Oct. 25 (Bloomberg) -- Advertisements touting for-profit universities are everywhere. Schools such as Apollo Group Inc.’s University of Phoenix peddle instruction in person and online, promising that students can earn their degrees on their own time, in their own homes -- even in their pajamas.
The growth of such institutions has sparked controversy, partly because of their reliance on federal financial aid and the high default rates of their students.
A recent congressional report found “exorbitant tuition, aggressive student recruiting and abysmal student outcomes,” all subsidized by taxpayers. Current regulations allow for-profits to collect as much as 90 percent of their revenue from federal financial aid, and many come close. In 2009-2010, the University of Phoenix received more than 86 percent of its revenue -- almost $5.4 billion -- through such funding.
This isn’t the first time for-profit universities have boomed, nor is it the first time they have stirred up debate. In the late 19th century, the variety and availability of for-profit education skyrocketed. By 1871, more than 150 commercial colleges were operating across the U.S., and by the early 1890s, estimates went as high as 500.
Business education was big business. Bryant & Stratton, a Midwestern chain founded in 1854, aspired to open a branch in every American city with more than 10,000 inhabitants. Within a decade, the company had more than 50 schools and published an array of popular textbooks. Many were short-lived, but Bryant & Stratton College was not. Today, it operates 18 campuses in New York, Ohio, Virginia and Wisconsin.
Commercial colleges offered practical instruction in bookkeeping, penmanship, stenography and surveying. They operated mock bank offices and stock exchanges, teaching clerks to prepare the many notes and financial instruments that greased the wheels of the growing economy. Future steel magnate and philanthropist Andrew Carnegie attended night school at a commercial college to learn bookkeeping. John D. Rockefeller studied accounting, penmanship and banking at Folsom’s Commercial College in Cleveland, which survives today as Chancellor University.
Success stories aside, quality of instruction varied wildly. Some schools were reputable establishments offering “able commercial lectures and thorough training,” but others were, as the U. S. commissioner of education put it in 1872, “purely business speculations.”
Consider Pittsburgh’s Iron City Commercial College. In 1859, the school claimed to be training four times as many students as any other in the U.S. However, less than a year later, the Ohio Statesman reported that the school had “changed hands under the Sherriff’s hammer” for the “second or third time” since its opening only four years earlier. The school “proved a ruinous concern.”
The Michigan Journal of Education agreed that a number of “inferior schools” had “blazoned forth under the name and style of the Commercial College.” But they remained confident that time would sort the good from the bad, and that the commercial college would “vindicate its title to a permanent place among the educational institutions of the land.”
By 1897, the U.S. commissioner of education counted 123,913 students in commercial courses in high school and college. Among the 76,819 collegiate students, more than 92 percent were enrolled in the new for-profit commercial colleges.
The most common form of tuition at these early schools was the “life scholarship.” Students paid a lump sum in exchange for unlimited instruction at any of the college’s branches -- $40 for men and $30 for women in 1864. This was a considerable fee, but much less than tuition at most universities. And it was within reach of most workers -- common laborers earned about $1 per day and clerks’ wages averaged $50 per month.
Life scholarships appealed to prospective students by offering what they really wanted: a skill that could lead to a job. If students found themselves unemployed at the end of their course, they could continue their education to sharpen their skills. If they found employment midway through a course, they could always return later to complete their education.
Modern for-profits, too, fill gaps in the U.S. educational system. Recent research by Harvard economists David Deming, Claudia Goldin, and Lawrence Katz shows that for-profits educate proportionately more minority, disadvantaged and older students. They also have greater success at retaining students during their first year and in helping them to complete short degree programs.
But the study also found that students at for-profits graduate with far higher debt burdens than comparable students elsewhere. This results from high tuition costs, which don’t always translate into a better education. For one thing, a good chunk of it is going to marketing: JPMorgan Chase & Co. estimated that in 2010 the largest for-profit schools were spending $4,000 to lure each new student. More problematically, federal financial-aid policies entice for-profit universities to push tuition up to the maximum aid levels available to students. While such schools may give poorer students access to much-needed education, they also encourage them to take on debt that they will have trouble paying off.
And, unlike the 19th-century schools that sold life scholarships, modern for-profits don’t continue training students who can’t find a job. This is especially troublesome given that students at for-profits are more likely to be unemployed after graduation.
Edmund James, the first director of the University of Pennsylvania’s Wharton School, characterized early commercial colleges as “rough” and “primitive,” but he also understood that they met an “immediate and pressing demand.” As he reflected, the founder of the first commercial college “waited not to formulate the problem and to discuss the solution, but bent himself straight-a-way to furnish the opportunity and to meet the demand.”
With the rise in online education today, for-profits are booming again, and regulators are working to rein in their excesses. Regulatory changes may push some for-profits out of business, sending them the way of schools such as Iron City Commercial College. But others may prove as adaptable as the best of their 19th-century predecessors, surviving to offer truly affordable education.
(Caitlin Rosenthal is the Harvard-Newcomen postdoctoral fellow at Harvard Business School. The opinions expressed are her own.)
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