Policy Analysis No. 678

Federal Higher Education Policy and the Profitable Nonprofits

Undergraduate education is a highly profitable business for nonprofit colleges and universities. They do not show profits on their books, but instead take their profits in the form of spending on some combination of research, graduate education, low-demand majors, low faculty teaching loads, excess compensation, and featherbedding. The industry’s high profits come at the expense of students and taxpayer.

To lower the cost of education, federal government policies should encourage competition. Regulations should not favor nonprofits over for-profits. Further, the accreditation process should be reformed so that any qualified institution can easily enter the industry. The financial-aid process should be redesigned to remove the bargaining advantage that colleges currently hold over prospective students.

The higher-education industry is heavily subsidized by the federal government. These subsidies play a significant role in the high profitability of the industry and represent a massive transfer of wealth from the taxpayer to the industry. This should change. All tax credits and deductions should be eliminated immediately, as should all direct subsidies. The federal loan program should be restructured to eliminate the government subsidy and ensure that any deserving student can graduate from college without excessive debt, and eligibility for Pell grants should be tightened significantly. The net result of these changes would be greater efficiency and annual savings of $50 to $60 billion. To the extent that the federal government continues to play any role in higher education, its goal should be to ensure that all deserving students have access to higher education, not to maintain high industry profits.

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Vance H. Fried is Riata Professor of Entrepreneurship at Oklahoma State University and author of Better/ Cheaper College: An Entrepreneur’s Guide to Rescuing Undergraduate Education. His research focuses on higher education, entrepreneurship and public policy, the venture capital industry, and management of rapid-growth firms. Fried previously was a private-practice attorney, an oil company executive, and an investment banker.