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Pay for performance: Making for-profit schools work for student outcome-based rewards

Outcome-based contracts between students and for-profit colleges would change the cost of attaining a degree by incentivizing success.

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Who is the target audience for your idea and how does it reimagine the cost of college?

Students choosing a for-profit post secondary education are the target audience. By tying the cost of their education directly to their post-graduate income, students will only pay for the benefits they receive from their education. The up-front cost is eliminated, and the percentage payment plan means that schools are incentivized to help students find post-graduate success.

    Student debt in the United States increased by over $9,000 per student between 2005 and 2013. (1) The problem has grown into an epidemic felt in every strata of society, and will require a multi-pronged solution. Our partnership has identified one area of particular urgency - the plight of students at for-profit institutions.

    For-profit colleges continue to attract students, because of their flexible education plans, marketing, and aggressive pricing, yet they are at the epicenter of the national student debt crisis. Although they contain just 11% of our student body, for-profit institutions account for 22% of all federal direct loans, and 47% of all defaults. Students at for-profit colleges graduate within 5 years at a rate of 27.8%, as opposed to the national average of 55.1%, and they do so with $12,000 more debt than their counterparts at public and non-profit schools (2). These students are paying for services that meet their immediate needs, but are often unable to graduate and more likely to struggle with their debt. Students at these institutions are victims of a perverse incentive structure that rewards getting students in the door but not providing skills and success. How do we reconcile this attractive education model with the positive outcomes we desire for our institutions of higher learning?

    We propose to correct the incentive structure at for-profit colleges, by changing how the schools get paid. We will set up contracts in which students pay nothing up front, but instead tender a percentage of their future income for a specified number of years. Repayment will be handled directly out of each paycheck like a payroll tax. There will be no monthly checks, and no late fees or penalties. This will allow for government oversight and regulation. Instead of collecting money up front in the form of tuition, for profit colleges will receive money based on the accumulated success of their alumni.

    This new repayment plan will wright fundamental changes in the industry, that will alter key aspects of the for-profit college business model for the better. The long-term repayment plan will increase the barriers to entry, weeding out many of the current “degree farms,” but can be configured to increase the financial rewards to building a long-term, successful institution. Colleges will profit from student outcomes, rather than student entry, and by doing so they will need to re-focus their business models to new goals such as supporting students to graduate, providing skills with long term benefits, and job placement networking. This program will decrease the up-front costs of attending college and make schools compete on the value of their services.   

    In short, we propose to regulate the for-profit college industry by requiring long term income based payments, instead of up-front tuition. By changing the “customer” of the for-profit college to the alumnus, rather than the prospective student, we will rearrange the rewards structure for the industry, building better institutions that care foremost about the welfare of their students. Thinking of our education system as an investment in social success begets positive outcomes for all parties. We hope that you will consider the merits of this idea for further research, as it cuts to one of the most important pieces of the national crisis in higher ed finance.


Data Sources

(1): https://www.newyorkfed.org/studentloandebt/index.html

(2): U.S. Dept. of Ed., 2014, Student Loans Overview, http://whttp://www2.ed.gov/about/overview/budget/budget14/justifications/s-loansoverview.pdf

What early, lightweight experiment can you try out in your own community to find out if the idea will meet your expectations?

We could survey students at local for-profit institutions for their feedback on outcome-based contracts. We might also look to interview new start-up for-profit institutions, business managers/CEOs, for their response to this change in business drivers. We could conduct hypothetical walk-throughs of the repayment process with for-profit students to identify how to make repaying easier and less emotionally/mentally stressful.

What skills, input or guidance from the OpenIDEO community would be most helpful in building out or refining your idea?

We could use guidance from risk management consultants to determine the rates for repayment. We also would need assistance in designing a business model that could serve as a template for convincing current for-profit schools of potential benefits. Additionally, we could use more input from students within current for-profit on why they chose these institutions. We could then design outcome based models tailored to their specific needs.

This idea emerged from

  • A group brainstorm

Are you interested in the Path to Pitching track we've developed for this challenge?

  • Yes

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