The Newfoundland Fisheries Innovation and Adjustment Fund

Last Tuesday, the Globe and Mail published a story about a $280 million federal contribution to a fund intended to help the fisheries industry in Newfoundland and Labrador. The fund had been promised during the negotiations around the Comprehensive Economic and Trade Agreement (CETA) with the European Union. The story has Premier Paul Davis of Newfoundland saying that the federal government was reneging on its commitment, made in 2013, that would allow Newfoundland to spend the money to create a “fishery of the future” if the province removed its minimum processing requirements (MPR). The MPR require that, by and large, fish landed in Newfoundland be processed in Newfoundland. Federal Conservative Rob Moore, however, is quoted in the story as saying “[t]he MPR fund was created to compensate for anticipated losses from the removal of minimum processing requirements” and not as a “blank cheque”.

An exchange of letters, made public in December 2013 by then-Premier Kathy Dunderdale suggests Premier Davis is right. In a rapid-fire exchange of letters, the federal government at first insisted that the $280 million contribution be spent only to compensate workers displaced as the result of elimination of the MPRs. But faced with a determined statement from the province saying that the fund must also be available to support the future development of its fish and seafood industry, the federal government gave in and explicitly agreed to allow the money to be used for purposes other than compensation for displaced workers.

The first mention of the fund is in a May 24, 2013 letter sent to Ed Fast, the federal Minister of International Trade by Keith Hutchings, then the Newfoundland Minister of Innovation, Business and Rural Development. Apparently written in the aftermath of a May 20 meeting between the two ministers, Hutchings requests a “Fisheries Innovation and Adjustment Fund” as one of the conditions for dropping its MPRs as they apply to the European Union. He requests $400 million to be used for a variety of purposes, only one of which is “Fishing Industry Adjustment”. The federal government apparently rejected the Hutchings plan because, on May 27,  Hutchings writes to Fast to express his disappointment at this development but notes the federal position on the fund:

On the matter of a fund to help restructure the industry, you have advised that the Federal Government could consider a modest step towards this, but you also asked the Provincial Government to cost-share such a fund. We believe a fund is necessary to help industry restructure to take advantage of opportunities that open as a result of real market access to the EU and to assist the communities and the people that could be displaced or adversely impacted by a move to narrow the application of MPRs. (Emphasis added)

On May 28, Fast reiterates the willingness of the federal government to support a fund for Newfoundland in return for its elimination of the MPRs. He offers “… a transitional package of up to $400 million for those workers who experience job displacement as a result the time-limited carve-out of MPRs for fish and seafood exports intended for the EU…”. No mention is made in this letter of using the fund to help the fishing industry restructure. Moreover, the Minister asks that Newfoundland pay for half of the “up to $400 million” cost of the fund.

Hutchings makes the next move. He writes on May 29 that Newfoundland is not willing to have the fund be “limited to worker adjustment” and that “… it should sustain the programs necessary to ensure that the industry is positioned to fully avail of opportunities emerging from the deal …”. Hutchings also rejects the notion of federal-provincial cost-sharing.

Fast responds the next day with a letter offering a 70-30 federal-provincial cost-share for the fund but still characterizes that fund as “a transitional program … for those whose jobs are displaced as a result of MPRs no longer being applied to product destined for the EU.” Hutchings agrees to Fast’s offer of a 70-30 cost-share but asserts that “… it is imperative that this program facilitate industry adjustment”.

The issue is truly engaged in the next exchange of letters on May 31 in which Fast writes that the fund of up to $400 million (emphasis added) “…must be cost-shared and only for worker displacement” while Hutchings writes back accepting the 70-30 cost-share “… but only if this program provides for industry transition, development and renewal”. Fast caves in, writing on June 1 that “… we are prepared to instruct our officials that the transition program address industry development and renewal as well as worker displacement.” Hutchings now accepts the offer “for a total expenditure of $400 million” (but does not put an “up to” before the  “$400 million”) to be cost-shared on a 70-30 basis.

