This May, millions of new graduates found themselves torn between triumph and trepidation, as looming obligations to begin repaying student loans tempered celebrations nationwide. Still others had no cause to celebrate, having accrued debt without obtaining their desired degree or certification. Many of those in the latter group attended a for-profit college or university; students at these schools tend to accumulate more educational debt, and make up a disproportionate share of indebted dropouts. On average, they also have poorer educational and labor market outcomes than students who attend nonprofit institutions. Adding insult to injury, for-profit enterprises tend to target students from disadvantaged backgrounds.
Closer examination reveals that private equity plays a pernicious and outsized role in generating these discrepancies. Private equity-owned colleges and universities have accounted for most of the increase in the for-profit share of student loan defaults since 2000. A groundbreaking new study examining the effect of private equity buyouts in higher education found substantial declines in graduation rates, earnings, and loan repayment rates after buyouts took place. These declines were accompanied by increases in per-student borrowing and receipt of federal grants. In some respects, such as student loan repayment rates, other for-profit colleges more closely resembled community colleges than they did their private equity-owned peers.
The aforementioned study also found private equity-owned schools to be more responsive to regulatory changes that affect their access to government aid. Tuition and borrowing at private equity-owned colleges and universities increased much more rapidly after Congress raised student borrowing limits in 2007, for example. Private equity buyouts corresponded with a 10 to 20 percent increase in reliance on federal aid from Title IV-based programs. Moreover, the share of funding that private equity-owned schools received from Title IV sources tended to cluster just below the statutory cutoff of 90 percent. All of this suggests that maximized capture of government aid is a core part of their business model.
Private equity appears to combine superior capture of government subsidies with targeted cost cutting measures. Buyouts are followed by an average drop of three percentage points in the share of expenditures devoted to instruction. Some of this is reallocated to recruitment; the share of employees in sales at private equity-owned schools is twice that of other for-profits. Private equity also appears to be more willing to use questionable marketing tactics to entice potential students, and the number of law enforcement actions taken against a school increases dramatically after it is bought out. The implication is that private equity prioritizes enrolling students — by dubious means, if necessary — over educating them.
Private equity’s mercenary approach is especially evident when the schools they own begin to struggle financially. When Vatterott College, which was owned by the private equity firm TA Associates, abruptly shut down schools across the Midwest in 2018, many students weren’t even given 24 hours’ notice. In the same year, the Education Corporation of America, backed by private equity firm Willis Stein & Partners, also shuttered numerous campuses across the country with little warning to students and staff. These precipitous closings are devastating for students, whose debt may or may not be dischargeable through a lengthy and complex process, and whose credits rarely transfer. The executives at the head of these operations, meanwhile, often profit immensely even as students are left in the lurch. Private equity, in particular, has shown to be disinclined to keep a school open if it is more profitable to hastily close its doors.
The opportunity to profitably exploit misaligned incentives appears to increasingly determine where private equity firms invest. Other burgeoning markets include health care, infrastructure, and defense — all of which are characterized by sizable government subsidy, complex or opaque product quality, and/or contextual constraints that inhibit dissatisfied customers from “voting with their wallets.”
Signs point to a resurgence of interest in for-profit higher education among private equity firms. Though for-profit colleges have declined since their heyday during the Great Recession, data from Pitchbook and Acuris show modest increases in the segment’s number of private equity acquisitions in 2017 and 2018. This includes the procurement of one the country’s largest providers — Apollo Global Management, which owned and operated the University of Phoenix — by a consortium of investors in 2017.
Portfolio managers seem eager to bet against the continuation of the current growth cycle, anticipating another surge in enrollment should a new recession cripple the job market. However, while current levels of corporate debt are problematic in ways that are likely to cause harm, they are not analogous to the housing bubble that triggered the most recent financial crisis. Students are liable to suffer either way. If there is no recession, and enrollment does not grow as anticipated, more schools will close, leaving their students with worthless credits and considerable debt. If another recession does prompt an increase in enrollment, that many more students will take on burdensome debt for questionable returns. For some, those returns will take the form of a certification that is unlikely to improve their labor market prospects, while still more will come away with no certification at all. In each case, the likely victims will be drawn from America’s most vulnerable and least economically resilient.
Private equity’s renewed enthusiasm is also attributable to the Trump administration’s more permissive regulatory regime. With Betsy DeVos at its helm, Trump’s Department of Education has reversed many of the Obama-era rules designed to hold schools accountable and protect students from predatory practices. Particularly noteworthy are DeVos’ recent elimination of the gainful employment rule, which will allow underperforming programs to continue to pocket billions of dollars in federal aid, and her restoration of federal recognition to the Accrediting Council for Independent Colleges and Schools (ACICS), the beleaguered accrediting body that oversaw several collapsed for-profit chains and that career DOE officials repeatedly found to be noncompliant with federal standards. Under DeVos, the Department of Education has also dismantled the team that had been investigating fraudulent activities by for-profit colleges, including several colleges that previously employed DeVos’ senior staff appointees.
Aside from issues of regulatory capture and corruption under DeVos, it is clear that reduced oversight by the Department of Education will benefit for-profit colleges backed by private equity at the expense of students and taxpayers. It is past time for the US government to cease subsidizing private equity’s abusive practices in higher education, and to reaffirm its commitment to student, not corporate, success.
 Low-income and minority students make up a significant portion of those who enroll at for-profit colleges and universities. Educational and labor market outcomes are poorer among students who attend such schools even after controlling for demographic and socioeconomic factors, however. Moreover, and notwithstanding differences in student body composition, evidence suggests that for-profit colleges act as direct substitutes for open enrollment community colleges. This undermines the argument that for-profit schools are simply filling a niche and meeting unmet demand, rather than competing directly with non-profit institutions for students. For-profit recruitment appears to rely on aggressive marketing tactics to boost enrollment, despite the availability of better quality non-profit options.