Thirty years ago, I worked briefly at a state mental hospital on the West Coast. A more experienced co-worker told me to keep an eye on street-wise young men who signed themselves into the hospital voluntarily claiming alcohol or drug dependence. It seems that, every once in a while, one of them would aggressively trade small amounts of money or cigarettes in exchange for other patients’ medications, if the pills had value as a recreational drug. Since many patients didn’t like to take their medication, or just wanted some pocket change, a savvy drug dealer could turn a few cartons of cigarettes and several twenty-dollar bills into a stash worth a thousand dollars or more on the street in a few weeks’ stay—much of it on the state’s dime.
So what does this anecdote have to do with higher education? It illustrates the point that wherever there is an opportunity, somebody will find a way to exploit it—a principle with serious implications for higher education.
Wherever there is government money, there is opportunity of the worst type. The world of higher education is awash in government money, both federal and state. A wide range of people, from administrators to students, find ways to extract funds for different purposes than the ones intended. Most often, these deceptions are legal, but some are not.
Financial aid is particularly ripe for the plucking. In 2009, the U.S. Department of Education alone spent $24.5 billion, almost all of it on financial aid. An April, 2010, Business Week article described how for-profit universities recruit students even in homeless shelters, simply “because they qualify for federal grants and loans.”
It is not only the taxpayers who get taken by such schemes. For many of these marginal “students,” who struggle to hold even basic jobs, the lure of immediate dollars mixed with the hope for a brighter future sticks them with a permanent debt they may never pay off, since student loans are not wiped out with bankruptcy.
Certainly, such hyper-aggressive recruiting tactics are hardly the rule. But they are not isolated incidents. For-profit industry leader University of Phoenix settled a lawsuit in December of 2009 for $78.5 million, in which the plaintiffs, two former admissions counselors, claimed that the school paid recruiters bonuses based on the number of students they enrolled. This type of incentive leads recruiters to sign up anybody, regardless of either their ability to profit from the education or to repay their eventual debts. It is illegal for schools receiving federal student aid to have such incentives for employees.
Such charges are common in the for-profit world, where 75 percent of the revenue comes from financial aid paid for tuition, but this article is not an indictment of for-profit schools. They are merely finding “opportunities” created by the massive outlay of government funds for higher education. As long as governments give out grants, loan money, or guarantee private loans, there will be abuses.
And for-profits are hardly the only ones working the system for government dollars. According to one community college department head, who wishes to remain anonymous, much of the community colleges’ enrollment growth is “manufactured” for state money.
In North Carolina, state funding for community colleges is raised retroactively for increased enrollment after the school year is over. The rules state that if a student either comes to class or has contact with the professor past the ten percent point of the class’s schedule (usually the second week of classes), that student is counted in the official enrollment statistics for state appropriations the next year. Because the schools are able to count such non-students as enrolled, and because funding is dependent on the number of students, administrators give teachers strong incentives to pad their enrollment, explained the department head.
He added that all that is needed to add to the headcount is for the student to say in a phone conversation, “I’ll be there,” even if he or she does not actually show up.
There is a lot of money riding on this enrollment growth. For the 2009-10 school year, the community college system (NCCCS) will receive an additional $85 million from the state for its official increase of 34,000 full-time equivalent students.
Public universities and private non-profits also manipulate the financial aid system. Many small private colleges would not exist without government aid to students. Mid-Continent College in Mayfield, Kentucky, for example, admits 83 percent of all applicants. According to StateUniversity.com, 25 percent of the school’s students have combined math and reading SAT scores below 760 (roughly the bottom ten percent of all test takers). Ninety-three percent of all its students receive federal grant money, and 87 percent get student loans. The school’s retention rate is only 44 percent; that is, only two of five entering freshmen continue to their sophomore year. The four-year graduation rate is only 7.5 percent.
Given such dismal statistics, it is probable that the school recruits many financial aid recipients who could not reasonably be expected to complete a four-year academic program.
There is also plenty of temptation for staff to seek ill-gotten gains from financial aid. In 2006, when Seattle’s Crown College was about to shut its doors, four employees submitted false applications for federal student loans and Pell grants, according to the Seattle Post-Intelligencer, They received $65,750 before the fraud was discovered.
Students get in on the action as well. Kennon Briggs, the vice president for business and finance of the North Carolina Community College System, once remarked in a legislative meeting on financial aid that sometimes students use their aid for purposes other than education or college living expenses, such as car payments or mortgages. In a later phone conversation, he said that he had heard about such uses of aid “anecdotally,” adding that financial aid to attend college is “access to money” for people living on the edge.
And students’ uses of financial aid are not always for necessities. The Business Week article described how one Capella University student, a recovering crack addict, spent $700 of her financial aid for Christmas presents for her seven-year-old son.
Middle-class students also take advantage of the easy access to borrowed money to live beyond their means. Federally subsidized student loans provide low interest rates and have delayed repayment plans—recipients don’t have to pay anything until they leave school. This is hardly an incentive for young people to behave prudently. In a May 2008 article, the Pope Center’s Jenna Ashley Robinson described how she and her friends used the loan program for foreign travel, concert tickets, stock market gambles, and flat screen TVs.
An article by B.T. Donleavy on the Ludwig von Mises Institute website described the situation thus: “Realistically, no private institution would lend this kind of capital to such a young demographic without credit history.” But the same institutions, with federal guarantees, have been eager to loan as much as possible to students, without concern for how the loans are used.
In many cases, aid becomes the primary goal, rather than an education. The anonymous community college department head described how one student called him up in desperation just before the summer term began. She needed to take two classes to continue her financial aid status. “Just put me in something,” she begged. He said his department had no courses for the summer, so she wound up taking two library science classes, which were irrelevant to her major and her interests.
“Right now, there’s an incentive to take classes that will have no bearing on their future,” he added, simply in order to keep financial aid coming.
He said that “the incentives need to be changed” by making all students pay at least something for their education. He said that this would very likely result in a decrease in enrollment of 20 to 25 percent throughout the community college system. The absence of these students—who are not generally serious about their educations—would likely push the graduation rate of community college students who seek four-year degrees from its current 29 percent to one closer to 40 percent.
(This would also mean tremendous savings for the state, far beyond the wasted financial aid. Twenty percent of the roughly 200,000 FTE students who attend NCCCS schools equals 40,000 students. The state’s average annual subsidy for each community college student is slightly more than $5,000. Without these students, few of whom complete their programs or care about learning, the state would save $200 million per year—and improve the intellectual atmosphere of the campuses as well.)
Government money is likely to be an increasing part of the higher education picture for a long time. Financial aid was once entirely private or institutional, given to promising students by universities, churches, or rich patrons—today it has largely become a government–funded entitlement program. Private banks are being pushed out of much of the student loan market by the Obama administration’s recent overhaul of the system. That means fraud, waste, and inefficiency will be growing as well. It’s time for administrators and especially legislators to develop a little of the street-sense displayed by my former co-worker, the one who wised me up about the street hustlers posing as patients thirty years ago.