With this issue seemingly resolved, the overall CETA negotiations go forward and an agreement-in-principle is made public on October 23, 2013. On October 29, Premier Dunderdale triumphantly announced that “We have negotiated an agreement with the federal government to create a $400 million fund to transform our fishing industry.” She made no mention of the fund being limited to worker displacement or being defined as worth “up to $400 million.”

The federal government could not have believed that $400 million could be spent on worker displacement alone. (Of course, they might credibly have believed that “up to $400 million” could be spent.) In the short- to medium-term, the elimination of the MPRs on fish and seafood destined for the EU is highly unlikely to cause any major damage in Newfoundland. In 2013, in Newfoundland, there were 86 active fish and seafood processing plants that employed about eight thousand people. In that year, Newfoundland exported $117 million of fish and seafood to the EU, a sum that was only 14 percent of its exports to non-EU countries. Moreover, CETA is expected to increase provincial employment in the fisheries sector as Newfoundland companies take advantage of duty free access to the enormous EU fish and seafood market. All this will happen with minimal risk of higher import competition.

To be sure, fish processing workers tend to live in remote Newfoundland communities (see the map here on p.28) and these communities will be likely to be under threat for the foreseeable future. But there is no immediate danger than any jobs will be lost. While there is apparently a nascent fish and seafood processing industry in Europe, there is no reason to think it will pose a threat to Newfoundland’s industry for some time.

Based on the public record, therefore, it would seem that the federal government is indeed reneging on its promise to create a cost-shared fund (albeit one of “up to” $400 million) that can be used to build a “fishery for the future”.

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Ravens and Redblacks: More on a conflict of interest

On April 17, I raised the question of whether a conflict of interest existed for some Carleton Board of Governors members around the new and expensive parking structure approaching completion on the North end of campus. That parking structure, along with two more in the planning stages, is important to the ongoing development of nearby Lansdowne Park, a development to which at least two Governors have very close ties.

University conflict of interest policies vary in their strength.   Some are weak, some are strong; some are weak against one sort of conflict and strong against another sort. For example, Adrienne Shnier and her colleagues published a review of the conflict of interest policies in force at all Canadian medical schools.   Shnier at al. provide the following example (p.2):

… between 2002 and 2006, the pain management course for medical and other health science professional students held at University of Toronto was partly funded by grants from Purdue Pharma LP, the maker of OxyContin. As part of the course, a chronic pain management book that was funded and copyrighted by Purdue Pharma was distributed to the students by a lecturer who was external to University of Toronto and had financial ties to Purdue Pharma. Concerns were raised that some of the contents of the book were not consistent with the current best evidence for narcotic medication administration.

An inquiry found no actual conflict of interest, but recommended that the course curriculum be immediately revised to avoid the perception of a conflict that surrounded the situation.

Shnier et al. did a careful review of conflict-of-interest policies at all Canadian medical schools as they pertained to twelve different sorts of issues (e.g., consulting relationships, ghostwriting and samples) and rated each policy on a three-point scale, ranging from 0 to 2, according to the strength of the policy, with higher scores reflecting more restrictive policies. The authors then sent the results to the deans of each school, asking them to review the findings and to correct any inaccuracies. The scores evenly covered a wide range from a maximum of 19 out of 24 for Western University to 0 out of 24 for the Northern Ontario School of Medicine.

I know of no comparable study of the conflict-of-interest policies of the university Boards of Governors.

I ended my April 17 post by noting that I had sent an email, four weeks earlier, to the secretary of Carleton’s Board of Governors, asking whether any conflicts of interest had been declared in recent years. Later that afternoon, I received a message from the secretary, Anne Bauer, apologizing for not responding sooner and promising to look into the matter.

