The Public Costs of Higher Education:

A Comparison of Public, Private Not-for-Profit,

And Private For-Profit Institutions

Robert Shapiro and Nam Pham1

Executive Summary

A new debate has arisen in American higher education about the role of private for-profit
institutions. While public and private not-for-profit institutions of higher learning have long
dominated post-secondary education in the United States, private for-profit colleges, universities
and institutes have expanded dramatically in recent years. This very rapid expansion has raised
questions about rising government support for private for-profit institutions and the rising costs
of government grants and loans for the students who attend them. This report provides the first
comprehensive analysis of all forms of federal, state and local government support for each of
the three classes of institution – for-profit, public, and private not-for-profit institutions. The
data and analysis show definitively that concerns about disproportionate support for private for-
profit colleges, universities and institutes and their students are misplaced.

There is a false perception that for-profit institutions cost American taxpayers

significantly more money to educate students than their not-for-profit counterparts. In fact, the
data show that the opposite is true.

 Private for-profit institutions and their students receive less than 30 percent of the
support per-student from all levels of government provided to public institutions and
their students, and less than 48 percent of the support per-student received by private
not-for-profit institutions and their students.

To begin, private for-profit institutions receive very little direct support, compared to
public and private not-for-profit institutions, through government grants, appropriations and
contracts.
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Robert J. Shapiro is the chairman and co-founder of Sonecon, LLC, a private firm that advises U.S. and foreign businesses,
governments and non-profit organizations on market conditions and economic policy. He is also a Senior Fellow of the
Georgetown University School of Business, director of the Globalization Initiative at NDN, chair of the U.S. Climate Task Force,
co-chair of the America Task Force Argentina, and a director of the Ax:son-Johnson Foundation in Sweden. From 1997 to 2001,
Dr. Shapiro was Under Secretary of Commerce for Economic Affairs. Dr. Shapiro has been a Fellow of Harvard University, the
Brookings Institution, and the National Bureau of Economic Research. He holds a Ph.D. and M.A. from Harvard University, a
M.Sc. from the London School of Economics and Political Science, and an A.B. from the University of Chicago. He is widely
published in scholarly and popular journals, and his most recent book is Futurecast: How Superpowers, Populations and
Globalization Will Change the Way You Live and Work, St. Martins Press: 2008.

Nam D. Pham is the founder and president of NDP Group, LLC, an economics consulting firm that specializes in assessing complex
issues in finance, industrial organization and international trade. Dr. Pham earned a Ph.D. in economics from the George
Washington University with concentrations in international trade and finance, economic development and applied microeconomics,
a M.A. from Georgetown University and a B.A. from the University of Maryland.

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  For every $1 in direct support for private for-profit institutions, per-student, from federal,
state and local governments, private not-for-profit institutions receive $8.69 per-student
and public institutions receive $19.38 per-student.

Across the three classes of four-year institutions, for example, direct government grants,
appropriations and contracts provide 45 percent of the revenues of public colleges and
universities institutions, and 12.5 percent of the resources of private not-for-profit institutions,
compared to just 5.5 percent of the resources of private for-profits. Moreover, private sources of
revenues, such as funding from foundations and alumni, are also largely unavailable to private
for-profit institutions. These sources provide 51 percent of the revenues of private not-for-profit
colleges and universities, and 37 percent of the revenues of public institutions, compared to just
6 percent for private for-profit institutions.
With such limited access to government support or other private sources of funds, four-
year private for-profit institutions rely on tuitions for 88 percent of their revenues, compared to
36 percent for private not-for-profits and 18 percent for public institutions.
This dependence by private-for-profit institutions on tuitions, and the lower average
incomes of the households or families of the students who attend them, causes those students to
rely more heavily on government grants and loans. Nevertheless, the data show that the average
student recipient of government assistance at four-year private for-profit institutions receives less
in total grants from all levels of government than the average recipient at public or private-not-
for-profit institutions. This disparity largely reflects very low levels of state and local
government support for students at private for-profit institutions.

 Recipients of government grants at four-year private for-profit institutions receive an

average of $5,952, compared to $6,638 per-recipient at public institutions and $7,351 per-
recipient at private not-for-profit institutions.

Because of lower family incomes and the very low levels of state and local government
support, students at four-year private for-profit institutions rely more on federal loans.

 Across four-year institutions, student borrowers at private for-profit institutions receive

an average of $7,529 in federal loans, compared to $4,130 per-student borrower at public
institutions and $4,567 per-student borrower at private not-for-profit institutions.
The cost of these federal student loans to taxpayers is based on their interest rate
subsidies and the default rates. The interest rate subsidies are the same for student-borrowers at
all three classes of institutions, but the default rates are higher among students from private for-
profit institutions than for those from public or private not-for-profit institutions. However, these
taxpayer costs are more than offset by another distinction of private for-profit institutions: They
pay federal, state and local taxes on their incomes, while public and private not-for-profit
institutions are largely tax-exempt.

