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Ryan Craig: American Clampdown Forcing Forlorn For-Profit Colleges To Look Abroad

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Harvard, Yale and the Future of For-Profit Universities

By Ryan Craig, Columnist

What makes American higher education exceptional?  Most Americans would argue quality, which it turns out boils down to a discrete mix of readily quantifiable educational inputs like spending per student, and outputs relating to research, but not student outcomes.  Beyond the top 100 institutions representing less than 10% of enrolled students, it becomes hard to make the argument on even these metrics.

Closer observers of higher education might then turn to the size and relative importance of private (not-for-profit) universities.  America’s rich tradition of private universities dates back over 300 years to its first colleges:  Harvard, William & Mary, Yale, and then most of the rest of the Ivies in the 18th century.  Today, there are twice as many private institutions as public, although total enrollment in public colleges and universities is about 3x private enrollment.  At the same time, private higher education is also dominant in countries like Japan, Taiwan, South Korea, the Philippines and Indonesia, where approximately 80% of all students attend private HE institutions.

In this regard, what actually makes American higher education exceptional is the maturity of its private universities and the era in which they developed.  This turns out to be key to understanding the fundamental challenge facing America’s for-profit universities and explains this week’s announcement by University of Phoenix that prospects for future growth are largely outside the U.S.

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From President Obama’s inauguration four years ago until the fall of 2011 and the emergence of the Occupy Wall Street/Colleges movement, the top higher education priority of the Administration was to rein in the growth of for-profit higher education.  Supported by Congress and advocacy groups, and driven by critical media reports on the sector, the effort proved remarkably successful – suddenly thrusting years of double-digit growth into reverse, in large part due to responsive self-regulation.

One of the most cogent responses from for-profit institutions came from DeVry CEO Daniel Hamburger who attempted to draw a clear analogy between the behavior of for-profit institutions and private not-for-profit institutions like Harvard and Yale, which typically generate a profit each year but instead call it a surplus.  Why then should for-profits receive discriminatory treatment not only in the tax code, but in direct (and increasing) regulations that only impact for-profit institutions?

While many in the for-profit sector applauded Mr. Hamburger’s logic, few outside the sector paid any heed.  Mr. Hamburger’s argument would have had much greater success in countries like India and Brazil.  For in both these countries, private “not-for-profit” institutions exhibit what would be considered “for-profit” behavior.

Look at Amity University in India.  Probably the fastest growing private university in India, Amity was founded 16 years ago by Ashok Chauhan.  The university has over 100,000 students.  Critics say the university’s revenue, estimated to be in the half-billion dollar range, supports a lavish lifestyle for the Chauhan family.  We do know that Chauhan’s birthday is celebrated at the University with a month-long sports festival; his wife’s birthday is the basis for a week-long conference on human values.  And that Chauhan has appointed his son as Chancellor and says he expects his family to control the university for generations to come.  Many other family-founded private universities in India have been criticized for the same cost/value issues that spawned the for-profit pushback in the U.S. (e.g., “blurring the lines between philanthropy and business” – Wall Street Journal).

The analogy in Brazil, where virtually all private and for-profit universities have been founded in the past 30-40 years, and flourished, is even clearer.  About half of all students are enrolled in for-profit universities, and another quarter in private institutions.  Despite for-profit growth that has exceeded the U.S. at its peak, few in the Brazilian for-profit sector are sweating in fear of a U.S.-style crackdown.  Some argue that this is due to the size and relative importance of the sector.  But the best explanation is the amazing fluidity between privates and for-profits in Brazil.  It’s widely recognized in Brazil that founders of private universities are living the high life off the backs of their universities through “funds siphoned off to associated foundations, and vast salaries paid to management and directors.” Private not-for-profit institutions are supposed to allocate 20% of their revenue to scholarships, but rarely do so in practice.  Many of the large for-profits are converted private universities.  This is explains why Brazilian regulators and observers alike are more focused on the distinction between public and “private” institutions (including for-profits in the definition) than between private not-for-profits and for-profits.  And so, in stark contrast to the U.S., there is no meaningful legislative, regulatory or – crucially – consumer distinction between private not-for-profits and for-profits.

In contrast, American views of private universities are fixed by the era of their founding, and the subsequent time elapsed.  Our most prominent private universities were founded in the 18th and 19th centuries, a time when few looked upon higher education as a business or means of support for one’s family (let alone dynasty building).  Higher education was viewed solely as a charitable endeavor:  worthy of a bequest, not a business plan.  This, in combination with founding by religious groups, was the basis for the establishment of all our top private universities, including those established in the late 19th century like Stanford and Chicago.

Over time, even if the founder or founding donor was alive at the time (like Rockefeller with University of Chicago), control of the university passed quickly to an independent governing board, which would make and approve decisions based on a defined (albeit not always clear) philanthropic mission.  It was thus that the American public’s confidence in private universities was established and solidified.  It has now solidified to the point that “surplus”  (to use Hamburger’s terminology) scandals like the recent dust-up at Stevens Institute of Technology (President given illegal $1.8M low-interest loan to buy vacation home) or Louis XIV-esque spending by the former President of American University ($200k in redecorating, French chef, tuxedoed waiters, a $22k first class plane ticket to Nigeria) bounce off the now-bulletproof edifice of our private colleges and universities.

The fitting equation might be something like:

private + time = public

Although American for-profit institutions have been around since the 19th century, until the 1980s and 1990s they lived the quiet, unassuming lives of vocational or trade schools.  As such, the “for-profit university” is nearly as young in the U.S. as in Brazil.  The difference is that Brazilian for-profits are perceived as no different from Brazil’s equally young private universities whereas American for-profits are viewed as on a different planet from the august private universities that now constitute the firmament of American higher education.

It will be interesting to see whether Grand Canyon University can be successful in crossing this chasm between for-profit and private – an ambition evident in that institution’s adoption of the trappings of private universities (campuses for traditional age students, participation in NCAA Division I basketball).  But we think most for-profits will be better served by seeking new growth outside the U.S., where they may well look like Harvard or Yale compared to many of the new family-owned surplus-generating private universities.  While Apollo may have seen the light only recently, this is exactly what Mr. Hamburger and DeVry have been doing for years in Brazil.

This is not at all to say there are no opportunities for innovation in American higher education.  We expect to see more change over the coming decade than we have over the prior century.  But it won’t be for-profit universities leading the charge.  Rather, due in no small part to this “American exceptionalism,” it will be new models like partnerships, joint ventures and service providers that combine the best of public and private (private not-for-profit, of course) universities with market-driven, student-centric companies providing a combination of capital, management and technology, in order to develop programs that address critical social and economic needs.  This “American exceptionalism” is on its way to producing a new generation of world-beating higher education companies.

Ryan Craig is a Partner at University Ventures, a venture fund focused on innovation from within higher education. In the past, he founded an education startup, worked in consulting and government roles. He attended Yale University for undergraduate degrees and law school. 

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