioning might be directed toward "non-profit" colleges. A lot of non-profit private colleges behave in ways to maximize the size of the endowment, which does not always seem consistent with education, research, the overall economic health of the community (local or national), and the utility of students.

Look at the Univ of Michigan - how can you have such a large endowment and such a currently lousy economy in Michigan?

I've also heard on this blog that sometimes admissions slots at elite universities are auctioned away or allocated to donors. This seems like for-profit activity to me. Admissions slots are sold. Instead of denying this... why not add more liquidity, openness and transparency?

So part of success of "for-profit" colleges may be due to market inefficiencies and Type I and Type II errors at private universities - private universities may every once in a while hang out out with a dolt and deny access to passionate, talented people of relatively little means or connections.

The issue is a lot more than the rambling in this comment.


One more: i know for a fact that the admissions process at a certain college is or was misleading - point blank. This is very easy to ascertain for a candidate because the candidate can compare the process and answers provided by two different schools, and can compare reality to representations.

It might be an agency problem: someone may have orally misrepresented the university's policy to an admissions candidate.

In any event, if a university misleads an admissions candidate for whatever reason, the university in my mind has lost a lost of respect.

It is all about the endowment and reputation. Quality too.


Very interesting topic. As I see it, a key factor in the whole analysis is signalling. Specifically, individuals obtaining an education to signal future employers about their intelligence and schools signalling prospective students about the quality of the education they will receive.
Individuals signalling employers is my primary concern with regard to for profit colleges and universities. Specifically, I do not think most employers perceive for profit schools as providing a particularly good signal. Getting a degree from the DeVry Institute is basically a joke. However, this just begs the question: why is getting a degree from a for profit institute a joke.

This gets to the second issue: signalling to the prospective student. Obviously the problem the school faces is that it needs to signal to the student that he/she will receive something of value. Once the student is at the university the university has an incentive to "defect" i.e. provide lousy service. this is of course a problem in all sorts of transactions. A bank has an incentive to get your money that then abscond. One solution to this (for the bank) is a quality investment. For example a bank buys a big solid immovable building to signal that they don't plan run out of town in the middle of the night. Therefore might non-profit status be a similar quality-investment-signal for a university. In other words a university is saying "our committment to quality education" is so great we will forgo the possibility of profits entirely. Moreover, presumably, it takes a very long time for universities to develop a reputation for quality (at least 10-20 years). A for profit institution may not be able to provide the kind of high quality service for 20 years (at a loss) necessary to establish a reputation for quality. If employers (and indirectly students) begin taking profit or non-profit status as a signal for quality the problem becomes even worse. Basically for-profits must make a huge investment in "brand" to establish that they offer quality services.

I obviously do not have empirical data to support this speculation. However, I would suggest that it is intuitively plausible for the lack of for profit institutions with a high quality reputation. I'd be interested in what others think.


In response to Arun Khanna's comment, the ACT and SAT are tests that are more geared for a liberal arts education and many of these for-profit schools are have specific programs that would not be in the liberal arts category (nurse assissant, construction, etc).

However I do agree that the problem and solution of 'scam schools' lies in the ease of government loans. The recent collapse of Decker College was major news in my hometown. The newspapers were filled with stories of students who went through the government loan process in a matter of minutes. The stories implied that many of the students were not fully aware of the amount of debt they had taken on until much later.
It would appear that maybe that process is being mismanaged.


Overall, private college are more likely to serve their students better than public institutions and the public funds spent on public universities to support the cost of students would be better spent as grants and subsidized loans to the students.

For the corrupt practices, they should be divided into tow types, those that exploit students financially (purposely leaving out the potential waste of time) and those that exploit the public through student public financial aid, including veterans benefits.

The government could collect data and require that colleges that want to have the federal governmentís accreditation and thus public funded financial aid for students, have to show their government ratings to potential students. The standards would show graduation rates, salaries within one year of graduation and percent who went on to graduate school, and student debt at graduation. Colleges with better government rating would be able to get a better mix of public grants versus public subsidized loans for its students.

