Government-Assisted Market Failure: America’s Higher Ed Accreditation System

Many of today’s political fights boil down to fights about what the government should provide, and what it should leave for the “free market” to do. It’s part of the argument about health care, public schools, and public housing. I would argue that these are all fields that have shown substantial market failures, fields where the importance of the good in question are in particular tension with the incentives of the private industry.

It’s held as a truism that “markets work best without government interference,” but that’s only true when consumers of a good have enough information and enough power to protect themselves from imperfect products, usually by taking their money elsewhere. The case with for-profit education is interesting in that government intervention—in the form of federal student loans—has allowed a spectacular market failure to get even worse.

The past few years have brought increasing scrutiny of for-profit higher education. In 2015, a group of college students made the news when they defaulted on their student loans. The “Corinthian 15” had all pursued higher-education by at Corinthian College institutions, a chain that eventually shut down after a series of Department of Education investigation.

But Corinthian Colleges is far from the only for-profit institution in the United States; a 2012 ProPublica report published a growth of more than 1 million students from 2001-2010, and as of 2016 the industry was worth more than $36 billion. As critics, including those in the Obama Administration, have pointed out—most of that revenue is made up of federal student loans—taxpayer money that is getting students nowhere but costing the rest of a lot while they get there.

In her new book Lower Ed, author Tressie McMillan Cottom outlines some of the most damning characteristics of for-profit schools: their high tuition rates compared to public universities, their dependence on federal student aid funds, and their students’ low employment prospects after graduation.

What has received relatively less attention is the mechanism that allows these colleges to operate—and to receive federal funding—in the first place, the federal accreditation system and the regional accreditation institutions that it depends on. US accreditation agencies are not federal or governmental agencies—they’re private institutions, often funded by fees paid by the institutions that they’re meant to oversee.

Late last year, the National Advisory Committee on Institutional Quality and Integrity voted to derecognize the Accrediting Council for Independent Colleges and Schools (ACICS). NACIQI found that many of the schools that the organization accredited were failing. This unprecedented derecognition would mean that the institutions accredited by ACICS—most of which are for-profit institutions—would no longer be eligible to receive federal student funding. This is a welcome step, but it is not enough. There are far too many for-profit institutions in the United States that are providing sub-par education at exorbitant high costs—and too few guidelines for the accreditors that enable them.

A Waste of Federal Funds

A December, 2014 Government Accountability Office report found that accreditors rarely derecognize or even sanction institutions—and when they do, they tend to sanction them for financial difficulties. According to a 2012 study, taxpayers paid for an estimated $32 billion in tuition fees for for-profit institutions in 2009. Many for-profit schools depend primarily on federal funding and likely would not be fiscally sound without federal funding.

The Obama administration began a campaign of demanding greater oversight of federal accreditation —but the Department of Education under DeVos seems poised to roll back these remedies. Rhetoric in defense of private insitutions often talks about the “efficiency of the market,” and Devos herself has spoken along those same lines when talking about K-12 education. The failure of many public K-12 schools in the United States is a pressing problem, one that many charter schools may well be poised to address.

But higher-education is a different landscape, with different market conditions—and different market failures. The current state of the industry has many students going deep into debt while receiving worthless degrees that employers don’t recognize—at the very least, they don’t recognize them the same way that they recognize degrees from traditional institutions, including community colleges and public universities. Alas, it doesn’t seem like Devos will hold for-profit schools accountable—earlier this year, a former lobbyist for for-profit schools hired by Devos resigned after a controversy erupted over his appointment. There may be a universe in which the market, with a proper set of accountability standards, may succeed. But the Dept. of Ed doesn’t seem interested in holding these schools accountable, even though they receive billions of dollars anually in federal funds.

Preying on the Most Vulnerable Students

Some critics of the accreditation system (incorrectly) speculate that perhaps students fail to graduate from for-profit institutions because they are less motivated or less “suited” to education. But this is an unfair assessment, given the asymmetry between the resources that non-profit and public colleges and universities devote to their students. For-profit institutions instead choose to spend their money on advertising, or even on princely (and illegal) compensation for their recruiters.

Unfortunately, for-profit institutions have been incredibly successful in recruiting students, especially among populations that have traditionally had less access to or knowledge about higher education. These include not only ethnic minorities, but also veterans and those who return to school later in life.

Some of these options are cheaper, too. Courses at community and public colleges and universities can be far less than those at for-profit institutions, and they’re more likely to be recognized by employers in the market. Some non-profit organizations provide training, as well, such as Certified Nurses’ Assistant certificates provided by the American Red Cross.

A Failure of Incentives

After the Obama administration began making moves to challenge accreditation institutions in 2015, critics decried what they saw as another effort to increase government control of private activity.

However, the rise of for-profit education institutions in the United States (many of which are publicly traded), and their mounting history of abuse and fraud—proves that there aren’t enough incentives to encourage accreditors and schools to provide quality education. Worse, the history of accreditor sanctions—mostly for schools that are financially unstable—may incentivize schools to increase tuition costs and not to take risks on investing in resources to improve education.

For-profit institutions and continuing education programs at better-regarded schools also have a history of preying on individuals who are trying to improve their skills and knowledge, but may not have had the opportunity or knowledge of the system to access more traditional educational opportunities.

Increase Accountability—and More Favorable Options

The Department of Education and the Federal Government should take the following steps to increase accountability of accreditors and improve the higher-education landscape:

  • Introduce higher, more explicit standards for accreditors to adhere to, and speed up the process for derecognizing institutions.
  • Continue to recognize the “gainful employment rule” formulated by the Obama Administration, which requires that institutions prepare students for gainful occupation and stipulates other regulations.
  • Re-invest in public universities and community colleges to pre-recession levels. These institutions not only have a better track record of serving their students well, but are also more closely governed by elected officials, and have greater cachet in the job market.
  • Encourage states to invest in more funding for college guidance counselors in high schools—so that students are well-informed about their options.
  • Explore a long-term replacement or refurbishment of the accreditation process-perhaps involving greater intervention from state bodies.

During the Obama administration, the Department of Education took many necessary steps to improve the accountability of accreditation system and the many for-profit colleges it recognizes. These policies are not only vitally necessary protections of the nation’s student-consumers, but they’re also fiscally sound. The Department of Education under Secretary DeVos should continue to ensure that federal tax money allocated for education is well spent.

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