I later spoke to Ms Bauer who said that Board members must sign a Statement of General Duties, Fiduciary Responsibilities and Conflict of Interest that requires that “[b]oth prior to serving on the Board and during their term of office, Governors must openly disclose a potential, real or perceived conflict of interest as soon as the issue arises and before the Board or its Committees deal with the matter at issue.” The statement defines an “apparent/perceived conflict of interest” as “[a] reasonable apprehension which a reasonable person may have, that a conflict of interest exists, even if there is neither a potential nor a real conflict.” Should any disclosures be made by a Governor, “[t]he disclosure and decision as to whether a conflict exists shall be duly recorded in the minutes of the meeting, or in a not[e] to file in the Office of the University Secretary.”

Ms Bauer told me that some disclosures had been made in committees of the Board but the minutes of such committees are not publicly available. She did not know of any disclosures that had made in meetings of the full Board in the period from April 1, 2009 to the present.

Returning to the parking issue, the minutes of the Board meeting on March 25, 2013 record that: “[i]t was moved by Mr. Ruddy and seconded by Ms. Binks that the budget, funding, design and construction of the New Parking Facility be approved.”

You may recall from April 17 post that the $22.5 million dollar New Parking Facility — the cost of which has since risen to $34 million — is an integral part of the plan for the off-site parking required for the crowds that will attend the games of new CFL Redblacks franchise. And you will recall that John Ruddy is one of the principal figures in the Ontario Sports and Entertainment Group (OSEG) which owns the Redblacks and is driving forward the Lansdowne Revitalization.

Far be it for me to claim to be a reasonable person, so I will leave it to you, readers, to decide if there is a “reasonable apprehension … that a conflict of interest exists.”

The issue may be deeper than one vote on one issue. The 2010 Carleton Master Plan (p.30) envisions two more parking structures to be built alongside the one now approaching completion. The university’s commitment to environmental sustainability, however, asserts that there will be “no increase in parking spaces per capita” (p.3). The Board clearly has some work to do reconcile these seemingly competing goals. Might it be better to do that work without the shadow of a perceived conflict of interest?

 

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Carleton University, the Lansdowne Revitalization and a (Potential) Conflict of Interest?

Canadian universities typically have clear statements of how to deal with perceived, potential and real conflicts of interests that arise for members of their Boards of Governors.

For example, the by-laws of the Carleton University Board of Governors state:

“A member of the Board is involved in a conflict of interest when (i) the member owes a duty to the University as a Governor, and (ii) the member has a personal interest in the matter or owes a duty to act in the matter in the interests of a different person, group of persons, institution or organization.”

Such conflicts of interest can arise in any number of interactions between the university and its Board — a person can be both a student and a member of the Board of Governors, a professor can be a member of the Board of Governors and the parent of a university student, a community leader can be a member of a Board of Governors and a prominent land developer. In such a situation, as Concordia University’s External Governance Review Committee put it, “[t]he challenge is not to completely eliminate such conflicts of interests. They are endemic to a university organization. An important principle in university governance, however, is to ensure that such conflicts are declared and appropriately managed.”

A complication for those who are interested in a university’s affairs but who are not members of its Board of Governors is that the publicly-available information about what goes on during Board discussions is limited (as it should be when private information is being discussed).

For example, the following facts illustrate, but in no way establish, a potential problem. The publicly- available information is simply not sufficient to establish any conclusion.

Some publicly available information:

Carleton’s 2010 Master Plan calls for the construction of three parking garages in the northern section of the campus. Each garage would have about 600 parking spaces.

Also, in 2010, the McCormick-Rankin consulting company released its report on parking needs related to the proposed redevelopment of Lansdowne Park. It notes that for events attracting 45,000 participants, off-site parking will be essential and points to the three proposed Carleton parking garages as the source of 1,800 of the required spaces. Their report assumed that the Lansdowne developers would create a shuttle bus service from Carleton to Lansdowne.