However, colleges with bad ratings or who refuse accreditation could still operate and students could still use public unsubsidized loans there. However, such colleges should be required to warn students of their lack of government accreditation.

This policy would lower the costs of information gathering for students and help create greater accuracy in the prices of higher education that students face in terms of public funding.

Another idea is to have the private colleges with bad ratings have to be partly responsible for students who default on their loans (and require insurance for those colleges who may not have the capital to cover such defaults).


For profit college or university are the result of following market demand:
(1) required jobs for many of researchers, scientists and engineers after the bubble years. Teaching would be one of the jobs that suitable for the thousands that got laid off from Telecom/electronic bubble days. Just check the resumes of the personnel will tell you the percentage.
(2) lack of capability to differentiate talent of a potential employee by so called HR.
(3) artificial inflation of both marks and degree (lack of capability of judge the talent of existing employee by the so called HR)
(4) Instability of workforce due to the current industry environment. High demand on 3rd party certification regarding the professional experiences in order to compete in the job market (other creditation service also high in demand, such as PMP, PENG, etc).
(5) As for the differentiation of "for profit" and "non profit", it is almost less difference than 10 years ago. Just look at the EXEC-MBA at the so called "non-profit" U...
(6) Many university/college took short cut to make maximum profit on "degree". For example, "science/engineering MBA" program utilize the engineering student's math background to fast track the MBA program (not the program got anything to do with a specialized MBA program with engineering profession in the industry).
(7) Gov. subsidy to the excessive workforce in term of masked "unemployment insurance". By keep them in the school of any-form in order to delay the effect of current job shortage. (hopefully, after next election)...

Unless the demand is changed in the market place, some form of the sub-standard college or university, or what ever the certification organization will exist and possibly, flourish under one way or the other of Gov. encouragement.

by the way, the overhead costs in current "for profit" or "non-profit" high education is scary. The high cost of the education has little impact on quality. Very sad situation.

my 2 cents.
j (one with lack of education)


If for-profit schools accept students that more traditional universities don't, then they're almost certainly going to have lower graduation rates, fewer students getting good jobs after school, etc. This isn't because of any inherent evil in for-profit schools, just because the for-profit schools are taking people with lower test scores and grades, which probably means less intelligence, less background knowledge from what they learned in previous schooling, and less persistence in studying and doing homework and so on.

The same issue arises in evaluating different grade schools and high schools. If school A has mostly poor minorities, and school B has mostly middle class white kids, school B almost always has better test scores. The schools should definitely do better teaching poor and minority kids, but you can't blame all the difference in outcomes on the teachers--they were working with different populations of students.

Josh Doherty

My first impression upon reading this post is that the underlying assumption is that the demand for private (esp. online) education is rooted in continued development.

I suspect, but can not prove, that most of the demand is driven by hollow reward systems. For example, in many school districts, an employee is eligible for a certain salary band if he possess a degree of a certain level. There is no consideration for the quality of the degree. As a result, we see demand for privite courses which are not very demanding to acquire. This follows the economic truism that supply does not create demand, rather demand generates supply.

It would be very interesting to see a breakdown of the type of degrees awarded and the professions of the customers. I suspect that a high percentage work int he public sector and are trying to satisfy degree tiers that give no consideration to quality.

Andy Kneeter

I've research the University of Phoenix for investment funds. It specializes in the non-traditional adult learning market (age 24 & older); which a couple of years ago became larger than the traditional market (18-24). This is the result of workers needing continuous training for their jobs & promotions, workers desiring credentialed education (vs. non-credentialed education provided by their employers), & poor K-12 nationwide education leaving high-school graduates inadequately prepared for the work force.

