Cornell University: For-profit colleges increase students’ debt, default risk

Prospective students should weigh their options carefully before enrolling at a for-profit college – a decision that could prove costly, according to new research by a Cornell economist and collaborators.

Attending for-profit colleges causes students to take on more debt and to default at higher rates, on average, compared with similarly selective public institutions in their communities, the researchers found.

Worse financial outcomes, they argue, are not a consequence of for-profits tending to serve students from more disadvantaged backgrounds, a correlation established in prior research. Rather, more expensive for-profits lead students to take out more loans, which they then struggle to repay because they’re less likely to find jobs, and the jobs they get tend to pay lower wages.

“It’s not just a product of differences in the composition of students,” said Michael Lovenheim, the Donald C. Opatrny ’74 Chair in the Department of Economics, of the higher debt and default risk. “This is a causal effect of going to these schools.”

The team’s findings are reported in “Student Debt and Default: The Role of For-Profit Colleges,” published in the April issue of the Journal of Financial Economics. Lovenheim, a professor in the Cornell Jeb E. Brooks School of Public Policy and the School of Industrial and Labor Relations, is a co-author along with Rajashri Chakrabarti, Ph.D. ’04, a senior economist at the Federal Reserve Bank of New York, and Luis Armona, a doctoral student in economics at Stanford University.

For-profit colleges – run by private companies that return profits to shareholders – are a growing fixture of the U.S. higher education market, serving almost 1 million students in 2018, or 5% of all enrollments. That’s up from 2.9% in 2000, though down from a peak of 9.6% in 2010.

During that period, total student debt rose by two-thirds, to $57.5 billion, and for-profits have been a focus of concerns about default rates. In 2012, 39% of defaults on federal student loans occurred among borrowers who had attended for-profit colleges – nearly four times the percentage enrolled in the 2010-11 academic year.

To better understand how for-profit enrollment affects student finances, the economists developed a new analytical approach utilizing five publicly available sources, including census information and data on colleges, loans and employment. They compared how student outcomes changed across cities that experienced similar economic downturns, or “shocks” – conditions that increase the demand for college enrollment – based on differences in their relative supply of for-profit versus public schools (two- and four-year) between 2000 and 2018.

The analysis initially provided new insight into how students choose schools: They’re much more likely to go to a for-profit college in areas where there are more of them, compared to areas with fewer for-profits, when a negative economic shock occurs.

That’s an important finding, Lovenheim said, because it highlights students’ sensitivity to the local schools they can access, which impacts workforce development.

“That has wide-ranging implications for how communities will recover from recessions,” he said. “It means the set of schools in a local area can influence the dynamics of economic activity in that area.”

For-profit colleges generally can respond more rapidly to demand for specific degrees than public counterparts, where crowding may also limit course availability, the researchers said. But while they may be nimbler and may expand access to historically underrepresented students, the authors concluded for-profits on average deliver a poor return on students’ investment.

“In the areas with more for-profits, the for-profit students do worse relative to the public students,” Lovenheim said. “They would be better served to go to a public school. They would take on less debt and default at lower rates.”

The analysis found the higher debt load was consistent with for-profits’ higher tuition – about $3,300 for four-year students, with the likelihood of defaulting increased by 11 percentage points. Employers also didn’t value for-profit degrees as highly. In the two-year sector, for-profit students were more likely to complete degrees than public community college students, but still earned less.

The findings suggest a range of policy opportunities, the authors said, including regulation to minimize harmful loans, increased funding for public postsecondary schools and more information for students choosing between programs that could help launch meaningful careers – or saddle them with debt and ruined credit.

“Students are just really misinformed about the implications of choosing a specific school,” Lovenheim said. “We need to provide students better information to make these important, lifetime decisions.”