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  The revenues of all private for-profit institutions were more than $20 billion in 2008,
with expenditures of about $17.5 billion. At a combined 40 percent federal, state and
local tax rate, they paid nearly $1 billion in taxes, or an average of $549 per-student.

 These tax payments are greater than all of the direct government support private for-
profit institutions receive from all levels of government.

A final determination of the relative taxpayer support provided to the three classes of
institutions of higher education, on a per-student basis, draws on all of these elements – direct
government grants, appropriations and contracts to institutions from the federal, state and local
governments; grants, interest subsidies and covered defaults for students provided by federal,
state and local governments; and offsetting tax payments paid by the institutions to federal, state
and local governments. The data and analysis show that:

 Considering all sources of support, four-year private for-profit institutions receive an

average of $2,394 per-student in direct and indirect federal, state and local government
support, compared to $7,065 per-student at four-year private not-for-profit institutions
and $15,540 per-student at four-year public institutions.

 Total federal support, direct and indirect, averages $2,755 per-student at four-year
private for-profit institutions, compared to $5,398 per-student at private not-for-profit
institutions and $5,192 per-student at public institutions. The disparities are even greater
with regard to direct and indirect support from state and local governments: This support
averages $236 per-student at the private for-profit institutions, compared to $1,668 per-
student at the private not-for-profit institutions and $10,348 per-student at the public
institutions.

 As already noted, the total direct support provided by all levels of government to four-
year private for-profit institutions is negative, since they pay greater taxes than they
receive in direct government grants, appropriations and contracts, by $22 per-student. In
contrast, direct support from all levels of government comes to $4,765 per-student for
four-year private not-for-profit institutions and $13,240 per-student for public
institutions.

 The total indirect support provided to these institutions by all levels of government,
through federal, state and local government student grants, loan subsidies and default
payments, is comparable across the three classes of institutions: This support for students
averages $2,416 per-student at four-year, private for-profit institutions, compared to
$2,301 per-student at four-year private not-for-profits, and $2,300 per-student at four-
year public institutions.

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Implications for meeting President Obama’s American Graduation Initiative

The report also estimates the taxpayer costs to fulfill President Obama’s proposal to
expand student enrollments in higher education sufficiently to produce 5 million more
certificates and associate degrees. We calculate those costs under two scenarios. First, we
estimate the price tag for government if the additional enrollees were distributed across all three
classes of institutions, based on their current relative enrollments. Second, we estimate the costs
if the policy were carried out entirely by public institutions. The data show that relying on
private for-profit and private not-for-profit institutions, as well as public institutions, would cost
the government $33 billion less than would relying entirely on public institutions.

One major factor is the different graduation rates of the three classes of institutions. The
policy would be carried out by two-year institutions that award associates degrees and by less-
than-two-year institutions that award certificates. The final costs, however, are highly influenced
by graduation rates. While graduation rates at less-than-two-year institutions are uniformly high
across the three classes of institutions, only 28 percent of students enrolled at two-year public
institutions graduate, compared to 65 percent of students enrolled at two-year private for-profit
institutions and 58 percent of students enrolled at two-year private not-for-profit institutions.
These differences, along with the lower total taxpayer costs, establish that two-year and
less-than-two-year private for-profit institutions produce associate degrees and certificates more
efficiently than the other classes of institutions.

 The cost for programs leading to associate degrees is $9,766 per-enrollee at two-year
private for-profit institutions, compared to $11,892 per-enrollee at private not-for-profit
institutions and $14,161 per-enrollee at public institutions.

 The relative efficiency of private for-profit institution is even greater on a per-graduate

basis: The cost of an associate-degree program, per-graduate, is $14,932 at two-year
private for-profit institutions, compared to $20,469 per-graduate at private not-for-profit
institutions and $49,864 per-graduate at public institutions.

 Similarly, the cost for programs leading to certificates is $9,037 per-enrollee at less-than-
two-year private for-profit institutions, compared to $16,694 per-enrollee at private not-
for-profit institutions and $20,738 per-enrollee at public institutions.

 Again, the relative efficiency of private for-profit institutions is even greater on a per-
graduate basis: The cost of a certificate level program, per-graduate, is $12,892 at less-
than-two-year private for-profit institutions, compared to $20,867 per-graduate at private
not-for-profit institutions and $25,891 per-graduate at public institutions.

As a result, the total cost of the President’s proposal using all three classes of institutions,
and especially private for-profit institutions, would come to $213 billion, compared to $246
billion if the policy were carried out using only public institutions.

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