By Peter Sacks
Are for-profit colleges and universities getting a raw deal from the government compared to their more elitist peers in the private non-profit sector of American higher education?
Vance H. Fried, writing in a recent policy analysis brief published by the libertarian think-tank, the Cato Foundation, argues just that. Fried is a former private-practice attorney, oil company executive, and investment banker, now a professor of Entrepreneurship at Oklahoma State University. He targets private non-profit colleges and universities as the beneficiaries of federal largesse, waste and inefficiency.
"Undergraduate education is a highly profitable business for nonprofit colleges and universities," Fried writes. "They do not show profits on their books, but instead take their profits in the form of spending on some combination of research, graduate education, low-demand majors, low faculty teaching loads, excess compensation, and featherbedding. The industry's high profits come at the expense of students and taxpayer."
To fix this mess, Fried wants to eliminate the federal tax shelters the government provides to non-profit universities. In his ideal world, there would be no deductions allowed for charitable contributions to non-profit colleges, no federally subsidized student loans, and far tighter rules on one’s eligibility for the mainstay federal grant program to needy students, the Pell Grant.
“Undergraduate education is clearly a profit generating commercial activity at nonprofit colleges,” Fried says. “A major driver of this appears to be the federal government, which by greatly increasing subsidies has allowed schools to earn increasingly larger profits.”
Fried would get no argument from some critics that America’s elite colleges and universities – the vast majority of which are private, non-profits, such as Harvard, Yale, Princeton, etc., etc.--are far more dependent on the federal government that their “private” labels might suggest. Their ties to, and dependency on, the federal government come in a number of forms. First, all “earnings,” or the net growth in endowment assets, are tax exempt. Second, individuals who make “charitable contributions” to the endowments of these institutions also enjoy substantial tax breaks by virtue of their gifts. Third, depending on the extent of their research enterprises, private, non-profit universities get large sums of federal money for research in medicine and science.
Consider Harvard. In the period between fiscal 2004 and fiscal 2008, Harvard received more than $2.5 billion from federal agencies for research, which was about four times the amount Harvard received from nonfederal sources. In fact, federal research support to Harvard in fiscal 2008 alone, about $529 million, nearly equaled the total of nonfederal payments for the entire five-year period. In fiscal 2008, the federal government accounted for fully 15 percent of Harvard’s $3.5 billion in total income. Among all private non-profit universities, according to National Center for Education Statistics data, from the mid-1990’s through 2005, federal funds accounted for about 14 percent of revenues of the private non-profits. By contrast student tuition and fees accounted for about 30 percent of revenues.
While the government’s direct spending on private non-profit institutions is substantial, the federal tax benefits these colleges and universities receive are essential to the business model of non-profit private universities. According to the Congressional Joint Committee on Taxation, taxpayers subsidized these colleges to the tune of almost $40 billion in revenue as a result of the deduction for charitable contributions to educational institutions between 2007 and 2011.
As one might expect from a professor of entrepreneurship, Fried is a champion of free markets, and he suggests that private, for-profit colleges and universities provide a more efficient and more effective business model for running the nation’s higher education system. Therefore, he says, the government should stop treating these institutions unfairly, and permit easier entry into the higher education marketplace in order to encourage competition.
It’s here that Fried and other advocates of the for-profit model of higher education seem to lose sight of economic reality. Granted, Harvard and other elite private non-profit universities are tied to the government’s hip by virtue of generous tax benefits and direct government revenues. But for-profit institutions are even more dependent on federal largesse, thanks to Title IV of the Higher Education Act of 1965 -- a key element of Lyndon Johnson’s Great Society efforts – to provide low-income students financial assistance for college.
Indeed, the Pell Grant and other federal support to students provided under Title IV are the sine qua non of private for-profit schools. Just as the nation would have no defense industry without federal spending on weapons, the for-profit higher education industry would barely exist without the government’s prevailing national commitment equal educational opportunity for lower-income students.
As a former oil company executive, Fried knows that oil entrepreneurs go where the oil is. By the same token, corporate executives start education companies because of the huge opportunity to make a lot of money -- all made possible by Uncle Sam.
Consider the Apollo Group, among the world’s largest private educational corporations, including the University of Phoenix. Judging by the company’s annual and quarterly filings with the Securities and Exchange Commission, the company is deeply concerned about the stability of Title IV funds for the sake of future profitability and maximum return to investors. In its most recent annual report to the SEC, virtually the entirety of management’s discussion of the company’s financial outlook centered on the prospects for unrestricted Title IV funding.
