Where Do Students Go When For-Profit Colleges Lose Federal Aid?

Abstract

Recent federal investigations and new regulations have resulted in restrictions on for-profit institutions' access to federal student aid. We examine the enrollment effects of similar restrictions imposed on over 1,200 for-profit colleges in the 1990s. Using variation in regulations linked to student loan default rates, we estimate the impact of the loss of federal aid on the enrollment of Pell Grant recipients in sanctioned institutions and their local competitors. Enrollment in a sanctioned for-profit college declines by 53 percent in the five years following a sanction. For-profit sanctions result in negative spillovers on unsanctioned competitor for-profit colleges in the same county, which experience modest enrollment declines. These enrollment losses in the for-profit sector are offset by gains in enrollment in local community colleges, suggesting that the loss of federal student aid for poor-performing for-profit colleges does not reduce overall college-going but instead shifts students across higher education sectors. Finally, we provide suggestive evidence that students induced to enroll in community colleges following a for-profit competitor's sanction are less likely to default on their federal loans.

The Fast Track to New Skills: Short-Cycle Higher Education Programs in Latin America and the Caribbean

“…Seeking to protect the substantial federal resources devoted to higher education financial aid as well as students' and families' own resources, the US government has attempted to regulate HEIs. a For-profit institutions have been a particular concern because they cost more yet generate lower earnings, higher debt, and lower loan repayment rates than comparable programs at other institutions, even after controlling for confounding factors (Cellini and Koedel 2017;Armona, Chakrabarti, and Lovenheim 2020;Cellini and Turner 2019;Gaulke, Cassidy, and Namingit 2019;Cellini and Chaudhary 2014;Cellini, Darolia, and Turner 2020).…”

“…Past regulations succeeded at limiting the activities of low-performing programs and HEIs. In the early 1990s, many programs and HEIs with low student repayment rates lost federal student aid eligibility or were closed (Darolia 2013;Looney and Yannelis 2019;Cellini, Darolia, and Turner 2020). The displaced students, in turn, mostly shifted to local community colleges (Cellini, Darolia, and Turner 2020).…”

How Does For-profit College Attendance Affect Student Loans, Defaults and Labor Market Outcomes?

“…That the variation in supply of postsecondary institutions across areas can plausibly affect how students sort into different types of schools depending on where they live has been a 22 Online Appendix focus of prior research. Previous studies attempting to use geographic variation in supply conditions either used cross-sectional variation in supply (Card 1995) or exploited changes in college openings over time (Currie and Moretti 2003).…”

“…tutional level and control. 22 In both the four-year and two-year sectors, for-profit schools are much smaller than their public counterparts. Consistent with Figure 2, the mean labor demand change is about -1%, but there is much heterogeneity as illustrated by the relatively large standard deviation.…”

How Does For-Profit College Attendance Affect Student Loans, Defaults and Labor Market Outcomes?

“…Specifically, we exploit the fact that people are more likely to enroll in college when labor demand is low because of the reduced opportunity cost of enrollment in terms of foregone earnings. 23 Resulting changes in the demand for college then interact with baseline postsecondary supply conditions to generate variation in where students enroll. The thought experiment underlying our method is to consider two cities that experience identical labor demand changes (say, negative) in a given year but that have a different pre-existing supply of for-profit colleges.…”