In 2011, two community members were appointed to the Board of Governors. John Ruddy is the President of the Trinity Development Group. Bob Wener is the Chief Financial Officer of the Minto Group. Both are active in charitable ventures and have undoubted experience and knowledge that could be employed to the benefit of the university. Both are the sort of community members that any university should be proud to have on its Board of Directors.

Both, however, hold high positions in companies heavily involved with the ongoing “Lansdowne Revitalization”. John Ruddy is one of the founding partners of the Ottawa Sports and Entertainment Group (OSEG), the group leading the Lansdowne project. Another partner is Roger Greenberg, who is the chairman of the Board of the Directors of the Minto Group, and therefore clearly associated with Bob Wener. Given their links to the Lansdowne Revitalization and the need by that project for parking at Carleton, the potential for a conflict of interest would seem to exist for both John Ruddy and Bob Wener.

A search of the publicly-available minutes of Carleton Board of Governors shows no declaration of a real, perceived or potential conflict of interest by either Board member. Indeed, there are no declarations of real, perceived or potential conflicts of interest by any Board member.  In the minutes of the board meeting on October 8, 2013, and in apparent answer to a question posed to the Board, the minutes state:

“Conflict of interest with Board members: Board members have signed the Statement of General Duties, Fiduciary Responsibilities and Conflict of Interest and as such, are aware of what constitutes a conflict and the process to declare it. No members of the Board have had any financial gain either in the past or present, as a result of being a Governor.”

The publicly-available minutes of the Board indicate that a number of issues related to the construction of the parking garages have been addressed by the Board but no record of any of materials presented or of the discussions that took place seems to be available. One of the parking garages is currently under construction and apparently will cost about $34 million, about $9 million more than anticipated. Whether Carleton needs these parking garages for its own purposes is far from clear; see, for example, the following blog about the garages.

These facts in no way establish an undeclared real, perceived or potential conflict of interest. Perhaps a real, perceived or potential conflict of interest was declared but not reported in the publicly-available minutes. Perhaps it was determined that no real, perceived or potential conflict of interest existed.

So on Wednesday, March 19, 2014, I sent an email to Anne Bauer, the Secretary of the Carleton Board of Governors, asking two questions:

(1)  Has any member of the Board of Governors declared a conflict of interest (whether real, perceived or potential) over the period from April 1, 2009 to the present?

(2)  If so, which Board members declared such a conflict and what was the nature of the conflict?

As of today, four weeks later, I have not yet received any response from Ms Bauer, not even an acknowledgement that my query had been received.

 

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The 2010-2012 Governance Crisis at Concordia

Because university governance often involves (at least) three powerful bodies — the administration, the Board of Governors and the Senate — it is not surprising that all sorts of conflicts arise.

The uproar at Concordia University in early 2011 illustrates one such conflict.[1]  The school’s president, Judith Woodsworth, had resigned in December 2010, long before her term was scheduled to end. Only speculative explanations for her resignation have appeared publicly, but it seems that conflict with the board of governors was part of the issue.  The previous president, Claude Lajeunesse, had also resigned in 2007, less than halfway through his term.[2]

With approval of interim president Frederick Lowy, the university Senate and the board of governors, a special committee was appointed in March 2011 to look into overall governance at Concordia. That External Governance Review Committee (EGRC) was notable because two of its three members were Bernard Shapiro, Canada’s first ethics commissioner and a former president of McGill university and Glen Jones, a professor at the Ontario Institute for Studies in Education and the leading expert on university governance in Canada.[3]

Their report, issued in June of 2011, not only guided subsequent changes in governance at Concordia but also serves as a blueprint for university governance more generally.[4]  They wrote (p.10): “The governance structure of the university is the contact point between the academic community and representatives of the community at large to which the university, as a public interest institution largely funded by society, is accountable. Governance processes can provide a space for vigorous discussions of the mission, the future direction and the present administration of the institution. Of course, this needs to take place within an environment of mutual respect.”

