Anyone who uses the internet has probably seen an advertisement for a for-profit higher education institution at least once (who hasn’t heard of the University of Phoenix?). However, although most people know of for-profit institutions, they may not be familiar with how they run or to what extent they prepare their graduates for success since conversations about higher education tend to focus on public institutions and private non-profit institutions.
Higher education is largely divided into two sectors: the public sector and the private sector. By definition, public universities, which are mainly funded by state governments, are not-for-profit. The private sector, on the other hand, is comprised of both for-profit and non-profit institutions. For-profit schools are run like businesses with the purpose of generating revenue—by contrast, non-profit schools must reinvest surplus revenue back into the institution—and range from exclusively certificate-granting to doctorate-granting institutions.
For-profit higher education institutions have been highly controversial in recent decades and have been accused of employing deceptive recruiting and marketing techniques and failing to deliver on their promises after getting the student to enroll. Given the misinformation that’s out there, you may be wondering how for-profit institutions fare compared to their public and private non-profit counterparts with regard to their quality of education and the career outcomes of their graduates. In this article, we give an in-depth comparison of for-profit and non-profit institutions, from their sources of funding to their cost of attendance to the labor market outcomes of their graduates.
Sources of funding
For-profit institutions rely more on tuition revenue than do non-profit institutions. Whereas 4-year for-profit institutions receive 90 percent of their revenue from tuition and fees, 4-year public institutions and private non-profit institutions receive 21.5 percent and 39.3 percent, respectively. Consequently, for-profit institutions spend much more on advertising and recruitment than do non-profit institutions, generally spending less money on instruction and more on marketing.
Compared to public and private non-profit institutions, for-profit institutions enroll a disproportionate number of students who are low-income, people of color, women, single parents, and over the age of 25. For-profit institutions tend to attract non-traditional students for their flexibility and wide range of occupational training programs. They were one of the first to embrace online learning, making higher education more accessible to those who may not have the time to take classes at a community college or public university (e.g. single parents who may have a hard time finding someone to watch their kids). While this may seem like a good thing, for-profit institutions have been accused of targeting vulnerable groups for profit and failing to deliver on their promises once the student has enrolled (see below).
Field of Study
For-profit institutions may offer programs that take less than 2 years, 2-years, or 4-years to complete - or even graduate degrees. Although the type of programs offered at for-profit institutions vary, they primarily offer training for a vocation or trade. Common fields of study include nursing, welding, auto mechanics, culinary arts, and cosmetology. The career-oriented approach offered by for-profit colleges means that students are less likely to find a general liberal arts curriculum. This may or may not be a drawback depending on the student. On the one hand, students who know what they want to study from the start may see little point in a general liberal arts curriculum. On the other hand, some students benefit from having additional time to explore their various interests before coming to a decision on their career path.
Cost and Financial Aid
For-profit institutions cost more than public institutions and less than private non-profit institutions. According to a 2019 report by the National Center for Education Statistics, the average net price of attendance (total cost minus grant and scholarship aid) for the academic year 2016-17 was $13,800 at 4-year public institutions, $26,800 at 4-year private non-profit institutions, and $22,000 at 4-year for-profit institutions. The average net price at 2-year institutions was $7,400 at public institutions, $21,600 at private non-profit institutions, and $21,800 at private for-profit institutions. Like their peers at public and private non-profit institutions, students at for-profit institutions are eligible for Pell grants and federal student loans.
Graduation Rate, Earnings, and Employment
One way to measure the quality of education at a higher education institution is to look at its graduation rate. The 6-year graduation rate, oft-cited during conversations about for-profit schools, is highest at private non-profit institutions—66 percent, compared to 59 percent at public institutions and 26 percent at private for-profit institutions. But these numbers don’t tell the whole story. For 4-year degree programs, for-profit colleges have the lowest graduation rate, but the opposite is true for 2-year degree programs. According to a report by the National Center for Education Statistics, for 2-year degree programs, for-profit institutions have the highest graduation rate, graduating 61 percent of their students. By contrast, only 25 percent of students at public 2-year institutions completed their program. Even counting the 18 percent of students who had transferred to a different institution, public 2-year institutions fare significantly worse in graduating their students. This doesn’t necessarily mean, however, that for-profit 2-year institutions do a better job at educating their students—it might mean that they set a lower bar for graduation.
The latter hypothesis is supported by differences in earnings between graduates of for-profit and non-profit institutions. According to a press release by the U.S. Department of Education, graduates of public undergraduate certificate programs outearn graduates of for-profit undergraduate certificate programs by nearly $9,000. Some people attribute this difference in earnings to different student demographics at for-profit and non-profit higher education institutions. It may be that students at for-profit institutions had low earning potential to begin with, they argue. Others, however, put the blame squarely on for-profit schools. According to a 2016 study by the National Bureau of Economic Research, for-profit certificate students experience lower earnings and are less likely to be employed than their public sector counterparts, even after controlling for differences in student demographics and fields of study. The study also found that students attending online for-profit colleges and multicampus chains had particularly poor earnings and employment outcomes.
Finally, the stigma against for-profit institutions may influence the way graduates are perceived by potential employers. When researchers sent fictitious resumes to employers seeking to identify differences in callback rates, they found that “a business bachelor’s degree from a for-profit institution [was] 22 percent less likely to receive a callback than one from a non-selective public institution. In applications to health jobs… for-profit credentials [received] fewer callbacks unless the job [required] an external quality indicator such as an occupational license.”
Borrowing and Defaults
Students at for-profit institutions borrow more and default at higher rates than their peers at non-profit institutions. For the academic year 2011-12, 73 percent of for-profit students borrowed money of some kind, compared to 51 percent and 63 percent at public 4-year and private non-profit 4-year institutions, respectively. Moreover, 16 percent of for-profit borrowers default within three years of entering repayment, compared to 12 percent and 7 percent of public and private non-profit college students.
To summarize, research suggests that most students would be better off at public institutions of higher education. Not only are for-profit institutions more expensive, they do not lead to improved labor market outcomes, such as increased earnings or higher employment rates, which might justify their cost. Students should be especially wary of online for-profit institutions and multicampus chains. Taking classes at a public higher education institution may not always be a feasible option as public institutions, especially those facing budget cuts or limited resources, cannot always meet student demand. However, research suggests that even for students choosing between for-profit higher education and no education at all, the former isn’t an obvious choice. The same 2016 study by the National Bureau of Economic Research found that although graduates of for-profit institutions experience small, statistically insignificant gains in earnings compared to young individuals who do not attend college, the gains are not enough to offset debt and interest payments.
For more information on for-profit colleges, the Center for Analysis of Postsecondary Education and Employment gives a comprehensive economic comparison of the public and for-profit college sectors. Edmit's college cost comparison tool is another helpful resource that will help you make financially smart decisions about college.