Higher Education

Colleges are pushed to stand behind what they sell with money-back guarantees

As prices rise, pressure to make schools share risk is winning broad bipartisan support

Flatiron School co-founders Adam Enbar and Avi Flombaum in the New York complex where students learn to code. The school has a money-back guarantee that its graduates will get jobs.

NEW YORK — Just outside the cavernous loft that serves as the campus of the Flatiron School, tourists line up to take selfies with the famous statue of a charging bull that symbolizes nearby Wall Street.

Free enterprise is also on display inside, where students work in teams and with instructors to learn coding, the kind of computer programming that makes possible websites, apps, and software. It’s a hot field with median pay of nearly $80,000 a year, according to the Bureau of Labor Statistics.

If the strong job market for coders drew them to this bright and buzzing place instead of a conventional university or college, so did something else: a guarantee that they’ll receive a full-time job offer in the field within six months of finishing, or get their money back.

To the entrepreneurs who started the Flatiron School, and a growing number of policymakers and politicians, the surprise isn’t that students in programs like this are being promised results for their investment. It’s that, in spite of its skyrocketing cost — and the $138 billion a year in taxpayer money it gets from federal financial aid alone — traditional higher education makes no such guarantee.

“A higher education is one of the most expensive purchases a person will make in their life. And we’re asking them to make it when they’re 17 and specifically telling them not to worry about the consequences,” said Flatiron co-founder Adam Enbar.

Related: A bid to show which colleges are worth the money reveals some surprises

Today, said Beth Akers, a senior fellow at the Manhattan Institute, “The stakes are getting much higher.”

Most other major purchases in life — of cars, for instance — come with guarantees, argued a paper Akers co-authored for the Brookings Institution. In higher education, by comparison, the risk is borne almost entirely by consumers and the government, not the institutions that collect the money from tuition, loans and grants.

This despite the fact that more than 45 percent of those consumers fail to graduate within even six years, the National Student Clearinghouse Research Center reports, and the estimated debt on which students have defaulted has grown to at least $99 billion, according to the think tank New America. A record 8.1 million students are now in default, The Institute on College Access and Success calculates.

Now there is increasing pressure, likely to heighten further this year, to make universities and colleges stand behind what they’re selling.

Converging proposals would variously require or encourage institutions to assume part of the losses from loans on which their students default, warrant that their students will graduate within a given period of time, and pledge that their graduates will land jobs with salaries worth what they pay for their educations.

A bipartisan bill in Congress called for colleges to lose eligibility for their students to get federal loans altogether and cover some of the debt their students fail to repay if the proportion who default exceeds a certain level. And while that measure was among the many that didn’t make it out of committee in the pre-election inertia, the general idea has support among members of both parties, including Democrat Elizabeth Warren and Republicans Orrin Hatch and Senate Health, Education, Labor, and Pensions, or HELP,  Committee Chairman Lamar Alexander. It was also one of the campaign proposals of unsuccessful Democratic presidential nominee Hillary Clinton.

There’s already a rule on the books disqualifying colleges and universities from receiving federal financial aid if more than 30 percent of their students default on their loans within three years of starting repayment. But that cutoff is so high and the appeals process so long that only 11 institutions have been removed from federal student aid programs in nearly 20 years, an investigation by the HELP Committee found. It found that some colleges and universities avoid scrutiny by pressuring their students to go into deferment to prevent them from defaulting during those three years.

Universities “can run their default rates all the way up to that threshold without any consequences,” Akers said. “We’re moving to a place where people would like to see more accountability than that.”

Related: A huge and stubborn reason, still unsolved, that students go into so much debt

That would focus colleges and universities on helping students graduate on time, repay their loans, and find jobs, advocates say — responsibilities for which they’re now surprisingly unaccountable.

The universities and colleges respond that making them share the risk in this way would penalize them all for the actions of a few, and that they have little control over how much their students borrow. After all, they say, taking out federally subsidized student loans is a right.

“Providing opportunity is a more valuable policy goal than limiting risk,” said a written statement provided by the principal higher-education lobbying organization, the American Council on Education.

It said students can take their money elsewhere if they’re not satisfied with the performance of a university or college, and that the risk-sharing proposals would increase costs.

That’s exactly the point, say advocates across the political spectrum: to give colleges a financial stake in their students’ success.

