Are Degrees From For-Profit Colleges Worth the Paper They're Printed On?
Unlike most public and private universities and colleges, for-profit educational institutions are run by businesses in order to make, as you might guess, a profit. Instead of being required to put proceeds back into the school for instruction and services, they can (and do) distribute earnings to shareholders and invest heavily in marketing for new students.
These schools have been in the news in recent years for a number of reasons, specifically concerning how they should be regulated. For example, in an environment of growing student debt burdens, four years ago the Government Accountability Office had found evidence of for-profits encouraging fraud on loan applications. This is especially worrisome because the for-profit education sector is booming:
- 42% of college enrollment growth in the last 10 years came from for-profit schools.
- 20% of the growth in bachelor's degrees came from just the 23 largest for-profit schools.
- Nearly one in seven college students in 2012 were attending a for-profit college.
Despite their popularity, we don't really know that much about how valuable a service these schools provide to their students. Are these degrees really valued in the job marketplace?
It's an important question to ask not only because students invest considerable time and energy into their studies, but because the cost of a for-profit is considerably higher than the equivalent qualification at a non-profit educational institution. In fact, for-profits cost about 80% more in fees and tuition than public schools.
They're also an enormous recipient of federal student loan funds. The authors of a recent National Bureau of Economic Research study point out: "Seven of the ten largest distributors of Pell Grant dollars are online for-profit institutions, and the for-profit sector overall receives 25% of all Federal Title IV aid and is involved in about of all Federal loan defaults" [emphasis mine]
Considering the cost, and in light of the somewhat murky regulatory situation, you would think that for-profit students should be getting a lot of bang for their buck. Are they?
Testing the value of a for-profit education
The researchers decided to test the merits of for-profit degrees in the labor market by sending out a huge number of resumes with different education backgrounds (the resumes were also standardized for each job type and randomized across race and gender) to real job openings in five major markets -- Chicago, Los Angeles, Miami, New York, and San Francisco.
The applications focused on jobs in health and business, which are very common areas for certificates and diplomas and for bachelor's degrees, respectively. To get better insight into how different schools are perceived, the researchers included national online for-profit schools, local brick-and-mortar for-profits, and public universities ranging from the least to the most selective (private non-profit universities weren't included in the study).
Armed with their randomized set of application templates, the researchers sent 9,564 resumes, of which 784 got a response (an 8.2% callback rate).
The researchers found that "resumes with a bachelor's degree from a for-profit institution are about two percentage points less likely to receive a callback than otherwise-identical resumes with a degree from a public institution... the effect is a decrease of 22% in the probability of callback."
In other words, applicants with for-profit degrees are 22% less likely to be called than those with public-school degrees (the findings for health care jobs were less conclusive, partly because there were much fewer to work with).
It's a result that might be driven by perceptions about how good an education the students at each type of institution are getting. A couple major surveys with hiring managers and executives both found that employers tend to value public university degrees more than for-profit ones, which could be driving the higher callback rate.
Two caveats should also be noted. First, employers also tended to call people who they presumably thought would be a good fit. So someone with a business degree from UC Berkeley was less likely to be called back for a low-paying job and more likely to be called back for a high-paying job. That's important to consider when you're mulling your future earnings options -- prestige could make a big difference in getting a higher-paying job.
Second, these results only apply to the "business" fields and jobs requiring a bachelor's degree. While business degrees account for more than 20% of all bachelor's degrees awarded, it's still possible that results may vary for other fields of study.
However, I would actually guess the opposite. Business is, by nature, a very broad and generalized subject area. For jobs requiring a more focused skill-set, like engineering, I would hazard that the perceived quality of an educational institution would matter even more than the study suggests, rather than less.
In the end, is it worth the investment?
At the end of the day, you have to ask yourself if a particular degree course makes sense. If tuition at for-profits is, on average, 80% higher than a public university and the callback rate for jobs requiring a bachelor's degree is 22% lower, well... it really doesn't make sense, does it?
There are surely other reasons people pursue education at a for-profit; for example, the convenience of online classes, the ease of enrollment, or maybe a perception that the overall cost is lower. This study demonstrates that there might be major hidden costs to a for-profit education that students aren't aware of.
That means that you might be better off finding a way to study part-time at a community college or public university, rather than signing up for an education that looks more attractive on the surface, but which costs much more in reality.
Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here.
The article Are Degrees From For-Profit Colleges Worth the Paper They're Printed On? originally appeared on Fool.com.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.