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Do 72 percent of for-profit programs have graduates making less than high school dropouts?

(AP Photo/Manuel Balce Ceneta)

“Of the for-profit gainful employment programs that our department could analyze, and which could be affected by our actions today, the majority — the significant majority, 72 percent — produce graduates who on average earned less than high school dropouts.”

— Education Secretary Arne Duncan, news conference at the White House, March 14, 2014

This column has been updated with a link to an extensive response to its findings by the Education Department.

This was a surprising statistic uttered from the podium in the White House briefing room, offered when Education Secretary Arne Duncan announced a proposed regulation that is designed to target what the Education Department contends are poor-performing career programs that burden students with unsustainable levels of debt.

Could attending a for-profit institution actually result in a three-out-of-four-chance of earning less than a high school dropout? The claim seems to overturn the widely-held assertion that college-level education will boost earnings.

For-profit education institutions are now one of the fast-growing areas in higher education and have a different business model than private universities, which generally don’t pay taxes, and community colleges, which receive state subsidies. For-profit institutions tend to have higher tuition, and a vast majority of their students take out federal loans to pay for that tuition. One study found that tuition and fees in 2009-2010 for public community colleges averaged just $2,300 for in-state students, while for-profit two-year colleges charged more than six times as much, averaging $15,000.

Many of the students in for-profit institutions tend to be poorer, more female and often are single parents; as entering students, they also tend to make less money than students who attend more traditional programs.

Congressional and governmental investigations have uncovered evidence of deceptive marketing practices. In the proposed “gainful employment” regulation, the Obama administration is trying to measure whether career programs meet standards based on how much debt former students have relative to their income, and how often they are defaulting.

As the department put it in a statement to The Fact Checker: “A good program, or one that prepares students for gainful employment, results in students who have jobs and have earnings that allow them to pay their educational debt. Conversely, a poor-performing program is one where students are not able to find jobs, or who find jobs with earnings so low that they are unable to manage their debt.”

The Fact Checker obviously takes no position on the proposed regulations. And while The Washington Post used to be owned by the same company that runs Kaplan Education, a big player in the market, The Post is now owned by Jeff Bezos, so there is no longer a potential conflict of interest.

We should note that this was not a one-off comment by Secretary Duncan. It is highlighted in department material as one of its key talking points and has been repeated by the news media. The factoid has also been tweeted by supporters of the administration’s plan:

We wanted to use an easily understandable term for the public to convey just how poor these outcomes are, especially since taxpayer dollars heavily subsidize these programs through federal student aid,” said Massie Ritsch, acting assistant secretary for communications.

The Facts

The math behind this statistic is explained deep in the department’s lengthy proposed regulation. First, officials took the median weekly wages for workers who had dropped out of high school, which at the time was $471. This is Bureau of Labor Statistics data, drawn from the current population survey. The Education Department then multiplied that number times 52 (weeks) to yield an annual wage of $24,492, which is described as “average annual earnings.” 

The Education Department received earnings data of students about three years after graduation, in aggregate, from the Social Security Administration, after the schools provided student information to Social Security. Officials say they took the highest of the mean or the median for the salary figures. (For “communications purposes,” officials say “average” even though the BLS data concerns median wages.)

Labor Department officials said the Education Department’s math is actually an incorrect method for using the weekly wage data. “We wouldn’t report it that way,” one BLS official said. “We don’t know if the workers worked year around.”

Indeed, an arm of the Education Department, using the same CPS data set, puts the median high school dropout’s annual wage at $22,860 in 2011. The most recent published Census Bureau average annual wage (from 2009) is $20,241. A different Labor Department measure, using information from employers, puts the median annual wage as low as $18,580 for high school dropouts with no training.

Education Department officials defend their method as reasonable but, as it happens, it turned out they used the highest number available. The $18,580 figure, by contrast, would improve the results for for-profit institutions to about 49 percent, down from 72 percent.

That still seems high, right? But here’s the strange thing: the numbers are bad for all educational institutions. Buried in the regulation — and not advertised by the department — is that graduates of 32 percent of community college programs earn less than high school dropouts. “We were surprised by that,” one Education Department official acknowledged.

