For-profit schools have a bad reputation. The bad apples spend a bundle on recruiting marginal students and then leave them with crushing debt and poor job prospects. Many for-profit schools generate the majority of their revenue from Title IV federal student aid. In a Department of Education audit of for-profit schools, 470 out of 2,057 schools generated more than 85 percent of their revenue from Title IV. The portion of Title IV funding is not to exceed 90 percent, but this cap excludes some types of government funding such as veterans benefits. This reliance on government student aid means that many for-profit schools are as much creatures of government policy as market forces.

Even when these subsidies are spent on worthy schools, a forthcoming paper by Stephanie Riegg Cellini and Claudia Goldin shows that the subsidies might simply be driving up the cost of tuition. First, the researchers recognized that many non-degree granting schools are not eligible for Title IV funding. (Usually, the numbers cited on for-profit schools actually include only schools receiving Title IV funding because these are the numbers that are readily available.) By focusing their attention on non-degree programs, they can determine the impact that receiving federal student aid has on tuition rates. After controlling for various factors such as program length and subject matter, they find that schools receiving Title IV funding cost on average 78 percent more than schools that aren’t eligible. Why wouldn’t a school be eligible? Most of these schools are relatively small. The benefits of becoming certified to collect Title IV funds might not be worth it for smaller schools. Each year an estimated 670,000 students are educated in for-profit schools that receive no Title IV funding.

The paper has a particularly interesting comparison for Florida cosmetology programs. These programs are relatively homogeneous and prepare students to take a state licensing exam. The average cosmetology program costs $9,558. But Title IV schools charge $3,903 more than non-Title IV schools. Despite the difference in costs, the quality of the schools seems to be comparable. The pass rates are similar for the two types of schools: 67 percent for Title IV schools versus 63 percent for non-Title IV schools. The government grants and loan subsidies that the students receive through Title IV are estimated to be worth $3,690. This is approximately the same size as the extra tuition that Title IV schools charge. The government is heavily subsidizing cosmetology education, but it doesn’t seem to reduce the out-of-pocket costs of the students by very much.

Cellini and Goldin have another means of showing that the cost differential isn’t primarily due to Title IV schools being of higher quality. Programs that are shorter than 300 clock hours are not eligible for Title IV funding even if the school itself is eligible. If a school increased tuition to capture the student’s financial aid, it would presumably only do this for programs that were actually eligible for student aid. And this is borne out by the data. Both types of schools charge comparable tuition for programs that are ineligible for Title IV funding.