For-Profit Tuition Rises as GI Benefit Grows

A new working paper finds that as Congress increased Post-9/11 GI Bill benefits, for-profit colleges raised tuition.

May 29, 2018
 

A long-held conservative viewpoint on financial aid goes like this: as government assistance gets more generous, colleges and universities simply respond by raising tuition, worsening affordability.

A new working paper takes a look at the so-called Bennett hypothesis, first proposed in 1987 by former U.S. education secretary William Bennett. The analysis finds that in the case of a veterans’ benefit enacted after the Sept. 11 terrorist attacks, the principle seems to hold true, at least in this case, for just one sector: private for-profit institutions.

The findings come courtesy of four researchers -- two at RAND Corp., one from the American Institutes for Research, and a fourth from the U.S. Military Academy. The researchers looked at tuition trends at private for-profit and nonprofit colleges before and after Congress tweaked the Post-9/11 GI Bill, in a few cases dramatically changing how much tuition assistance veterans were eligible to receive.

The original version of the Post-9/11 GI Bill, enacted in 2009, capped benefits based on tuition rates at each state’s most expensive public university. The maximum payment in Delaware, for instance, was as low as $665, while in Colorado it was $43,035.

In 2011, lawmakers threw out that formula, capping the standardized benefit nationally at $17,500. As a result, it rose sharply in states like Delaware while dropping in places like Colorado.

“It’s kind of a very neat, natural experiment for an underserved group,” said Michael Kofoed, an assistant professor at West Point and one of the researchers.

What they found: in states where the benefit increased, for-profit universities increased their sticker price, on average, by $437, even though enrollment didn’t grow. By contrast, private nonprofit university tuition remained unchanged.

In states where benefits dropped, for-profit institutions cut tuition by $1,260.

The researchers conclude that for-profit colleges change their price “to extract surpluses from their students,” engaging in what economists would call “price discrimination” -- pricing that has little to do with demand.

Kofoed, who stressed that his opinion was his own and not necessarily that of the U.S. Defense Department, the Army or West Point, said private nonprofits simply can’t adjust tuition rates so easily and quickly.

“If I’m Duke or Stanford, I’m going to have to go to a Board of Trustees to hike my tuition -- particularly if I want to claim that I’m going to do it in response to increased GI Bill benefits,” he said. “But if I’m a for-profit college and I’m targeting veterans or active-duty military that are around -- for example, a lot of these are located around military bases -- then I might have an incentive now.”

He noted that veterans receiving the more generous tuition benefit might not be as “price sensitive” as other classmates, since the federal government is picking up the extra cost of attending for-profit colleges. “So I can increase my tuition to capture these excess funds,” he said.

Robert Kelchen, an assistant professor of higher education at Seton Hall University’s Department of Education Leadership Management and Policy, agreed that, in this case, veterans aren’t necessarily focused on price.

“It’s the classic third-party-payment issue,” he said. “The student doesn’t care how much they pay because they don’t actually pay it.” Likewise, he said, the college doesn’t have much of an incentive to keep their price down because someone else is essentially footing the bill.

Wallace E. Boston Jr., president and CEO of the online for-profit American Public University System, said private for-profits are simply “more market sensitive” than private nonprofit universities. The new analysis is incomplete, he said, in part because it doesn’t capture online students. “Whatever the population in the county, it may not be relevant to the number of veterans who are enrolling nationwide in an online program."

Bennett first proposed his hypothesis in a February 1987 New York Times op-ed, in which he looked at federal loans, not grants like the Post-9/11 GI Bill.

Titled “Our Greedy Colleges,” the op-ed alleged that increases in financial aid in the preceding years had “enabled colleges and universities blithely to raise their tuitions, confident that federal loan subsidies would help cushion the increase.”

Kelchen said Bennett floated the idea at a time when the U.S. for-profit college sector was tiny and dominated by “mom-and-pop” institutions, not major corporate players.

Kelchen said he’d need to see more evidence before calling the for-profits’ Post-9/11 behavior “predatory.” He noted, for instance, that the researchers also found that for-profits quickly reduced tuition when the veterans' tuition benefit in some states dropped.

“My biggest conclusion is that for-profit colleges are quite responsive to potential changes in their revenue sources,” he said.

Over all, the benefit continues to rise -- this fall, it is due to grow to a maximum of $23,671.94 at private institutions, about $866 more than for the current academic year, according to the Department of Veterans Affairs.

APUS's Boston said the data presented in the survey likely represents students enrolled at programs at physical campuses "where the opportunities to grow enrollment may be limited by location and capacity." It may also not reflect most of the veterans attending college.

Also, he said, correlating data to counties likely skews the results for students attending online institutions from multiple states.

He noted that APUS's online enrollments of students using VA benefits have increased since the passage of the Post-911 GI Bill without an undergraduate tuition increase for active-duty service members and veterans since 2001. "As a result, our tuition is less than most in state public institutions," he said, at $250 per credit hour. "None of these statistics reflect that. Policy makers would be more informed by seeking a study that examines the entire population enrolled and not a subsector of a subsector."

Kofoed, the West Point researcher, noted that about one in three veterans has used the Post-9/11 benefit to attend for-profit colleges, spending about 40 percent of GI Bill dollars at these institutions. He and his fellow researchers say lawmakers should consider the behavior of for-profits when designing future financial aid programs.

“Policy makers need to think very, very carefully, because they might be overpaying for an education for our veterans and active-duty military that won’t help them transition to civilian life well,” he said.

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