There are two kinds of accreditation — national and regional. Accreditation bodies are non-governmental, non-profit peer-reviewing groups. Schools must earn and maintain proper accreditation to remain eligible for Title IV programs. In many instances, the for-profit institutions sit on the boards of the accrediting body. The inmates run the asylum.
Thanks to Alex Tabarrok for the pointer.
Eisman’s talk comes after his slides. Read the whole thing. His charge is that some large, fast-growing for-profit colleges, including part of the Kaplan division of the Washington Post, are scams, being fed by government grants and loans. He thinks that the Obama Administration is closing in on them.
Some questions come to mind:
First, why does the market do such a poor job of policing these predatory education companies? Some possibilities:
1. The customers are mostly poor, and that is market segment that is not well served by consumer magazines or other private watchdogs.
2. The companies are dealing with a market segment that is not served by rest of the education sector, because these students are highly unreliable, and among them high dropout rates and low success rates are inevitable. If you tell the companies they have to achieve higher success rates, they will exit this segment of the market and it will go unserved. Sort of like if you put a ceiling on credit card interest rates, the riskiest borrowers will go unserved.
3. Education is inherently a market that consumers cannot judge quality, so that it’s all about the marketing. This should be a warning to voucher supporters.
Second, why is there such a high rate of profit in this industry?
1. Other companies do not enter the industry because they suspect that its profits are not sustainable.
2. The incumbents use their influence over the accreditation process not only to maintain their own licenses but, more importantly, to block the path of competitors.
3. The accounting does not sufficiently recognize the cost of future defaults. The failure to reserve for losses today means that the bad news will show up tomorrow.
4. There are very high fixed costs in setting up a for-profit education company. This deters entry.
Eisman paints a sordid portrait. But should those of us who pay $50,000 tuition bills be feeling so smug? Yes, our kids do graduate, but could they have learned just as much on their own on the Web?