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

83 Pages Posted: 25 Apr 2017

See all articles by Luis Armona

Luis Armona

Stanford University

Rajashri Chakrabarti

Federal Reserve Bank of New York

Michael Lovenheim

Cornell University - Department of Policy Analysis and Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: August 1, 2018

Abstract

For-profit providers are becoming an increasingly important fixture of U.S. higher education markets. Students who attend for-profit institutions take on more educational debt, have worse labor market outcomes, and are more likely to default than students attending similarly selective public schools. Because for-profits tend to serve students from more disadvantaged backgrounds, it is important to isolate the causal effect of for-profit enrollment on educational and labor market outcomes. We approach this problem using a novel instrument combined with a more comprehensive data set on student outcomes than has been employed in prior research. Our instrument leverages the interaction between changes in the demand for college owing to labor demand shocks and the local supply of for-profit schools. We compare enrollment and postsecondary outcome changes across areas that experience similar labor demand shocks but that have different latent supply of for-profit institutions. The first-stage estimates show that students are much more likely to enroll in a for-profit institution for a given labor demand change when there is a higher supply of such schools in the base period. Among four-year students, for-profit enrollment leads to more loans, higher loan amounts, an increased likelihood of borrowing, an increased risk of default, and worse labor market outcomes. Two-year for-profit students also take out more loans and have higher default rates and lower earnings. But they are more likely to graduate and to earn over $25,000 per year (the median earnings of high school graduates). Finally, we show that for-profit entry and exit decisions are at most weakly responsive to labor demand shocks. Our results point to low returns to for-profit enrollment that have important implications for public investments in higher education as well as for how students make postsecondary choices.

Keywords: postsecondary education, for-profit schools, student loans, default, returns to education

JEL Classification: H4, I2, J1

Suggested Citation

Armona, Luis and Chakrabarti, Rajashri and Lovenheim, Michael, How Does For-Profit College Attendance Affect Student Loans, Defaults, and Labor Market Outcomes? (August 1, 2018). FRB of NY Staff Report No. 811. Available at SSRN: https://ssrn.com/abstract=2958120

Luis Armona (Contact Author)

Stanford University ( email )

Rajashri Chakrabarti

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://nyfedeconomists.org/chakrabarti

Michael Lovenheim

Cornell University - Department of Policy Analysis and Management ( email )

Ithaca, NY
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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