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Students’ debt and default risk grow as a result of for-profit universities Ipass

According to a new study conducted by a Cornell economist and colleagues, prospective students should carefully consider their alternatives before enrolling in a for-profit college — a decision that might be expensive IPass California office.

Attending for-profit universities results in students accruing more debt and defaulting at a greater rate on average, the researchers found, as compared to equally selective public institutions in their area.

They claim that worse financial results are not a result of for-profit institutions’ proclivity to serve students from more disadvantaged backgrounds, a link proven in past studies. Rather than that, more costly for-profit institutions encourage students to take out further loans, which they struggle to repay since they are less likely to find work, and the jobs they find pay less.

“The increased debt and default risk are not just a result of variations in student composition,” said Michael Lovenheim, the Donald C. Opatrny ’74 Chair in the Department of Economics. “This is a direct result of attending these institutions.”

The team’s results are published in the April edition of the Journal of Financial Economics as “Student Debt and Default: The Role of For-Profit Colleges.” Lovenheim is a professor at Cornell’s Jeb E. Brooks School of Public Policy and School of Industrial and Labor Relations. He co-authored the paper with Rajashri Chakrabarti, Ph.D. ’04, a senior economist at the Federal Reserve Bank of New York, and Luis Armona, a Stanford University a doctoral student in economics.

For-profit schools – managed by private firms that provide profits to shareholders – are increasing in the United States’ higher education industry, enrolling about 1 million students in 2018, accounting for 5% of total enrollments. This is an increase from 2.9 percent in 2000 but a decrease from 9.6 percent in 2010.

Total student debt increased by two-thirds to $57.5 billion, and worries about default rates have focused on for-profit institutions. In 2012, 39% of federal student loan defaults occurred among students who attended for-profit universities — almost four times the rate enrolled in 2010-11.

To better understand the impact of for-profit enrolment on student finances, the economists created a novel analytical technique based on five publicly accessible sources, including census data and data on universities, loans, and jobs. They analyzed student outcomes across locations that suffered comparable economic downturns or “shocks” – situations that raise demand for college enrollment – between 2000 and 2018, depending on changes in their relative supply of for-profit vs. public institutions (two- and four-year).

When a negative economic shock occurs, students are more likely to attend a for-profit college in regions with a higher concentration than in areas with fewer for-profit colleges.

This is a significant result, according to Lovenheim, since it demonstrates kids’ sensitivity to the local schools they may attend, which affects workforce development.

“This has far-reaching consequences for how communities recover from recessions,” he said. “This indicates that the collection of schools in a given neighborhood may have an effect on the dynamics of economic activity in that neighborhood.”

According to the researchers, for-profit institutions can typically react more quickly to demand certain degrees than their public equivalents, where congestion may restrict course availability. While for-profit institutions may be more agile and provide access to historically marginalized students, the authors determined that, on average, for-profit institutions give a low return on students’ investment.

“In locations with a higher concentration of for-profit institutions, for-profit students do worse than public students,” Lovenheim added. “They would benefit from attending a public school.” They would incur less debt and default at a lower bankruptcy rate.”

The investigation found that the more significant debt burden was commensurate with for-profit colleges’ higher tuition – around $3,300 for four-year students, with an 11 percentage point increase in the chance of defaulting. Employers also did not place a high premium on for-profit degrees. In the two-year sector, for-profit students completed degrees higher than public community college students but earned less money.

According to the authors, the findings suggest a range of policy opportunities, including regulation to limit harmful loans, increased funding for public postsecondary schools, and more information for students deciding between programs that can help them launch meaningful careers – or saddle them with debt and ruined credit.

“Students are simply uninformed about the consequences of selecting a certain institution,” Lovenheim said. “We need to provide them with more knowledge so they can make these life-altering choices.”