Why Attacking For-Profit Colleges and Universities Is Bad for All of Higher Education

Over nearly 35 years I have had the great fortune of being on the “inside” of well over 100 institutions of higher education as a student, professor, administrator, president, consultant, and accreditation evaluator. I am in awe of the dynamism and diversity of the American Higher Education System, which exists nowhere else in the world. But all is not well.

For those educators who work in private sector (for-profit) higher education, the last seven years have probably been the toughest stretch of their careers. Delivering a high quality educational experience with good student outcomes is a tough task even in the best of circumstances. However, when you go to work each day in the midst of a well orchestrated, government-led attack against the industry in which you work, it can be emotionally exhausting. This is particularly so when the basis of the attacks is purely ideological—in this case a deep bias based solely on tax status.

In any broad field (health care, national security/defense, road construction, law enforcement, corrections, education) there will be a combination of entities that operate under both for-profit and not-for-profit legal structures. Likewise, there will be a combination of public and private financing for those enterprises. As with education, one will find a broad range of efficiencies, outcomes, value, talent, regulatory compliance, etc. across those enterprises. However, the notion that an enterprise is inherently bad/good, or even evil/beneficent, based on its tax status, is absurd. However, for the most part, that has been the basis of the judgments, and subsequent treatment, that tax-paying educational organizations—many of which are multi-generational, family owned operations—have endured for roughly the last seven years.

There was a similar dynamic a couple of decades ago, when the “boogey man” was for-profit health care. Interestingly, that is not only no longer the case, most of us probably can’t even remember the last time we thought about “for-profit” and “health care” in the same sentence relative to our own care. Ironically, most of us, in the communities where we live, would be unable to get a colonoscopy, blood test, cataract surgery, or x-ray from an entity with a not-for-profit tax status. We certainly could not fill a prescription at a not-for-profit pharmacy and most of our physicians operate for-profit businesses. While there is a host of reasons that for-profit health care is no longer demonized (pharmaceutical companies may be an exception), it is interesting and disappointing that the thinking of many federal and state regulators, accreditors, media outlets, and politicians has not evolved in an equally measured and nuanced way relative to the delivery of higher education.

Most of us know intuitively that tax status by itself cannot be an inherent source of “bad behavior” or fraudulent intent. If it were, we could not transact even a minute fraction of our daily lives with the vast majority of entities we encounter that operate with a for-profit tax status. It is intellectually sloppy and frankly indefensible to suggest that value or integrity or compliance is a product of tax status. In fact, in most cases, the legal structure of an organization vis-à-vis tax status, simply defines where the capital to create and operate the entity comes from and whether or not the organization pays taxes on its profits.

With health care and other industries, we focus on outcomes, not tax-status, and it is astonishing that so many otherwise intelligent and well-meaning folks have been unable to take that simple approach with educational enterprises.

To be clear, this is not simply a problem for the educational organizations that operate with a for-profit tax status. In fact, although it has been painful for the dedicated folks who work in private sector schools, the downsides are actually much more grave for the huge majority of the public that attends and pays for not-for-profit institutions. The reason for this is that the failure to focus on outcomes rather than tax-status has created a world in which truly critical issues such as student retention, graduation and employment, return of unused federal financial aid, student debt, and loan default rates among other issues, are effectively ignored by the Department of Education, state regulators, political figures, the media, etc. in the institutions where nearly 90% of students go to school—traditional, not-for-profit colleges and universities. For-profit institutions are heavily regulated in all of these areas and their students can lose access to government financial aid if they do not achieve certain enumerated outcomes in those areas. The schools themselves can lose their accreditation if they fail to meet certain thresholds. However, in a typical year, all for-profit schools combined serve only about 10 to 12% of higher education students. In effect the other 90 percent are attending schools for which there is little accountability for the same outcomes, either through accreditation, state oversight, or the Department of Education, which, in fact, frequently writes regulations that apply to institutions based on tax status alone!

