June 6, 2011

Now that for-profit higher education firms, along with the minority and low-income advocates who represent most of the sector’s students, have negotiated a truce with the Education Department over “gainful employment” rules meant to ensure that graduates end up in jobs that pay enough to service their student loan debt, it’s time to focus on the broader issue that all sides (and the media) have ignored: Soaring student loans unintentionally subsidize practices by both for-profit and not-for-profit colleges that drive the cost of college up.

Changing this equation in ways that lower the cost of college for everyone could be the surprising contribution the for-profit sector makes to the country, if for-profit firms are farsighted enough to seize the opportunity.

Before explaining why, a few disclosures are in order: The Washington Post Co. owns Kaplan, a for-profit educator; my wife is on the board of a company that operates another for-profit university; and I was once approached in my consulting life about offering paid advice to yet another, though I have not done so. Also, I serve on an Education Department commission looking at questions of how the nation funds K-12 schools. Ordinarily these affiliations might counsel leaving this subject to others, but there have been perspectives missing from the “gainful employment” battle that could now usefully move to the center of public discussion.

Start with two points on which most of us can agree. First, college in America costs too much. Second, it’s shameful that in the United States, alone among advanced nations, students routinely incur heavy debts (now averaging $27,000) to get a diploma.

What most of us don’t stop to consider is that federally backed student loans have enabled these tuition hikes. The late economist and university president Howard Bowen famously investigated what influences the expenditures of the typical (nonprofit) college. His conclusion was simple: Colleges will spend whatever revenue is available. Nonprofit colleges have long lobbied for more grants and student-loan availability under the banner of ensuring “access” — a manifestly worthy goal. But surging loans have effectively ratified price increases while also helping fund the pricier dorms, gyms, theaters and other parts of the “amenities arms-race” many college presidents privately decry.

Broadly speaking, the student-loan racket has also let traditional colleges maintain bloated cost structures largely immune to innovations in how education can actually be delivered. Perhaps that’s not surprising, because these schools are run by tenured faculty, and faculties have generally been happy with long-standing norms concerning teaching loads, course design, research priorities, campus amenities, summer vacations and the like.

If you doubt that changes to the traditional model are seen as a threat, consider one prestigious public university that recently decided to offer online courses and degrees. When I asked an administrator behind this initiative if the online students, most of whom were expected to be from lower-income families, would enjoy sharply reduced tuition (reflecting the much lower cost involved in delivering instruction online), he shook his head. “Not at all,” he said. “The faculty would go even more bananas than they already have.” The only way the online program could win faculty approval was to have it become a profit center that subsidized other activities. This in a nonprofit school whose avowed mission includes expanding access to underserved students!

The newer for-profit colleges that focus on online learning, or which use hybrid online/traditional models, do the same thing for different reasons. They’re changing the way education is delivered, via centralized course design, greater use of lower-salaried nontenured staff, fewer amenities, and more sophisticated use of Web-based learning technologies. Many are delivering quality results. The for-profits hardly have a lock on these new approaches — the nonprofit Western Governors University is one of the leaders (and is part of the reason I’m convinced the quality critique of online education will end up being a red herring) — but there’s no question that the for-profits bring that classic entrepreneurial energy to deliver more for less.

What these for-profits have found, however, is that when you lower the cost of delivering higher ed, but you’re still able, as a competitive matter, to hug the price points of the traditional brick-and-mortar colleges (which they all basically do), you can make a lot of money. That’s what’s been happening in recent years.

This is the insight missing from the current debate. The federal student loan system subsidizes (1) fat and happy faculties and fancy amenities at traditional nonprofit colleges, as well as (2) hefty earnings at for-profit schools which, after lowering the cost of delivering education, find themselves able to pocket the savings instead of passing them on to the student/consumer.

From society’s point of view, the biggest opportunity in education in the decade ahead is the way innovative learning technologies can lower costs while boosting quality. This should be, as the business jargon holds, a “win-win” for the for-profits.

If student debt is a problem, and it is, it makes sense to apply any “gainful employment” rule to all colleges, rather than to for-profits alone.

But whatever happens as these new rules are implemented in next few years, for-profit colleges will never get out from under a cloud, nor make good on their potential social contribution, until they pass on to students the benefit of the lower educational cost structures they are creating. To date, they’ve been reluctant to do so, because, for public companies especially, it seems tantamount to ignoring the shareholder interest in maximizing profits.

But this is shortsighted. For one thing, it ensures a perennial political backlash, which can’t serve shareholders over time. And beyond this, as a business matter, it means there’s a huge opening for any number of “Wal-Marts of higher ed” to win a vast market of underserved or overindebted young Americans (or mid-career workers who seek training) who desperately need affordable, high-quality educational services. The strategy should be to lower costs, lower prices and “make it up on the volume.” The firms that do this and earn a reputation for quality will force the traditional college world to reexamine its own inefficient practices, to the lasting benefit of students and the governments that fund them.

Are there shady “bad apples” in the for-profit education sector? Of course. But there are also plenty of “good apples” providing a quality education to students (many of them working adults) whom traditional schools have served poorly or not at all. If these “good apples” came together around this vision, they’d better align their interests with society’s, and rightly transform the debate.

mattino2@gmail.com