A Middling Problem, Part 2

“But all things excellent are as difficult as they are rare.” Spinoza

If the market is great at providing us with the next iWhatever, shouldn’t it also be great at providing us with a better education system? Let’s be blunt: why wouldn’t anyone who remembers that first day of class in a public school want to give privatization a shot?

It’s true that the success of specific charter schools has been trumpeted from the rooftops, especially in total fail, tabula rasa scenarios like New Orleans. As it happens, it’s easy to come up with equally pleasing anecdotes on the other end – the hopeless public school made good, simply through the implacable willpower of its teachers and administrators, a creative and adaptable approach, amenable unions, etc. (That shouldn’t be hard to reproduce and scale, no not at all.)

Charter schools have only been around since 1992, so comparing their record to that of public education may seem a tricky exercise. But Stanford University's Center for Research on Educational Outcomes (CREDO) recently published the most authoritative study done on charter schools thus far, and the verdict is rather qualified:

17 percent of charter schools reported academic gains that were significantly better than traditional public schools, while 37 percent of charter schools showed gains that were worse than their traditional public school counterparts, with 46 percent of charter schools demonstrating no significant difference.

Interestingly, one of the factors affecting charter schools’ results is the fact that it’s much easier to open a new one (ie, procure a new charter) than to shut down a failing one. This leads to diluted results and churns teachers, students and administrators. But who can resist chasing the next great anecdote – or feeding it to the press?

Moderate minds will believe – and doubtless be proven correct – that charter schools will evolve a significant role for a society that is decentralizing and growing ever more complex. Like any other service, education will be sourced from more and different providers than ever before, just like our media or our electricity. This genie doesn’t go back into the bottle, and that’s a good thing. The charter model is moreover certainly not monolithic, and one hopes that success will be recognized, reproduced and scaled. But as implied above, a successful school is a deeply social exercise, and good education is one of those enterprises that seems to resist reproduction at scale remarkably well.

But it’s not high school graduates that get jobs. That was a long time ago. The kind of workforce that we are talking about – agile, productive, well-rounded – requires some kind of post-secondary education. What has been the market’s response?

All Shall Have Prizes

If you live in New York, you’ve seen the subway plastered with advertisements for the University of Phoenix, et al. – pioneers of the brave new world of for-profit education. But beyond such trainspotting, does for-profit really occupy some kind of critical mass in our educational landscape? Well, while post-secondary enrollment has increased by 31% over the decade (1998-2008), for-profit enrollment has skyrocketed by 225%. Whereas in 1990 less than 1% of students enrolled in for-profit schools – which themselves constituted less than 10% of all schools – by 2009 almost 10% of all students were enrolled in for-profits. In same timespan, the sum total of for-profits grew to comprise 25% of all educational institutions (Eisman, p6).

Ok, but didn’t non-profit community colleges fulfill this function until recently? As always, the past proves instructive. I refer the enterprising reader to a fascinating revisionist history of the development of community colleges vis-à-vis four-year institutions. In an essay entitled “Institutional Origins and Transformations: The Case of American Community Colleges,” Steven Brint and Jerome Karabel question the idea that community colleges constitute a “great democratic experiment”. Here is Brint, in a subsequent paraphrasing of that article’s many magnificient provocations (emphasis added):

In addition to our doubts about historical studies based on the responsiveness of community colleges to consumer and employer demand, we raised a number of critical questions about community colleges. We characterized them as the lowest rung in postsecondary education, both in terms of student composition and student life chances, and we raised concerns about the effects of community college entrance on the life chances of students. We saw community colleges as one means by which student ambitions were softly lowered to fit with the opportunities actually available in the labor market. We speculated whether the colleges led to democratization of higher education – by bringing in students who would not otherwise have attended a postsecondary institution – or whether their primary function was to divert students who would otherwise have attended a four-year college. We presented evidence that otherwise comparable students had a better chance of completing their baccalaureate if they started at a four-year college than if they started at a two-year college. We also raised questions about the economic payoffs to vocational programs. We anticipated important differences by field, but we also argued that many vocational students did not obtain jobs in the fields in which they prepared. We found no evidence for a common argument of the time – that rates of return for vocational students were notably higher than for liberal arts transfer students who went on to complete a baccalaureat.

This is not some quote from the 1970s. It is Brint in 2003, reflecting that not much has changed since 1989, when the original article was published (mmm-mm. I do looove me some Institutionalism). If we accept Brint and Karabel’s research as such, you would rightly say that there is a vast market opportunity here. For-profit education will surely rise up, delivering the education and training that ambitious students need to succeed in the employment marketplace.

As the above statistics demonstrate, thanks to a Siren-like mix of convenience, promise and high-powered marketing, those students have been beating the doors down. So what do they get for it? Recently, the GAO, which sometimes seems to be the only effective government agency in operation today, conducted an investigation into for-profit education organizations’ marketing techniques. Among the practices uncovered included coercion and fraud, encouragement to not report income on student loan applications, and such practices that would not be out of place in a pink-slip boiler room or a Florida subprime mortgage broker’s office.

Ok, let’s say there will always be a few bad eggs. It’s not like the GAO would have come up with something all that different, had they investigated the used-car industry. However, what is really at stake is not educating students but making a boatload of money. Obviously, if you’re running an online education service, your marginal costs of adding the next student are pretty minimal, compared to actually having to put some kid’s ass in a seat, feed and house them, clean up after their keggers, etc.

