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Money Minute: Are for-profit colleges really that bad?

You’ve seen the headlines. Left and right, for-profit colleges in the U.S. are being sued and shut down by regulators. But what makes for-profits so much worse than traditional, nonprofit schools? I explain in this week’s Money Minute.

To be fair, not every for-profit school is evil. For-profit defenders point out that these schools cater to students who may not otherwise be able to attend a traditional nonprofit college. They may have dropped out of high school and have only a GED, or they may have families to raise and/or a full-time job already. For-profit schools offer flexible class hours and online courses, making it easier for these students to work school into their schedules. For-profit schools also typically offer career-oriented programs, like medical assisting, welding, or culinary arts, which are aimed helping students get a specific job in a specific field.

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But here’s the most important difference between the two: for-profit schools are run by big companies. And like any business with shareholders to answer to, their owners have one central mission: generating profit.

A public nonprofit school, like a state college, relies on state funding to keep things running.

For-profit colleges make their money by enrolling as many students as they can. Up to 90% of their funding can come from federal student aid — like Pell grants and student loans — that their students bring in. The more students they enroll, the more money they can collect.

In order to get more students through the door, for-profits advertise like crazy and some schools have been known to link their recruiters’ paychecks to their enrollment numbers. The really shady ones have even been caught lying about their job placement rates.

Shady practices aside, for-profit schools have other shortcomings. On average, they charge tuition rates that are 67% higher than traditional four-year nonprofit schools, yet their graduation rates are much lower.

Only 32% of students complete their degrees at for-profit institutions, compared to 57% at public institutions.  And because for-profit students graduate with much more student debt than nonprofit college graduates, they are far more likely to default on their student loans, with default rates of 22%, compared to 13% at public institutions.

Now, while it is true that regulators have been cracking down on shady for-profits recently, it has not been easy. The for-profit industry spends millions of dollars each year to keep elected officials from voting for policies that would hurt their business. The Department of Education recently put out a list of more than 500 colleges it is watching closely for fraud — more than half were for-profit institutions.

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