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