June 1, 2015 at 5:00 am ET
The recent collapse of the Corinthian College education system underscores the numerous, fundamental flaws in the for-profit education system. These institutions rob attending families and American taxpayers of their money, while providing an entirely valueless education in return. And, as Corinthian demonstrated, when the proverbial crap hits the fan, the penultimate burden lies on American taxpayers to shoulder the pain. The system is broken and must be remedied before billions more of taxpayer dollars go to waste.
So, what happened at Corinthian?
When Corinthian officially declared Chapter 11 and shut its doors in April, billions of dollars of federal student loans, owed by the 78,000 students who attended Corinthian, were left up in the air. These indebted students no longer had a college to attend, and those that did complete their degree now held a useless piece of paper and no applicable skills to earn employment. The public response? Over 50 consumer and labor organizations are now petitioning to Anne Duncan, the U.S. Secretary of Education, to cancel these billions of dollars of debt. These groups claim that because Corinthian misrepresented job placement rates and defrauded students by enrolling them in costly and ineffective classes, the federal government and American taxpayers must step in to save the day.
The implications here are vast. Corinthian, like its peers, lures naïve customers by spending a disproportionately large amount of its budget to engage in deceitful marketing and recruiting tactics. Knowing that a savvy consumer would never fall victim to its sale, these schools choose to exploit a vulnerable demographic, often targeting those from low-income backgrounds. This strategy enables for-profits to continue spending on recruiting, rather than actual teaching expenses. In the process, they also pay their staff excessively, often with executives receiving annual salaries in the millions. When they fail, which is really just a matter of time, the American taxpayer pays the price.
The statistics are striking.
Most of the revenue at for-profit institutions comes in from federal aid, which accounts for nearly 90% of their top-line earnings. Rather than spend the cash on causes that generate value for their students, such as the delivery of instruction and research, for-profit schools allocate disproportionately toward recruiting, marketing, and administration. A recent study found that for-profit institutions spent 23 percent of their revenue on advertising and marketing, compared to only 18 percent on teaching. In sharp contrast, non-profit institutions spend only 1 percent on marketing and focus predominantly on research and instruction spending. In essence, for-profit schools use American taxpayer money to lure more students into purchasing an utterly worthless education.
Just how worthless?
For starters, those that have fallen victim to the broken promises of for-profit institutions are least likely to graduate. These schools have a graduation rate of a mere 22 percent, versus 55 percent at public institutions and 65 percent at private non-profits. The data doesn’t improve when they do graduate, either. Research suggests that 72 percent of these institutions produce graduates that earn less than high school drop-outs. Consequently, the loan default rate at for-profit colleges is the highest among all institution types—nearly 22 percent, compared to a 13 percent default rate at public universities and 8.2 percent at private non-profit colleges. Broadly speaking, that means that despite accounting for only 11 percent of federal loan borrowers, for-profit students make up nearly 50 percent of loan defaulters. And because of the business model and spending allocation of these institutions, the cycle is perpetuated until catastrophe hits.
Clearly, the current framework is broken.
For-profit colleges rob their attendees and the American nation of our time, money, and education. These institutions must either adhere to a higher set of standards or be wiped out entirely. Higher standards could entail properly appraising the return on investment at these schools, including such measures as job placement, earnings of graduates, and research awards. Wiping these schools out means just that: forcing the unscrupulous players that are unwilling to improve to shut their doors. Either way, a fundamental shift in the for-profit college sector is needed, and the time for change is now.
Allen Kors is the CEO of Achieve Lending.