19/10/2012 10:23 BST | Updated 18/12/2012 05:12 GMT

For-Profit Higher Education: A Telling Case Study

The majority of UK higher education is positioned between an extreme of a planned state economy with the multiple demands of a public service and the other extreme of a market economy with its need for private capital and profit.

Recently, higher fees and a partial deregulation of undergraduate numbers have seen the UK sector edge closer to the latter. Not surprisingly, commentators have asked if more institutions should operate directly in a market economy; the suggestion being that shareholder pressure would focus institutional resources and attention unwaveringly on the needs of the paying student and result in a positive relationship between student benefit and institutional profit.

That win-win suggestion is credible if the student pays for the full benefit he or she receives. Currently, state subsidy is necessary if the for-profit market sector is to grow but unless it comes coupled with some tight regulation, it is likely to distort the relationship between student benefit and institutional profit. Is such a concern credible? One way of evaluating the effect of state subsidy unencumbered by effective regulation is to consider a case study of for-profit colleges in the US.

Small, independent, for-profit colleges have a long and well-respected history there and have thrived because they were close to the community they served, were focused on vocational, typically one-year programmes and balanced affordable fees, profit and student benefit. Today, over three-quarters of the students in for-profit colleges are enrolled in institutions owned by a company traded on a major stock exchange or a private equity firm. These colleges typically offer associate and undergraduate degrees and almost all of their students receive grant and loan support from the Department of Education. They have increased the capacity of the higher education sector considerably, have widened access and in so doing have provided opportunity to millions of Americans. However, the past few years have seen media reports detailing the plight of non-traditional higher education students who were recruited into high-fee, for-profit colleges but left them early with student loan debt but no degree.

During the first week of the 2012 Olympics the United States Senate released its long-awaited report on for-profit colleges. Tom Harkin, Senator from Iowa and Chairman of the report hit the airwaves with two stunning sound bites in sharp contrast to the sporting stories of the day:

• For-profit colleges have around 17% of the students, around 25% of the Federal fee funding and around 54% of the dropouts.

• College financial accounts indicate a 19.4% pre-tax profit with 17.3% of costs on teaching and 22.7% on marketing and recruiting.

On the same day (31st July) USA Today discussed the 'for-profit college racket' that 'harvested Federal money' and left students 'drowning in debt', a theme picked up by national and international media throughout August.

The report acknowledges that there are some excellent for-profit colleges that provide opportunity where it is needed; for example, for US veterans. However, it paints a picture of a front-loaded sector that emphasises sophistication in the recruitment rather than the education and support of its students. The report hammers home the message of a breakdown in the relationship between student benefit and institutional profit in a distorted market. For example, fees for undergraduate degrees at for-profit colleges were typically 20% higher than at flagship universities while the ratio of recruiters to careers staff was ten to one. The title of the Report has become its synopsis 'For-Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success'.

For-profit colleges can have an important role in any higher education sector and many would argue they are vital in an era of deficit reduction. If there is any lesson to be learnt from the American experience it is that we must understand the impact of state subsidy via grants and loans and enhance our current checks and balances if we are to ensure that intuitional profit is related positively to student benefit. Establishing enhanced regulation in the UK would be difficult, time-consuming and contested. However, we now have a well-documented case study of the lack of effective regulation, for as the report states bluntly: 'Federal law and regulations currently do not align the incentives of for-profit colleges so that colleges succeed financially when students succeed'.