Stop subsidising for-profit education

Among the many failures in the education ‘reform’ movement, the attempt to promote for-profit education has been the most complete. The Swedish experiment, for quite a few years seen as the exemplar of success, has turned out very badly.

In the US, the for-profit schools company Edison failed completely. Far worse for-profit universities like Phoenix, which have prospered by recruiting poor students, eligible for Federal Pell Grants, and enrolling them in degree programs they never finish. Phoenix collects the US government cash, while the students are lumbered with debts they can never repay and can’t even discharge in bankruptcy.

Several years ago, there was a major scandal in Victoria (which led the way in privatising vocational education) about similar practices.

This did not, of course, lead to any change for the better. Instead, governments across Australia followed the Victorian model. For-profit providers responded by emulating the University of Phoenix, with recruiters offering free laptops to anyone will to sign up for a course and the associated debts: the targeted groups were low-income earners who would not have to repay the income contingent loan except in the unlikely event that the course propelled them into the middle class.

This isn’t just a matter of fringe players: a report on A Current Affair[1] identified some of the biggest for-profit firms, such as Evocca, Careers Australia and Aspire. The Australian Skills Quality Authority is supposedly investigating. However, as with the authorities that are supposed to regulate greyhound racing, the obvious question is why, when these rorts have been common knowledge for years, a current affairs show can find the evidence ASQA has apparently missed.

It’s clear enough that privatisating VET-TAFE has been a failure, as would be expected based on international experience. But the answer isn’t to go back to the past. Rather, we need a national framework for post-school education, with funding both for TAFE and universities on an integrated basis.

There’s still the problem of how to wind down the for-profit system. I’d suggest that we could start by converting the better ones into contract providers of TAFE courses, and then gradually absorbing them into a unified system.

Those who don’t like that deal could compete like good capitalists in the open market, charging upfront fees and serving whatever market they could find, subject to ordinary consumer protection laws.

fn1. Presumably reflecting a change in the audience, A Current Affair has started targeting large-scale corporate wrongdoing rather than going solely after the easy target of dodgy tradespeople and low-grade con artists. Unfortunately, the story was spoiled by an apparently irrelevant attempt to drag in the Mormon affiliations of some of those involved in the basis, but you can’t have everything.

94 thoughts on “Stop subsidising for-profit education

  1. As J.Q. essentially said in the original post, free market “for-profit” education does not work. It’s a judgment which I thankfully can agree with despite our other differences in this debate.

    The reasons why it doesn’t work must be complex and interesting and would shed considerable light on the whole subject of the limitations of free markets. Like the free market’s failure to deal with negative externalities it’s another example of market failure. Apart from the whole “privatise the profits, socialise the losses” strategem it must be something to do with incorrect time discounting (if that’s the correct phrase) not to mention imperfect information and plain old deception.

  2. And J-D, you have refreshed my memory of high school. I’d forgotten just how many students vanished during and at the end of year 10. I guess they were kids I usually had nothing to do with, while most of the kids I actually knew went on to year 11 and 12.

    One thing I remember about high school is that all the children of a fairly high powered public servant went to it, even though it was a government school. It is hard to imagine such a thing happening today, although I’m sure there must be a few who still put their faith in the government system despite having the money to go private.

  3. @Uncle Milton

    It’s worth observing that the alternative, entering the US workforce with a high school education, is also appalling. Real wages lower than in the 1970s, if you can get work at all.

  4. @John Quiggin

    What’s the expected payoff for someone who enrols at the University of Phoenix and others of its ilk, taking into account cost of the degree, debt interest, likelihood of finishing, time to finish, and earnings premium paid to graduates of those august institutes of the higher learning?

    I’d sooner take my chances and try and find a job in a paint factory.

  5. @Uncle Milton

    Completion rate is something like 10 per cent, and earnings premium is modest for those who do. OTOH, most of the cost is picked up by Uncle Sam. Same deal as in Oz.

  6. Uncle Milton

    For cars, food, entertainment, mortgages or anything else, there is reliably a segment of the population that can be sold lemons. In consequence, there are firms and people who make their varied livings off that segment (just as, in any forest, there are enough sick trees for various organisms that live off them to flourish). How big this segment is is a matter both of policy and of circumstances – it’s easier to sell scams to the desperate. Look at many Republican political sites and you will find firms selling quick cancer cures, survival kits for the end times and similar. So why not education?

  7. JQ complains about “for profit” education. And then as evidence for his reasoning he shares a link about the poor management of public funds in Victoria. Is this some sort of clever joke?

