For-Profit Colleges & Free Lunches

Corinthian Colleges is exploring a sale as the bottom drops out of its business.  That might seem like a strange combination of words – except that Corinthian Colleges is a large operator of for-profit colleges. It is much reduced from its height of growth and potential (around 2009), when it faced the sweet combination of low capital costs and being an ideal counter-cyclical asset.  It turns out that when a massive recession hits, young people scramble to get back into school and federally subsidized loans keep the revenue flowing in no matter what the broader economy looks like.  It was a good time to be in the for-profit colleges, and fortunes were made.  But problems were large, and the government was distressed about the massive debt loads carried by the graduates and drop-outs from these institutions.  The Obama Administration has waged a low-profile war against for-profit colleges, most recently announcing sweeping new regulation that will shut down programs that can’t place their students after graduation.  It’s long been known in the industry that something like this was coming (Disclosure: in my former career, I did a small project on the sector for an educational publisher).

For-profit colleges are an interesting case of privately-provided public services.  It actually seems like an ideal situation for a private solution.  College graduates earn more money than high school grads.  So private schools provide the services, paid for with loans that are leveraged against students’ future earnings but regulated so that students won’t carry crippling debt. Students earn more money, the government gets its money back and can provide the service for little expense, and private agents earn some profit on the side.  Everybody wins.  Except when put in those terms, it seems obviously true that not everyone can win – the idea that this is obviously better seems a little like a perpetual motion machine.

The lesson we should take from Corinthian isn’t necessarily that for-profit schooling is doomed – it’s that it is hard and might be doomed.  As the Administration has realized, federally guaranteed loans set the incentives wrong for schools.  They don’t need to make sure their graduates are employable because the government is going to pick up any slack, so revenue is pretty purely a function of enrollment rather than candidate selection or school quality.  The government could withdraw its backing, but to do so would make loans more expensive and more burdensome for students as lenders would demand higher rates.  And when the government steps in to fix both of these problems, it turns out that the bottom drops out of profitability.  It’s not just Corinthian, the sector as a whole is getting slammed.  The regulation needed to make this work basically turns the schools into regulated utilities, and it’s not clear that it’s a good business to be involved in.

Private education can be effective, accessible, and profitable but probably not all three.

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