Momentum is building for requiring universities and colleges to have more skin in the game, including from the right-leaning American Enterprise Institute and U.S. Chamber of Commerce, and from Reagan administration Education Secretary Bill Bennett, who in a book he coauthored called Is College Worth It? proposed that institutions take an equity stake in every loan their students borrow or pay a fee for each one who defaults.

Other approaches include applying risk-sharing rules only to universities and colleges where more than half the students take out loans, or those with default rates of at least 15 percent, or above the previous year’s national average default rate — 11.3 percent in 2015, according to The Institute for College Access and Success.

Related: University bureaucracies grew 15 percent during the recession, even as budgets were cut and tuition increased

Several colleges and universities already offer guarantees of some sort, including Buffalo State College, the University at Buffalo, and SUNY Fredonia in New York, which all promise to waive the additional tuition for students who meet certain requirements but still take longer than four years to graduate. That follows a demand from State University of New York Chancellor Nancy Zimpher for public colleges and universities there to increase the proportion of their students who actually reach graduation.

To accomplish this, among other things, those campuses have added new sections of required courses that students have until now had trouble getting into (though part of the cost is being charged to them at the University at Buffalo through an added $375-a-year “academic excellence fee”).

Two private institutions in Michigan guarantee that their students will get jobs at specific annual incomes after graduation: Adrian College, which pledges to help repay graduates’ loans until they land a “well-paying job” (which the college’s president has said means one with a salary of at least $37,000 a year), and Davenport University, which will provide additional education for free to any graduate who meets a list of requirements but still doesn’t have a job within six months. Davenport says all of its eligible graduates so far have gotten jobs; Adrian’s guarantee took effect for freshmen entering in 2014, who have not yet graduated, so the results aren’t yet in.

Other coding schools like Flatiron also offer employment guarantees. So does Udacity, an online course provider that offers a money-back guarantee for students who don’t get jobs within six months of finishing its short-term technology courses.

That started, Flatiron’s Enbar said, for the practical reason that these schools were concerned about being compared to private, for-profit universities and colleges, whose enrollment has plummeted as consumers learned that many graduates weren’t getting jobs in their chosen fields. Some have closed.

Begun in 2012, the Flatiron School attracts people with and without college degrees, many of them in dead-end jobs who want to change careers, and a handful still in high school. The 12-week program costs about $12,000 and reports a 99 percent placement rate. (That figure is independently audited by an accounting firm, as compared to college and university placement rates, which often come from unscientific surveys of alumni.)

It’s not accredited in the way that universities and colleges are, though students who take Flatiron courses are in some cases eligible for federal financial aid — another kind of official imprimatur — under a new pilot program.

But Enbar also is an unexpected defender of nonprofit colleges and universities against demands that they should offer guarantees like these.

At coding schools, “People are buying one thing: a job,” he said, gesturing around the New York training room that bustles with caffeine-fueled students gathered intently in knots around computer monitors.

“If you’re asking me would I say every university should do everything that we’re doing — of course,” he said. “But there are reasonable arguments against that. You’re getting into some big philosophical questions” about, for instance, whether all universities’ sole purpose is to train graduates for particular jobs as opposed to giving them the other skills they need for life.

Related: More universities and colleges reach out to boost their home communities

Still, more than 60 percent of freshmen nationally surveyed by a research institute at UCLA said they had enrolled in college because they want to get good jobs, the highest proportion since the question was first asked in 1983.

And “even though we can disagree about what the most important returns are from higher education, we can probably all agree that if a person is in a position of financial distress that was caused by the institution they attended, we should do something about that,” Akers said.

With the line of picture-takers at the statue of the bull outside persisting even as a wintry dusk falls, Enbar, who is 33, said he’s convinced the market will have an impact on higher education with or without guarantees.

“There’s an upper limit to how long this system will last, because our generation won’t tell our kids what our parents told us, which is go take out a loan and get a degree, no matter how much it will cost,” he said. “They’ve built up their institutions based on this thing that won’t last forever.”

This story was produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Read more about higher education.

Unlike most of our stories, this piece is an exclusive collaboration and may not be republished.

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Jon Marcus

Jon Marcus, higher-education editor, has written about higher education for the Washington Post, USA Today, Time, the Boston Globe, Washington Monthly, is North America higher-education… See Archive