Officials also confirmed that graduates of 57 percent of private institutions — a list that includes Harvard’s Dental School but also child-care training programs — earn less than high school dropouts.

On the face of it, these statistics appear to fly in the face of the general adage that higher education yields greater earning power. The BLS data from which the department drew its estimates makes that clear.

So what’s going on?

First, note that the statistic concerns a percentage of “programs,” not overall graduates. The Education Department does not have individual student data, so it could well be that most graduates do fine, especially from the larger programs. The list of 8,000 programs that were measured includes everything from massage therapy to nursing or becoming a legal assistant. The programs could be very big — or relatively small. But each is counted as one program.

Second, on wages, the department is comparing apples and oranges. The Social Security earnings data obtained by the department includes people who are not working, which would bring down the average wages for programs. But the wage data for high school dropouts only counts people who are working — and it includes all high school dropouts, even people who left school decades earlier.

“This is an observation we are making,” one Education Department official said. “It may be framed as apples and oranges, but it is meant to be. It is meant to be a benchmark.”

As an example of how this might work, imagine taking the same approach to evaluate different departments at an elite college. Three years after graduation, how would the philosophy department fare, on average? Suppose you had five philosophy majors, and one was unemployed, one made $20,000 a year, one made $24,000,  one made $30,000 a year and one made $45,000. “On average,” the wage is in the program is $23,800 — just enough for the philosophy department at Ivy League U to be labeled as producing graduates earning less than high school dropouts under the department’s metric. The median figure would be $24,000, also below the cut-off point.

A more effective approach might be to measure the gain in earnings experienced by graduates of for-profit colleges.

The research on the earnings potential from for-profit colleges is mixed. Part of the issue is that people entering such programs often don’t make a lot of money to begin with, and so they start at a low base — and have high borrowing costs. But a review of the academic research shows that there is some sort of earnings gain. “We find lower earnings for for-profits than other college students but not so low that they would imply no earnings gain at all,” said Lawrence Katz of Harvard University, who recently co-authored a lengthy examination of for-profit programs.

Stephanie R. Cellini, an associate professor at George Washington University, and a co-author recently compared the earnings potential from attending a for-profit college with graduating from high school. They calculated that there was  a 4 percent return per year of education from attending a for-profit college.

“The research I am aware of shows that, on average, students experience a small positive increase in earnings after attending a for-profit college, relative to high school graduates with no college,” Cellini said. “I am not aware of research involving high school dropouts, but that comparison would likely reveal larger relative gains for for-profit students. Still, it is unlikely that the boost in earnings for for-profit students is enough to offset the high cost of attendance.”

Nevertheless, Education Department officials insisted their statistic was still valid.

“We are not saying that there will not be earnings gains,” Ritsch said. “There may very well be earnings gains in the vast majority of these programs. A student may be making much less than a high school dropout before they enroll in a program, and three years after they graduated they are still making slightly less than a high school dropout. That’s a problem if you have accumulated debt that requires a couple of thousand dollars a year in loan payments.”

Ritsch added: “However you cut it, one statement remains true: Graduates of a significant number of for-profit career college programs wind up getting jobs with very low earnings — a fact that should cause concern for any consumer who’s considering those programs as a post-secondary option intended to prepare them for a job.”

Update: The Department of Education disputes the Fact Checker’s conclusions and provides further support for its statistic on the Department’s website.

Update, April 15: Ben Miller of the New America Foundation offered a critique of the original statistic and this fact check.

The Pinocchio Test

In straining for a striking factoid, the Education Department went too far. Officials calculated a relatively high figure for the earnings of high school dropouts, compared to other available data. Then they compared it to average wages that likely were adversely affected by recent graduates unable to find employment.

Not only were these two data points apples and oranges, but the entire comparison to high school dropouts is fairly bogus. There’s a reason academic researchers have not tried to compare the earnings of graduates for-profit colleges to the earnings of high school dropouts — it also would be considered an apples and oranges comparison unworthy of research.

Academic research suggests there are real differences in earning power between attendees of for-profit colleges and high school dropouts. That’s also intuitive, suggesting there is something basically wrong with the statistic.

It’s possible a large percentage of for-profit programs are not serving students well — and that students are emerging from those programs with heavy debts. But this statistic is too fishy to make that case.

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