A new budget bill recently passed by Congress has significantly modified the classification of institutions of higher education. The bill has nullified the "50 percent rule" that required colleges to deliver at least half of their courses on a campus, instead of online, to qualify for federal student aid. The rule was enacted by Congress in 1992 after investigations revealed that some for-profit trade schools sold diplomas without delivering an education. The bill also abolished the "90/10 rule" that previously required for-profit colleges to obtain at least 10 percent of their revenue from funds that do not come from federal student aid programs. The Daily sat down with Associate Economics Professor David Garman to discuss the bill and its implications.
Tufts Daily: Please compare for-profit colleges to traditional non-profit ones.David Garman: A for-profit company could be organized either as privately-owned or publicly-owned, in the sense that it could be six entrepreneurs who pool their money and form a private enterprise, or they could go public through the stock market. In the for-profit group, there are both publicly owned and privately owned firms. The for-profit companies just have a different set of pressures. As a for-profit company, they want to grow, expand, earn a certain return on their investment. Not-for-profits compete in different areas. They want to stay in business, but they tend to compete in terms of programs provided, services provided in the kind of group we are familiar with at Tufts. They compete on selectivity. They compete on a different range of things. You could almost think of it as: for-profits need to earn a return on their investments, whereas non-profits are investing that return back into the college to further the goals of the college.
TD: Enrollment at for-profit online colleges has already grown tremendously in the past decade. What effect will the new bill have on the business of these schools?DG: My understanding of this bill is that it will relax the 50 percent rule. If they do away with that completely, that means there is no need to have a bricks-and-mortar college at all. A college could be completely virtual. It is going to increase competition in the online segment tremendously. It could be revolutionary in that online segment. You could get a group of investors ready to start an online college. They would not have to go through the investment and fixed capital of leasing classrooms and setting up visitations and enrolling students on an actual campus. Everything could be flexible. When you think of how quickly other online businesses have grown, there is tremendous potential for this sector to grow.
TD: For-profit colleges have been known to market an education, but deliver only degrees. Could you address the issue of fraud in these schools?DG: Fraud is a big issue in higher education. It is not exclusively for-profits, but some of the more famous abuses have happened with for-profit institutions that have basically sold their product the way you might sell cell phone service. I have a feeling that these kinds of regulations will tempt these programs to market more aggressively to students that are not well-suited for the college experience. Then there will be cases that are openly fraudulent. All they will ask is, "How much are you going to pay for the credits?" TD: What can the government do to crack down on such kinds of fraud?I think it is hard to crack down on fraud, but in the news reports about changing the 50 percent rule, they mention that accreditation agencies will certify that some programs are solid and some programs are not. Accreditation agencies have a hard time of looking in detail at what a college is doing on a year-by-year basis. They typically only look at colleges in five-to-10-year intervals. The other piece is that accreditation agencies tend to be formed by a group of schools with common interest, so if a group of online schools forms an agency with very lax standards, they can say that they are accredited, but that accreditation will not mean very much. What I worry about is, would the prospective student who is not knowledgeable about those colleges understand that accreditation by Joe's Accreditation Agency does not mean anything? As far as I know, there is nothing in the change in this law that authorizes any extra government oversight of these online schools. They seem to be leaving it up to the market and saying that consumers are savvy enough.
TD: According to the New York Times, a fifth of the $1.8 million that executives of the largest chains of proprietary colleges and their political action committees have donated to federal candidates since 2000 went to John A. Boehner and Howard P. McKeon, the two Republican representatives who sponsored the bill. Is this typical in higher education?DG: Almost everybody lobbies Congress in some form or another, from the AARP to a war veterans group to large pharmaceutical firms. Educational institutions lobby, too. Schools like Tufts will lobby. It is not lobbying per se that is very unique here. What seems to be different in this particular law change is that they targeted donations that were made. So what some of the for-profit colleges did is this: They made donations to key lawmakers who were in a position to advocate eliminating the 50 percent rule. That is something that traditional colleges do not do. The lobbying that most non-profit colleges have traditionally done has been much more general lobbying for higher education, not making quid pro quo donations.
TD: Please discuss rent-seeking in the context of lobbying by for-profit colleges.DG: In a nutshell, rent-seeking means that if there are excess returns to be made, then firms will try to find ways to earn those returns. So, if you and I thought that we could set up an online college that would only require a Web site, we could probably figure out a way of doing it. If we thought that in the time we invested in that, we could earn more than working at our current jobs or even what we expect to earn in our next jobs, we have an incentive to pursue that. To the extent that there are people positioned to start up or expand online colleges to go for those extra-large profits, they will try to do it. If I look down the road, I would expect there to be several scandals concerning online colleges that entice students into taking on loans through aggressive sales techniques and then fail to deliver education. I would expect the reputation of online colleges to become more and more important. Eventually branding is going to be big in online colleges, just like the brand is big in online selling. eBay is a well-established brand name now that stands for something, and so you know that you can trust eBay because if its reputation. If you look down the line, there will be some branded online colleges that have higher standing, higher status and greater public trust. I still do not think there will ever be an eTufts. There is something that goes on in that personal contact that I do not think anyone will replicate online.
