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Profiting From Federal Aid

February 14, 2012

For-profit colleges that can accept federal financial aid from students charge about 75 percent more in tuition than those that can’t, according to a new study from the National Bureau of Economic Research, which suggests that federal aid might drive up college costs.

While the reasons for higher tuition levels at aid-eligible for-profits are hard to pin down, those colleges “may indeed raise tuition to capture the maximum grant aid available,” wrote Stephanie Riegg Cellini, an assistant professor of public policy and economics at George Washington University, and Claudia Goldin, a professor of economics at Harvard University, the study's authors.

The two economists say their research lends credence to the so-called “Bennett Hypothesis,” a difficult to measure theory attributed to William Bennett, Ronald Reagan’s second education secretary, who alleged that federal financial aid disrupts the higher education marketplace. But unlike Congressional Republicans or Bennett, who have pointed to nonprofit colleges when making that argument to bolster attempts to cut aid programs, the researchers focused on for-profits.

The difference in tuition between the two categories of for-profits “seems to match, pretty well, the size of a Pell Grant,” said Cellini.

The study also found that research about for-profits substantially underestimates the sector’s size. That’s because academics and policymakers generally use federal data to scrutinize for-profits, and ignore the large number of colleges that are ineligible to participate in federal aid programs.

As a result, commonly cited figures from the U.S. Department of Education that for-profits enroll 1.8 million students, or about 10.7 percent of all college students, leave out an estimated 670,000 students who attend for-profits that cannot receive federal aid. That group accounts for 61 percent of for-profit institutions, according to the study, and 27 percent of the sector’s students. Most of the colleges in this group are small, which explains their relatively high numbers and smaller percentage of students.

"The NBER Report only begins to identify the growing diversity of private sector postsecondary institutions in America,” Steve Gunderson, president and CEO of the Association of Private Sector Colleges and Universities, said in a written statement. “This sector will continue to grow in size and delivery forms as we seek to respond to the needs of a 21st Century workforce with enhanced training and educational programs."

The researchers used data from for-profit regulatory agencies in five states: Florida, Michigan, Missouri, Tennessee and Wisconsin. After controlling for program length, enrollment, year of operation and a “rich set of program, county and year-fixed effects,” they compared tuition charged by for-profits that participate in federal aid programs with prices at for-profits that don’t. The study also extended the state data to make national estimates about the industry's scope.

'Tuition Premiums'

Non-aid-receiving for-profits award only a small number of bachelor's and graduate degrees, so the study focused almost entirely on non-degree programs. That also means large chains – publicly traded for-profits like the University of Phoenix or DeVry University – are not the institutions whose tuition levels the researchers compared with for-profits that are ineligible to receive federal aid.

The non-aid-eligible colleges are typically independent operations that skew heavily toward health profession, culinary and transportation programs. Cosmetology schools are the largest group. "There are a lot of students at these institutions and we just don’t know that much about them,” Cellini said.

The group of for-profits tend to fare well despite their lack of federal aid revenue.

“Rather than being new or ephemeral,” according to the study, many of the non-aid eligible for-profits “are long-lived, surviving and apparently thriving without access to Title IV funds and the imprimatur of the U.S. Department of Education.”

Colleges jump through several hoops to participate in federal aid programs. To be eligible, colleges must have existed for at least two years, have received accreditation from an agency that the Department of Education recognizes and be licensed or authorized by the state in which they operate, according to the study.

Many small for-profits do not qualify. And some choose not to try, because meeting accreditation requirements can be costly.

For-profits that do participate in federal aid programs either pocket the extra tuition money, spend more on advertising and student recruitment or rack up additional costs, according to the study. Those costs might include complying with accreditors, administering grants and more spending on student services.

The study “indicates that participating in Title IV is an extra cost for any educational institution, and tuition premiums at these schools may be reflective of this,” said Gunderson. “These institutions are working to cover costs that allow them to grant greater access to their schools for those who otherwise may not be able to afford it."

Mark Kantrowitz, an expert on financial aid, said the study’s findings do not broadly support the Bennett Hypothesis. “Conclusions about the relationship between college costs and student aid at for-profit colleges do not apply to non-profit and public colleges,” he said via e-mail.

Kantrowitz also cited an argument, often used by leaders of for-profit colleges, that federal regulation may actually encourage the sector to charge higher tuition. Specifically, the rule that colleges may only receive 90 percent of their revenue from federal financial aid forces colleges near that limit -- who often serve a large proportion of lower-income students -- to charge more in tuition to avoid hitting the cap, according to that argument. (The Government Accountability Office in 2010 released a report on for-profits that are heavily reliant on federal aid.)

Goldin, however, said the so-called 90/10 rule had no bearing on the study’s findings. The research focused on periods during which Pell Grant levels were not increased. Furthermore, she said increases in federal aid grant levels were “small potatoes” compared to the tuition differences between aid receiving and non-aid receiving colleges.

The research, Goldin said, shows that for-profits are not operating in a properly functioning marketplace.

“This is a market that is not in equilibrium,” she said. “There should be more competition and prices should come down.”

 

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