A powerful example is a regulation the Department of Education is currently attempting to promulgate called “borrower defense to repayment” that is designed to make it easier for students who feel that an educational institution in which they enrolled, and borrowed money to attend, misrepresented some information at some point during the student’s application and/or attendance. The basis of the proposed language is terribly flawed to begin with (intent to misrepresent and/or actual damage is not required), but as an example of the “intellectually bankrupt” process whose motivation is tax status, not outcomes, the regulation as currently written, exempts public, not-for-profit institutions attended by roughly 85% of the population. In other words, despite the Department’s claim that the regulation is to protect students and taxpayers, the vast, vast majority of students who could theoretically suffer from misrepresentation are not protected at all! And to be clear, as someone who has spent half of his career in not-for-profit organizations, the notion that the extent to which individuals will make mistakes is dependent on the tax status of the organization in which they work is preposterous. Certainly, students, as consumers, merit meaningful protection relative to misrepresentation, but to suggest that such risk does not exist or does not matter, if students attend public, not-for-profit institutions, is pure folly.

Another example is how the Department tracks and enforces the return of Title IV financial aid for students who fail to attend part or all of the classes for which they receive federal financial aid. Because of the intense scrutiny placed on schools with a for-profit tax status, and the extreme penalties that can result from making even minor mistakes with the return of such funds (colloquially called R2T4), private sector (for-profit) schools are extremely fastidious about returns of Title IV aid. In traditional, not-for-profit institutions (particularly large, public institutions), they generally don’t track attendance, and unless students go to the registrar and formally withdraw from class, the institutions simply flunk the students at the end of the academic term and keep the money. This likely accounts for billions of dollars in financial aid annually drawn down for students who don’t actually attend the classes for which the financial aid was intended. This bizarre situation continues because the Department simply doesn’t enforce R2T4 the same way in not-for-profit institutions. Why? Because their focus is ideologically based on tax status, not outcomes. To be clear, these institutions are not purposely engaged in malfeasance in the management of Title IV funds. They have simply never been held accountable for return of funds in the same ways for-profit institutions have. It is assumed that because they have a not-for-profit tax status, that they are less likely to misapply federal funds. That assumption is, of course, fundamentally flawed.

The current dynamic fails to protect most students in other ways as well. The Education Department has promulgated another regulation that applies almost exclusively to for-profit institutions called “gainful employment,” that penalizes institutions whose graduates’ debt exceeds a certain percentage of their income after graduation. This is actually a recent reinterpretation of statutory language that had been deemed satisfactory in its previous form for decades. Importantly, the concept of gainful employment makes perfect sense and may, in fact, be something that ALL institutions of higher education should be accountable for. But to suggest to a graduate, as the Education Department does, that his or her debt doesn’t matter because he or she pursued a liberal arts or law degree at a not-for-profit institution is not only intellectually bankrupt, it’s insulting to those students. Does anyone really think that a graduate of a not-for-profit college with upwards of a hundred thousand dollars or more in debt, and no hope of ever paying it off through employment in his or her chosen field, does not feel the same pain from that debt that he or she would if they graduated from a for-profit institution?

Likewise, astonishingly, most regionally accredited, not-for-profit institutions have no accreditation or regulatory accountability for student retention, graduation, or employment outcomes. As with gainful employment, however, the notion that none of these outcomes matter as long as the college or university operates under a not-for-profit tax status is ludicrous, but that has been the basis of much of the Department’s regulatory activity for nearly eight years. And that is the greater danger of the intellectually bankrupt regulatory perspective currently in play. It is true that colleges and universities with a for-profit tax status have taken body blow after body blow in this ill-advised and irrational environment, but the greater risk to students and society comes from the relative lack of accountability for important outcomes in the vast majority of higher education institutions that operate on a not-for-profit basis!

While this essay may suggest to some that I personally favor for-profit educational institutions or, similarly, disfavor traditional institutions with a not-for-profit tax status, that couldn’t be further from the truth. I have studied and worked extensively in both kinds of organizations and have found excellence and mediocrity in both as well as cultures of compliance and laxity with rules and outcomes, regardless of tax status. Now more than ever we need a diverse, robust higher education system, and that includes institutions that pay taxes on their profits and those that do not. The basis of my position is not partiality in favor of one tax status or another. The purpose of this essay is a long overdue response to the blind ideological bias that has infected federal and state oversight of higher education, eliminating even the pretense of objectivity relative to for-profit institutions of higher education. This is frankly dangerous as it has set a precedent in which hugely material judgments and decisions are now regularly made based on ideological litmus tests rather than a due diligence process based on objectively defined criteria. The stakes are far too high for such an intellectually bankrupt process.