  8. @TerjeP

    No, it’s not any kind of joke. The poor management of public funds of which John Quiggin is complaining is the use of public funds to subsidise for-profit education providers. It’s even there in the title of the post, which is not ‘Stop for-profit education’ but ‘Stop subsidising for-profit education’. Is the distinction not clear to you? Or are you making an unsuccessful attempt at some sort of clever joke?

  9. @TerjeP

    What J-D said.

    And, in a point that should gladden your heart, I suggested the for-profit providers should try their chances in the open, unsubsidised market.

  10. And I suggest government schools should do the same.

    But if we are going to have subsidies (eg for children) then they ought to apply to students irrespective of the financial motive of the institution they attend.

    If you want to use Sweden as a case to make your argument then rather than merely reference a hack piece of an article you should put up some data showing that the for-profit Swedish schools deliver inferior outcomes compared to their government operated counter parts. Adjusted for size of taxpayer subsidy.

  11. @TerjeP

    But if we are going to have subsidies (eg for children) then they ought to apply to students irrespective of the financial motive of the institution they attend.


  12. @TerjeP

    But the IEA are a free market think tank. That is, they try and promote the free market, so they would say nice things about Sweden.

    Anyway, if Swedish students sit some sort of external exam at the end of school, then the performance of schools can be easily judged, and the parents of potential students make informed decisions. This imposes a discipline on the schools which is absent in much of the for-profit education sector in Australia.

    TEQSA, as far as I know basically approves course design for courses offered in Australia, but then has very little role. It was going to have a bigger role in ongoing quality assurance, but one of the first things the Libs did on being elected was to cut back that role.

    So all a fly-by-night education provider has to do is come up with a good course design and get it approved by TEQSA, and after that take the money and provide the minimum level of service that stops their students rioting in the streets. The students, often used to not performing very well in formal education, will tend to blame themselves for their poor performance, not even realising that their institution is providing a rubbish service.

  13. @Terje
    Not only is your source a free-market thinktank, but the paper is from 2010. This just confirms the point in the OP

    The Swedish experiment, for quite a few years seen as the exemplar of success, has turned out very badly.

    On your claim about government schools, I’m interested to see you endorsing the second-best principle that as long as some people are getting subsidies, it’s OK for everyone to get subsidies.

  14. Nah.. Don’t get it.

    How can you have a form of education that avoids consideration of social and personbal construction and action unless it is for-profit education?

    This system won’t allow for criticism of itself, modus operandi and function and functioning, lest it discredit itself through the revelation of its underlying true rationale.

    Ok, I know- tongue in cheek.

    But let’s not get in the way of Murdoch/ Kcoh Brothers Tea Party civilisation’s efforts to gag, neuter, lobotomise cripple and deceive itself, otherwise we will never tip over the edge of that cliff, like demented Lemmings or Gaderene Swine.

  15. @Alan Hunter

    2 links will often send you to the bin (a “Reply” is counted as a link).

    There is a secret list of weird words which will also send you to eternal moderation.

    For example, som@li@.

    One trick is to try posting in chunks to see if part of your comment gets through and see if you can isolate the secret offending word.

  16. The IEA publication gets basic facts wrong. It says:

    School competition in Sweden has increased levels of educational achievement.

    In fact Sweden’s PISA ranking dropped to below the OECD average and is now the worst among the Nordic countries. Two Swedish economists, Björn Tyrefors Hinnerich and Jonas Vlachos, uncovered the reason why:

    It’s the darker side of competition that Milton Friedman and his free-market disciples tend to downplay: If parents value high test scores, you can compete for voucher dollars by hiring better teachers and providing a better education—or by going easy in grading national tests. Competition was also meant to discipline government schools by forcing them to up their game to maintain their enrollments, but it may have instead led to a race to the bottom as they too started grading generously to keep their students.

    Also note that 10,000 Swedish students were left stranded after one private for-profit company went belly up. Thousands more have been left stranded when smaller for-profits declared bankruptcy.

    Private for-profit schools create moral hazard and it is has been absolute disaster for Sweden.

  17. unfortunately the fee help system is like Hire Purchase except that with fee help you do not get the product (an award) until you finish. Anytime there is apparently “free” government $$ there will be private sharks diving in to the pool.

    One option is for the provider not to get paid all of the $ until the product ie award is received by the student. This would require strict accreditation processes to ensure quality including admission standards to stop the Sharks preying on the unsuspecting customers.

