Prof. Philip Booth: Higher education for profit, it's time to move forward

Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs and Professor of Insurance and Risk Management at Cass Business School.

After reforming student finance, the UK Government now wishes to liberalise the higher education sector. The rationale is simple. If the Government is paying less of the cost of higher education and students are paying more, then the sector should be more responsive to students. Students will be paying the bills so they should be taking the decisions as to where they go to university and how they study. Why restrict their options to the currently established universities and why exclude profit-making institutions?

The Government is also trying to put different types of higher education on a similar footing so that there is now a less clear division between part-time and full-time courses from the point of view of student support. Given this, it would seem illogical to keep out of the university sector the private sector, profit-making institutions that have traditionally served so well those who are taking part-time courses whilst working in a profession.

Unfortunately, the reform agenda has become confused and the legislation delayed as the Coalition to sort out ideological differences and practical details, but the direction of travel should be clear.

Predictably, the traditional, left-leaning higher education establishment has started squealing about the idea of profit-making organisations providing higher education. They point to the incentives that profit-making universities will have to dumb down courses and pack students in whilst giving them an inferior education. With a disturbing number of current business courses receiving student satisfaction rates of less than 60 per cent, perhaps the underlying motive is that they are concerned about the potential success of the competition rather than the potential failings of the competition. Perhaps self-interest is at work in their protests.

But the critics of reform do point to credible evidence. They suggest that for-profit colleges in the US have high student loan default rates and low completion rates. Indeed, Democrat administrations have responded to these criticisms by imposing onerous regulation that has put profit-making higher-education institutions at a disadvantage compared with other colleges and universities.

There is much the UK can learn from this US experience and it is important that we do not learn the wrong lessons, as recent research published by the Institute of Economic Affairs shows very clearly.

Firstly, for-profit higher education institutions have improved access in the US dramatically. Between 1986 and 2008, enrolment in for-profit higher education soared from 300,000 to 1.8 million students. The for-profits tend to focus on the more vocational courses but, very significantly, also specialise in taking students who traditionally would have been excluded from higher-education. More than half of students at US for-profit institutions in 2007 were over 25 years old and ethnic minority enrolments comprised 40 per cent of the total. For-profits also take a particularly high number of first generation students whose parents do not hold a degree.

These for-profits institutions have achieved this without the natural advantages of non-profit education institutions, such as inherited real estate and a favourable tax status. For-profits can afford fewer staff but employ those staff more efficiently at the coal face of teaching. Online education and curriculum standardisation across institutions also leads to greater efficiency compared with government-cushioned, non-profit universities.

It is against this background that the objections of the chattering classes to the profit motive in higher education should be judged. As the Wall Street Journal noted two years ago, the war against for-profit colleges is part of an ideological war in favour of government control of business on the part of the Obama administration.

But, the objections to profit-making colleges cannot be dismissed out of hand. We saw in the financial crisis how government underwriting failure led to a rapid market response, distorted incentives and created bad outcomes, ultimately creating the conditions for the financial crash. Private sector educational institutions will respond to incentives too.

In this context, the design of the government’s student support scheme is very worrying. Government loans will be available to students and there will be big rewards for failure. The interest rate depends on how well you do after graduation and how much capital you pay back depends on whether you are earning and how much you earn. Those whose education adds little value to them in the labour force will pay back the least.

In this context, perhaps the government should not require for-profit higher education institutions to provide bursaries to less-well-off students as non-profits will have to. After all, this target group is likely to be a large part of the customer base for the for-profit institutions in any case. Instead, perhaps, there should be incentives for success. Why not have 70 per cent of the student loan repayable to the government and the last 30 per cent repaid instead to the institution if it is a for-profit institution? They then have skin in the game. The incentives of students, government and the institution will be very effectively aligned.

We then can get the best out of for-profit institutions and the self-interested complaining of the traditional universities will carry no weight whatsoever.