Arnold Kling  

Predatory Educating

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Left, Right, and Wrong... Most Monolithic...

Steve Eisman says,


There are two kinds of accreditation -- national and regional. Accreditation bodies are non-governmental, non-profit peer-reviewing groups. Schools must earn and maintain proper accreditation to remain eligible for Title IV programs. In many instances, the for-profit institutions sit on the boards of the accrediting body. The inmates run the asylum.

Thanks to Alex Tabarrok for the pointer.

Eisman's talk comes after his slides. Read the whole thing. His charge is that some large, fast-growing for-profit colleges, including part of the Kaplan division of the Washington Post, are scams, being fed by government grants and loans. He thinks that the Obama Administration is closing in on them.

Some questions come to mind:

First, why does the market do such a poor job of policing these predatory education companies? Some possibilities:

1. The customers are mostly poor, and that is market segment that is not well served by consumer magazines or other private watchdogs.

2. The companies are dealing with a market segment that is not served by rest of the education sector, because these students are highly unreliable, and among them high dropout rates and low success rates are inevitable. If you tell the companies they have to achieve higher success rates, they will exit this segment of the market and it will go unserved. Sort of like if you put a ceiling on credit card interest rates, the riskiest borrowers will go unserved.

3. Education is inherently a market that consumers cannot judge quality, so that it's all about the marketing. This should be a warning to voucher supporters.

Second, why is there such a high rate of profit in this industry?

1. Other companies do not enter the industry because they suspect that its profits are not sustainable.

2. The incumbents use their influence over the accreditation process not only to maintain their own licenses but, more importantly, to block the path of competitors.

3. The accounting does not sufficiently recognize the cost of future defaults. The failure to reserve for losses today means that the bad news will show up tomorrow.

4. There are very high fixed costs in setting up a for-profit education company. This deters entry.

Eisman paints a sordid portrait. But should those of us who pay $50,000 tuition bills be feeling so smug? Yes, our kids do graduate, but could they have learned just as much on their own on the Web?


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COMMENTS (20 to date)
ThomasL writes:

People have now-a-days, said he, got a strange opinion that everything should be taught by lectures. Now, I cannot see that lectures can do so much good as reading the books from which the lectures are taken. I know of nothing that can be best taught by lectures, except where experiments are to be shown. You may tech chemistry by lectures. - You might teach making of shoes by lectures!

Hyena writes:

The fact that this sector is so new probably in itself means that it is hard to judge quality. I would argue that many of these students are the first in their family to attend college, some might be the first to graduate high school, and so the family lacks basic knowledge about the college system.

Lastly, though, isn't it possible, just maybe, that these schools really are just scams? It's not like scams don't exist in a free market and it's not as if the people in question aren't among the most vulnerable to them.

Solid Ellipsis writes:

"First, why does the market do such a poor job of policing these predatory education companies?"

This is a question that has occurred to me several times. I think your points are good (particularly the credit card analogy), and, given that, perhaps their drop out/ graduate employment rates would be better compared to community colleges. There may also be a significant cultural component. It could be that the idea of the idea of the liberal arts education (in the classic sense, not the B.A. sense) is so ingrained as the gold standard of true academic achievement that these for-profits, which, frankly, are geared towards ostensibly practical jobs skills and lack so much the air of tradition and dignity. If the "second rate" education of obscure state schools/community colleges is unattractive to the ambitious, how much more so these schools entirely outside the world of academia?

"Yes, our kids do graduate, but could they have learned just as much on their own on the Web?"

1. Signaling, as Prof. Caplan might point out, of a students conscientiousness. A person may be quite well self-learned, but that doesn't tell a future employer much about one's ability to get a task done on time and as expected.

2. For those lacking superior self-motivation, the class schedule should (hopefully) keep a person somewhat on track. Ditto for the reinforcement of lecture, reading, and tests/homework.

3. Networking and access to resources. Professors (for those entering academia), alumni (private and government sector) and practical work opportunities (think lab assistants and interns). For many job seekers, these will make all the difference...


TDL writes:

I have a question to add to this discussion. Is it not possible to look at the 4 (realistically 5 1/2 year to 6) university experience as a scam?

Regards,
TDL

Richard A. writes:

From presentation by Steve Eisman
SUBPRIME GOES TO COLLEGE

From 1987 through 2000, the amount of total Title IV dollars received by students of for-profit schools fluctuated between $2 and $4 billion per annum. But then when the Bush administration took over the reigns of government, the DOE gutted many of the rules that governed the conduct of this industry. Once the floodgates were opened, the industry embarked on 10 years of unrestricted massive growth. Federal dollars flowing to the industry exploded to over $21 billion, a 450% increase.

