Students of for-profit colleges leave school with more debt than public college students

For many Americans who don’t live in big cities, a for-profit college near where they live may seem like a convenient higher education option compared with a public college many miles away. But that convenience comes at a price, according to a new report.

Students who enrolled at a nearby four-year, for-profit college on average take on $3,300 more in federal student loans than if they had gone to a comparable public college, according to new research published this month in the Journal of Financial Economics.

Students who chose to go to a two-year, for-profit college on average originate $6,000 more debt than if they had chosen a community college.

Aside from taking on more debt, enrollment at a four-year for-profit college increases the likelihood of default by 11 percentage points, which is nearly double the baseline default likelihood, according to the study.

The research used five publicly available resources, from Census information, data on colleges, loans, and employment, to tease out how students choose their college.

The researchers used data from time periods when the economy went south and workers’ job prospects dimmed to map out whether the prevalence of for-profit schools in their vicinity affected their decision to pursue higher education.

Transparency over debt outcomes isn't enough: author

To help students compare colleges before they enroll, the Education Department has been putting more information on the College Scorecard to help students factor in financial prospects when choosing a school.

The Scorecard is a government database that publishes data including how much debt a student is expected to take on, and how much in earnings they can expect on average, should they choose a specific school.

Yet "students just seem to be very poorly informed,” Michael Lovenheim, a co-author of the study and a professor at Cornell University, told Yahoo Finance.

“Part of it is on purpose on the part of for-profits ... they're giving them a sales pitch, and the students for the most part lack the background ... to make an informed choice,” he said. "Just information being available is insufficient – you have to help them understand what it means."

The federal government has also signaled that it is watching for-profit colleges to see whether they mislead students about jobs and earnings prospects.

The Federal Trade Commission in October sent notices to 70 for-profit higher education institutions with the warning that any false promises they make about their graduates' jobs and earnings prospects and other outcomes could lead to "significant financial penalties."

Location, location, location

But the choice of which college to attend is a student's own.

And particularly during times of economic crisis, a lot of publicly available information on outcomes is not fully utilized, which could in the future lead to students taking on unnecessary debt.

For instance, when the U.S. economy undergoes a shock and more people find themselves out of a job, they turn to education to fill in the gap. But their method of choosing a school — especially nontraditional students — has historically been influenced simply by what’s most convenient and nearest to them, according to the report.

And if they see more for-profit colleges in their vicinity, then they’re more likely to attend such schools, versus another student surrounded by public community colleges.

This phenomenon is concerning to the authors. This makes the supply of local options critical, Lovenheim said, because it affects where people choose to go and how much debt they end up taking.

For-profit schools branch out across the country

For-profits appear to be ubiquitous partly because they have the financial ability to create many branch campuses aimed at making it easy to commute to school, particularly for those working part- or full-time jobs.

A separate data project by researchers at the University of Wisconsin-Madison found that most undergrads attend college “within just 50 miles of their permanent home address."

For-profits appear to capitalize on that demand for convenience.

According to the University of Wisconsin-Madison authors, some colleges that have signed an agreement to operate with the Education Department have created many branch locations across the state, such as in fire stations, YMCAs, churches, and even within private companies such as at Verizon Wireless stores or in a Walmart, or in hotels.

Yahoo Finance has reached out to the Education Department for comment on whether it monitors such branch locations and whether that has an implication on their agreement with the schools.

When a school signs an agreement with ED, it can tap federal funding from taxpayers. These funds are then loaned to students as loans.

Student loan debt and for-profit colleges

The U.S. economy is holding steady at present, but this new report in the Journal of Financial Economics said that the findings carry implications for when a recession hits.

Roughly two decades ago, 450,000 students were enrolled in for-profit colleges, which represented 2.9% of enrollment. During the recession in 2010, enrollment peaked at 9.6%, then dropped to 5% in 2018.

A rise in enrollment at for-profits coincided with “large increases” in student debt, the authors noted. Total federal loans to undergrads rose from $34.1 billion in 2000 to $57.5 billion in 2018 – a 66.3% increase. Out of all the borrowers who had defaulted on their federal student loans in 2012 specifically, 39% had enrolled in a for-profit school in the 2010-11 academic year.

It's not just students who bear the financial burden: When some of these for-profit colleges go bust, if they've acted in a predatory manner, millions of taxpayer dollars are written off.

Ultimately, Cornell’s Lovenheim said he wanted his research to stress how a students’ choice of school is impacted by their options in their area, and how that can be addressed.

With for-profits being “more prevalent, and taking up a large part of the U.S. higher education system,” he said, “the answer to this question is quite important for the outcomes of these students.”

Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami.

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