Prospective students should weigh their options carefully before enrolling in a for-profit college — a decision that could prove costly, according to a new study by a Cornell economist and associates.
Attending for-profit colleges causes students to take on more debt and default at higher rates, on average, compared to similarly selective public institutions in their communities, the researchers found.
They argue that the worst financial outcomes are not a consequence of the fact that for-profit organizations tend to serve students from more disadvantaged backgrounds, a correlation established in previous research. On the contrary, more expensive for-profit companies cause students to take out more loans, which they then have difficulty repaying because they are less likely to find a job, and the jobs they do get tend to pay lower wages.
“It’s not just the product of differences in student makeup,” said Michael Lovenheim, Donald C. Opatrny ’74 Professor of the Department of Economics, of the higher risk of indebtedness and default. “It’s a causal effect of going to these schools.”
The team’s findings are reported in “Student Debt and Default: The Role of For-Profit Collegespublished in the April issue of the Journal of Financial Economics. Lovenheim, a professor at the Cornell Jeb E. Brooks School of Public Policy and the School of Industrial and Labor Relations, is a co-author with Rajashri Chakrabarti, Ph.D. ’04, senior economist at the Federal Reserve Bank of New York, and Luis Armona, a PhD student in economics at Stanford University.
For-profit colleges — run by private companies that return profits to shareholders — are a growing part of the U.S. higher education market, serving nearly one million students in 2018, or 5% of all enrollment. . That’s up from 2.9% in 2000, but down from a peak of 9.6% in 2010.
During that period, total student debt rose by two-thirds, to $57.5 billion, and for-profit companies were at the center of concerns about default rates. In 2012, 39% of federal student loan defaults occurred among borrowers who had attended for-profit colleges, nearly four times the percentage of enrollees in the 2010-11 academic year.
To better understand how for-profit enrollment affects student finances, economists developed a new analytical approach using five publicly available sources, including census information and data on colleges, loans and employment. They compared changes in student achievement in cities that have experienced similar economic downturns, or “shocks” – conditions that increase demand for college enrollment – based on differences in their relative supply of education. for-profit versus public schools (two- and four-year-olds) between 2000 and 2018.
The analysis first provided new insights into how students choose schools: they are much more likely to go to a for-profit college in areas with more, compared to areas with fewer for-profit establishments, when a negative economic shock occurs. .
This is an important finding, Lovenheim said, because it highlights students’ sensitivity to local schools they can access, which impacts workforce development.
“It has broad implications for how communities will recover from recessions,” he said. “This means that all of the schools in a local area can influence the dynamics of economic activity in that area.”
For-profit colleges can generally respond more quickly to demand for specific degrees than their public counterparts, where crowding can also limit course availability, the researchers said. But while they can be more nimble and can expand access to historically underrepresented students, the authors found that for-profit companies on average provide a low return on student investment.
“In areas with more profits, for-profit students do worse than public students,” Lovenheim said. “They would be better served to go to a public school. They would take on less debt and default at lower rates.
The analysis found that higher indebtedness corresponded to higher tuition fees at for-profit institutions – about $3,300 for four-year-olds, with the likelihood of default increasing by 11 percentage points. Nor did employers place as much emphasis on for-profit degrees. In the two-year sector, for-profit students were more likely to graduate than public community college students, but still earned less.
The findings suggest a range of policy opportunities, the authors said, including regulation to minimize harmful lending, increased funding for public postsecondary schools and more information for students choosing between programs that could help. to launch meaningful careers – or burden them with debt and ruined credit.
“Students are really misinformed about the implications of choosing a specific school,” Lovenheim said. “We need to provide students with better information to make these important life decisions.”
Comments are closed.