Wednesday, April 21, 2010

The bubble in for-profit schooling

In the midst of economic depression, the for-profit trade-school industry is booming. Enrollment has grown 20% annually over the past two years, and some experts predict that revenue may increase as much as eightfold over the next decade. Entrepreneurs and economists alike would usually commend such a herculean performance and credit the basic laws of supply and demand at work; however, this growth has not been earned by free-market means such as innovation, efficiency, and accurate forecasting.

Instead, the giants of for-profit education have grown fat on a steady diet of government credit by cleverly maneuvering their way through a vast field of regulatory landmines to take advantage of federal-aid programs aimed at helping those they ultimately hurt — students. As expected, many have ignorantly aimed their weaponry at the profit motive, instead of unleashing their fury on the root cause: government interference in the market.

For-profit trade schools have long been marred by controversy stemming from questionable business practices and accusations of sub-par education. For example, only 16% of University of Phoenix students without prior college experience graduate within six years, compared to nearly 50% at traditional schools; moreover, Corinthian Colleges Inc., which owns Everest College, agreed to pay $6.5 million in 2007 to settle a lawsuit that claimed they engaged in false advertising by overstating starting-salary information. Unimpressive outcomes and multimillion dollar lawsuits have become synonymous with the for-profit trade school industry.

Under market conditions, such dismal performance would unquestionably have a substantive impact on a company's bottom line; after all, if an airline agreed to bring its passengers to Maui but instead brought them to Midland, a rational observer would expect the business to founder soon after. In essence, this is precisely what for-profit trade schools are doing — promising paradise in the form of high-paying jobs and delivering destitution in the form of unimpressive career prospects and heavy government-sponsored debt burdens. In fact, the average debt for students graduating from proprietary schools in 2008 was an astounding $33,050 — a substandard return on investment, considering many struggle to achieve hourly wages above $12 in the workforce.

Unlike the fate of our incompetent airliner, however, trade schools continue to fill their seats. In 2009, the publicly traded giant Career Education Corporation (CEC), which owns Le Cordon Bleu and American Intercontinental University, reported revenue of $1.84 billion, a 10.6% increase over 2008. Similarly, Apollo Group, which owns University of Phoenix, has seen enrollment nearly double since 2004. Federal loans and grants accounted for 80% and 86% of their revenues, respectively while this figure jumps to 88% industrywide. To understand how unsatisfactory student outcomes can be accompanied by increased profits, one need not look further than the effects of federal financial aid (FFA) on the industry's pricing system.

"In essence, FFA allows for-profit schools to increase their prices significantly above what they would be in a true market."

In a free market, the ability to satisfy an obligation is a basic consideration of almost any transaction; with a reputation for not satisfactorily settling his debts, one is hard-pressed to find a willing creditor. However, creditors might be keen on accepting a high degree of risk in exchange for a larger return; this risk is directly reflected in the form of higher relative interest rates.

In essence, a market has natural mechanisms for punishing credit abusers, mechanisms that decrease the likelihood that these individuals will be the beneficiaries of credit in future transactions.

Unfortunately, much to the dismay of the American taxpayer, such mechanisms are not intrinsic in FFA, where everyone enjoys equal status regardless of their ability to satisfy debt-related obligations. Only in rare instances, such as prior default on student loans, will government restrict access to this ubiquitous program. While some may champion FFA by arguing the merits of readily accessible education, they fail to heed the lessons taught to us by Henry Hazlitt in his masterpiece Economics in One Lesson. In particular, advocates conveniently overlook the unintended consequences of systematically extending credit to undeserving debtors: higher prices and default.

When government offers virtually unfettered access to student loans, it artificially increases the threshold of what students can afford. Many would presume this to be a highly desirable outcome and precisely the reason FFA exists. However, this reasoning fails to account for the causal relationship between FFA and prices: tuition rates are not only based on factors such as the costs of delivering education, the industry's competitive landscape, and the economy as a whole, but also on demand, which encompasses the ability of students to pay for the education they consume.

In essence, FFA allows for-profit schools to increase their prices significantly above what they would be in a true market. If FFA were eliminated or significantly scaled back, schools would be forced to decrease their prices to the point of market efficiency or face a catastrophic decrease in enrollment industrywide. Only then would students receive a market-based return on investment in their education.

Moreover, it's commonsensical that systematically extending credit to high-risk borrowers has dire consequences for creditors and debtors alike. Unqualified borrowing, in addition to paltry completion rates and low admission standards, has caused for-profit education to become a breeding ground for student-loan default. A US Government Accountability Office analysis of the 2004 federal student loans cohort default rate has shown that 23.3% of proprietary students default on loans within four years. In a private transaction, this would generally be of little or no consequence to the average citizen; however, because these losses are socialized, one can reasonably conclude that the financial success of for-profit schools is being bankrolled by American taxpayers.

Many schools have begun offering their own institutional loans to stay in compliance with federal regulations such as the "90/10" rule, which stipulates that no less than 10% of a school's revenue must come from nongovernmental sources; failure to adhere to this guideline could result in FFA funds being frozen, a cataclysmic result for any of the major trade schools.

