Redefining Colleges' Costs and Benefits

When the Nexus Research and Policy Center set out to study the costs and benefits of a bachelor’s degree, the results were perhaps unsurprising: the center, funded by the parent company and founder of the for-profit University of Phoenix, found that degrees are good for students and society, and that the education provided by for-profit and private colleges is a better deal for taxpayers than that offered by public institutions.

May 12, 2011

When the Nexus Research and Policy Center set out to study the costs and benefits of a bachelor’s degree, the results were perhaps unsurprising: the center, funded by the parent company and founder of the for-profit University of Phoenix, found that degrees are good for students and society, and that the education provided by for-profit and private colleges is a better deal for taxpayers than that offered by public institutions.

Outside experts questioned some of the methods of the study, “Who Wins? Who Pays? The Economic Returns and Costs of a Bachelor’s Degree,” as well as its underlying assumptions. But they praised the researchers for trying to bring data to bear on a question that has generated emotional debate in the federal government and elsewhere: Just what is a for-profit education worth?

“There’s been more heat than light about both the costs and benefits of all higher education, but the for-profit sector in particular,” said Jane Wellman, executive director of the Delta Project on Postsecondary Education Costs, Productivity, and Accountability, who was critical of the study’s underlying assumptions and generalizations. “This will advance the conversation; that’s a good thing.”

The study by Nexus, which derives its funds from the Apollo Group and the John G. Sperling Foundation, the philanthropic arm of the founder of the University of Phoenix, is obviously self-interested (as many such studies produced by colleges and higher education associations are). The authors, Jorge Klor de Alva, president of Nexus, and Mark Schneider, vice president of the American Institutes for Research and commissioner of the National Center for Education Statistics in the Bush administration, readily admit that they want to reframe a public policy discussion that has been highly critical of Phoenix and the for-profit education sector.

By focusing entirely on what students pay, and what they borrow, for college, and on the perceived quality of their education, Congressional Democrats and the Obama administration have produced often damning data to build a case for tougher regulation of for-profit institutions. Schneider and Klor de Alva aim to show that the situation looks quite different when evaluated in another light: how much public money is required to educate those students, on top of graduates' own contributions, and the return to students and taxpayers on their investments if they graduate.

The study, released today, examined starting and estimated career-long salaries for bachelor’s degree recipients from a range of institutions, including proprietary, public and private nonprofit colleges and universities at varying levels of admissions selectivity. Klor de Alva and Schneider then calculated the net cost or net financial gain, to students and to taxpayers.

The benefit to students was measured by taking the amount they earned over what they would have earned with a high school diploma, then subtracting tuition, books, room and board, and the wages they did without while in college, as well as the additional federal and state income taxes students paid. In all selectivity categories, students came out ahead. Even those with a degree from a noncompetitive private nonprofit college earned more than $230,000 more over their lifetimes than they would have with no college degree. The biggest gains were seen by those at the most competitive nonprofit colleges and universities, who earned $552,000 more than they would have without a bachelor’s degree. (Students at for-profit colleges, which were grouped in the “non/less competitive” category, earned $284,000 more over the course of their lifetimes than they would have without a bachelor’s degree.)

“A bachelor’s degree, whether from a public, a not-for-profit, or a for-profit institution, pays a handsome net financial reward in comparison to a high school diploma,” Klor de Alva and Schneider wrote.

For taxpayers, the math was more complicated, more beneficial to for-profit institutions, and more controversial. Researchers calculated the amount each type of institution received from federal, state and local government, in direct subsidies and Pell Grants, subtracted taxes paid, and divided by the number of full-time students. During this step, endowment contributions, forgone sales taxes and other taxes that nonprofit and public institutions do not pay were subtracted -- making those institutions a net loss for taxpayers.

“Strictly from a taxpayer perspective, for-profit institutions represent a better deal than tax-exempt not-for-profit or public institutions,” the researchers wrote. The report went on to recommend that public policy reward good completion and retention rates, focusing on less selective institutions and needy students. It also recommended support for “higher-quality nontraditional providers,” including StraighterLine and, yes, some for-profit colleges and universities.

The study relied heavily on publicly available data, including the federal Integrated Postsecondary Education Data System, or IPEDS, and salary information from, which collects voluntary data on salaries as well as information from professional organizations. Klor de Alva said the researchers purposely chose those measurements so the study could easily be replicated, even by those who might question its conclusions. Anticipating disagreement, the researchers also provided a detailed appendix explaining their methods -- as well as a call for better data for future studies. Still, they emphasized that the goal was to change the conversation.

"Much of the current debate about the cost and value of higher education has focused on how much students pay, how much they borrow, and how poorly some of them are being educated," they wrote. "Much less attention is being paid to how well or how badly taxpayers are being served both by the institutions they are helping to fund and by the students they have helped to graduate."

Those data are necessarily limited, said observers, some of whom reviewed the report. But some of the researchers’ choices, especially counting taxes paid by for-profits as a gain by taxpayers while simultaneously considering taxes forgone by private institutions as a loss, might have skewed the results.

“It’s a reasonable study,” said Dennis Jones, president of the National Center for Higher Education Management Systems (NCHEMS), who reviewed a draft version of the report. “Any argument that I have with it would not, I don’t think, change any of the bottom-line findings.”

Still, the study has flaws, Jones said. It does not take into account the cost of not completing a degree, which would weigh against for-profit institutions, which cost more than public institutions and have higher dropout rates than expensive private colleges. (Schneider and Klor de Alva said a forthcoming study will examine the cost of dropping out.) By counting lost wages while students attend class as an opportunity cost, it also ignores the fact that the majority of college students are also working, he said.

He also pointed out a frequent criticism: that counting the taxes for-profit institutions pay as a public benefit, while counting taxes that nonprofits forgo as a public loss, overrepresents the for-profit institutions’ contributions.

“You can count one of those, but you can’t count both,” said David Longanecker, president of the Western Interstate Commission for Higher Education, who reviewed the study and said it was sound and important over all.

In part because of insufficient data, the study didn’t break out the different functions of public flagship universities -- teaching, research and graduate education, among others -- so the cost of a bachelor’s degree appears unnaturally high, Jones said. “The inability to recognize that states are buying something more than undergraduate education when they fund the land-grant institutions, I think, kind of tilts the answer,” he said.

Others raised more philosophical questions, including whether the study really evaluated the total benefits of a college’s presence -- and whether a cost/benefit analysis is a sound foundation for public policy.

“If your goal is bachelor's degree attainment and that’s the only goal you have for higher education, and your other goal is to minimize all costs to the taxpayer, period, then investing in private institutions saves money,” Wellman said, adding that the question hardly needed extensive research.

But private institutions simply shift the costs to the student in the long run, she said. And the economic benefits of a college or university’s physical presence, including employing local residents and contributing research, are “palpable and real and worth defending.”

“One of their conclusions is, given that this is good for taxpayers, this is what we should do,” Wellman said. “Being good for taxpayers may not be what’s good for society. What you want in any social compact is the best balance between keeping taxes low, keeping services high, and the right blend of public and private kinds of investment strategies to achieve the right balance of those.”


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