Mass student failure equals billions for executives running for-profit US colleges

by: Paul Rosenberg

Tue Nov 16, 2010 at 13:30

Yesterday, my diary "A book worth a look: The Trouble With Billionaires"
was based on an item in IPS's weekly newsletter on inequality issues, Too Much. Another item in Too Much linked to an amazing piece of reporting from Bloomberg:

Executives Collect $2 Billion Running U.S. For-Profit Colleges
By John Hechinger and John Lauerman
Strayer Education Inc., a chain of for-profit colleges that receives three-quarters of its revenue from U.S. taxpayers, paid Chairman and Chief Executive Officer Robert Silberman $41.9 million last year. That's 26 times the compensation of the highest-paid president of a traditional university.
Top executives at the 15 U.S. publicly traded for-profit colleges, led by Apollo Group Inc. and Education Management Corp., also received $2 billion during the last seven years from the proceeds of selling company stock, Securities and Exchange Commission filings show. At the same time, the industry registered the worst loan-default and four-year-college dropout rates in U.S. higher education. Since 2003, nine for-profit college insiders sold more than $45 million of stock apiece. Peter Sperling, vice chairman of Apollo's University of Phoenix, the largest for-profit college, collected $574.3 million.
Education corporations, which receive as much as 90 percent of their revenue from federal financial-aid programs, are "private enterprise that's almost entirely publicly funded," Henry Levin, director of Columbia University's National Center for the Study of Privatization in Education, said in a telephone interview.
Students at for-profit colleges are defaulting on their loans at three times the rate of those at private, nonprofit institutions, according to data from the U.S. Department of Education, which is tightening regulation of the industry. The graduation rate for first-time, full-time candidates for four- year degrees at for-profit colleges is 22 percent, compared with 55 percent at state colleges and 65 percent at private nonprofit universities.

This is about as clear an example one could want of how much more efficient and productive the public sphere is compared to the private sphere. Of course, all the ideology goes the other way, largely because private enterprises are experts at externalizing their costs, so that they can appear to be more efficient. But as the above passage shows, top executives are able to extract massive paychecks from large private institutions that massively under-perform their public counterparts.

This is also about as clear an example one could want of America's conservative welfare state, the re-purposing of America's welfare state from Reagan onward to specifically benefit America's oligarchy and specific privileged sectors of industry and society.

In Gøsta Esping-Andersen's original formulation in The Three Worlds of Welfare Capitalism, conservative welfare states in Europe, following Bismarck's early model, are designed to enhance the power and prosperity of the nation, its elites, and favored members of society whose success strengthens the hierarchical social order. America falls into another category, the liberal welfare state, whose purpose is to clean up after the failures of the market with minimal interference to it. But even this minimalist approach was too much for American conservatives, who, failing in their attempts to destroy the welfare state, decided to repurpose it instead to serve their own ends. In this framework, where enhanced social stratification is part of the core purpose, the profound disservice to the large mass of students who fail to graduate and/or default on their loans is as much a part of the conservative welfare state project as the extraordinary financial success of the "education entrepreneurs."

The article goes on to provide some examples of the spectacular "earnings" at the top of this pyramid of broken dreams:

'Public Trough'
"For-profit colleges are reaching into the public trough to finance luxurious lifestyles at the expense of people who are going to have to pay back loans," said Levin, a professor at Columbia University's Teachers College in New York.
John G. Sperling, Apollo's 89-year-old founder and executive chairman, received $263.5 million from stock sales during the last seven years. Robert B. Knutson, retired CEO and chairman of Pittsburgh-based Education Management, the second- largest for-profit college chain by enrollment, got $132.4 million. Dennis Keller and Ronald Taylor, former co-CEOs of DeVry Inc., a Downers Grove, Illinois-based for-profit higher education company, together collected $110.4 million in stock proceeds.

And it turns to rationale, which is pure "free market" boilerplate:

'Appropriate' Rewards
Industry executives deserve to be rewarded because of their records as entrepreneurs and the performance of their companies' stock, said Harris Miller, president of the Washington-based Association of Private Sector Colleges & Universities, which represents the industry.
"If a company has done well, and the market has rewarded executives, that's totally appropriate," Miller said in a telephone interview. "These guys were in it for the long term. They believe in the sector. They weren't in it for a quick buck."

Such a rationale might have been credible if the students of these institutions had gotten superior value from their education. But the fact that they got vastly inferior value does the exact opposite: It throws the entire rationale into question, not just as it applies to privatized higher education, but as it applies to the entire entrepreneurial capitalist model as we know it. If being in it for the long term is all it takes, without regard for value, then anyone practicing a long con is supposedly justly rewarded--a preposterous claim.

To the contrary, if companies can "do well" while producing a vastly inferior product--cigarettes, anyone?--that undermines the fundamental claim of capitalism. The same could be said if companies can "do well" while destroying the very foundations of future human civilization--fossil fuels, anyone? So long as externalized costs are a central feature of any enterprise, it can only discredit the fundamental rationale for capitalism. If such enterprises cannot be distinguished from others, then the rationale in general is discredited--or at the very least, it is seriously incomplete, and no one has any idea what capitalism would look like if its underlying rationale were to be made sound.
The vastly dysfunctional nature of the market reward system can be seen in a passage from the article comparing executive compensation:

Harvard University in Cambridge, Massachusetts, pays President Drew Faust $800,000 a year. Shirley Ann Jackson, president of Rensselaer Polytechnic Institute in Troy, New York, received $1.6 million and was the highest-paid president of a nonprofit or public university, according to Chronicle of Higher Education surveys of the most recent college filings. The median annual pay of presidents at private nonprofit universities was $358,746, compared with $627,750 at large, private research universities, the Chronicle found. Heads of public institutions took home a median $436,111, according to the Chronicle.
At Strayer, Silberman heads a chain of colleges with 54,000 students last year, about the size of New York University, based in lower Manhattan. Silberman's $41.9 million pay package amounted to 32 times NYU President John Sexton's $1.3 million a year.

These aren't the pay differentials of individuals involved in the same activity being rewarded according to their levels of success. They are the pay differentials of entirely different ways of organizing activities that are only superficially similar. They are, in fact, more like the pay differentials between mowing lawns and dealing drugs.

The Bloomberg article reveals the entire for-profit college industry to be nothing but an enormous scam. Since it is entirely dependent on public funding--and hence on the political system--it's appropriate to say that a healthy political would never have allowed such an industry to emerge, or if it had emerged, would have quickly shut it down, once its failures became obvious.

One last thing. One excuse given for the rock-bottom success rate of these schools is--you guessed it--the students themselves:

The industry has transformed itself, growing from its roots in trade schools for auto mechanics and massage therapists to offer bachelor's and even graduate degrees. For-profit colleges cater to low-income and minority students often neglected by traditional institutions, the industry group's Miller said. Higher default rates reflect the socioeconomic status of students, rather than the quality of institutions, he said.

What this clearly suggests to me is a strong similarity to how the sub-prime mortgage industry targeted minorities, including many who easily qualified for traditional loans. In both cases, traditionally disadvantaged communities had their disadvantaged position used against them to exploit their hopes and dreams, taking advantage of even the most qualified and successful. Instead of traditional public policy options allowing them the same chances as others before them--others who were overwhelmingly white--they were given "special treatment" from public-private "get-rich-quick" industries. "Get-rich-quick" for the CEOs, that is.

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