    Check the ownership of some of these providers and you will find limited liability $2 entities or trusts as the ultimate owner with a network of other related entities providing “services” to cream off the profits.

  18. I’m interested to see you endorsing the second-best principle that as long as some people are getting subsidies, it’s OK for everyone to get subsidies.

    JQ – in Australia there would hardly be any primary or secondary student anywhere that was not having their education subsidised by the taxpayer. If we allow students to take that subsidy to a “for-profit” institution there is no increase in subsidy nor anybody in receipt of a subsidy that previously wasn’t.

  19. J-D – private schools in Australia are expensive. Fostering schools with the profit motive will provide an incentive for additional supply. Additional supply will foster price based competition. Which all else being equal should lower the price of private education.

  20. @TerjeP

    So your goal is to lower the price of private schooling?

    I can’t think of any reason why that should be a goal deserving of public support.

  21. Terje

    For a price signal to work reliably, the product has to be a commodity (ie, simple, uniform, easily graded, readily quantified) and the externalities low. If you think that education has, or can have, these characteristics, I pity you. if you think that these characteristics are not required, and that price signals work reliably for almost anything, I pity you further. It is of course both permissible and common to keep one’s beliefs quite separate from observed reality, but it does not help when evaluating complex phenomena.

  22. @TerjeP
    “…Additional supply will foster price based competition…”
    Peter T has already given a more informed answer, but this is an assertion. Based on ideology not any sort of evidence at all, you have ignored JQ’s reasoning. Can you think of anything similar to education where this has been the case?

  23. @TerjeP

    John Quiggin supported his conclusions by reference to empirical data. You may consider his data unreliable, or insufficient, or misinterpreted, but it exists, and it’s not dogma.

  24. J-D :
    So your goal is to lower the price of private schooling?
    I can’t think of any reason why that should be a goal deserving of public support.

    I can’t think of any good public policy reason to maintain a prohibition that makes private education more expensive. If you can then I’d love to hear the details. The ban on subsidises for children at “for-profit” schools is as arbitrary as if we decided that there should be no subsidy for children at Anglican Schools. As it stands we are happy to give a subsidy to providers motivated by Government or God but not those motivated by profit. Why the need for such prejudice?

  25. J-D :
    John Quiggin supported his conclusions by reference to empirical data. You may consider his data unreliable, or insufficient, or misinterpreted, but it exists, and it’s not dogma.

    There was zero data provided by JQ. There may well be data that supports his argument but it has not been provided. I actually provided a scholarly paper with data but JQ dismissed it as out of date and inferred it was biased. He can do that if he wants but you can’t accurately claim that JQ has provided any alternate data. At least not in the post he has made here.

  26. @John Brookes

    I agree with the point about exams. Well designed carriculums that are independantly set and assessed are the key. Unbiased and transparent feedback is essential for any control or management system.

    Funding methods affect fairness of access, but it’s the lack of quality control and lack of visibility to students about what the outcomes are that leads to the private rip-offs.

    By the way, there are plenty of not-for-profit rip-offs also in the non-government sector. In fact these are probably even worse. On top of accepting government money and loans to provide poor education, the directors of private not-for-profits also employ their family at high wages to do nothing, who then can all deduct of almost all personal expenses from taxable income.

  27. @TerjeP

    In my view, the generic default position is not for the government to fund something but rather for the government not to fund it — no matter what the ‘something’ is. There is no need for negative arguments against publicly funding something when there are no affirmative arguments in favour of publicly funding it. I would say this about anything whatsoever. For example, in this context, I would say that if there are no affirmative arguments in favour of public funding of schooling-in-general, then it shouldn’t be publicly funded — no negative argument against doing so is required. I emphasise the word ‘if’ because I want to emphasise that I am not here taking any position on whether there are any affirmative arguments in favour of public funding of schooling-in-general. I know many people think there are and I’m not here disputing that. I’m just using an example to illustrate the generality of my position.

    However, it is not obviously the case that arguments in favour of public funding of schooling-in-general automatically translate into arguments in favour specifically of public funding of the schooling of children at for-profit schools. There’s a step in your chain of reasoning there that you have not spelled out, and this is why I say that you have not made the case in favour of your stated position.

  28. @TerjeP

    John Quiggin cited (by URL link) two sources of data. They are not scholarly sources, but ’empirical’ is not a synonym for ‘scholarly’. ‘No support from scholarly sources’ is not synonymous with ‘no support but dogma’.

