Expanding Pell Grants to for-profit colleges benefits institutions, not students

During the House debate over a provision to exclude for-profit colleges from the Pell Grant expansion in the Build Back Better Act, 13 Democratic members of Congress signed a letter opposing it on the premise that it would harm students. 

While for-profit advocates seem to be pushing this narrative, a growing body of economic research indicates that this is simply not the case. Rather than passing along Pell Grant increases to the low-income students who so critically need it, for-profit institutions are likely to raise their tuition to capture any aid increases without benefiting the students they serve. 

First, some background: For-profit colleges are heavily reliant on federal student aid. The latest Department of Education data from 2018-19 shows that the median for-profit institution receives more than two-thirds of its revenue from Pell Grants and federal student loans. The largest institutions get more than 75 percent of revenue from these sources. In a single year, the University of Phoenix received more than $744 million and Walden University received $452 million. 

The magnitude of these subsidies is partially driven by extremely high tuition. The average annual tuition at a two-year for-profit institution is more than four times the tuition of a public community college: $15,333 compared to $3,377. As might be expected, for-profit students are more likely than students in the public sector to borrow and when they do, they take on more debt. 

So, how do for-profit colleges respond to increases in federal student aid? 

Research has shown that for-profit colleges increase their tuition in response to expansions in federal student aid. Studies focusing on public and non-profit institutions find mixed results, but in the for-profit sector, the research is clear; tuition rises when federal student aid increases. 

In a study published in the American Economic Journal: Economic Policy, my coauthor, Claudia Goldin, and I found that for-profit institutions and programs receiving federal student aid charged tuition that was 78 percent higher than that of comparable programs in non-participating institutions. In dollar value, this difference was roughly equivalent to the average Pell Grant award, suggesting that institutions raise tuition to capture aid, rather than pass on the savings to students. 

In another study, economists at the Federal Reserve Bank of New York found that tuition changes in response to increases in Pell Grants and student loan limits were nearly four times larger among for-profits than not-for-profit institutions. 

The profit motive, when combined with heavy taxpayer subsidies and little accountability for student outcomes, can be problematic. The combination creates incentives for for-profit institutions that are different from those for public or nonprofit institutions. Economists studying private equity buyouts find that government aid capture is a key way that private equity ownership translates to higher profits in the for-profit sector. 

Beyond tuition and aid capture, my research also has also shown that increases in the maximum Pell Grant award are strongly correlated with for-profit college openings, with more campuses opening in counties where more students are eligible for aid. There is a strong incentive for for-profit colleges to recruit low-income students, but there is little incentive to ensure their success.

Finally, students can and do find other educational options when aid is withheld from for-profit colleges — and these alternate options tend to have better student outcomes. Rajeev Darolia, Lesley Turner and I found that enrollment in neighboring public colleges increased when a for-profit was threatened with the loss of federal student aid, nearly completely offsetting declines in the for-profit sector. We also found evidence that borrowing and default declined as students shifted away from poorly-performing for-profit institutions to lower-cost community colleges. 

The bottom line is that excluding for-profits from a Pell Grant expansion will have little to no impact on college access, nor will it impact the price that for-profit students pay. The 970,000 or so Pell Grant recipients in for-profits are unlikely to see even a dollar of benefit from a Pell Grant expansion. The proposed policy can also signal to prospective students — particularly low-income, first-generation, and students of color for whom federal student aid is critical — that there may be other college options where they can expect less chance of default, better labor market outcomes and where their Pell Grant will go further. In the absence of accountability around cost and student outcomes for for-profit institutions, restricting Pell Grant expansions to public and nonprofit institutions is good policy.

If for-profit institutions are worried about their students’ well-being, they have an easier option that requires no taxpayer investment or government action: Lower tuition.

Stephanie Riegg Cellini is a professor of Public Policy and Public Administration, and of Economics at George Washington University, and director of the Postsecondary Equity and Economics Research Project. She served as a fellow with the U.S. House of Representatives Committee on Education and Labor in 2019 and as a non-resident senior fellow with the Brookings Institution from 2015-2021.