Tuesday, November 15, 2011


The Future of For-Profits

I have a close, longtime friend who has lived the mixed blessing of getting what she has wanted, when she has wanted it. Luckily for her, she generally has good taste, but she has boxed herself into corners a few times when circumstances refused to conspire to save her from herself.

I’m thinking that the last couple of years are conspiring to save for-profit higher ed from itself.

Having worked in both the for-profit and community college worlds, I’ve been arguing for years that the right move for the for-profits is to go upscale. Apparently, they’re starting to figure this out for themselves, even if only as the result of newfound Federal scrutiny.

Historically, for-profits arose in the gaps of traditional higher ed, focusing primarily on the fields that traditional colleges either ignored or neglected. That made some sense at the time. But since then, the non-profits have greatly expanded their coverage, and the for-profits have greatly expanded their offerings to chase enrollments; at this point, the programmatic overlap between the sectors is substantial. Some for-profits have even earned regional accreditation (and others, horrifyingly enough, have bought it.)

Now that they’re offering many of the same courses of study as community colleges and the midtier state colleges of the world, the for-profits are finding it difficult to compete. For a while, many of them managed by taking all manner of ethical liberties with financial aid packaging and deceptive recruiting; the Feds, rightly, have made that more difficult.

They’ll never be able to compete on cost. Community and state colleges are subsidized and, just as importantly, untaxed; for-profits are taxed and unsubsidized. (Proponents of public higher ed rightly note that the subsidies aren’t what they once were, but they often fail to note that the tax exemptions remain.) Yes, for-profits can minimize the taxation issue with online offerings -- property taxes don’t apply to cyberspace -- but the publics can go online, too.

The way to compete is on value, as opposed to price. This is where the for-profits can escape the ethical and legal issues they’ve caused for themselves, set up a lucrative niche, and even expand.

That would actually mirror the way that privatization works in most other industries. Most of the time, “public” offerings are considered less desirable than private ones. Public housing, public transportation, and public schools are generally -- with exceptions, yes, but generally -- considered inferior to their private counterparts. I don’t see any obvious reason that for-profit higher ed couldn’t try the same strategy.

Granted, it would have a hard time competing on academic prestige, at least initially. But by combining programmatic focus with a year-round schedule and concierge-level staffing in career services, it could offer a pretty compelling value proposition. And by being selective, it could screen out the high-default populations and avoid the ethical traps into which the sector as a whole tends to fall. It’s one thing to object to boiler-room sales tactics and shoddy curricula; it’s quite another to object to specialization and good service.

In fact, a high end proprietary could become known for its high academic standards. If it could truthfully market its grads to employers as being among the best in a given industry, it would have a legitimate selling point for prospective students.

The ethics of it all are debatable, but to the extent that they actually chose to compete on quality, I’d argue that the rest of the industry would have to step up. Bottom-feeding is insane when you’re competing with institutions with built-in cost advantages, and you can only run on the boiler room model for so long. The way up is the way out. The for-profits are being forced to figure this out; the winners will be the ones who lean into the change.

How would what you are describing be any different from the high-end private colleges that already exist (and many of which are struggling to retain enrollment in an era of tuition inflation and a bad economy)? It sounds like you are advocating for a creation of new SLACs.
Save them from themselves, or save them from the insane expectations of "the market" (i.e. short term traders)?

There was a time when steady profits were viewed as a good thing. This was before the 1% got greedy. Now you see newspapers that are actually turning a steady profit in a down economy cutting costs and reducing the value of their product ... so the profits will go up every quarter to "meet expectations". For the short term.

The advantage non-profit colleges have is that they are perfectly happy to have steady "profits" and don't have to use any means necessary to attempt to achieve the impossible: continuing exponential growth.

What you argue for is a very good idea, but it requires a long-term investment strategy that is rare, dare I say very rare, in the US corporate climate. It will even be hard for non-profit Second Tier State to pull off.
Aren't the largest subsidies being given to the private colleges? Harvard and Yale can have $5 or $10 billion of investment income and not pay one dime in taxes on it. I get $50 in interest on a CD and have to give up $10!

When the CBO does their analysis of "tax expenditures" they tally up the lost revenue caused by private retirement plans, employer provided health insurance, the mortgage interest deduction, and so on. The list creates a target list for changes in the tax rules. Interestingly, they never tote up the lost revenue from the tax freedom on investment income for endowments! It probably runs to hundreds of billions per year--and that's not counting the cost of deductions for donations to the endowments. The truly rich are in no danger of paying taxes anytime soon.

I don't see how for-profits can compete with that.
DD, when you start going down the path of comparing other public vs private sectors (housing, transportation) I think you're missing the fact that public ed already has well-established private counterparts, and that is true at the K-12 level, where the private counterparts are non-profit.
I think the problem with for profits going high end is that non-profits are already figuring out some of it. I think the cost of the "concierge" services is either not compatible with the profit model, or would price it as a boutique product for the elite. The non-profits are already doing this in the areas where there is a market - business, engineering - and can adapt in their traditional areas.
nensateeI rather agree with Edmund Dantes here; there already is a high-prestige (quality?) private higher education sector, with tax exempt status. Thus able to attract tax-deductible contributions, avoid property taxes (although perhaps subject to PILOT--payments in lieu of taxes), and so on. I suspect that entry into that market is likely to be fairly difficult, and could be even more difficult if high-prestie private universities leveraged their brand names by opening new campuses.
My understanding is that the for-profits are complicated money-laundering schemes for Federal student loan dollars.

If students as a class get wise, then the model doesn't work. And that's that.
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