In the past few years, the for-profit college sector has faced rising regulatory pressure. The U.S. Department of Education (ED) recently investigated and sanctioned two large national for-profit chains, Corinthian Colleges and ITT Tech. As a result, both companies filed for bankruptcy, shuttering hundreds of campuses across the country and leaving tens of thousands of students in educational limbo. Additionally, new “Gainful Employment” (GE) regulations will likely result in many for-profit colleges losing access to federal student aid and, potentially, further closures. So what happens to current and prospective students when a poorly performing for-profit college closes or loses federal student aid? We tackle this topic in a new working paper.
Financial aid and for-profit colleges
Money matters for prospective students deciding if, when, and where to go to college. To encourage and support low-income college students, the federal government disburses huge sums in programs such as the means-tested Pell Grant and subsidized student loans. However, these programs are not available to students at every college. Colleges must satisfy a set of conditions to provide their students with federal student aid.
Until the recent GE regulations, the most stringent student performance-based requirement relied on student loan cohort default rates (CDR) – the percentage of a college’s former students who default on their federal student loans within a set period of time. CDR regulations were enacted in the late 1980s in response to a higher education environment that was in many ways similar to today’s setting, in which an expansion in for-profit college enrollment accompanied concerns about student loan default and the quality of the educational offerings at these schools.
As shown in the figure, the share of Pell Grant recipients attending for-profit institutions grew substantially between 1980 and 1988. The CDR regulations had a lot of bite in the 1990s, and led to a dramatic decline in enrollment of federal aid recipients and the closure of many colleges in the sector. Over the course of the 1990s, more than 1,200 for-profit institutions were sanctioned.
Note: Y-axis shows the proportion of Pell Grant recipients.
The Impact of Sanctions on College Enrollment
Few would deny the need to protect vulnerable students from colleges where they are unlikely to succeed. However, because for-profit colleges can provide unique pathways to college for underserved students, past and current regulatory actions have the potential to limit access to higher education by restricting the number of options available to students. Consequently, a key question is whether students who would have enrolled or persisted within a sanctioned, poorly performing for-profit college instead attend other colleges or whether these students forego a college education altogether.
In new research, we assess the effect of federal student aid loss on two-year college enrollment by examining the impact of CDR regulations in the late 1980s and early 1990s. We look at effects on enrollment within sanctioned schools and nearby, unsanctioned institutions that served similar students. We focus on students receiving means-tested federal Pell Grants since these students are most likely to be vulnerable to changes in access to financial aid.
Our findings suggest that when for-profit institutions are threatened with the loss of federal aid, Pell Grant recipient enrollment at that institution falls, as does enrollment in other local unsanctioned for-profit colleges. While further research is needed to clarify the reasons for this negative spillover, it is likely that – much like today – the whole sector suffers the reputational impacts of federal sanctions placed on individual schools.
However, we find evidence that the decline in for-profit sector enrollment following a sanction does not reduce aggregate educational attainment – increased enrollment in local public institutions offsets the decline in for-profit enrollment. We also find suggestive evidence that federal student loan borrowing and default decline in the area as students shift away from poorly performing for-profit colleges to lower-cost community colleges.
In addition to possible future for-profit college closures, the new GE standards are expected to displace many students, as the ED estimates the regulations will affect about 1,400 programs (99 percent of which are in for-profit colleges) and 840,000 students. This loss of aid can be particularly problematic to students at for-profit colleges who heavily rely on aid because they are relatively more likely to come from low-income backgrounds and are less likely to expect financial support from family. Beyond financial constraints, for-profit colleges are also important when making policy because they disproportionately enroll students who are first-generation college students, have served in the military, or identify as a racial or ethnic minority.
Our findings indicate that when students at poorly performing for-profit colleges lose access to aid, these students can and do find programs to fit their needs in the public sector. And, concurrent to this shift of students across sectors, student loan outcomes improve. Therefore, since average costs of attendance are lower and job market prospects are equivalent (or better) at public colleges, restricting federal student aid at poorly performing for-profit colleges can lead to better outcomes for students and public loan programs, without substantially harming access to higher education.
We caution, however, that capacity constraints at lower-cost competitor public institutions did not appear to be a concern in the time period and context that we study, as public institutions were able to accommodate students who switch sectors in response to federal sanctions. But, states have disinvested in community colleges over time. Therefore, to ensure that students have access to higher education during a period of heavy for-profit college regulation, we suggest an increase in public support for community colleges and other high-performing educational options.
 See for example, Stephanie Riegg Cellini and Nicholas Turner (2016). “Gainfully Employed? Assessing the Employment and Earnings of For-Profit College Students Using Administrative Data.” NBER Working Paper No. 22287.