Profit, Education, and Student Grants

One of the less-noticed measures in the November 4 budget had to do with restrictions on student loans. Specifically, it was about banning students attending for-profit institutions from accessing grants provided by the Canada Student Financial Assistance Program (CSFAP). Today, I want to examine the rationale behind this move and its likely effects. But first, some history.

CSFAP did not always have a big investment in grants. In fact, it had none at all for the first thirty years of its existence – that was something for provinces to handle. But when it started handing out general grants on the basis of income – which, if memory serves, was 2005 – it wanted to restrict the amount of money going to private vocational colleges because, had they not done so under the rules being contemplated, something like a third of all dollars would have gone to this sector.  

So, it adopted a simple rule: restrict the grant to programs of two years or more in length. At the time, that had a disproportionate effect on private post-secondary education because the sector overwhelmingly consisted of for-profit one-year sub-baccalaureate programming, but it wasn’t exclusive to privates because it also affected a lot of certificate programming at both colleges and universities. 

And that’s where policy on the matter stood until last week. Now, the feds are straight-up banning all students in private for-profits from the program. The rationale for this change is basically i) a lot of private colleges now offer two-year programs specifically to gain their students’ access to better student aid, and ii) on average, the outcomes of these programs are not very good, so why waste money on them ($200 million/year according to the government, which is quite a significant sum)?

This represents a key change in policy, in the sense that government is regulating directly based on ownership rather than on objective criteria. I am not 100% sure that it has the ability to do that. Up until a few years ago, the Department of Justice’s position was that such an approach would not survive a legal challenge (I guess a new generation of lawyers feels it can be more aggressive about this). The problem with this is simply that it implies that ownership is the cause of bad results. And, frankly, I am not sure this is true.

The government’s case is essentially that for-profits have bad results on average, and therefore they should all be banned from the program regardless of results. I am not entirely sure what the government means by “outcomes”, but based on old data from Canada and newer data from elsewhere, I would probably accept that the first part of that case. But within both the for-profit and the public/non-profit category, there is going to be wide variation in outcomes. Most public higher education institutions probably have good outcomes, but I bet if we drilled down to the program level, we would also find some dogs. And while I am willing to accept essentially without evidence that average outcomes at for-profits are weak, I am almost certain that there are some – particularly those that are laser-focused on degree-level professional areas – that would have outputs as good or better than many publics.

If the government were pursuing policy in a rational way, it would define what it meant by “good/bad outcomes”, publish them for all institutions, and draw in the sand to distinguish acceptable outcomes from unacceptable ones. But because neither the federal government nor the provinces collect outcome data on private higher education at an appropriately granular level, they are left with what amounts to policymaking by lazy categorization: public good, private bad.

There’s a second reason this is a less-than-great solution: “for-profit” is not an immutable characteristic of organizations. Institutions can and do change in response to changes in legal and regulatory systems, and I guarantee you that one unanticipated consequence of this new policy is that institutions are going to do exactly that.

Institutions of all types can generate surpluses: the profit/for-profit line is about the way that these surpluses are distributed. In public or non-profit organizations, surpluses get re-invested in the organization, either through investment in capital, or by raising salaries. For-profits can do both of these things, but they also allow ownership to withdraw funds from the organization. When people say they dislike private education, what they are really opposed to is the withdrawal of funds.

But here’s the thing: there’s withdrawal of funds and then there’s withdrawal of funds. It’s not as clear cut as it sounds. 

Let me give you two obvious ways that you can withdraw funds without appearing to be “for-profit”. The first is to increase specific people’s salaries. Particularly in the case of family-run universities (yes, this is a thing – see here for a good book on the subject), you just put key people/owners in specific jobs and give them very high salaries, or possibly incentive-laden salaries that allow surpluses in good year to be distributed as bonuses. These arrangements are absolutely not non-profit in spirit, but they can quite easily be non-profit in practice.

There’s another way to take money out of an institution while remaining “non-profit”. It works like this:

• Divide the for-profit into two organizations: one for-profit and the other non-profit.
• Let the non-profit teach, let the for-profit focus on “intellectual property” (i.e. designing courses and curricula).
• Let the non-profit generate surpluses.
• Let the for-profit charge the non-profit for intellectual property in such a manner that it absorbs the vast majority of the surplus.
• Rinse and repeat.

This is pretty common – for instance, it’s the way that Laureate University managed to keep operating in Chile after for-profit universities were banned in that country. This is a perfectly legal means to get rid of surpluses via commercial expenditures, and in precisely the way what some for-private institutions lengthened their programs to skirt the government’s 2-year rule, they will also adjust their ownership strategy to take account of this budget’s new rules. It’s possible the government could respond by banning grants to institutions which license any part of their curriculum, but that could get messy (there’s more licensing out there than you think). 

So, in sum: it’s a good thing to try to focus student aid program spending on institutions and programs that bring real benefits to students in society. But, if you’re going to do it well, why not do it based on objective criteria? Instead of letting the country’s utter uselessness on education data push us collectively to blunt-edged solutions, why not invest in the data necessary to make laser-sharp policy? Instead of going down a path which will inevitably result in playing cat-and-mouse with privates over their ownership status, why not give yourself the ability to set some objective criteria for performance and stick to them? That’s what a truly smart and strategic government would do. 

Sadly, it’s not the path our government has chosen.