The bottom line is that as long as the government continues to flood the for profit education industry with loan dollars AND the risk for these loans is borne solely by the students and the government, THEN the industry has every incentive to grow at all costs, compensate employees based on enrollment, influence key regulatory bodies and manipulate reported statistics – ALL TO MAINTAIN ACCESS TO THE GOVERNMENT’S MONEY.
In a sense, these companies are marketing machines masquerading as universities. And when the Bush administration eliminated almost all the restrictions on how the industry is allowed to market, the machine went into overdrive.

floccina writes:

5. Maybe it is too difficult to judge the value of credentials, which is what people are buying. You cannot real ask prospective employers if the accept a degree from Kaplan/ITT/Pheonix. In ten years we will know what weight these schools carry.

There is also this idea that a diploma is worthy because of what is taught but IMO the value is more based on who the school rejects. The for profits accept less capable students so their degrees are less valuable.

Schooling should be for education (OK and baby sitting) and not for testing/credentialing. We need a separation of schooling/education and testing/credentialing.

BTW I am not sure that Government and not for profits do any better job of education than the for profits do. They are just more selective and so their credentials are more valuable.

BZ writes:

"could they have learned just as much on their own on the Web?"

No, for two reasons.

1. Judgement and Grading matter: think Weight Watchers.

2. Our understandings are so different that each of us could read the same web article and come away with different aspects we did not understand. Good profs fill in those gaps.

Doc Merlin writes:

This is a symptom of an education bubble. In a bubble when there are not enough good assets, its more easier to disguise the bad assets as good assets and sell them along.


Also, not-for-profit education is also very profitable in the economic sense, just not in the accounting sense.

hutch writes:

why do you make the assumption that they are, in fact, "predatory education companies"? if they are, like TDL suggested, maybe its not just for-profits.

and as far as how much the government stands to lose, i'd like to see how much public money is spent/lost on for-profits compared to non-profits once you consider the taxes paid by for-profits and the heavy subsidies given to non-profits. for-profits *do* provide an education that is less expensive for society as a whole even if it’s not markedly less expensive for the actual student. you can argue that the education is not as good (and i'll agree to a point), but there's no way the outcomes eisman and others talk about are caused by the quality of the education alone.

i would expect the main reasons the non-profits look so much better is 1) they get first pick, so to speak, of the good students (similar to what floccina said) and 2) the students themselves pay a much smaller proportion of the cost of delivering the education because of subsidies and large endowments. on the first point, even executives at for-profits (and i've heard one say this) prefer their kids go to the harvards and stanfords of the world because they recognize that the value of an "education" is so much more than the classes you sit through. the "good" schools act as a filter, letting the best students in and leaving the rest to fend for themselves. the apples, and mckinseys, and goldman sachs, and johnson & johnsons, and wal-marts know this and the students know this. you could secretly take all of the best kids out of the best schools and plug them in at u of phoenix or kaplan with the exact same curriculum as the best schools and see outcomes better than what you see now out of the schools and worse than you see out of the students. how much of the school’s improvement is from better students v better curriculum? what caused the students decline?

[in the interest of disclosure, i work for an investment firm and have read a fair bit about the industry. i personally don't have any positions with the for-profits, but my firm does in a couple. however, a large part of how i feel about education comes from sitting in mba classes at a “top five” school and wondering what i’m learning that my friends in lower schools aren’t. i realized it probably wasn't much if anything.]

Jenn writes:

This is informative - and college is not necessarily a scam, especially for medical and science practices - they legitimately need the training and on hand.

Peter writes:

Fail to see why the emphasis on placement as a measure of success. Universities shouldn't be in the placement business and this ever growing away from their primary function (education) is bothersome.

agnostic writes:

"why does the market do such a poor job of policing these predatory education companies?"

Because in everyone's mind, there is no such thing possible as a predatory ed company -- education is good for everyone, the more the better, so anyone offering education is by definition helping the world, especially if they're offering it to "historically underserved groups," wink wink. Double sainthood.

That's also like the subprime bubble -- gigantic houses are a basic human right, so anyone who helps people into them, especially the underserved, is a saint. How dare you subject them to the same scrutiny we throw on tobacco and drug companies, mere peddlers of cancer sticks and deodorant bars?

It's like asking for neutral 3rd-party evaluators of charity / aid groups -- to even think of demanding this would be to betray your trust in the charities / aid groups and thereby admit to yourself and tell others that these groups aren't saints. See how long you last in your social circle with that level of hard-headedness, unless you hang out with some really cynical people.

agnostic writes:

"Universities shouldn't be in the placement business and this ever growing away from their primary function (education) is bothersome."

The discussion is about for-profit guys like ITT, not Harvard. No one involved -- teachers, students, creditors, politicians, anyone -- wants ITT to be in the business of "education," but rather placement. You go there because you want a better job.

Peter writes:

I'm not so sure that true agnostic .. my understanding of this entire argument is based on the fact that the for-profit technical colleges (which btw have been around forever issuing associates degree's, this isn't a recent phenomenon) are muscling in on the won't-admit-in-public-their-for-profit_public/private university bachelor/graduate degree cartel.

You're probably right nobody involved wants for-profits to be involved in actual education (as that would add competition and drive reforms in the current cartel) but at the same time lots of privates and publics (i.e Harvard) tout their placement rates.

