For-profits, student losses

A couple of weeks ago, I attended an interesting conference in New York, titled “Who and What are Universities For?”. As always, American anxieties were exactly like British ones - and utterly different.

Fears for the future of the humanities are common coin, as are anxieties about the casualisation of the academic workforce. Also shared are doubts about the way secondary school prepares young people for higher education - and the extent to which many universities allow students to wander through their courses without apparently reading, writing or learning anything, yet somehow collecting a B average on the way.

The major difference, of course, flows from the fact that Americans find it unimaginable that the federal government could be in a position to behave in the way the coalition has done since the Browne Review. The states are another matter. Different states have behaved with varying, but generally low, levels of competence and imagination over the past couple of years: New York State finds it impossible to disentangle the funding of the State University of New York from patronage battles in the state capital of Albany; California is as dysfunctional under Democrat governor Jerry Brown as it was under Republican Arnold Schwarzenegger. But the thought that every institution of higher education could be messed about in the British fashion boggles the American mind.

Still, one bit of recent - and indeed, current - American higher education politics deserves to attract as much attention in the UK as in the US: the continuing battle between the for-profit college sector and the federal Department of Education.

It is a battle much enlivened by the presence of Steve Eisman, the short-selling investor who predicted the collapse of the sub-prime mortgage industry, made a vast amount of money from shorting the sub-prime market, and became famous when Michael Lewis gave him a starring role in his book The Big Short: Inside the Doomsday Machine (2010).

About a year ago, Eisman set the cat among the pigeons by announcing that the for-profit education sector was the next “Big Short”. Because he had been right about the sub-prime mortgage debacle, his speech to an investment conference in New York in May 2010 was widely reported. It didn’t hurt that he has a talent for phrase-making. One that stuck in listeners’ minds - as well as the throats of the for-profits - was: “Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the sub-prime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task.”

Now that the Higher Education Policy Institute has come out in favour of giving the for-profits a clear run in the UK, it is worth thinking about Eisman’s criticisms and the for-profits’ response - which included announcing that Eisman was “a nutjob who got lucky” and quadrupling its expenditure on lobbying in Washington. The Republican-dominated Congress is currently hostile to all attempts to protect the consumer, and responded good-naturedly by investigating whether the Department of Education had taken too much notice of Eisman in pursuing its recent enquiries into the for-profit sector. It also looked at whether Eisman had been engaged in the traditional ploy of short-sellers, which is to talk down the stock of the businesses whose stock they want to short. Paying attention to the moral hazards with which for-profit education is beset is not a Republican project.

But they are worth paying attention to. Last August, higher education debt in the US overtook credit card debt. Unlike mortgage debt, which Americans have been paying down as fast as they can, higher education debt is rising. The average figure is only about £15,000, but this disguises the fact that some graduates owe four times that figure for their undergraduate education alone.

The income of for-profit colleges is overwhelmingly provided by way of federally supported loans - more than 90 per cent of their income. The similarities with the role of Fannie Mae and Freddie Mac - the federal mortgage corporations that underwrite the bulk of American mortgages - in stoking the sub-prime bubble are obvious, and haven’t occurred to Eisman alone.

It would be fine if the students who attend for-profits got well-paid jobs thereafter. Mostly, they don’t. Employers aren’t impressed with their degrees. The credits they get are very rarely transferable to regular higher education institutions, so they can’t build on a for-profit basis to get better degrees elsewhere. The default rate on the loans taken out by students who attend the for-profits hits 40 per cent after three years, and for-profits are responsible for about half of all defaults. None of this matters to investors. The sector has boomed over the past decade for the same reason sub-prime boomed: gullible consumers thought house prices would only go up, and gullible potential students with no access to conventional higher education think degrees are an investment in a prosperous future.

This does not mean for-profit institutions have no role outside conventional undergraduate education. But if the UK government takes more care than either it or the US government has hitherto taken to avoid being ripped off - and if recruitment is properly regulated and high standards of provision are insisted upon - the for-profits will quickly discover what other educational institutions already know: outside technical training in IT, law, finance and medicine, there’s not a lot of money to be made out of higher education.