To be clear, many colleges and universities struggle to consistently deliver high quality outcomes regardless of tax status, but an irony that most Americans are not aware of is that, despite being mercilessly demonized, for-profit schools generally achieve equal or better outcomes than not-for-profit institutions and do so with fewer tax dollars per student. We know from federal data that two year graduation rates in private sector schools are typically two or three times higher than in community colleges serving students with similar backgrounds. For-profit institutions also tend to serve much higher percentages of minority, first generation, and non-traditional students than is the case in most not-for-profit institutions. While there have indeed been dramatic failures on the part of some colleges with a for-profit tax status those institutions should be held accountable, if not vilified, for performance or regulatory failures, not because of their tax status.

The traditional, not-for-profit higher education sector as a whole suffers performance challenges far in excess of what is commonly understood, not because of any lack of commitment or expertise, but because of a fundamentally different culture and practice around accountability. Broadly speaking, the worst graduation rates are in community colleges where nationally roughly 1 in 5 students graduate within three years. The greatest student debt is found in “middle tier” private, not-for-profit institutions that have high tuition, but do not have the means to offer generous grants and scholarships. The average graduation rate over six years in public, four-year colleges and universities is barely 50%, and much lower for minority students. To be clear, these institutions are full of hardworking, dedicated staff, faculty and administrators who work long days striving to achieve high quality educational experiences for their students. However, as someone who spent many years in similar not-for-profit institutions, these institutions are frankly handicapped by internal and external belief systems that perpetuate the notion that because they are not-for-profit, they are somehow morally excused from regulatory failures, and relatedly from accountability for performance outcomes. And, significantly, the approach taken by the Education Department over roughly the last seven years to clumsily demonize educational institutions with a for-profit tax status has made the situation described above worse as it has provided governmental validation to the fundamentally flawed notion that tax status either excuses accountability (not-for-profit) or indicates inherent guilt (for-profit)—more intellectually vapid thinking.

As someone who has worked on institutional accreditation teams (within a college or university) as well as on teams of accreditation evaluators that visit colleges and universities as part of the “peer review” process, I have personally observed excellent, student-focused practice in both for-profit and not-for-profit institutions. I have also observed sub-standard practice in both sectors. What I have never observed, in any institution of any kind, are staff, faculty, and administrators who have open disdain for students or who broadly make decisions that purposely sacrifice student outcomes. What I have seen, in both types of institutions, is pressure from “higher ups” to pursue agendas that may not be in the daily best interest of students. Among for-profit institutions, this is more likely to occur in schools with large, corporate ownership, and is usually connected to short-term financial performance. Among not-for-profit institutions, the pressure is likely to be both financial and political.

The reality for most private sector institutions is remarkable. Objectively speaking, we know from federal and industry data that millions of graduates from for-profit colleges and universities are currently employed in the fields for which they trained. We also know that in some fields in some states, a majority of workers were trained in private sector schools. And, remarkably, for the highest risk students, their likelihood of graduating is higher in institutions with a for-profit tax status. It is simply impossible to have the empirical outcomes that we have on one hand, yet sustain the notion that every institution with a for-profit tax status is inherently flawed/evil/fraudulent, etc. on the other hand.

We know that on any given day, millions of students across the country are well-served across all sectors of higher education, regardless of tax status. We also know that on any given day, many students do not achieve what they intended when they enrolled—and this happens in every kind of higher education institution, public and private, on campus and online, for-profit and not-for-profit. Students graduate only to sometimes struggle to find jobs. Students drop-out, saddled with debt. Students flunk classes due to a lack of academic support or life crises that are beyond the scope of typical student services. Students run out of money to pay for tuition and books. It is unlikely that the students who suffer these unfortunate outcomes care about the tax status of the institution in which they enrolled. They just know that a given higher education experience did not work out well for them.

What is absolutely un-debatable, however, is that building a regulatory infrastructure and pursuing enforcement policies for higher education based on tax status rather than outcomes is not only intellectually indefensible, it utterly fails in its stated purpose to broadly protect students and taxpayers.

