The rise of for-profit universities and colleges

In the midst of the Great Recession, for-profit colleges and universities in the United States grew at a staggering pace in enrolment, profits and the corporate value of those traded on the New York Stock Exchange.

The 11 largest for-profit higher education companies, for instance, experienced an increase in enrolments of over 30% between 2008 and 2010. The downturn in the economy triggered ‘hypergrowth’ in for-profit institutions, including a rush of laid-off workers seeking job retraining.

Before the recent bubble, steady growth in American for-profits was already a well-worn pattern. From 2000-10, the sector grew by some 235% in enrolment, increasing its market share from 3% to 9.1% of all tertiary enrolled students.

At the same time, and not surprisingly, the number of new for-profit institutions grew. In the five-year period beginning in 2005, a total of 483 new colleges and universities gained regional or national accreditation in the US. Of those new institutions, some 77% were for-profits, compared to only 4% public and 19% independent non-profit institutions.

In total, and while still representing less than 10% of all enrolments, the for-profit sector currently accounts for 26.2% of all the post-secondary institutions.

There are specific characteristics of the for-profit sector that are peculiar to the US; others reflect global trends largely seen in developing economies. Simply put, in the US as in other parts of the world, the for-profit sector is a modern feature of changing market dynamics related to demand and supply – or the lack thereof.

The ‘Brazilian Effect’

The current US experience is a version of what I call the ‘Brazilian Effect’: when public higher education cannot keep pace with growing public demand for access and programmes, governments often allow for-profits to rush in and help fill the gap, becoming a much larger and sometimes dominant provider.

This is the pattern in many developing economies such as Brazil, where some 50% of student enrolment is in profit-driven private institutions, together with Korea, Poland and many other parts of the world.

The American case is a different twist in this common theme.

For example, Brazil began with an elite university sector and is trying to build a mass higher education system that includes for-profits and private non-profits. In the US, a once robust mass higher education system is in various stages of decline, exacerbated by the onset of the Great Recession.

Throughout the US, state governments – the primary funders and regulators of higher education – are making massive cuts in their public higher education systems and an array of social services. The decline in funding higher education is a trend long in the making, accelerating mightily over the past three years.

In the mega-state of California – the largest state in population and with an economy that would rank among the world’s top 10 in size if it were a country – budget cuts are greatly diminishing the ability of public colleges and universities to hire faculty and provide courses to meet enrolment demand. There are similar examples of retrenchment in public higher education in about half of the 50 states.

The future

The question is how this story will unfold over the next decade in the US.

Under the creed that a variety of providers creates more avenues for socio-economic mobility, the US needs a robust for-profit sector as part of any coherent effort to increase educational attainment rates, improve the nation’s labour pool, and help create a more competitive economy.

But there are indicators that an era of unquestioned and largely unregulated growth of the for-profit sector may be ending. There are new concerns at the national and state levels about the economic model of for-profits, their low degree completion rates, the quality of those degrees, their high tuition and fee levels, and the high levels of debt and poor employment record of graduates.

Despite these concerns that are spawning new federal regulations and a series of lawsuits, my prediction is that the for-profit sector will continue to grow over the long term, not so much because it meets societal demands for diverse forms of higher education, but because of the inability of the public sector to return to the levels of public subsidies it had in the past – the Brazilian Effect.

The result now, and in the future, is a kind of policy default: the future tertiary market will not be the result of a well-thought out policy at the national or state levels, but a quasi-free market consequence that will foster lower quality providers and fail to meet national goals to increase the educational attainment level of Americans.

Higher education policy is about broad issues of socio-economic mobility and economic competitiveness, but it is also about money, big business and political influence.

* John Aubrey Douglass is a senior research fellow at the Center for Studies in Higher Education, University of California, Berkeley. Email: douglass@berkeley.edu. This is an excerpt from Douglass' article, “The Rise of the For-profit Sector in US Higher Education and the Brazilian Effect”, which appears in the European Journal of Education, Volume 47, Number 2, 2012.