“Substantially all of our net revenue is composed of tuition and fees for educational services,” the company stated in a recent quarterly SEC filling. “In fiscal year 2010, University of Phoenix accounted for approximately 91 percent of our total consolidated net revenue. University of Phoenix generated 88 percent of its cash basis revenue for eligible tuition and fees during fiscal year 2010 from receipt of Title IV financial aid program funds.”
Indeed, for the fiscal year ending Aug. 31 last year, the Apollo Group reported net revenues of $4,925.8 billion; The University of Phoenix accounted for $4,498.3 billion of that total.
Are profit-maximizing education companies -- which are ultimately accountable to shareholders -- models of educational efficiency that could other colleges and universities important lessons on eliminating waste, featherbedding, administrative bloat, and teaching effectiveness? The evidence to support such claims looks sketchy.
Profit-seeking education companies as the answer to administrative bloat? A recent investigation by John Hechinger and John Lauerman of Bloomberg News reported that the Strayer Education Inc., “a chain of for-profit colleges that receives three-quarters of its revenue from U.S. taxpayers, paid chairman and CEO Robert Silberman $41.9 million last year. “That’s 26 times the compensation of the highest-paid president of a traditional university,” the Bloomberg report found.
When comparing the private-for-profit University of Phoenix with the State University of New York system -- both having equivalent enrollments of roughly 470,000 students -- Bloomburg found that SUNY Chancellor Nancy Zimpher got paid $545,000 a year. By contrast, Phoenix’s president, William Pepicello, received cash and stock compensation of $1.8 million annually.
If for-profit educational institutions’ supposed edge in anti-featherbedding is doubtful, what about the costs of student tuition? Using the Education Department’s Integrated Postsecondary Education Data System, known as IPEDS, I compared net price data for all U.S. for-profit educational institutions, public institutions, and private non-profit colleges and universities. Among 571 for-profit colleges in the United States, students paid net prices (tuition costs less scholarships and aid) averaging $23,251 in 2009. By contrast, students at 1652 private non-profit colleges and universities paid net prices of about $18,000. Students at four-year public colleges and universities paid the least in terms of net price: about $11,000.
What about teaching effectiveness, and students’ satisfaction that their educational experiences were worth the cost? Again, the private-for-profits performed least effectively, according to National Center for Education Statistics data.
Just 68 percent of students at these colleges reported that their pursuit of a degree was worth the cost. Most satisfied were students at public institutions, where nearly 82 percent said their educational experience was cost-effective. In the middle were students at the non-profit private colleges and universities, where about 79 percent reported to be satisfied customers.
On the surface, Harvard University and the University of Phoenix would seem to have virtually nothing in common. Harvard, of course, is among the richest and most powerful institutions in America, a self-styled educator to the nation’s future leaders. The oldest university in America, Harvard’s tradition as a molder of presidents, chief executives, and Supreme Court justices is undisputed. The essence of Harvard’s enterprise and that of similar institutions is the reproduction and maintenance of American elites, generation after generation.
By contrast, the University of Phoenix’s educational mission is more modest, focused on making college accessible to nurses, firefighters, police officers, and other working adults. For many of its working-class students who return to school in order to advance their careers, a University of Phoenix degree is a portal into the American middle class, not a credential for maintaining or reproducing class status.
In the end, however, many of the supposed distinctions between private universities, whether non-profit or for-profit, are not as clear cut as they might seem. In one way or another, both are in the business of maximizing wealth. Harvard tries to maximize its endowment income over the long haul. The University of Phoenix maximizes profits. Harvard’s existence, as we know it, depends on the generosity of American taxpayers and its tax-exempt status. Too, the federal government, by way of grants and loans to students, remains the dominant source of profits for the University of Phoenix.
Fried and other advocates of profit-seeking education companies are quite right to suggest that the old days are over, when traditional colleges and traditional students dominated the higher education system. To a large extent, the traditional model of higher education dominated by public and private colleges, has not met the promise of Lyndon Johnson’s dream of an equal opportunity to seek higher education for any citizen, regardless of race or class. Profit-seeking education companies, with a good nose for federal money, have stepped in to the fray, providing access to students whom traditional colleges have ignored.
Indeed, while the principle social and economic function of old school colleges and universities is to be the college of first resort to the sorts of upper-middle class students and families that are dwindling in relative numbers, profit-seeking institutions have become the institutions of last resort for growing numbers of students that were not born so lucky.
Peter Sacks is a writer and economist. He is the author of "Generation X Goes to College" and "Tearing Down the Gates: Confronting the Class Divide in American Education".