Commercial universities have several advantages over traditional pedigree universities in competing in this market. They devote all their resources to teaching students & marketing (nothing to libraries, dormitories, cafeterias, etc...). They don't have tenure, so professor pay is tied directly to teaching benchmarks (numbers of students, retention & satisfaction). Commercial universities don't have pedigrees to protect, so they can aggressively build brands in non-pedigree adult markets. They have stronger marketing cultures & resources than traditional universities (UoP's growth is impressive). They are nimble businesses that respond quickly to market demand (new degree programs are developed in months; rather than years for traditional universities). Finally, their focus is on satisfying their "customers" (students); not on internal politics. UoP's goal is that every customer be able to immediately apply what they learn after class is over.

A huge challenge for any commercial university is accreditation; because the accreditation organizations are controlled by traditional universities that look down upon & are threatened by commercial universities. John SperlingÔøΩs (UoPÔøΩs founder) dogged persistence enabled his company to overcome this; opening the door for other commercial universities to follow.


I wanted to weigh in and say that I think that the discussion here largely makes an erroneous comparison and consequently, the analysis largely misses the point. Both Becker and Posner start with a premise–there are the typical non-profit schools (Harvard, Swarthmore, UMich and U of C). They then proceed to compare the non-profits to these institutions, assuming that the people attending the University of Phoenix generally would not be accepted into any one of these four schools. While their assumptions are true, their comparison is inapt, and this is the root of the problem. Here’s why:

First, the comparison neglects the tiers of higher education. There are not just private, public and for-profit institutions, but a whole myriad of varying quality within each of these designations. There are 5 standard tiers. First, the Ivy and Quasi-Ivy leagues. These are institutions with strong job placement and that cast a positive light on their students (ie. high IQ and industrious). Attending here is a net gain for the students; the mere diploma (the Yale Seal of Approval) gives additional opportunities.

The tier down would be a true flagship state school in the state where the student lives–for example, the University of Idaho--or flagship regional private schools. Admission says little about the students. They may have foregone a top ivy education for financial or family reasons, or they may be here since they couldn’t get into Swarthmore. No one knows. Grades will count substantially more here in terms of prospects at the end, and generally the opportunities here are divvied up based on the student’s successes. As the student is judged totally based on her record, with no additional opportunities based on their alma matter’s reputation, going here is largely a push in terms of both short and long term prospects.

Below these institutions are the non-flagship state schools and well-respected regional private schools. Essentially, these schools remain a push to the top of the class, assuming that the students can supply a good reason for their choice. But these schools begin to limit their students, and send signals to that effect. In practice, often students here are viewed as not being able to get in (or stay in) the U. As a result, the students here begin to suffer a net loss based on the reputation of the alma matter–their accomplishments are discounted by the relatively lower esteem that the institution is held in. The student suffers short-term, and potentially long-term, loss of prospects.

Then there are the “Harvards on the Highway”–normally private non-profit institutions who specialize in taking students that no one else would take. These institutions normally take students who couldn’t get into the U and may have failed out of the non-flagship state school too. They offer a college degree and experience to those who want it, but the job prospects on graduation are limited and the school’s reputation causes the applicant and his accomplishments to be severely discounted. The general presumption is that the students are there because they are incapable of going “someplace good” and that their skills will prove sub par. Short and long-term prospects are undoubtedly impaired without a significant showing by the student to rebut this presumption.

Then there are the technical and community colleges, who generally do not compete with the four year and graduate programs, but to the extent that they do, can be lumped in tier four.

What this means in practice is that a high school graduate who wishes to teach math in a public school in her rural American hometown probably shouldn’t go to Harvard. Assuming that this Teacher X is certain she wishes to do this, and does not put any value on the prospects that a Harvard degree would offer for mid-career moves, the analysis is straightforward. The job prospect is a (at best) 30k a year starting salary job with minimal advancement assuming the principal is young stays until retirement, where most of the other professionals in the school will not have gone to Harvard or any other school that interacts with it, and who will likely not care–or will be inclined to dislike Teacher X–because the credibility signaling Harvard offers. Balance these advantages against the cost of Harvard, and you likely get a negative number. So where does Teacher X go?

