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RELEASE: Market-Based Reforms Can Steer For-Profit Universities Toward Better Outcomes for Students and Taxpayers

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Contact: Madeline Meth
Phone: 202.741.6277
Email: mmeth@americanprogress.org

Washington, D.C. — At an event today featuring higher education policy experts and the president of a for-profit university, the Center for American Progress released a new report examining why education is generally provided through nonprofit and public entities and what makes for-profit companies in higher education different.

The analysis finds that because quality is difficult to monitor and measure, investor pressures frequently lead for-profit institutions to compromise student and public needs in the pursuit of growth and profit. While all colleges seek revenue, nonprofit institutions are subject to a nondistribution constraint—i.e., they are overseen by boards without an ownership interest—reducing the likelihood that students will be misled or overcharged in the pursuit of personal gain. The primary purpose of nonprofit status is to eliminate the potentially hazardous aspects of investor-owners in providing services such as education. The rejection of the nondistribution constraint by for-profit institutions explains their generally worse outcomes.

Based on the report’s analysis of why nonprofit entities tend to reduce the likelihood that students will be misled or overcharged by their educational institution, the report outlines a number of market-based reforms that policymakers should pursue in order to ensure quality outcomes at a reasonable cost.

As higher education has become more important to a secure future for both individuals and the nation itself, policymakers should adopt market-based reforms that promote quality outcomes at a reasonable cost. First, Congress should restore the expectation that colleges demonstrate the market viability of their programs by enrolling some students without federal financial aid. Second, the Department of Education should adopt a strong gainful employment regulation to ensure that career programs lead more frequently to a better future than to crippling debt. Third, quality and value in higher education would improve if consumers and expert analysts had access to more information about all colleges, including the qualifications of instructors, accreditation reports, and audits submitted to the Department of Education. Finally, a more radical solution could improve quality across all higher education sectors: Through independent, expert review of student work and teacher-student interactions, colleges and faculty members would have every incentive to engage in practices that promote deeper learning and stronger critical thinking skills.

The report points refutes the argument made by for-profit lobbyists that they have been unfairly targeted because of bias against the sector. As author Robert Shireman points out, for-profit colleges have rejected the regulation that levels the field and is most effective in reducing the incidence of predatory practices: the nondistribution constraint.

By deciding to operate as a for-profit enterprise, a college is subjecting itself to pressures to cut costs and to grow in ways that can be—and too often are—contrary to the interests of students and society. According to the economic theory behind nonprofit status, a greater tendency toward predatory behavior is the logical and predictable result of a college’s decision to adopt an investor-owner model, rejecting the consumer protection that comes from placing control in the hands of people without an ownership stake.

With the right market-based protections, for-profit institutions have the potential to play constructive, perhaps even revolutionary, roles in addressing the nation’s educational needs. But policymakers should not support these institutions if for-profit leaders fail to recognize that any claimed benefits of the for-profit model are matched by real hazards that must be addressed. In the current policy debate, lobbyists of for-profit colleges either dismiss or are ignorant of the important regulatory role played by nonprofit status. As policymakers consider the role of for-profit institutions, they should treat this apparent lack of self-awareness as a warning sign.

Read the report: Perils in the Provision of Trust Goods by Robert Shireman

To speak with CAP experts on this issue, please contact Madeline Meth at mmeth@americanprogress.org or 202.741.6277.

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