The economics of higher non-profit and for-profit education

Here is a 2009 paper of mine with Sam Papenfuss (pdf), a later version of which was published in this book edited by Joshua Hall.  The paper deliberately sidesteps the recent scandals and focuses on fundamentalist explanations of why higher education might be provided on a non-profit or for-profit basis.

The key stylized facts are this:

Two primary features characterize the observed educational for-profits. First, for-profits tend to specialize in highly practical or vocational forms of training. For-profits are especially prominent in areas where student performance can be measured by a relatively objective, standardized test. Nonprofits, in contrast, have a stronger presence in the liberal arts, although they are by no means restricted to that arena..

This is a general pattern, and not unique to the United States today:

A comparison of for-profit and non-profit institutions in the Philippines [in the 1970s] bears out many of the differences noted above. Filipino for-profits tend to charge lower fees, specialize in education of lower academic reputation, spend less on capital equipment, and serve students who plan on pursuing vocational careers or taking a standardized vocational test upon graduation…Students at for-profits are approximately ten times more likely to take the tests. Adjusting for the lower pass rate from for-profits, the for-profits are putting about five times the number of students through the tests as the non-profits, even though for-profits educated no more than three-fifths of all Filipino students at the time.

Here is one possible (partial) resolution:

Faculty governance implies that for-profits and nonprofits place different relative weight on reputation and profits. The for-profit selects students and faculty on the basis of how easily their reputational benefits can be captured by shareholders, whereas the non-profit places greater weight on the reputational benefits that are kept by faculty. The for-profit pursues “reputation as valued by students in dollar terms” and the nonprofit pursues “reputation with the external world,” or “reputation as a public good.” In the resulting equilibrium, for-profits achieve lower status.

…The hypothesis therefore predicts a segmented market for higher education. Students who seek the highest levels of certification and reputation will attend non-profit institutions, which are run by faculty and use their prestige to raise donations. Students whose quality can be certified by an outside vocational exam do not need the non-profit reputational endorsement. They will pursue the more efficient instruction offered by for-profits.

There is a good recent paper by David Deming, Claudia Goldin, and Lawrence F. Katz on educational for-profits, available here.  Here is a 2010 Dick Vedder piece on for-profits, more positive than most recent accounts.

Comments

There is no such thing as "not for profit" education. This is just a fallacy or fantasy. What we have in this "sector" is no stockholders holder and no accountability; there is plenty of "profit" to go around.

The administrators and (mostly senior) faculty most defiantly "profit" from this systems and at the expense of the students, their families and, more often than not, the taxpayer.

"Not for profit" is a fallacious concept. This can be easily shown by cutting back the huge layer of administrators, the bizarre proliferation of "victimology departments", applying merit pay and rolling back some salary levels. The howling of those scoundrels who do profit from this racket we call "higher education" would be deafening and constant.

Additionally, this notion of "reputation in the external world" is highly flawed. What they really mean is "reputation among other academics". Few assertions could be more radically opposed to reality than the notion that academics pursue "reputation with the external world". Academics loath the "external world" and only deal with it to con or bully more money out if it. People giving meaningful certification of skills so that they might get work are, on the other hand, most concerned with that "external world". If their students do not get jobs based on their certifications then they are out of business.

We have developed and educational system that is all most medieval is nature and aspect, and is comprised to a great extent by an unaccountable "elite" seeking rents form the taxpayer via stagecraft about their "reputation". In fact, much of their "research has little positive worth, their "teaching" amount to the regurgitation of cant, and the degrees they issue are often quite worthless.

It really cannot go on much longer, and this the whining about "for profits".

"Higher Education" no longer serves the function it claims to serve. It is merely another special interest group out rattling its cup.

The distinction between many "nonprofits" (including government) and for-profit businesses is that in the former much of the value is captured by the administrators and staff, and in the latter shared among shareholders, managers, staff, and customers.

It cracks me up how many people assume that the people running nonprofits (and government) are not driven by self-interest (just a bunch of well-meaning do-gooders). In a fashion similar to the way elected officials and bureaucrats like to describe themselves as "public servants" and wrap themselves in the flag while pretending they are somehow better than those who work in and own private businesses. Because it is a "privilege" dontchaknow to be allowed by the state to have a business.