The foregoing analysis is simply an exercise in wealth maximization, which plays a guiding role in what tier a student will choose within the options that are open to them. In practice, the calculus should look something like this: Add the job prospects, peer & professional networking opportunities, and credibility signaling (Or, more crudely the “You went to Harvard?!” effect) benefits from each tier and then weigh the sum in dollar terms against the cost of the education. You should select whichever tier offers you the best value.

Given this, the comparison above seems fallacious. Obviously, using this calculus, a student capable of admission into Harvard will never choose UoP, and for that reason UoP shouldn’t be compared to the first two tiers. For-profits do not compete with Harvard. And if the applicant could get into the flagship U, the scholarship money waiting for them at a tier 3 school would also make UoP unacceptable. Finally, the difference between UoP and a tier 3 school would be so significant in terms of job prospects that mere admission into a tier 3 institution would also make UoP largely unappealing. So, for the most part, for profits are competing with the fourth tier–also schools that tend to leave employers viewing applicants from them in a negative light at the outset.

Limiting the comparison to UoP style for profits vs. Harvards by the Highway changes the analysis. The objections to UoP apply to HoH with equal or greater force. Both schools have every incentive to over-enroll, accept unqualified applicants, and accept applicants who likely will not repay their debts. Further, neither is renowned for its educational excellence, nor is either thought to have particularly high earning alumni. Consequently, it is hard to see why the UoP should be castigated, and Party U should not be.

At the same time, we need a bottom to prevent a vicious cycle where various HoH’s race to the bottom in terms of grade inflation, wholesale student acceptances, and poor instruction. The typical devices fail in these settings since many of the factors that weigh on the top tier schools do not bother the lower ones. Party U is not concerned with its USNWR ranking, nor is it terribly concerned with its community standing beyond simply being accredited, a lower bar, and it isn’t as concerned about giving employers adequate signals about which graduates can do the job.

However, UoP (and other online schools especially) set a floor–if a degree from HoH is no more valuable than one from UoP, why not attend the latter from the comfort of one’s living room instead of going all the way to route 31 to attend Harvard by the Highway? This encourages HoH to up the ante in terms of instruction and corresponding employment prospects, which in turn makes the prospect of student loan repayment more likely, even though it has other schools in the area competing with it for students.

In short, for-profit U’s, which have a very small portion of the market, perform a very valuable thing–they stimulate other schools that would otherwise race each other to the bottom to raise their standards collectively.

We should be comparing this benefit against the costs that UoP and its progeny visit. And this should be the only point of comparison. Often debates like these take place between members of the Ivy elite, those of us who have never darkened the door of a Harvard on the Highway, and never will. It may be beyond us to understand the motivations of those who do choose to attend, and this is certainly understandable. However, the reason we lend money to these schools, and should encourage UoP to compete and prosper, is the belief that some of their graduates will turn out. Maybe this makes economic sense, and maybe it doesn’t; I personally reserve judgment on that. But the intrinsic effects of an educated populace are valuable and as long as we are willing to pay for this, we shouldn’t discourage devices that will result in a net gain to the system as a whole. UoP makes its competitors better, and that’s not a bad thing.

Dan C

I recently read an article that said that if a 40 something worker loses their job, and they seek retraining, they can expect to increase their future lifetime earnings by about $10,000 - $10,000 in total future earnings.

It would appear that the return on investment for older adult students is very small. Retraining programs for displaced older workers seems to be a waste of money.

However many government funds to displaced workers requires that they seek some education. The students know that the process is of questionable worth. The schools know it too.

Ford Motor Company is offering workers the opportunity to return to school with Ford paying for some education, or they can take a lump sum. ( I think they have some other options.) Most of the workers would be smart to take the money. Looking at fifty and thinking that education will help them start a new career, is for most, a false dream.

I read the New York Times article, and while I dislike a lot of government intervention, I can't help but feel that these for profit schools are selling snake oil to desperate people.


I am confused. 1st half of your mail talks about how different different institutes serve for different market (sure agree that U of P is no Harvard), but the last para "U of P make its competitor better" just not logical... Sure you not mean competitor to Harvard, do you? If U of P or others like it, just issue a paper with added differentiation in the name of degree, sure it would make its competitor better or at least, different.
Totally confused... must be lack of either U of P or Harvard alike education.. sorry...