They went on to say (p.10) that the situation at Concordia was “… not a culture of mutual respect but, rather, a culture of contempt” in which “by projecting experienced difficulties on some other person or on some other group, one was relieved of any responsibility to question one’s own motives and behaviour.”

Based on eight general principles, the EGRC put forward a large number of recommendations for governance reform at Concordia — reducing the size and authority of the board and strengthening the powers of the President and the university Senate.[5]

The situation at Concordia has changed considerably in the ensuing years.  In July 2012, the long-serving and controversial chair of the board of governors, Peter Kruyt, was replaced by Norman Hébert;  in August, 2012, Alan Shepard was appointed as President, taking over from Frederick Lowy, a former president who had returned on an interim basis.

In an interview in October, 2012, Shepard reported that “virtually all” of the EGRC recommendations had been adopted.[6]  For example, the board of governors for 2013-2014 had been reduced to 25 members and only six 2013-2014 members had been on the board in 2010-2011.[7]

From a distance, it’s impossible to tell if these changes have improved governance at Concordia but some are optimistic.  For example, Maria Peluso, a new board member who had been critical of previous boards, said in a September 2013 interview with a Concordia student newspaper, that the board’s operation under Norman Hébert was a “marked improvement from the top-down governance style she had seen in recent years.”[8]

It took considerable courage, though perhaps born of desperation, for Concordia to invite outsiders like Shapiro, Jones and Coté to reshape its major governance institutions. We can all hope that that it works out for Concordia and that other universities can learn from their experience.


[1] My thanks to Nick Falvo for piquing my interest in the Concordia events. In 2011, he wrote two short blogs about it, one called Concordia’s “Culture of Contempt” and the other Concordia Decides That Less Is More.

[2] Lajeunesse stepped down in the fall of 2007 “by mutual agreement” with his Board of Governors.  Concern about the resulting instability was expressed in an open letter to Peter Kruyt, the chair of the Board of Governors, from the head of the faculty association. (Woodsworth resigned for “personal reasons” in December of 2010.  The report of the External Governance Review Committee, discussed below, asserts that the departures were “apparently as a result of irreconcilable differences between each of them and the Board.” (p.3)

[3] The third member was André Coté, a former Dean of Law at Laval University.

[5] The eight principles, which are eloquently put forward in the EGRC report, are: (1) bicameralism and shared governance; (2) clear roles and responsibilities; (3) transparency; (4) strong academic administration accountable to an effective governance system; (5) managing conflicts of interests; (6) board and senate renewal; (7) the necessary distinction between collective bargaining and university governance; and (8) mutual respect.

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A short overview of university governance in Canada

Several recent controversies at Carleton — the building of the new parking garage over the O-Train tracks, the destruction of the campus community garden and the agreement to set up the Riddell Graduate Program in Political Management — have spurred interest in how the university is being governed.

To inform that interest, I thought I’d summarize what the literature says about post-secondary governance in Canada.  Glen Jones, a professor at the Ontario Institute for Studies on Education, has written extensively on the topic and most of what I say here is based on what he has written.  He has a research website at www.glenjones.ca and his most recent piece appears here.

Canadian universities are created by university-specific provincial legislation that establishes them as private non-profit corporations.  In some other countries, universities are run directly by the government. In others, notably in the US, private for-profit universities are common. The status of Canadian universities as private non-profit corporations gives them a welcome degree of autonomy and freedom from direct government interference.

Provincial legislation usually creates two main bodies that are formally in charge of the university. At the top of the heap is a Board of Governors (BoG). According to a 1997 survey by Jones and his colleagues — the latest information available — about one-third of Board members are internal to the university (faculty, administrators and students) and two-thirds are external (generally corporate executives ).  At many universities, including Carleton, the Board of Governors is self-perpetuating, meaning that the existing Board can elect new members as existing members depart. Generally speaking, Boards of Governors devote their attention to seemingly non-academic matters.

