March 7, 2005

Don’t Blame the Market

By Neal McCluskey

Like ancient Rome in its waning days, American higher education is corrupted by excess. According to a now infamous 2003 New York Times article, for instance, Ohio State University boasts a massive facility its peers call the “Taj Mahal,” which features kayaking, canoeing, a ropes course and massages. Washington State University possesses the largest Jacuzzi on the West Coast, a tub that can accommodate up to 53 people. And that just scratches the surface. One reads regularly about tens of millions spent to install new football stadium skyboxes; about gourmet cafeteria cuisine; and even about student rioting to celebrate athletic success.

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Examine for-profit colleges, however, and one observes quite the opposite. There are no water parks, skyboxes or Jacuzzis. Typical is a campus of DeVry University, as described by the Berkeley professor David Kirp in Shakespeare, Einstein, and the Bottom Line: The “campus off Highway 88 in Fremont, California ... looks like one of the high-tech companies in the area. It’s low-slung and functional, built with an eye to use, not aesthetics. With its long corridors of classrooms and labs ... it could be a community college, though without the gym or student center.”

“Market forces” are often blamed for indulgences at traditional universities, as they are in the recent Futures Project report “Correcting Course,” and for exploitation of students at for-profit colleges. But how can the market produce such contrasting corruptions: excessive opulence in presumably well-intentioned nonprofit universities, and dirty dealings at essentially amenity-free for-profit institutions? Moreover, how can for-profit schools’ opponents continue to smear for-profit institutions as threats to students, as Rep. Maxine Waters (D-CA) did in recent Congressional testimony, while traditional colleges are typically portrayed as ivy-walled treasures dedicated only to seeking truth?

To a large extent, the answer, at least to the second question, is a failure to understand the practical difference between “for-profit” and “nonprofit.”

First, look at nonprofit institutions. “Universities share one characteristic with compulsive gamblers and exiled royalty,” writes the former Harvard University president Derek Bok in Universities in the Marketplace, “there is never enough money to satisfy their desires.” Bok’s point is unmistakable: Universities always work to maximize their revenue. Why? Because, like most of us, they always have things they’d do if only they had more money. William F. Massy, a former Stanford vice president, calls it a drive for “value fulfillment” in his book Honoring the Trust, further explaining that “because value fulfillment is open ended, no respectable university will run out of worthwhile things to do.”

That makes sense. The term “value fulfillment,” however, suggests that universities use additional money only for altruistic ends, while the reality is that nonprofit universities can be driven as much by greed as anyone else. For instance, as the Ohio University economist Richard Vedder explains in Going Broke by Degree: Why College Costs Too Much, university presidents often indulgently use new revenue “to fund large salary increases, add staff members ... build more luxurious facilities, and expand research projects.”

For-profit institutions also try to maximize their revenue. But in addition to maximizing revenue, for-profit schools want to minimize their expenses. That’s why they don’t have any football stadiums or massage therapists. Simply, maximum revenue and minimum expenses yield maximum profit.

That does not mean, as their critics suggest, that they will necessarily exploit their students. The only way for-profit schools can maximize their revenue, after all, is by bringing in as many students as possible. They can’t, therefore, reduce expenses to any point below which they can provide the education students are willing to pay for. Kirp’s discussion of DeVry helps confirm this. “Instruction is more intense than in most community colleges and regional universities ... and it is often better as well.” Moreover, “graduates do get hired ... DeVry’s proudest boast has been that within six months of graduation, 95 percent of graduates are working, and not behind the McDonald’s counter but at jobs with a future.”

Are for-profit schools perfect? Hardly. As their critics regularly point out, for-profit education’s past is checkered by scams and frauds. And it still has troublemakers. In January, “60 Minutes” aired an expose on questionable practices at Career Education Corporation, which runs 82 for-profit campuses. But general hostility to for-profit education, its past, and the ongoing scrutiny it receives as a result force for-profit schools to police themselves.

As Nicholas J. Glakas, president of the Career College Association, told members of the U.S. House Committee on Education and the Workforce last week, his association’s members are “committed to and focused on compliance” with the law. “We have to be because of our past.” He also explained, though, that accusations against for-profit schools are often sensationalized, noting that the “60 Minutes” piece focused on only “three students out of 100,000″ at “2 of 82 branch campuses” of just “one publicly traded company.”

So when scams occur in for-profit schools, or traditional colleges purchase ever-grander amenities, has the market failed? No, because a truly free market hasn’t even been allowed to exist.

According to the College Board, almost 60 percent of students in both nonprofit and for-profit colleges receive financial aid, primarily from the federal government. In addition, according to the U.S. Department of Education, more than a third of public universities’ revenue comes from state governments rather than consumers. Supply and demand have been crippled. Because a large percentage of their funds come from state governments, public schools aren’t bound by students’ demands. Moreover, most students use other people’s money — in the form of taxpayer-funded grants and loans — when deciding what they are willing to pay for at any school.

The solution to the problem is to let the market work, and with the federal Higher Education Act due to be reauthorized this year, a window of opportunity is starting to open.

Ideally, the federal government should cease providing grants and subsidized loans to students, and states should no longer furnish block appropriations for their colleges. Such solutions, though, are likely politically impossible.

What would be politically feasible, however, would be for states to do something like what Colorado will begin doing next fall. Rather than sending funds directly to its colleges and universities, the state will send money to students, who can either take it to the state school of their choice, or use half of it at one of three approved private schools.

The federal government, for its part, should phase out all grant and loan programs for wealthy and middle-class students. For the poor, it could offer loans that students wouldn’t have to start paying back until after they graduate and begin earning a college graduate’s salary, making them ultimately responsible for paying for their own education, but allowing them to do so when they’ve begun to reap its benefits.

Making all consumers pay their own way through college would infuse effective demand into college financing. Suddenly, the frills of traditional higher education, or taking a chance on potentially shady for-profit schools, would look a lot less enticing. The market would finally get to work.

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