Why I Get Nervous about Importing Ideas from the For-Profit Sector

The Obama administration recently banned ITT Technical Institute schools from accepting new students who receive federal loans or grants. Since ITT relies on that federal money for about 68% of its revenue, this could end up forcing the closure of one of the largest for-profit college chains in the country.

This is important. But to understand why it’s important, it’s useful to understand how for-profit colleges like ITT make money.

When a student takes out a student loan, that money goes from the lender – in this case, the government, to the school. For a for-profit school, every student who pays tuition is a net plus.

A good school will provide something of value to those students: a good education ending with a degree that helps those students gain employment. The good school – especially if it’s nonprofit – may even rely on its graduates having good jobs and positive feelings for the school in order to keep going. It needs the voluntary donations of its alumni.

A bad school will maximize profit by keeping the cost of having students as low as possible. It won’t provide a good education ending with a degree that helps those students gain employment. The bad school doesn’t care about the life of it students after they graduate. It made its money as soon as they paid tuition.

The best move for the bad school is to find people who are desperate for a degree, charge the highest tuition they can, and provide very little in terms of education. If the student can pay that tuition herself, the school takes her money. If she can’t, the school can steer her towards a loan; that way, the school makes the money without assuming any additional risk.

Not all for-profit schools have to be bad, of course. And not all nonprofit schools are good. But the ethos that motivates a bad for-profit school like ITT is rooted in the need for profit: maximize revenue, minimize costs. In that regard, it’s no different from other for-profit institutions. If the interests of investors and students align, it might be great. If those interests don’t align, then the students end up debt-ridden, unemployed, and living in poverty.

And that’s why I get nervous about importing ideas from the for-profit sector.

Both Steve Rothschild (in his book The Non NonProfit) and Dan Pallotta (in his popular TED Talk “The Way We Do Charity Is Dead Wrong”) advocate for the idea of nonprofit organizations generating profit for investors. In principle, there are ways to do this that provide financial resources to nonprofits while generating profit for investors. Rothschild provides some examples that look promising.

But we need to be incredibly careful with ideas like this. When someone makes a donation to a nonprofit, his interests are aligned with the interests of the people the nonprofit serves. For example, when I make a donation to my alma mater, I’m doing that because I want students to receive a good education; the students also want to receive a good education. Our interests are aligned.

If I invest in my school with the goal of making a profit, however, my interests don’t necessarily align with those of the students. If providing lower quality services to the students generates more profit, my interests would be met without meeting the interests of the students. And that’s what happens with institutions like ITT.

I’m not saying we can never ever take inspiration from the for-profit sector. Maybe social impact bonds or human capital performance bonds have potential. But stories like this – where we see the for-profit sector taking advantage of low-income people in order to make a profit, in accordance with the most basic motives of the for-profit sector – should make us skeptical of claims that the for-profit sector has something to offer.

After all, it’s a truism to say that the point of the for-profit sector is not to do good, it’s to generate profit.