Here is the first indication of trouble: you would think that for-profits would be cheaper than community colleges on a credit-by-credit basis, since they compete with community colleges and their public funding, non-profit tax status, etc? Actually, for-profits are significantly (ie, by multiples) more expensive than community colleges: on average, $100- $300 per course, versus the for-profit price of $900-$1800 per course. (By contrast, Columbia University’s tuition is about $3300 per 3-credit class, so you are pretty much halfway there.)

Much more significantly, “current regulations allow for-profit education companies that participate in Title IV programs to derive up to 90% of income from federal government loans”. Title IV programs are loans that are disbursed by Federal Student Aid, part of the Department of Education, and include such plums as Perkins Loans and direct loans, as well as all kinds of grants. 90% - that’s some gravy train! Now those coercive marketing practices make more sense: the point isn’t to enroll students to get them to pay for their education up front, it’s to get them to take out a raft of loans. Since it’s a loan, it’s that much easier for the borrower to put it out of mind and sign the promissory note. After all, they’ll all be making six-figure salaries once they finish their correspondence courses in nursing or accounting, right? (Someone actually was recorded as saying this during the GAO bust).

So are students finding jobs? I’m sure that some are, but those who aren’t are mad as hell: “At least 750 former students and employees” of some Arcadia of higher learning known as Westwood College are doing what any self-respecting American does when things don’t work out: they’re suing the bastards, alleging, among other things, that “the school failed to give them accurate information about future job prospects or whether their degrees would be recognized by other schools or employers.” (Oh, had I only known that I could sue my alma mater for allowing me to major in some useless liberal arts subject. On the other hand my degree is recognized, so perhaps I shouldn’t be too hasty).

Eat My Short

In fact, this situation is so egregious that the industry has attracted the baleful eye of that implacable financial predator, the short seller. In this case, Steve Eisman, whose FrontPoint Partners hedge fund made accurate calls (and boatloads of money) betting against subprime mortgage securitization, is now smelling blood in the for-profit education sector. (Yes, that Steve Eisman.)

I implore my Gentle Readers to take the time to read Eisman’s entire presentation, which is not too difficult and the very model of a carefully constructed short hypothesis. But the gist of it is this: for-profits got fat feeding off the Title IV trough. In fact, they are crowding out other Title IV participants, hoovering up 25% of Pell Grants, even though they hold only 10% of enrollments. More saliently to Eisman’s short thesis, “at many major for-profit institutions, federal Title IV loan and grant dollars now comprise close to 90% of total revenues”.

It should be clear that students are being used as a conduit to siphon off federal dollars. And the more students the better – dropout rates at many of these “institutions” are over 50%, so they have to keep packing them in. Thus, dropout rates are actually an incentive, since the institution doesn’t need to do any more work, but the loan sticks, and there’s always another sucker ready to be pressganged into the education grinder.

But wouldn’t defaults impact the profitability of these institutions? Not really. In brief, the for-profits’ tuition fees are paid out by Sallie Mae, which originates the loan. In case of default, the Department of Education makes Sallie Mae whole – interest and all – and then proceeds to go after you themselves.

Curiously, the unique nature of student loans is something that Eisman omits, but we shall complete the picture. Mortgages, as we all know, are non-recourse loans – if you default, no collection agency shows up to impound your car and put it up on the auction block. You mail the keys to the bank and walk away from the mess, albeit with a ruined credit rating. Other consumer loans and credit card debt are generally wiped out when an individual declares bankruptcy. Student loans are virtually unique in that they don’t go away. Bankruptcy or no, there is no statute for limitations – you will pay your entire loan, principal and interest, even if it has to come out of your Social Security check. That makes the for-profit gravy train cited above look like peanuts.

To give an idea of the scale of student loans, by this summer household deleveraging had managed to reduce consumer credit card debt to the point where student loan debt overtook it as the largest category of consumer debt, outside of mortgages, at about $830bn. And with rates of defaults surging, there’s plenty of money to be made by everyone involved in making the student loan sausage. In fact, Eisman’s projection is that total outstanding Stafford Loans will hit nearly $500bn by 2020; of those loans, fully $274bn worth are expected to default. But since, according to Eisman, the government collects $1.20 for each $1.00 of loans originated, the total burden on students is estimated to be $330bn (Eisman, p40). Even by today’s standards, that’s a lot of money, especially if you are asking it of underemployed workers, and not the Federal Reserve’s printing presses.

So we are left with a bleak picture. For-profit institutions scam their students on their way in, give them a steaming pile of shit for an education, and then, if those students cannot find employment and begin servicing their debts, condemn them to years of indentured servitude, courtesy of the Federal government. I started out writing this post concerned about how we would address structural unemployment, but this makes the case for ongoing permanent unemployment.

Come to think of it, perhaps I don’t have the faith in Eisman’s short thesis, it being completely against Washington’s interest to regulate more strictly for-profits’ participation in Title IV. But what the heck, since most of these for-profit institutions are corporations that are publicly listed, anyone with a Scottrade account can get out there and do some shorting (APOL, COCO, ESI, EDMC and even WPO, if you’re curious). In the meantime, though, how about microfinance for students? We can at least save a few souls, especially if they’re interested in learning Mandarin.