Where Do Students Go When For-Profit Colleges Lose Federal Aid?

Stephanie Cellini, Rajeev Darolia, and Lesley J. Turner , December 2016.

Federal student aid, in the form of grants, loans, and work study assistance, provides significant support to low-income college students across the United States.  This aid can be used at public, non-profit, or for-profit institutions to pay for tuition and other costs. Since 2010, however, many for-profit institutions have been the targets of investigation by the government for questionable business practices. As a group, for-profit institutions have higher student loan default rates and lower job placement rates than their public and non-profit counterparts. The Department of Education has introduced so-called Gainful Employment regulations that, if implemented, will prevent students who attend institutions that fail to meet specific benchmark requirements from accessing federal student aid. Although the current Secretary of Education has extended the deadline for compliance with these regulations to July 1, 2018, to allow for a review of the policy and give time to institutions to comply with the standards, the new scrutiny of for-profit institutions already has been associated with declines in enrollment and some closures.

In the late 1980s and early 1990s, for-profit colleges faced a similar round of government investigation and regulation that led to decreases in enrollment and closures of some institutions. With access to institution-level data on Pell grant receipt and enrollment for this earlier period, Stephanie Cellini, Rajeev Darolia, and Lesley Turner assess whether sanctions that were predominantly applied to for-profit colleges reduced aggregate enrollment or whether some of the affected students were shifted into public or non-profit institutions. They found that, if a for-profit school was denied access to federal aid by the government, its enrollment fell substantially. Additionally, enrollment at other local for-profit institutions fell, suggesting that the entire local for-profit sector faced a weakened reputation among prospective students. They also found, however, that growth in public and non-profit enrollment more than compensated for the decline in for-profit enrollment, with most of the growth occurring at public community colleges.

A two-year degree from a for-profit institution can cost a student up to five times as much as a comparable degree from a public institution. The default rate on student loans could be lowered substantially if vulnerable students were instead served by public or non-profit institutions. A concern for regulators, however, is whether vulnerable students will be left out of the education market if the for-profit option is removed. This study’s results suggest that, at least during the time period studied, when the for-profit sector was held to a higher standard by the government and enrollments at these institutions fell, the public sector was able to absorb that enrollment and serve vulnerable students’ needs. These results suggest that restricting access to federal aid for students attending problematic for-profit institutions need not reduce access to higher education.

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