Sunday, May 9, 2010

When Education Becomes a Business

The weekly FRONTLINE program of PBS (Public Broadcasting Service) aired a very interesting one-hour exposition College Inc. a few days ago.  It is about the rapidly changing landscape of the American higher education system after the secondary schools.  In particular, the story focused on the tremendous growth of for-profit companies and entrepreneurs in developing and running career colleges.  If you are like me who came from traditional colleges, you would never have guessed that today, with close to half a million students nationwide, one of the top three largest colleges of U.S. in terms of enrollment is the University of Phoenix owned by Apollo Group, Inc., a publicly-traded company on NASDAQ, rivaling New York State University and California State University systems.  It has 200 campuses over 39 states, Canada, Mexico, the Netherlands, and Puerto Rico.  It offers extensive online classes and on-line degree programs.  You might have seen signs and office-building like facilities of University of Phoenix off freeway exits.  Does that remind you of McDonald?  Is for-profit college fast-food business of higher education?

For-profit university and college business is not new.  Their mission and primary market has not changed much either: primarily offering vocational education for adults who want to acquire skills to get better paying jobs but have scheduling challenges to attend a traditional college.  What is new is the tremendous growth which is the result of increasing demands since 1990s and new PC and Internet-based technologies that made online classes easily available.   With the recent severe recession, its enrollment has exploded and is approaching 2 million that accounts for close to 10% of the total U.S. post-secondary school enrollment!  These schools focuses on the high demand professions in job market of the moment (like health care, information technology, food service, etc.) and promises immediate return on investment.

To appreciate better the business of for-profit colleges, one just needs to follow the money.  For-profits college/university as an industry is now brining in $29 billion dollar revenue annually compared to $9 billion only a decade ago.   That is comparable to, revenue wise, book publisher and jewelry retail industries.  However, unlike the traditional public or private colleges and universities, 90% of its revenues come from student tuition and fees.  Given the average tuition and fees of for-profits is about twice of that of in-state public universities and that it receives practically no direct government funding, you may wonder how do they compete and prosper?   

The clue lies with the fact that about half of the $29 billion dollar revenue of this industry comes from government-backed or subsidized student loans and grants.  For example, University of Phoenix derived 86 percent of its last year’s revenue from federal student aid last fiscal year, according to a New York Times March 13th article In Hard Times, Lured Into Trade School and Debt.  These financial aids include Pell Grants for low-income families, subsidized Stafford Student Loans for low-income students, and PLUS loans for parents of the student.   Indeed for-profit colleges/universities are estimated to have received (through their students) about $5 billion dollars (or almost 25%) of congress-appropriated Pell Grants and over $7 billion dollars of Stafford Students loans.  This would have been ok if few defaulted on the loans.  Unfortunately it is not the case.  Data has shown that close to half of all defaults of government-backed student loans came from students of for-profits and that over 20% of the students of for-profits colleges who had received loans defaulted in the first three years of repayment schedule.  You can be sure that tax-payers will be on-hook for those bills eventually.  That explains the recent attentions to this issue by media, Congress and Department of Education.   It also explains the heavy lobbying in Washington by this very industry since government policy and regulatory agencies’ actions do have a huge impact on the risk and profitability of for-profit colleges and universities. 

Like other businesses, for-profit colleges industry spends a lot of money on marketing and sales.  Schools like University of Phoenix spent around 20% of its revenue in marketing and sales in 2009, more than what it spent on instruction that is very different from non-profits.  After all, if one doesn’t bring in more paying customers, i.e. students, revenue and profit would suffer just like any other for-profit business.  There is no surprise that a lot of controversies and law suits have thus been about the aggressive, questionable, and sometimes unethical and downright illegal recruiting practices used by some schools.  Often the recruiters are incented or pressured to as many students as possible by misleading promises of future jobs and arranging loans that the prospective students have little chance to ever pay back.  As a result, many of the students ended up in financial ruins and were so much in debt before they found a better paying job, if ever at all.  But when government is the one who backs the loans, how could you not be attracted to that easy money?

To be fair, one cannot ignore the fact that for-profit colleges did many things right too.  They have been creative and responsive in meeting particular demands of the market with desired services and innovative ideas.  Their single-minded pursuit of better return of investment ensures that they do everything they can to sign prospective students up and to retain enrolled students, just like other businesses.  They offer year-round small classes that can start quickly and frequently without the constraints of rigid traditional semesters.  Most of their classes are available online and face-to-face classes are scheduled such that students have the ultimate flexibility and possibility to attend which is not the case in traditional schools.  They follow closely and adapt quickly to what is hot in market and focus on growing fields.  Their “customer services” process is responsive and proactive, modeled after successful private businesses. 

In contrast, traditional colleges and universities do have multiple stake holders and “customers”.  In terms of mission, community colleges in particular have most overlaps with for-profit colleges as tge former usually addresses career education in addition to transfer (to four-year colleges) and continuing educations.   So far some of the responses from traditional community colleges have been to start offering online classes and try to shift more of its teaching resources to “contractors”, a questionable direction that may compromise education quality and is in needs of rigorous examination.  

Perhaps the bigger and more fundamental question is how should vocational education be structured and supported.  A big part of the controversy about for-profits institutions stems from diverse objectives of education when government financial aids to students are involved.   The issue will become even more acute as the boundary of vocational education becomes more blurred with the changing career time-scale when technology advances and complexity increases rapidly in our modern society.  I would not be surprised that “underemployed” and “in between jobs” will become much more common terms in job market as more people struggle to hold on to jobs and in need of finding new jobs.   

As President Obama highlighted the importance of higher education for American competitiveness and declared back in February that he wants to make US the highest proportion of college graduates in the world by 2020, further increase in government funding in education can be expected.  While paying more attention and effort in education is always helpful, I am not optimistic about the return of investment of this drive.  It is worrisome that the increased political and business interests will likely lead to too much emphasis on short term career training and financial measures that would distort further the objective of quality education.  Worse yet, it is intuitively obvious that getting more people into community colleges and catch up late is certainly the least effective way to fix the problem.   What America really needs is to spend more energy in fixing the quality, not the quantity of its education system, especially with the primary and secondary schools which are controlled by state and local governments.  No, tax payers do not need to subsidize for-profit colleges and universities who should treat education as, after all, a real business.

Talk to you soon!

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