Harnessing the Power of For-Profit Higher Education

As is pretty well-known at this point, the United States has seen large increases in the “college wage premium” meaning that the top 20 percent of the income distribution has tended to pull away from the bottom 80 (separately, the top 1 percent have pulled away from the bottom 99). In principle, the magic of the marketplace ought to respond to this by increasing the supply of college graduates until we regain an equilibrium. In practice, this isn’t happening. We’ve kept increasing the number of people who start college, but they’re not finishing. And surely part of the explanation is that higher education isn’t a traditional market. Recently, though, there’s been an explosion of for-profit higher education providers out there who, in principle, could help solve this problem.

Unfortunately, many of these for-profit operators aren’t very good. The Obama administration’s solution is to tweak incentives through a regulatory lever. Specifically, they’re using the Title IV of the Higher Education Act of 1965′s stipulation that institutions qualifying for federal student aid must prepare students for “gainful employment in a recognized occupation” to base eligibility for money on performance:

For a program to be fully eligible for Title IV aid, its graduates would need to have a debt service-to-income ratio under 8 percent of their total income or 20 percent of their discretionary income. Or, of graduates and non-completers who entered federal loan repayment in the four most recent fiscal years, at least 45 percent would have to be paying down principal on their student loan debt. Forbearances and deferments (other than for program completers who qualify for public service loan forgiveness) would be considered nonpayments. Unless it passed at least one of the debt-to-income ratio tests as well as the loan repayment test, a program would have to disclose all of that data to current and prospective students.

In practice, this is a pretty modest step, but it’s a step down a potentially promising road. Basically the idea is to ensure that for-profit schools now have large incentives to make sure that students who attend them are securing a positive return on their tuition investment. That means that models of effective teaching will tend to spread and models of ineffective teaching will tend to die off. If it works, there’s plenty of room to make these standards tighter and drive the process of innovation further forward. You could imagine this turning out not to work, but the low-end higher education sector is in definite need of more incentive-compatible innovation and this seems like a smart way to get it done.