Or am I missing the fundamentals here on this entire for-profit v. existing_powers argument?

PS: Speaking of education, have yet to see a good study on whether degree X from a for-profit provides the same level of competency as degree X from a public. Is the BS in Econ from Strayer University really worse than the BS in Econ from UH-Manoa?

Chris Koresko writes:

Maybe what's going on is a shift in the way education is done, as our society adapts to the availability of the Internet.

After all, it's not obvious why it needs to cost $50K/yr for a student to take half a dozen classes, provided that he has the discipline and drive to invest the effort. Lectures, reading material, and homework (including feedback) are easily delivered online. There are potential efficiency gains here, including breaking the restrictions on time and location for the student (no travel, can "attend" lectures when it's convenient), distribution of a lecture to more students than could conveniently fit in a classroom, and profs and T.A.s can be from anywhere in the world.

But the transition from an old way of doing things to some new way can be rough, especially when the old way is deeply ingrained in society. It'll take us a while to get it all sorted out, and meanwhile the advocates of the old way will be pointing to every failure and false start as proof that the new way is just a passing fad if not a fraud.

And maybe they're right. As floccina says, time will tell what value a for-profit education really has.

Meanwhile, it'd be interesting to hear from someone who's taken classes at one of these for-profits. Are they any good?

Tom West writes:

however, a large part of how i feel about education comes from sitting in mba classes at a “top five” school and wondering what i’m learning that my friends in lower schools aren’t. i realized it probably wasn't much if anything.

I was under the impression that the extra value of a "top-five" MBA school was the connections that you presumably make with people attending a "top-five" MBA school. Given that personal connections are one of a businessman's most valuable assets, this is no small thing.

Floccina writes:

I was just thinking that many people are in denial about IQ and genetic abilities these days. Schooling is being grossly oversold as a cure to many ills and as a way to make much more money, so is it surprising that people might over buy schooling?

hutch writes:

tom west,

that was part of my point. and for what it's worth, the most valuable connections by far are your classmates. but the same is true for undergrad. if you go to harvard or stanford or northwestern or texas or whatever, you'll be going with really smart people who will be successful later on, whether its in engineering, business, law, medicine, or whatever.

Adam writes:

Seriously? Is for-profit higher ed the real problem? Take a look at non-profit higher education. So-called "non-profit" higher ed has gotten fat and happy with government subsidies and exploitation of uninformed clients. The standard non-profit BA degree in social sciences or biology is empty of skill. In my large state university, students are required to take "interdisciplinary" courses where the curriculum is formulaic: "race-gender-class", business-bad, and government-good.

Typical non-profit undergraduates spend 5 or 6 years switching to less demanding majors and acquiring mountains of debt. They'll grow old paying the minimum on student loan and credit card debt .

At graduation, there are no ready-made jobs for BA sociologists and biologists. Many of the current class have just now resigned themselves to returning back home since they "can't find a job" in their chosen fields. But certainly, this unexpected turn of events can't be the fault of the non-profits? No, the non-profits certainly have the best of intentions--look at how well they pay all their faculty and staff, regardless of productivity.

In contrast, one takes Kaplan courses and gets practical business and technical skills. One expects to graduate with modest skills and get an entry level position--no education for a global citizen and short-course stints in France or Thailand. With patience and determination, one's career grows into modest prosperity or better.

The state of US, non-profit higher education is appalling. Small segments in engineering, some sciences, medicine, and George Mason economics [:)] remain productive. But the latter are heavily taxed to carry the remaining burden. Most academics have floated away into a intoxicating ether--some to socialist ideologies and others to abstract models of presumably real phenomena. Their net contribution to growth and knowledge is negative.

Brian Clendinen writes:

I personally think the certification process is a joke. How many colleges have actually ever lost their certification? Not sure about the whole process but unless the certification is grading the quality of a large sample of individual classes by actually auditing the class-time and grading criteria, not just syllabus and textbooks, I don’t see much use in them.

Actually, the quality varies but I know talking with quite a few people who got degrees from technical institutions (ITT and Devry), they felt after years of work experience the degree was worthwhile. However, I have meet quite a few sound engineering graduates from Fullsale who have a few years professional experiance and were full of themselves because they graduated from Fullsale. I have yet to talk with an sound engineers with decades of experiance who thought much of them and one was a graduate of Fullsale.

I know people who have gotten specialty master(goverment contracting amoung others) degrees from Webster who thought it was valuable, but the MBA was worthless. However, the reason I think it was useful was almost all the classes were taught by working or retired professional with years of experience. I think the real problem of for-profits (for degree programs not certifications which are worthless from what I have seen) is quality control issues.

Non-profits tend to have better quality control.
I mean an IT guy with a computer science degree who was in one of my MBA classes was teaching Com 1 at Phonix and he admitted his writing skills were nothing special. Actually the community college I graduated from had a lot more consentient quality than the state university which was considered average. The top and bottom 10% to 15% of classes I had were at the university level.

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