Spillover Impacts of Sanctions on For-Profits

October 24, 2019

When the federal government penalized for-profit colleges for high student loan default rates, annual enrollment of Pell Grant recipients at those institutions declined by 70 percent, according to a new report from Third Way, a center-left think tank.

That's not surprising, because the punished college loses its eligibility to disburse federal loans and sometimes Pell Grants or other forms of federal aid.

However, the report, which is based on research from a forthcoming paper, found that "reputational effects of a sanction can spill over onto institutions that students view as similar." As a result, unsanctioned for-profits lost about 2 percent of their Pell-recipient enrollment when a local for-profit competitor was sanctioned, according to the report.

At the same time, enrollment of Pell recipients increased at nearby community colleges.

"Because public community colleges are typically large relative to their peers, each for-profit college sanction resulted in the Pell Grant enrollment at each unsanctioned local public community college growing by about 7 percent annually," the report said. "Accounting for the different average size of the colleges in each sector, we found that for-profit college sanctions led to county-wide total Pell Grant enrollment declines of about 2 percent. We also found suggestive evidence that student loan outcomes improved in the county as students shifted from the for-profit to public sector, with the rates of borrowing and student loan default both declining."

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