We have installed our own aristocracy and royal court in the form of government officials and others who populate and rotate among the heights of our crony capitalist system and who deign to grant the rest of us "privileges." And if you know what's good for you you will damn well like it you ungrateful peasants.

Maybe a better term would be "legacy schools" and "recent institutions"?

Personally, I prefer the terms "my betters" and "your royal highness".

It's not just that "value" is captured by administrators and staff, plenty of cold hard cash is involved. The key difference between "profit" and "non-profit" is that the latter retain net income permanently in their endowments instead of returning income to shareholders. One better phrasing would be "income-distributing" vs "income-retaining."

Many non-profit higher educational institutions vest control ultimately in alumni who elect a board of directors that runs the institution. This removes the conflicts of interest present in what are effectively employee owned non-profits (i.e. where any excess funds get turned into compensation rather than an endowment).

One of the theoretical justifications that has been advanced for organizing elite institutions of higher education as non-profits is that it discourages them from charging much higher tuitions driven by the prestige that comes from the high level of academic merit displayed by admitted students. Charging students for value created by their own reputational markets, as opposed to those created by the institution once they are admitted, doesn't look very fair to students and the institutions have been designed to prevent that from happening. Sure, Harvard and Yale are expensive, but really not very much more so than far less prestigious private colleges and universities. But, if admissions to these institutions were prices at their current value in the marketplace, they would be profoundly more expensive. College admissions are interesting in part because they are one of the last bastions of non-market demand priced goods in the economy.

At larger nonprofits you're probably correct. But having worked for and volunteered with smaller nonprofits, I do believe most of the people there are do-gooders. Just yesterday I was talking with a friend at the I Have a Dream Foundation. She's spent the last 10 years working with a group of kids from second grade through graduation. She gets paid less than half what she made as a telecom consultant before, and sometimes takes a second job to help make ends meet.

She loves her work, but her profits are mostly non-financial.

Outstanding.

I'd never have passed the CFA or actuarial exams had I taken them at university.

I wasn't there to learn.

Seems to be in line with what has happened in Sweden with the voucher system (students can choose between providers: public, private non-proft and private profit; all three paid for via taxes). For-profit schools attract students with lower grades and are more focused on vocational programs (high-school). Non-profit private schools attract students with the highest grades and often strive to be more "academic". Public are somewhere in between.

15-20 years or so after this reform it is quite interesting to see how also typical (classical) liberal types in Sweden (who favored the voucher system) become more and more skeptical to the for-profit institutions in education; mostly since there has been quite a few scandals with large private vocational schools (profit mostly comes from lower teacher density --> negative effect on quality). This is mainly seen for high-schools where the student self has reasonable power over the decision where to go to school (in earlier grades typically the parent dominates the choice); where many schools attract students with short-sighted things such as "free" computers; luring students with high discount rates into schools with academically low standard and quality.

since there has been quite a few scandals with large private vocational schools (profit mostly comes from lower teacher density –> negative effect on quality). This is mainly seen for high-schools where the student self has reasonable power over the decision where to go to school (in earlier grades typically the parent dominates the choice); where many schools attract students with short-sighted things such as “free” computers; luring students with high discount rates into schools with academically low standard and quality.

That is one of the reasons that I oppose vouchers. I would like to see the rich and middle class charged full cost directly for each child that they send to the Government schools rather than through taxes which should only go to the poor. The middle class and rich have to pay the full cost anyway either through taxes or directly and I think that they would push for lower spending if they paid directly.

"For-profits are especially prominent in areas where student performance can be measured by a relatively objective, standardized test."

This is an excellent distinction, especially in tech fields. Consider for instance Microsoft or Cisco professional certification schools. Not only do they teach towards highly-specific tests, they're often themselves evaluated and certified as competent trainers by Microsoft or Cisco. Even better, a prospective student can often find out from the certifying vendor what a school's successful certification rate is.

With that in mind it wouldn't be particularly efficient to go to Stanford to get an MCITP certificate, nor for Stanford to offer them. That said, Microsoft itself rarely hires MCITPs for programming positions, strongly preferring to hire people with Computer Science degrees from Stanford.

