The Promises and Perils of For-Profit Education

by Professor Latika Chaudhary

Latika Chaudhary

In the United States, two-year colleges enroll more than 6.6 million students every year, and while much is known about the public community colleges that serve these students, their private sector counterparts, i.e., for-profit colleges, largely remain a mystery. In recent years, these colleges have been in the center of a media firestorm with reports of fraudulent recruiting practices and accusations of fraud in federal financial aid programs at several large for-profit colleges.

At the intersection of postsecondary education and job training, for-profit colleges (also known as proprietary schools, vocational institutes, technical colleges, or occupational colleges), offer short-term certificates and associate’s degrees in fields ranging from computer programming to hairdressing. They are an integral part of the sub-baccalaureate market, conferring 18 percent of all associate degrees and compete for students with public community colleges which confer about 76 percent of all associate’s degrees.

These institutions hold both promises and perils for the low- and middle-wage workers whom they serve. Understanding for-profit colleges and their students is essential for the design of effective policies involving the regulation and licensing of for-profits, eligibility, and formulation rules for federal and state financial aid programs, optimal investments in public education systems, strategies for fostering economic growth, and individual incentives for human capital development.

In joint work with Stephanie Riegg Cellini, associate professor of public policy and economics at George Washington University, we study college quality in the for-profit sector by estimating the labor market returns, or earnings gains, to associate’s degree programs in for-profit colleges. A crucial statistical problem with such analyses is that students in for-profit institutions may differ on both observable and unobservable dimensions from those in public institutions. If these differences are correlated with a student’s choice of institution and her labor market success, simple comparisons between individuals attending for-profit and other colleges are likely to be incorrect.

To circumvent this issue, our research design compares the same individual before and after college attendance. Unlike bachelor’s degree candidates, students pursuing associate’s degrees often work before, during, and after they attend college, allowing us to compare an individual student’s earnings after attendance to her earnings before. In so doing, our analysis controls for any unchanging student characteristics such as race, gender, and parental education.

Using a nationally representative survey, the 1997 panel of the National Longitudinal Survey of Youth (NLSY97), we find that students enrolled in an associate’s degree program at a for-profit college experience a six percent increase in earnings. We find no evidence that the returns to attendance are different in the public and private sector.

We also look specifically at students who complete degrees. For graduates of for-profit institutions, returns are about 22 percent, or 11 percent per year, a figure on par with those of students in other sectors and levels of education. Moreover, for-profit graduates also appear to work more hours and be more likely to work fulltime after graduation than public sector alumni. In contrast, for-profit dropouts fare considerably worse than their counterparts in community colleges. While we can confidently rule out negative returns for public sector dropouts, we are unable to do the same for their for-profit counterparts whose absolute returns average -2.6 percent and range from as low as -11 percent to 5.8 percent.

Our analysis reveals that for-profit students generally experience positive earnings gains and labor market outcomes similar to those of students in the public sector. Given the much higher cost of a for-profit education relative to a public education, we expect that some students might find a community college a better investment, and further research is needed to assess whether the earnings gains from a forprofit education are enough to offset the high cost of attendance. Degree completion appears to be particularly important to student success in the for-profit sector and we suggest that, in the absence of earnings data, policymakers and prospective students should carefully study completion rates to assess the quality of a particular for-profit institution.

Latika Chaudhary, assistant professor of economics, has been at Scripps since 2009. Her academic focus is in public finance, labor economics, economic development, and economic history, and her professional interests include provision of public goods and economics of education.

Professor Chaudhary is on sabbatical this semester and is working on a variety of projects, including investigating the effects of the Dekkan Agriculturists Relief Act (DARA), a law change in how credit contracts were regulated in Western India in the late 19th and early 20th centuries, and a joint project on the effects of Muslim rule on educational outcomes in Colonial India.


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