Scholastic matters such as establishing academic policies, approving the creation or reform of existing academic units and regulating the quality of education are the purview of the senate. The senate is almost entirely composed of faculty, students and university administrators. Jones reports that his survey of Canadian senate members revealed a gap between what the members thought their senate should be doing and what is was actually doing.

What is the role of the university administration? Formally, according to Jones, the university president represents only one vote on the Board of Governors.  Senior administrators occupy about 25 percent of senate seats, with the remainder split among faculty and students.  But in the absence of constant vigilance by the Board of Governors and the Senate, the university administration is best placed to take direct action and seems willing to do so. This seems to be what happened when, without any decision by the Carleton Board of Governors,  the university closed down the campus community garden. See the comments on this matter by biology professor and BoG member Root Gorelick.

Running a contemporary university is far from an easy job. Declining government funding and, at best, flat enrolments means that new resources must be found.  Therefore, signing exclusivity contracts with beverage companies, like Coca-Cola, and electing wealthy land developers, such as those involved with the construction of Lansdowne Park, to university Boards of Governors is as much a survival strategy as an ideological choice.   One of the consequences, however, is a weakening of the collegial model of governance that has long set universities apart from other societal institutions.

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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.

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Are Students the Weaker Party in Loan Contracts?

Not all bargains are struck between parties with equal bargaining power; sometimes one party is far stronger because of greater knowledge and experience or because of the particular situation of the weaker party. If a vessel is sinking, the only other ship in the vicinity can drive a hard bargain before saving the crew. In contract law, various situations have arisen in which the parties that agreed to a contract had unequal bargaining power and the weaker party later sought to overturn the contract.

Might we consider students to be the weaker party when they contract for student loans? The quick answer is “probably not” though — caveat emptor — I’m no lawyer and no expert on contract law.

There is no law that prevents anyone from borrowing money to do something economically silly,  whether it be investing in diamond mines that never produce diamonds or paying thousands for a postsecondary degree that never produces a job.  In some circumstances, however, the poor decision might have been the result of a stronger party bargaining inequitably with a weaker party.

If I force you to sign a contract — as your vessel is sinking beneath you — you might later be able to claim that you agreed only under duress, having no available alternative. “Duress of the person” means exactly that — the threat of actual or threatened physical violence forced you to sign the contract.  “Duress of goods” occurs when the threat is not physical violence but instead the threat to seriously damage your business. One key issue here is whether the weaker party had any viable alternatives to signing the contract; if not, the economic threat posed by the stronger party was so ominous that it compelled the weaker party to sign the contract. Neither type of duress applies to student borrowers — no one threatens physical violence if the loan contract is not signed and, while the loan might be mandatory if the student is to attend the college of choice, educational alternatives abound.

Alternatively, the stronger party might exert undue influence that results from “an ability to exercise exceptional power in relation to another person’s choices” (Ben-Ishai, Percy, Boyle, McCamus and Flanigan, p. 678).[1]  The starting point here is the observation that the agreement made by the weaker party was so much to his or her disadvantage that there must be a presumption of some sort of malign influence. The weaker party must also be shown to have been victimized by someone she trusted and in whose judgement she had confidence. For example, if a psychiatric patient makes a large gift to his psychiatrist, a gift so large as to imply a manifest disadvantage, the patient (or his relatives) would have an argument that the gift was the result of undue influence.  For students, however, there is no doctor-patient, lawyer-client, or parent-child relationship that might qualify as one in which there could be a presumption of undue influence.

Finally, the contract might have resulted from unconscionable actions taken by the stronger party. In order to overturn a contract because of its unconscionability, there need not be any duress and there need not be any undue influence arising from a close personal relationship.  In the narrow view of unconscionability, the two key  elements are first that the weaker party, by virtue of need, ignorance or inexperience, is vulnerable to exploitation and second that the bargain struck is to the great disadvantage of the weaker party.  A wider view asserts that these ideas amount to the opinion that a contract can be overturned if the circumstances under which it was signed violate community standards, that ordinary citizens would immediately judge the terms of the contract unfair.