Interesting in between situations would be medical and law schools -- where the threshhold is definitely "certification" by outside boards even though the instruction is generally provided by non-profit institutions. Similarly a heck of a lot of "MBAs" are granted by for-profit colleges... although in fields where MBAs matter it appears to be more of a signalling degree (do you have one or don't you) rather than a capability-measuring one.

figleaf

For medical and law schools, the path is somewhat more mixed than you suggest. A student will often (perhaps typically now) study for an admissions exam with the assistance of for-profit educational service providers. If successful on the test, the student will be admitted to a non-profit school from which they will ultimately take a degree. After graduating law school students will study for the bar using services provided by a for-profit educational services provider. I am not sure how common it is for medical students to use for-profit services when studying for the USMLE, but I know that it as at least possible to study with the help of a for-profit educational service provider.

The basic pattern remains: for discrete educational tasks, for-profit service providers dominate, whereas non-profits do the longer-term less discrete and broader educational tasks.

"fundamentalist explanations"

I'm pretty sure that economists aren't using the arguments Biblical literalists to explain their results.

"lower fees"

If the "for profit" institutions in the U.S. charged lower fees, skepticism of their efforts would be greatly reduced. Instead, of course, "for profit" institutions in the U.S. charge much greater fees than non-profit equivalents (especially at the two year degree or certification level), have generally much lower graduation rates than non-profit equivalents, and finance it to some extent with government provided grants and mostly with government guaranteed student loans that are not dischargable in bankruptcy that have minimal underwriting requirements. Also, while U.S. "for profit" education is often vocationally oriented, much of that for profit education is not in fields where third party testing provided a useful benchmark.

There are components of the U.S. educational market, some "for profit" and some "non profit" that are a better fit for the model described from the Philippines. For example, there are "cram school" type offerings to prepare for bar exams, medical licensing exams, securities industry licensing exams, actuarial certification exams, undergraduate and graduate school admissions tests, and a variety of admissions tests for the military and various kinds of civil service positions. California has many unaccredited law schools whose graduates are nevertheless permitted to take the California bar exam (which is one of the main reasons that the failure rate on the bar exam in California is so much higher than in other states). Bar tending schools, driver's education programs, court reporting schools, and commercial driver schools in the U.S. arguably fit these models. I taught as a professor at a "for profit" institution whose primary mission was to help people secure a third party administered Certified Financial Planner designation, or one of several other financial sector professional certifications.

But, in part because the U.S. economy has relatively lenient mandatory licensing requirements in a wide variety of fields compared to our international peers (some German states require a license to be a waitress, for example), and because the non-profit and governmental higher education sectors compete in a wide variety of fields that would potentially be attractive for "for profit" institutions, like nursing, at very competitive tuition rates, the demand for vocational certification oriented training from "for profit" institutions may not be as great.

The fact that the U.S. has a competitive post-secondary market matters much more than the organizational structure of the competitors. In fields where it is possible to operate without large infusions of long term equity capital from investors, I'm not sure that organizational structure means a great deal. A formally "non-profit" structure can still be de facto either faculty or senior administration owned based upon what kind of bonuses are paid when there are excess funds and who controls the appointment of the CEO.

"Filipino for-profits tend to charge lower fees, specialize in education of lower academic reputation, spend less on capital equipment, and serve students who plan on pursuing vocational careers or taking a standardized vocational test upon graduation"

Is this really hard? If an institution is not run for the benefit of its shareholders, it will be run for the benefit of its staff. Academics are often not paid well - although not comparatively poor given the work they do - but they do get some degree of social recognition. That recognition is lower if they teach vocational courses. It is lower if they teach many students. So naturally the Academics at any university will want to teach as few students as possible something that has no chance of getting them a job.

The for-profits are just meeting the gaps in the marketplace.

The question no one seems to be able to answer is why can't "for profit" institutions emerge that maximize whatever it is that the non-profits do well at lower cost. If it's about certification or prestige or hand-holding or research opportunities or a liberal arts education or what have you, it's still not clear why non-profits should be better. Those who argue that non-profits rent-seek in favor of the staff don't seem to realize that such behavior should handicap non-profits. Yet it seems difficult for private profit institutions to emerge that attract the best students and provide them with the same goods they receive from non-profits at a lower price.

The paper makes noises in that direction but I still don't see a clear answer.

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