A Bad Mix: Complexity, For-Profit Schools and College Decisions

Almost 3000 four-year colleges are spread across the United States. Half are private non-profit schools and a quarter are public.  For the first time, in 2011-2012, there were more private for-profit college than public colleges.[1] Young people face the daunting task of first deciding whether or not to go to college and then deciding where to go and how to pay for it.

Economists have traditionally thought that young people make this complex decision as would “adolescent econometricians” (Manski, 1993, p. 45). Potential students are assumed to calculate the streams of expected costs and benefits arising from either going to college or not going to college and then to choose the option with the highest benefit-cost ratio.

As Avery and Turner (2012) make clear, the weight of evidence suggest that, on average, getting a degree from a four-year college is an economically sound idea, even in today’s world of relatively high youth unemployment rates and even if students must borrow to pay the cost. But unless they are willing to assume naively that their experience will be the same as that of the average person, each of our adolescent econometricians must form expectations that take into account their own particular abilities and inclinations as well as the possibility that they will be among the 50 percent of students who start college but do not end up with a degree.  Such heterogeneity (not everyone is average) and uncertainty (no-one can predict the future) makes for a very complex decision, even for the fully rational and fully informed adolescent econometrician.

The perhaps more typical young person is likely making what Safir, Simonson and Tversky (1993) call a reason-based choice, the far more qualitative, seemingly less precise alternative to the benefit-cost model assumed by economists. As they explain it (p.12), “[T]his approach identifies various reasons and arguments that are purported to enter into and influence decision, and explains choice in terms of the balance of reasons for and against the various alternatives.”  In experiments involving even simple choices,  psychologists have demonstrated that the choices that experimental subjects make are strongly influenced by how the choices are presented and by the reference point from which subjects begin considering their options. These results are often not consistent with the choices that fully rational, fully informed people would make.

Which bring us to undermatching. The whole point of student financial aid is to promote access, choice and persistence — to allow qualified students to attend at least one postsecondary institution, to allow them at least some measure of choice among schools and to promote persistence through to graduation.  Any systematic lack of access and choice implies that some qualified students are either not going to college at all or that they are not going to the school that is best for them.

Three recent studies [Roderick, Coca and Nagaoka, (2008), Bowen, Chingos and McPherson (2009) and Smith, Pender and Howell, 2012] have documented undermatching on the order of 40 percent among, respectively, students in Chicago, in North Carolina and in a nationally-representative sample. The method is these articles is to first classify school in various categories, using the selectivity ratings in Barron’s Profile of Colleges. Then each student’s test score, GPA and high school coursework are compared to those required to give the student a good chance of admission to schools of varying selectivity. A student is undermatched if their scores, grades and courses would have given them a good chance to be admitted to a more selective school than the one they actually chose.

While there are many reasons why students might not attend the most selective school that would admit them, one reason may simply be that students are making reason-based choices which can be heavily influenced by the way school choices appear to them, either because of their own circumstances or because of concerted efforts by schools to create a “path of least resistance” to enrolment. Left to their own devices, students might be persuaded to attend much weaker schools than they could have attended.

One policy that reacts to the undermatching observed among young people is free and impartial advice. And that is exactly the solution being tested by MDRC in Chicago with the College Match Program (MDRC, 2012).  Like the existing National College Advising Corps, MDRC placed “near peers” into  several Chicago high schools and gave them the task of helping “moderate to high-achieving students” (p.1) find their best college “match”.[2]  Initial results from the small pilot phase of the program are encouraging — the proportion of advisees who attended very selective or selective schools increased relative to similar students in previous years.