J--you might want to read the post again. But here are my responses:

[T]he last para "U of P make its competitor better" just not logical... Sure you not mean competitor to Harvard, do you?

The post goes through the lengthy exercise of defining the tiers of schools to make it clear that the comparison, and competition, should be between the fourth tier and the for-profits. And the logic of making that competitor better is provided in response to your second question.

If U of P or others like it, just issue a paper with added differentiation in the name of degree, sure it would make its competitor better or at least, different.

However, UoP (and other online schools especially) set a floor–if a degree from HoH is no more valuable than one from UoP, why not attend the latter from the comfort of one’s living room instead of going all the way to route 31 to attend Harvard by the Highway? This encourages HoH to up the ante in terms of instruction and corresponding employment prospects, which in turn makes the prospect of student loan repayment more likely, even though it has other schools in the area competing with it for students.


In response to the various commments that for-profit schools are only offering paper degrees with no really skills behind them. 1st, employers would surely notice that these retrained workers were not offering increased productivity to jusify increased wages. The employers would not be able to afford increased wages without some productive gains.

2nd, I know several people who have used for-profit colleges not for the degree, but merely for tech classes. Computers have changed the workplace so rapidly that workers need the training just to keep their current jobs.


Not Provided: I would more or less agree with your tiering. However, I woudl say that the signal quality of for profit universities is below your harvard-by-the-highway. Even if its not I think you would agree its certainly not above these schools. This is the point Becker/Posner are raising. Why is it that (some) for profit schools are not more highly regarded. In other words, why don't some invest in a high quality brand. Why don't we see "Motel-6 schools" and "Four Seasons schools." Instead everything seems to be motel 6 or worse. To an economsit this is puzzling. I've suggested an answer above having to do with signalling and investment and return on quality.


If anyone interested learning, not for a "degree", I highly recommend the open course at MIT. Every able body should learn something new. As for what is purpose to go to the "for profit", I am sure the purpose is more than just learning... May be the intend is "for future potential profit via livingroom comfort"...



First, I would like to know your opinion on why the times magazine and the government of the New york state has backed such a decision.

Second, in one of the comment Micheal has argued that the competition on the prospective students, and the decision for attending higher education are both signaling games. while i agree with him i would like to know your opinion about the contribution of fact that there are alot of free riding problem in this signaling game. i mean once you enter a good college like chicago or harvard, you have the choice to rely on other students efforts and publications and win a prestige, a signal, about your own abilities. in my view this is the biggest problem confronting an educational system. certainly there are preventive measures to bann such a behaviour, like the exam system, i would like to know which kind the schools (non-profit or profit) have more incentive to use them.

And finally, i think there is a growing need for a completely flexible educational system that could, frequently, adopt itself to the new progresses in technology, at least in those fields of study which more technological. i wonder to know what are the incentives and the necessary institutional structure of an educational system to handle such a need.


"i think there is a growing need for a completely flexible educational system that could, frequently, adopt itself to the new progresses in technology, at least in those fields of study which more technological. i wonder to know what are the incentives and the necessary institutional structure of an educational system to handle such a need."
The corp training used to cover such a need. However, with JIT work force requirement and lack of long term employment environment, make such an investment not profitable. (Japanese and most of EU corp still training in house. In fact, the super technician system in Japan Corp is one of the best example). The institution is too far distance from the "action" of the product technology that required for the JIT system (not fundamental research). Many of the college system provide some of the training, however, far from the leading edge (you do require some background prior to enter the "leading edge").