  29. J-D,

    The articles JQ linked to are essentially just opinion pieces. I don’t see how you can refer to them as data sources. Even to claim they are “non scholarly” data sources is an overstatement.

    As for the default position of what should or should not be funded I agree with you most of the way. But to then carve out some students on the basis of school type, be it “Anglican Schools” of “for-profit” schools of whatever, does in my view require some justification. Otherwise we could say that an education subsidy that only applies to white kids needs no justification but extending it to black kids needs to be justified. Placing the onus of proof in such a way seems absurd to me. A subsidy needs to be justified. If we accept the idea that the education of children should be subsidised then any exceptions such as black kids, Anglican providers or for-profit providers all then require justification.

    As such it is my view that any decision to exclude for-profit schools from student subsidy needs to be justified. And as far as I can see no robust justification has been given. Just hand waving.

  30. Terje,

    Clearly you didn’t read the Slate article I linked to above. The voucher system in Sweden has been a stuff up because:

    – well over ten thousand students have been left in the lurch after private providers declared bankruptcy. Naturally the state then has to pick up the mess left by these private sector fails

    – PISA rankings fell to below the OECD average and the lowest among the Nordics

    – The voucher system has provided an incentive for teachers to give their students soft grades, with disastrous consequences for the quality of education

    Other than signed affadavits from dancing bears and hoola hoop girls, I’m not sure how much more evidence is needed.

    I would personally go much further than the good Professor and ban all private schools for reasons of political economy. That is to say, we need vocal and articulate middle class parents to have a stake in quality public education otherwise it runs the risk become nothing more than a mediocre safety net for the poor.

  31. Terje: if you are trying to get people to change their mind, you need to explain to them what you think and why it’s better than what they think, not just state your conclusions.

    If I tell you I’m not convinced of some conclusion of yours, does it push you to change your mind? Why do you think that it works differently the other way?

    [there’s a trick you can use that might make arguing this way easier: you never state what you think, only why you think it. If you’re correct and doing it properly your conclusions are implicit in the evidence you’re looking at; if your data is up to scratch people will be convinced to come to your conclusions even if you never mention what they are.]

  32. Collin – that is pretty much the point I was directing at JQ. He has not made a persuasive argument that would change anybody’s mind. Of course the opponents of profit will cheer at his commentary regardless.

  33. @TerjeP

    The articles John Quiggin linked to contained assertions about facts. You may think those assertions were inaccurate, or that they are being misinterpreted, or that they are irrelevant to John Quiggin’s conclusions or insufficient to establish them, but saying that a conclusion is supported only by inadequate information, misinterpretations, inaccuracies, and irrelevancies is not synonymous with saying that it is supported only by dogma.

    The general form of the argument John Quiggin is making against public subsidies for for-profit education providers is clear enough to me: public subsidies for education should not extend to for-profit providers because subsidised for-profit providers fail to deliver the goods. Clearly you are not persuaded that there is adequate evidence to establish that for-profit providers fail to deliver the goods, and I am not trying to persuade you of that. However, I hope you would accept that if the case were made out that subsidised for-profit providers fail to deliver the goods, that would justify excluding them from receiving public subsidy. If you are asking what possible reason could there be for excluding them, I hope you would acknowledge that, as a possibility, that’s a reasonable answer. If you want to argue that for-profit providers should receive the same subsidies as not-for-profit providers even if they fail to deliver the goods, I want to dispute that. But if you only want to argue that you are satisfied on the evidence that they do deliver the goods, that’s not an argument I’m interested in getting into. I just want to make the distinction clear.

  34. However, I hope you would accept that if the case were made out that subsidised for-profit providers fail to deliver the goods, that would justify excluding them from receiving public subsidy.

    If “for-profit” schools were substantially and consistently inferior to “not-for-profit” schools as measured by reasonable criteria then all else being equal I would agree with the argument for excluding them from the general subsidy of childhood education. However I have no reason to believe that they are inferior. In fact the limited data from Sweden that I have managed to find indicates that they are as good as or slightly better than the alternatives. This notion is also supported by the fact that many parents choose to send their kids to such schools. The examples of Swedish “for-profit” schools that failed financially indicates that they failed precisely because parents withdrew their kids suggesting that parents are responsive in their decisions to poor schooling and suggesting the sector as a whole must therefore be healthy.

    And for what it’s worth the schools that did fail financially seem to have been merely taken over by new owners/management rather than closing down. People that see this as some serious problem must imagine that public schools never close down which is simply untrue.

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