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April 04, 2014 3:11 PM A New Model for For-Profit Education?

By Daniel Luzer

In the last decade for-profit colleges have come under extensive scrutiny for their low graduation rates, their former students’ high loan default rates, and the fact that many former students appear to have getting a job once they leave these institutions.

One of the major problems is that a success of large for-profit schools doesn’t have anything to do with the success of their students, profit comes from just getting more people to enroll. More students (and their federal financial aid money) means more income for companies. That’s how shareholders respond.

(The gainful employment rule, which makes colleges ineligible for aid if student loan payments are greater than 12 percent of former student incomes and/or more than 30 percent of former students default on their student loans (or something), is a sort of backhanded way to measure for-profit colleges. Yes, you can make a profit, as long as you don’t do a terrible job with student outcomes.)

And that, given the nature of a corporation, is actually OK. Because that’s the purpose of a corporation: to make money.

This, all criticisms of normal colleges aside, is the difference between a for-profit and a non-profit, which is primarily mission-driven.

But what if there’s a new way to structure a corporation such that it can both make money AND demonstrate success according to traditional non-profit measures of accomplishment.

That’s what a few states are proposing. According to an article in the Chronicle of Higher Education:

An unlikely opportunity for significant for-profit educational reform is popping up in many states in the form of corporation law. A new type of corporation, called a benefit corporation (B-Corp), has recently been written into law in many states, including Delaware (where a number of for-profit education companies are incorporated) and Arizona (where the Apollo Education Group—the parent company of the University of Phoenix, the largest for-profit educator—resides).
B-Corps make it possible to have a double or triple mandate, with corporate charters pledging to balance profit-seeking behavior with social or environmental benefits (or balance all three). That corporate design makes it possible to insulate socially conscious companies from abuse by shareholders demanding to see short-term profitable behavior that may damage long-term or socially beneficial goals. A B-Corp that protects student interests while still allowing the pursuit of profit is the perfect structure for companies that want to be involved in general higher education.

The problem with this measure is that the success of this initiative depends on precisely how success is measured at these corporations. How much success depends on profit and how much depends on the life outcomes of graduates? How much can colleges measure success and still make a profit?

As the article puts it, the proposal is designed to “discourage limitless growth and therefore reduce the considerable risk that some of the largest for-profit educators present for the Department of Education in the form of loan-repayment guarantees” but “discourage” is sort of vague.

Exactly how much power would “socially conscious companies” have from “abuse by shareholders demanding to see short-term profitable behavior”?

And, perhaps more importantly, would people want to invest in companies that couldn’t demonstrate short-term profitable behavior? It’s not like these companies sell organic yogurt or wind power here. These are corporations that exploit federal aid by charging people more money for education that it cost to deliver it. Why would people want to invest in such companies if they couldn’t generate short-term profit?

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer

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