To prevent the well from drying up, CEC planned on giving approximately $50 million in institutional loans in 2009, which helped them maintain a sufficient gap between public and private student funding. Interestingly, some schools are setting aside as much as 50% of these reserves as losses, clearly indicating that they have relatively little faith in the ability of their students to honor debt obligations. One cannot help but wonder how taxpayers can reasonably expect to collect their dues when for-profit schools can't collect such debts themselves. There is something terribly awry with this system.


Government interference in the marketplace has allowed for-profit schools to realize immense profits at the expense of American taxpayers. By offering virtually unfettered access to FFA, these institutions are able to increase prices significantly beyond true market value to students who pose a high risk for default. Privatized profits and socialized losses are the result of such a system.

Profits, per se, are not to be demonized; rather, the role of government-backed loans in private transactions must be called into question. For-profit schools can play a significant role in educating a traditionally underserved market; however, for their thousands of students to be the beneficiaries of such education, the market must be freed of governmental involvement.


SCOTUS to consider religious discrimination allegations vs. law school

At the oldest law school in the West, law is being made this semester, not just taught.

In a case that carries great implications for how public universities and schools must accommodate religious groups, the University of California's Hastings College of the Law is defending its anti-discrimination policy against charges that it denies religious freedom.

The college, which requires officially recognized student groups to admit any Hastings student who wants to join, may be well-meaning, says the student outpost of the Christian Legal Society. But the group contends that requiring it to allow gay students and nonbelievers into its leadership would be a renunciation of its core beliefs, and that the policy violates the Constitution's guarantee of free speech, association with like-minded individuals and exercise of religion.

"Hastings' policy is a threat to every group that seeks to form and define its own voice," the group told the court in a brief. The case, Christian Legal Society v. Martinez, will be argued in the Supreme Court Monday morning.

Hastings counters that the CLS, a national organization that seeks to "proclaim, love and serve Jesus Christ through the study and practice of law," is demanding special treatment. It wants the college's official stamp of approval and the access to benefits and student activity fees that come with it, but it will not commit to following the nondiscrimination policy that every other student group follows.

The CLS is not being forced to do anything, Hastings contends. "A group may abide by the school's viewpoint-neutral open-membership policy and obtain the modest funding and benefits that go along with school recognition, or forgo recognition and do as it wishes," it said in its brief.

The case poses a quandary for a court that has recognized both the ability of public universities and schools to control the use of their facilities and funds and the right of religious groups to select members based on their beliefs. It comes as religious groups have become more active and litigious in demanding a place in the public forum of free speech.

Christian groups have brought suits against similar policies across the country, from the University of Florida to Boise State University. "In every case . . . either the courts have ruled for the religious student group or the university has settled or mooted the case by revoking its unconstitutional policy," the CLS brief asserts.

The controversy also raises questions about who needs protection. CLS lawyer Michael W. McConnell, a former federal judge and director of the Stanford Constitutional Law Center, likens the underdog status of Christian groups at liberal law schools such as Hastings to the way gay rights groups might have felt on a Southern campus years ago.

"One of the things I find kind of pleasantly ironic about the briefing in this case is we find ourselves relying on about a dozen cases that involve gay rights groups in universities," said McConnell, who was appointed as an appellate judge by President George W. Bush. The other side, he said, relies on decisions and legislative acts that helped Bible clubs.

Hastings has also brought in high-powered help. It is represented by Gregory G. Garre, a solicitor general under Bush who is now in private practice. The National Center for Lesbian Rights, which represented a campus gay rights group called Hastings Outlaw that is a party to the case, has made way at the high court for Washington lawyer Paul M. Smith. He successfully argued Lawrence v. Texas, in which the court struck down a state law making homosexual conduct illegal.

They are joined by 37 organizations and states who have filed amicus briefs. Notably missing is the Obama administration, which chose not to get involved.

More here

British bishop fears loss of faith schools

A senior Roman Catholic bishop criticised the Liberal Democrats yesterday for an election pledge that could result in the abolition of religious schools. The Lib Dem manifesto commits the party to stopping Catholic, Anglican and Jewish schools from selecting pupils on grounds of faith.

Critics say the policy will effectively spell the abolition of schools that have succeeded in delivering high quality education over generations.

The Catholic bishops have refused on principle to be drawn into party politics during the general election campaign. But the Rt Rev Malcolm McMahon, the Bishop of Nottingham, broke ranks to accuse the Lib Dems of seeking to destroy the partnership between the state and the churches in the provision of education.

“Catholics should give it very serious consideration before they vote Liberal Democrat,” said Bishop McMahon, the chairman of the Department for Education of the Bishops’ Conference of England and Wales. “Our position is that every person should have the right to bring up their children according to their consciences.”

The policy is contained in a section of the Lib Dem election manifesto entitled Freeing Schools for Excellence. “We will ensure that all faith schools develop an inclusive admissions policy and end unfair discrimination on grounds of faith,” the policy states.

Critics said that if the policy was implemented 4,470 Church of England, 2,300 Catholic and 85 Jewish schools would lose control of the admissions process.


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