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The Rise of Private Universities in the US

By Felix von Wendorff

Updated April 10, 2017 Updated April 10, 2017

This article will try to summarize the rise of private universities in the US, and particularly the growing number of for-profit education providers, a key factor in the issue of why college education is so expensive – and getting even more so.

For those of you who have been looking at the recent developments among universities in the US, it could easily be compared to a libertarian’s wet dream: the private sector has finally been allowed to enter the higher education industry (yes, “industry”) – a “sector” which was previously successfully dominated by the government.

The recent 20 year run of tuition fee increases has given advocates of private universities the powerful argument that the private sector could offer higher quality at a lower price, and what the government should do is simply provide a voucher system. A voucher system is where the government gives families a coupon worth a certain amount of money, with which they can go to private universities; the state covers part of the cost and parents the rest.

The idea is that parents will be able to vote with dollars and reward schools that do a good job with their child (and money). But in my opinion, while private universities (especially for-profit ones) may be able to sit people down in a room and employ someone to say something, the quality and price is both worse and more expensive respectively.

Are the Ivy Leagues an exception?

Before I begin, let me make one concession; private sector education has worked surprisingly well in the case of elite schools. Ivy league students are not suffering from unemployment; far from it, demand for these students is higher than ever. A major reason for this could be that it is in the schools’ long-term best interests to provide high quality education regardless of the cost, firstly because their cliental can afford to pay for it and secondly because the higher they can drive their price, the more exclusive the organization appears to became, allowing them to charge yet higher fees.

Most of these elite private universities in the US operate as private companies – meaning there is a small group of investors (or overseers) who can do what they please with the organization, allowing them to ignore short-term obstacles in exchange for long term gain. The real trouble is when a for-profit educational institution is geared primarily towards the lower middle class, and operates as a public company with a number of shareholders.

Private universities as public companies

A public company is an organization in which investors can buy and sell stock of the company on the stock exchange. Public companies are subject to the ire of their stockholders, typically a rather panicky bunch of individuals who will sell their shares if the company does not 1) meet or exceed its expected profit margin, 2) the revenue growth does not increase as rapidly as expected, and 3) just about any other information that is not strictly positive.

Managers of public companies are almost always paid according to how well the stock price is doing right then, not how well the company is positioned for the future. This provides an incentive for the CEO to neglect long-term potential in exchange for short-term unhealthy growth. An even more sinister realization can be deduced out of this: in a for-profit education company, it is not in the CEO’s interest that students do well in the long run; it is in his interest that the company does well in the short term.

Put more clearly, the interests of students and the interests of the company are not aligned; in fact they are in many ways mutually exclusive. Once students gets their “diploma”, the company has no more interest in them. That means the actual education aspect of a for-profit education organization is exclusively an expense (and a loss of potential profit) for the company.

A good company (a public company is “good” when it acts in the best interests of its shareholders) would do its utmost to reduce the amount of money it spends on education and increase the amount of money spent on attracting new students (or “customers”), in order to generate the revenue growth demanded by shareholders so the CEO of the company gets his golden parachute.

Are private universities cheaper?

A common argument is that increasing the number of private universities would make university cheaper. This is both logically, and in reality, false. Why would a company want to reduce its revenue? Answer: it doesn’t. And it won’t. So instead of lowering the price of education, we are instead seeing that private universities are some of the most expensive options. Tuition fees at private universities in the US can cost upwards of $15,000, while a public two-year college costs around $3,000.

To bridge that gap, many students are turning to private student loans, usually through the university itself. And very few for-profit universities can justify the price, mainly because they are forced to be the bottom feeders of the education system, taking on people who could not make it into any other university. Unfortunately, these may be the same people who could benefit from education the most, but instead they end up with a large debt and a worthless diploma. A little off topic, but I feel it worth mentioning; private student loans are nothing less than modern-day indentured servitude: avoid them like your worst nightmare.

Should the government fill the gap?

So if private universities cannot effectively fill the void, who can? The answer is the same institution that has done so in the past: the government.

The government is actually ideally suited to engage in the education of its citizens. First and most important, the interests of the students and the government are aligned. Students want a good education to get good jobs, and the government wants well-educated students to advance the nation’s economic capabilities and of course pay those all-important tax dollars that finance the whole show.

And let’s not forget how cheap education actually is: according to the Department of Education, public universities in the US received $62.9 billion in tuition fees in 2012. That might sound a lot, but to add some context let’s remember that the US government has fully funded an airplane that cost $1.5 trillion, which even the US military says it does not need. And yet still politicians often say there is no money available. Well, clearly, at some point someone made the decision that we want a plane and not to cover the costs of higher education for all students in the US for the next quarter century.

This article was originally published in October 2014 . It was last updated in April 2017

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Written by

Felix von Wendorff studies econometrics as an international student at Goethe University in Frankfurt, Germany. He grew up in California and moved to Germany to take advantage of the great (and free) education system. In his increasingly shrinking free time, he enjoys running, budget traveling and reading.