The availability of independent advice is an important factor in all these cases. If the weaker party has received such advice, and signed the contract anyway, it is hard to argue that unfair advantage has been taken.  If the stronger party, knowing that it is negotiating with a weaker party, fails to suggest that the weaker party seek independent advice, that fact bears on the unconscionability of their actions.

In the context of student loan contracts, let’s consider two aspects involved in the protection of weaker parties. First, is there an inequality of bargaining power?   I would argue that many students, and especially “first generation” students whose parents have not gone to college, are at a great disadvantage relative to the lenders and to the school.  They are inexperienced, often uninformed and feel that they urgently need a post-secondary education. Moreover, they have no-one to turn to for independent advice.

In taking out a student loan, the majority of students are making their first major financial decision so their inexperience in such matters is obvious. We know from focus groups studies that students have very little idea of the contents of their loan contracts, often not understanding that the money they will receive is a loan and not a grant, and having only a sketchy idea of how compound interest works.  They are constantly being bombarded with the message that their future economic success turns on having a college degree.[2]  If taking a loan is the only way to finance that degree, their need is evident.

Demonstrating the second piece of the narrow doctrine of unconscionability seems more problematic to me. Is the bargain — students taking out a loan to go to college —to the manifest disadvantage of the student? And are the banks and the schools taking advantage of their stronger position to further their own interests? In most cases, the answer is obviously no. On average, getting a college degree is an economically desirable achievement; indeed, encouraging that outcome is the motivation for the existence of government-subsidized student loans. The manifest disadvantage, if it exists at all, exists when students borrow to attend schools that have very low graduation rates and offer programs that hold little prospect of gainful employment for those who do manage to graduate.

The graduation rate at private, for-profit colleges — think University of Phoenix — is only 16 percent for dependent students and 88 percent of students at such colleges take out student loans (Avery and Turner, 2012, p.178). The value of such degrees for those who do manage to graduate is quite unclear.[3] If these facts are well-known to both the schools and the lenders, and if they fail to advise potential borrowers to seek independent advice before borrowing, is not the resulting contract unconscionable?

Of course,  a far more straightforward method of helping the students would be to strength the standards that schools must meet to be certified as degree-granting institutions and to be eligible to participate in government loan programs. Using campaign donations and intensive lobbying, however,  these schools have developed and maintained considerable power to avoid such measures.[4]  Perhaps a case or two arguing, even unsuccessfully, for the cancellation of a student loan contract on the grounds of unconscionability would stiffen the backs of legislators.

[1] Much of the discussion of the law as it relates to the protection of the weaker party in based on Chapter 11 in Ben-Ishai, S. & D. Percy, eds. Contracts: Cases and Commentaries (8th ed., Careswell, 2009). These authors, however, are not to be blamed for any errors that I may have made.

[2] Avery and Turner (2012, p.169) write “… researchers have documented that students often misunderstand financial aid packages, fail to understand the much greater costs of consumer loans (such as credit card debt) relative to student loans, and miscalculate the trade-off between academic study and market work.  See Avery, C & S. Turner. (2012). Student Loans: Do Students Borrow Too Much or Too Little. Jounral of Economic Perspectives 26(1), 165-192.

[3] See http://chronicle.com/article/A-Damning-Portrait-of/133253/ for a summary of a US Senate report entitled “For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success” (available at http://www.help.senate.gov/hearings/hearing/?id=cdd6e130-5056-9502-5dd2-e4d005721cb2) that is highly critical of the for-profit sector.

[4] For a report on the magnitude of the lobbying effort by the for-profit sector, see http://www.huffingtonpost.com/2012/08/30/for-profit-colleges-lobbying_n_1842507.html

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