On the other side of this equation are the private for-profit colleges that have gone to great lengths to take advantage of the complexity that potential students face to create an unethical “path of the least resistance” that leads students to their doors, carrying their student loans along with them. As extensively documented in the US Senate report of July 2012, the largest for-profit colleges routinely use aggressive marketing and recruitment tactics, deliberately concealing the true cost of a degree, understating the time to completion and overstating the benefits of attending. The result is that almost all students must take out student loans to pay the tuition — tuition is set so that it is equal to available federal aid — and more than half  of  those who start drop out with no degree and a heavy loan burden.  Fully rational, fully informed students, armed with perfect information and perfect self-control, would never allow themselves to be recruited by these charlatans but they are not the target of the recruiters. The Senate investigation reported (U.S. Senate, 2012, p.58) that:

“For-profit colleges target a population of non-traditional prospective students who are often less familiar with higher education than other prospective college students and may be facing difficult circumstances in their lives … Recruiting materials indicate that some for-profit colleges viewed these populations as widely open to influence. ‘We deal with people that live in the moment and for the moment,’ Vatterott’s training materials explained.  ‘Their decision to start, stay in school or quit school is based more on emotion than logic. Pain is the greater motivator in the short term.'”[3]

What we have here is profit-maximizing firms, operating with little regard for the needs of their customers, in a weak regulatory system that was set up to function in an environment in which schools could generally be expected to put the welfare of their students ahead of making as much money as possible.

The state and federal rules around eligibility of schools for student financial aid programs must be tightened. For example, one of the current federal rules (the 90-10 rule) requires that schools receive less than 90 percent of their revenues from federal aid programs. A change in that ratio –  say to 80-20 — would lessen the damage to students but because many for-profits are close to the 90 percent threshold, their lobbyists have swung into action to oppose any change. Another policy idea is “gainful employment” rules that would remove aid eligibility from schools that cannot demonstrate that they provide an education that often leads to the jobs their recruiters promise. Once again, however, the industry has resisted the imposition of such rules.

The complexity of college choice is quite real even for well-prepared traditionally-aged students. The preliminary evidence that free and impartial advice changes the decisions of such students suggests that the complexity can lead to suboptimal decisions. Even more problematic, however, is the “solution” to complexity offered by predatory for-profit schools — aggressive and misleading recruitment focussed on especially vulnerable non-traditional students.

Works Mentioned:

Avery, C. & Turner, S. (2012). Student Loans: Do College Students Borrow Too Much — or Not Enough? Journal of Economic Perspectives 26(1), 165-192.

Bowen, W.G., M. M. Chingos, & M.S. McPherson. (2009). Crossing the Finish Line: Completing College at America’s Public Universities. Princeton, NJ: Princeton University Press.

Manski, C. (1993). Adolescent Econometricians: How Do Youth Infer the Returns to Schooling? In Clotfelder, C.T. and Rothschild, M. Eds. Studies in the Supply and Demand in Higher Education. Available from http://www.nber.org/chapters/c6097.pdf

Roderick, M., Coca, V., & Nagaoka, J. (2008). Potholes on the Road to College: High School Effects in Shaping Urban Students’ Participation in College Application, Four-year College Enrollment, and College Match. Sociology of Education. 84(3), 178-211.

Shafir, E., Simonson, I. & A. Tversky. (1993). Reason-based Choice. Cognition 43, 11-36.

Sherwin, J. (2012)  Make Me a Match:  Helping Low-Income and First-Generation Students Make Good College Choices. New York: MDRC

Smith, J., M. Pender & J. Howell. (2012) The Full Extent of Student-College Academic Undermatch. Economics of Education Review. Forthcoming.

U.S. Senate. (July 20, 2012). For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success. Available from: http://www.help.senate.gov/imo/media/for_profit_report/PartI-PartIII-SelectedAppendixes.pdf

[1] The exact numbers are 2,968 four-year colleges with 1553 private non-profit schools, 682 public schools and 773 private for-profit schools.  (See http://nces.ed.gov/programs/digest/d12/tables/dt12_279.asp.)

[2] See http://www.advisingcorps.org/ for a description of the National College Advising Corps.

[3] Vatterott Education Holdings Inc. is one of the 30 companies investigated by the committee.


About Saul Schwartz

Professor School of Public Policy and Administration Carleton University Ottawa, ON K1S 5B6 Canada
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