24 November 2016
by Stephen Hunt

The uncertain future of US for-profit higher education

Stephen Hunt investigates what the election of Donald Trump means for US for-profit higher education.

The election of Donald Trump as the 45th President of the United States has led to a gathering cloud of questions about the direction of US government policy. Among these are some that concern the fate of America’s for-profit higher education sector. The for-profit sector has had an increasingly high profile in US political debate, both because of its massive expansion and the problems that have condensed around it, and Trump has made some statements that have a bearing on the sector’s future.

The for-profit higher education sector concentrates almost exclusively on teaching, and its expansion from the early 1990s has been dependent on access to federally-funded students – those in receipt of Title IV student aid, in the form of grants, or, more commonly, tuition fee loans.

Deregulation of the higher education sector in the 1990s made enrolment of federally-funded students easier for the for-profits. Almost all American citizens are eligible for these loans, and course fees at for-profit universities and colleges are unrestricted by any state authority.

Wall Street, hedge fund managers and other capital investors identified the potential for profitable investment. Driven by heavy marketing and aggressive enrolment campaigns, the for-profit higher education sector expanded the proportion of students it enrolled fivefold over 15 years from 1995-2010. This expansion also saw the for-profit University of Phoenix become the US’s largest university, which, at its peak, enrolled well over half a million students, although recently student numbers have declined from 460,000 in 2010 to 171,000 in 2016. The income of the for-profit sector from federal student loans and grants had reached $22 billion by 2013, and the number of for-profit universities and colleges about 3,500.

Scrutiny and legislation directed at the for-profit sector were hallmarks of the Obama administration. The 2012 Harkin report from the US Senate Committee on Health, Education, Labor and Pensions highlighted a number of areas of misconduct characteristic of for-profit higher education providers, including: recruitment abuses, low graduation rates and high student loan default rates.

The report also found teaching to be a low priority among the for-profits: across a series of institutions the report examined, an average of 22 per cent of their revenues was spent on marketing, advertising, recruiting and admissions staffing, 19 per cent on profit distribution, and 18 per cent on teaching.

The for-profit higher education sector has, though, been in decline since the turn of the decade. Student numbers have dwindled – four-year degree enrolments dropped by 16 per cent between 2011 and 2013, and campuses closed; the number of colleges offering four-year degrees fell from 790 to 738 between 2012 and 2015. Improvements in the economic outlook in the US mean fewer people are concerned with enhancing their employability via the courses provided by for-profits, which has contributed – along with the rising tide of bad publicity – to the decline of the for-profit sector.

Obama’s response to the infractions of for-profit universities was realised in the gainful employment regulation, which was eventually passed in 2015 after years of wrangling.

The regulation stipulates that loan repayments cannot exceed eight per cent of a graduate’s total earnings. Anything greater and the programme in which the student is enrolled is judged to have violated the regulation, and is liable to have access to federally-funded students denied.

Its consequences have only recently been felt. The US Education Department, on 25 August 2016, barred the multi-state for-profit higher education provider ITT Tech from recruiting federal loan students, and put up $152 million to act as insurance in case it closed down. These decisions were made on the basis of ‘significant concerns’ the Department had about ITT Tech’s conduct and financial viability, although none of these concerns were fully substantiated before the decision was taken.

ITT Tech ceased to operate on 5 September 2016, with up to 40,000 students consigned to limbo, and the taxpayer liable for about $500 million in loans. This made headlines in the US (even with the approaching presidential election taking up most of the news agenda). ITT Tech’s swift demise indicates a broad feature shared by much of the for-profit sector: its total reliance on federally-funded tuition fee loans as an income source.

The for-profit sector may have expected a continuation of Obama’s proactive policies under a Hillary Clinton presidency. Its fate under a Trump presidency is far less certain. The general expectation is that Trump will be better disposed towards the for-profit sector than Obama was. Emily DeRuy, in The Atlantic, notes that the value of shares in some for-profits increased when it became clear Trump would become president.

The appointment of the Secretary of Education, would, ordinarily, have indicated at least broad policy directions. However, as the appointee, Betsy DeVos, has had little, if any, association with the higher education sector, the future remains mysterious.

Yet there are some pointers, from Trump, which appeared in an article in Education Investor Global. Trump has previously stated that he opposes the planned expansion of the public two-year degree community college sector, which Obama had ambitions to make free for secondary education graduates. Presumably demand will now be met by the private sector. Additionally, Trump has indicated that university endowments should not be subject to taxation.

More generally, Trump has stated that the federal government is likely to play a reduced role in education. One of his stated aims is to shift the source of tuition fee loans from the state to private banks, including local banks. This would remove the taxpayer liability, but also reduce the incentive for the state to monitor the for-profit higher education sector. It may also make it far harder for individuals to access tuition fee loans, and so result in the for-profit sector contracting at a greater rate. In a recent blog piece, Cryn Johannsen examines some of the complexities of this issue.

Trump has also intimated that the repayments of tuition fee loans should be income-contingent, with payments capped at 12 per cent of the borrower’s income. Currently, a Title IV loan usually becomes liable for repayment six months after graduation, or, on dropping out, sometimes immediately. Repayment in both cases is irrespective of income or employment status. This move, should it ever be implemented, may go some way to addressing the issue of loan defaults: 47 per cent of all student loan defaulters attended for-profit institutions.

It’s not yet clear whether any of Trump’s expressed opinions will become policy – even the direction they suggest could be revised or abandoned. This situation, though, is not unique to education, and applies to much of US policy in these uncertain post-election days.

This blog was also published in Times Higher Education