What is missing, or in decline, is the strong basic knowledge that covers Physics, Chemistry and Math, for example; and the key capability of learning (self study capability too.. therefore, can be utilize the MIT open course, for example). To improve such a knowledge, may be the 1st step is reduce the business proposal writing of the professor and put them in lecture hall (not the TA...Intel ex-CEO is calling for improve education by training Science and Eng. teachers, also indicated the basic problem of the education system.... I believe it is much beneficial to put them in Corp training classes... not training basic knowledge, but leading edge technology. leave the basic training to the education system). The prof. suppose to be the best to teaching, not business manager. Although they might decrease their creative energy due to aging, but the skill of teaching would increase... Both EU and Japan have different research funding granting process compare to North America, far efficient and less overhead...Research is important, but with such a large overhead, it is very much diminish of return in term of investment... off topic now..sorry.


Of course there is free riding in the signalling game. That makes the signal less effective. However, that jsut raises another question, namely why don't market forces work to eliminate this free riding problem. Put another way, what force are we not seeing is preventing someone from developing a mechanism to eliminate the free riding. It would seem the profit motive would provide a particularly good incentive to so and yet, empirically it does not seem to. That is the particularly interesting question.


to address the very long-winded comment, it is probably not the case that for-profit schools are preventing a "race to the bottom." unless you can demonstrate that prior to the founding of the for profit schools there was a race to the bottom, you analysis is probably flawed.

further, as much as we all love to see the tier rankings in USNews & World Report, your "five categories" of higher education is plain silly. a sliding scale(s) is more accurate.

the worry of some that the schools do not provide a good education should not be a worry at all. becker and posner both make this point, but from the comments it is clear that it did not hit home. the schools may be bad, they may be horrible, but they must be worth it, because students are enrolling and employers are hiring.


I disagree they Beker and Posner think "th may be horrible but they msut be worth it". Look at what Posner is saying regarding flase advertising.

Dan C


Who says they are being hired, beyond a level they would have been without the education. What are the returns on the investment, for the students and for the government programs that help support them.

If the returns are negative, why not stop the students from playing with other people's money on a long shot bet (that the school will offer them greater opportunities?

Limiting the schools may raise the returns to education, because the worst potential students are removed from the program. By limiting the schools, you limit the slots open to students. And schools seeking to demonstrate high returns, will need to compete for the better students, and hopefully, compete to give them the skills to be successful. (as measured by success after graduation.)

The For Profits seem to be in competition for the government dollars the students have access too, rather then a serious interest in the students. The students are often just going through the motions, going to school because welfare rules require it or because they lack the opportunity to do anything else.

Chris J

One thing that I think needs to be thoroughly discussed is the fact that many universities practice some form of price discrimination, namely perfect price discrimination in the way that a theoretical monopoly could. No matter the university you attend, whether or not they are trying to realize a profit, there is price discrimination on a grand scale. However, you may be lucky in the sense that the school is willing to pay your entire 'bill' but let me remind you that your zero price was in fact one of the last portions of the demand or marginal revenue curve to fulfill the perfect price discrimination. Since there is a bottom to that curve, there should also be a top, which is the maximum amount of money the university will charge and let me tell you that there will be somebody paying that full price. In between the person who pays the most and the person who pays the least, are the persons who pay various different levels of cost based on some degree of need based aid, financial assistance from your family, scholarships, etc. In any case, the university is always going to maximize the area under the marginal revenue curve, setting price equal to that curve differently for each person, thus to extract the last bit of consumer surplus from each person individually.

You can go onto any university website and find their base cost for tuition, room, board, and other misc. fees, then you could cross reference that with each student at the university and see who pays what. You will probably also have to check calendar years for people who were locked into certain rates, but still you will find shockingly that the cost education is different from each person and that the chance of finding two identical bills would be slim.

So no matter which type of university you submit yourself to, you will be a 'victim' of price discrimination. Of course it will not be called this, you will see your ten thousand dollar bill for a semester reduced to eight thousand because you got good grades. This will most likely cause you to feel lucky and think that the university is actually giving your account two thousand dollars toward your bill, but they are just charging you something different and calling it a scholarship.

So if you look at universities in this light, you will see that they are extracting profits no matter which type of school they are, for-profit or not-for-profit, but profits in the sense of consumer surplus being extracted and the university maximizing idiosyncratic producer surplus.

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