CAPPS - Avocacy and Communication Professional Development

California Association of Private Postsecondary Schools

For-Profits' Fundamental Difference

05/23/2014

Inside Higher Ed. May 22, 2014.

Let's stipulate up front that Bob Shireman is anything but an objective observer of for-profit higher education. For much of President Obama's first term, he made life a living hell for colleges in the sector through his aggressive pursuit of new regulations designed to ensure they were preparing their graduates for "gainful employment."

A federal judge blocked the rules in 2012, and Shireman moved on to a new job in California where he has focused more on the performance of the state's community colleges than on for-profit institutions.

But with the Obama administration set to promulgate a new version of its gainful employment rules, Shireman weighed in Wednesday with a new paper that makes a philosophical and historical argument about what differentiates for-profit colleges from their nonprofit counterparts and offers what looks like a rationale for why the federal government is right to regulate them differently. The analysis was the centerpiece of a discussion Wednesday at the Center for American Progress, which published Shireman's paper.

As Shireman explains it, for-profit colleges are fundamentally different from nonprofit ones because their owners -- be they shareholders for publicly traded companies or board members for privately held ones -- reap personal financial gain if the institution grows in size or increases its profits.

While boards and leaders of nonprofit institutions may get bigger salaries if their institutions thrive, federal tax law specifically prohibits them -- through a concept known as "nondistribution constraint" -- from having an ownership interest or "unduly" benefiting personally from their organization's net earnings. For-profit colleges "reject" that constraint by operating as for-profit companies, he argues.

The personal profit incentive that owners of for-profit colleges have increases the chances, Shireman argues, that the institutions "compromise student and public needs in pursuit of growth and profit." While Shireman notes that "nonprofits have problems, too," -- questionable levels of student learning, rising tuitions and student debt, etc. -- he is not shy in asserting that for-profits perform worse, citing the colleges' higher debt burdens and default rates, among other things.

And it is for that reason, he argues, that for-profit colleges need more regulation "to better direct the profit motive toward socially optimal ends." In addition to a gainful employment rule that could be made stronger with the addition of a student loan repayment rate, Shireman recommends that the government toughen the federal regulation (known as "90/10") that requires for-profit colleges to derive at least 10 percent of their revenue from sources other than federal student financial assistance. He proposes that it be changed so that at least 15 percent of a college's enrolled students not receive any federal funds, including military and GI Bill money, to "ensure that programs attract students who are subsidized by an outside source or who are able to pay on their own."

He also offers two additional regulatory strategies that in his vision would apply to all colleges, regardless of tax status. One, to provide better consumer information, would require all institutions to disclose the names and qualifications of their instructors, their most recent accreditation self-studies and other documents, and the audits and other financial statements they provide to the Education Department each year.

The other -- which he deems "radical transparency" -- would involve institutions making available for review by experts and the public the "raw material of the education process": student papers, presentations and tests, and possibly videotapes of class sessions. As difficult as this approach might be to pull off, Shireman said, it could go a long way toward gauging the quality and value of the education provided by colleges of all sorts. 

The for-profit college officials who appeared alongside Shireman at Wednesday's event challenged some of his assertions (and a few of his facts, noting that the paper misstates the degree of disclosure for-profit colleges make about the compensation of their executives and their accreditation outcomes). Wallace Boston, CEO of American Public University System, noted that its regional accreditor requires that a majority of its board members be independent of the company, for instance. And in response to a question, he said that his compensation this year was $560,000 -- a lot lower than a lot of private and public university leaders.