Friday, July 17, 2015

Many for-profit students would fare better in public community college

As a number of scholars have pointed out, on average, college still pays—even in light of the relatively high debt levels we see today.  The lifetime earnings gains from attending public and non-profit four-year colleges and community colleges have been shown to be consistently high enough to outweigh the costs of attendance. But very few studies have asked whether this is also true in the rapidly-growing for-profit sector.

In a recent paper, Latika Chaudhary and assess the earnings gains to associate’s degree programs in for-profit colleges. After carefully controlling for student background characteristics (including unobservable characteristics like ability and motivation), they find that for-profit students who work both before and after attending experience a bump in earnings around four percent per year of education—or 10 percent total (since a typical associate’s degree take 2.6 years to complete)—relative to high school graduates who do not attend college.  The annual earnings gain increases to seven percent when we add in the slightly higher probability of being employed post-education.  Students who drop out of for-profit programs see virtually no return and those who complete their associate’s degrees have higher returns—around eight percent per year.

Still, these numbers are quite a bit smaller than the returns found in other sectors (upwards of 12 percent per year for community college associate’s degree students) and suggest that many for-profit students would fare better in public community colleges, where earnings gains may be higher and tuition is less than a quarter of the price.

Of course, not all students may find their needs met in the public sector. For-profit colleges may offer shorter (or non-existent) waitlists, more evening or online classes, or specialized programs not offered in the public sector. The most important question then becomes whether for-profit students’ earnings gains are sufficient to offset the high cost of attendance (or essentially, the return on investment).

Some back-of-the-envelope calculations suggest that for-profit associate’s degree students need at least an 8.5 percent annual earnings gain to cover the cost of tuition, foregone earnings, and debt service at a typical for-profit college.  For the average student, the earnings gains are too low to justify the cost and generate a positive return on investment. It also suggests that many students may not have full or accurate information on the earnings gains that they can expect post-college.

How do these estimates compare to the social costs of a for-profit education?  Adding in costs to taxpayers in the form of federal student grant aid, loan defaults, and other sources of federal funding would require a 9.8 percent earnings gain to cover the cost to the individual and society. In the public sector, despite higher taxpayer costs, the much lower costs to students means that  only a 7.2 percent annual gain is needed to cover the combined private and social costs—a figure well below current earnings gains estimates in that sector. These figures again suggest that—on average—public institutions may be a better deal for students and taxpayers.

The Gainful Employment (GE) regulations that took effect earlier this month, while far from perfect, are a step in the right direction in seeking to hold underperforming for-profit institutions accountable for the earnings and debt of graduates.  They also go far in ensuring that prospective students will have access to information on average cost, debt, completion rates, and employment at the program level. However, GE does not hold institutions accountable for the nearly 40 percent of students who drop out of two-year for-profits and the roughly 65 percent who drop out of four-year for-profits. These students—more than anyone else in higher education—are the students most likely to find that their college education doesn’t pay off.  

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