In the end, we are stronger as a nation because of the tremendous institutional diversity we have in our higher education system—no other country comes close. We have career colleges and community colleges. We have small liberal arts colleges and massive state, land grant universities. We have large, online universities and small, technical colleges. And yes, some institutions pay taxes while others do not. However, one potentially terrible outcome of the relentless, ideological attacks against institutions with a for-profit tax status is the reduction in diversity that comes from regulating institutions out of existence. Another, very real and profoundly negative outcome could be the impact on our state, regional and, national economies. As previously noted, in some cases, a majority of the work force in given fields is currently trained in schools with a for-profit tax status. If these schools are strangled out of existence simply due to their tax status, where will the economy get its truck drivers or diesel mechanics or sonographers or surgical technicians? Who will draw your blood or enter your medical records? Who will cut your hair or cook your meal the next time you go to a restaurant?

And for the students themselves, where will they go to school? The not-for-profit sector, as critical and valuable as it is, simply does not have the capacity or the desire to fill the role currently filled by for-profit colleges and universities. And since for-profit schools tend to serve double the percentage of minority students that not-for-profits do, where will all the African American students who currently earn their MBAs and Ph.D.s in proprietary institutions earn their degrees? Where will all the first generation Latino students currently attending career colleges earn a credential that will support a middle class standard of living for their families?

We can do so much better. The Department of Education, members of congress, accreditors, other regulators, and the media can bring so much more intellectual rigor and value to the oversight process. A simple, objective focus on outcomes rather than an ideological focus on tax status (as exists in other areas such as health care) would be so much more defensible and would go so much further in protecting students and the public—which, of course, is what the Education Department claims it’s primary motivation and responsibility are. And importantly, in order for the Department’s activities to have any integrity, they cannot base their promulgation of regulation, their oversight of institutions, and their enforcement actions on a methodology that purposely excludes the educational institutions attended by the vast majority of students in America.

Higher education in America could also be much more cost-effective and serve students much better if we simply identified the outcomes we believe are critical for students and society, then built accountability structures for those outcomes and applied them to ALL institutions, regardless of tax status. Do we really believe that not-for-profit schools should get a pass on student retention or graduation rates or return of unused Title IV funds because of their tax status? Conversely, should for-profit institutions with excellent outcomes be penalized simply for their tax status?

Over the last several years, there have been some unforgivable failures on the part of a few tax-paying institutions of higher education. In the same time period, there have also been many examples of astonishing incompetence and even illegal activity on the part of government agencies, K-12 schools, law enforcement, county hospitals, and other not-for-profit entities, yet it is commonly accepted that we don’t attack all not-for-profit agencies because of their tax status or government affiliation. That same, simple principle should apply to tax paying entities in higher education.

The regulatory posture of the last seven or eight years has not only been brutally difficult and expensive for the dedicated, hard-working educators and students in the vast majority of for-profit institutions that change student lives for the better every day, it has also resulted in an unprincipled and two-tiered approach to oversight of higher education that provides weakened advocacy for students and taxpayers overall. And, sadly, it has perpetuated and strengthened an “us vs. them” dynamic within higher education and in the public dialog as well. This is a shame. Our higher education system, still the envy of the world, has so much to offer—and different sectors offer particular value to different kinds of students. Community Colleges and Career Colleges bring great value to students who wish to pursue vocational studies or who aren’t ready for academic or financial reasons to attend a four year school. Liberal arts colleges offer a stimulating intellectual refuge for students who desire and can afford a residency-based four-year experience. Large land grant state universities offer under graduate and graduate programs, on-campus and online, usually at reasonable cost, to students who want a “big school” experience and a research environment. Non-traditional, online universities, often for-profit, offer educational programs specifically tailored for working adults who are unable to attend more traditional programs.

Lastly, there is so much opportunity for deep collaboration between sectors of higher education. So much more can be accomplished working together, respectfully, than in the current, punitive, us vs. them environment. In order for that to happen, however, the oversight process must have more integrity. It must be based on defensible principles rather than ideological bias, and accountability must be connected to the outcomes that we say are important for students and society. If we do that, tax status will become irrelevant and everyone will benefit.

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