For-profit college Latin lesson — caveat emptor

Twelve state attorneys general, including Minnesota’s Lori Swanson, have asked the federal government to revoke the accreditation authority of the Accrediting Council for Independent Colleges and Schools, the largest body that certifies the academic credentials of for-profit post-secondary schools.

And in a 2014 lawsuit that went to trial this month, Swanson alleges two ACICS-accredited schools, Globe University and the Minnesota School of Business, inflated the value of the degrees they offered to students.

In their letter to U.S. Education Secretary John King, the attorneys general present substantial evidence that ACICS has given unmerited accreditation to schools with low-quality programs, enabling them to market their courses to students under false pretenses. The students allegedly spend years of work and tens of thousands of dollars buying an education — and related degrees, diplomas or other credentials — that, in fact, will not qualify them for the jobs or income they were promised.

These schools’ accreditations also are necessary for students to qualify for federal student aid in grants and loans or to use GI Bill funds earned in service to our country. Loss of accreditation can be a death blow for a for-profit school, because these schools are much more dependent financially on enrollees running up large federal student loans, and receiving aid, than traditional nonprofit colleges that have resources from state taxpayers, constituents, religious denominations, alumni and endowment funds.

This raises some interesting economic questions:

  • Why accredit schools at all?
  • Why should government play a role, considering the accrediting bodies are private-sector entities that often existed before there was a federal Department of Education?
  • How would inaccurate or even fraudulent information affect the overall economy?
  • Let’s start with the last point first. This is an example of what economists call a “market failure” due to insufficient and asymmetrical information.

    Efficient use of resources means someone deciding on buying or producing a good or service needs reliable information on all the costs and benefits of the decision. Without this, mistakes are made and resources wasted. However, information is costly to accumulate, and most decisions must be made with imperfect information. In many situations, this lack of information is small enough that the resulting harm to the satisfaction of needs obtained is minor. For example, it turned out that half the off-brand canning lids I bought last summer didn’t seal. The zipper on the blue sweatshirt pulled apart after two weeks of wear. And the oddball V-6 engine in the used GMC pickup I bought 40 years ago was not “just as good as a Chevy V-8.” These incidents caused frustration but not a huge loss or waste of resources to the economy as a whole.

    The quality of some goods is evident upon physical inspection — just handling a plank of wood or a pair of pajamas tells you a lot. Other goods are so uniform and so common that public opinion is a guide, i.e. the strengths and weaknesses of Ford versus Dodge pickups. Sometimes it takes a while for information on a new product to accumulate, and early buyers may be hurt, as with the Chevy Vega, but the characteristics of different models soon become well-known, and the market corrects.

    Schools, however, are not as uniform as F-150 pickups or canning lids. Most people expect to buy a post-secondary education only once. Education is expensive in time and money. A bad decision may mean the loss of years of one’s very finite youth. These days, it often also involves going into debt, which adds years and dollars to the cost. So the losses from people making bad decisions based on wrong information have real personal costs and waste real resources on a large scale.

    Losses due to wrong information are bad enough when blamed on simple miscalculation. They are worse when induced by systematic deception. That is alleged to occur all too frequently in for-profit schools. And it is facilitated if a body, like ACICS, that is supposed to be generating impartial and accurate information is instead allegedly facilitating the deception.

    Deliberate deception is so erosive of economic efficiency that there have been legal limits on it for centuries. Lying is an innately human activity. It is impossible to curb some degree of shading of the truth in commerce. We even have a Latin name for this: caveat emptor — let the buyer beware. Even the ancient Romans knew to take the assurances of a used-chariot dealer with a large grain of salt. The problem is when the deception becomes systemic in a business or industry with little or no checks or balances.

    Which brings us to our other two economic points. When markets fail in this way, one alternative may be government action. True, if some intermediate solution can be found, this is often better. The regional private accrediting associations arose spontaneously. The North Central Association that accredits most of the private colleges in Minnesota dates to 1895. The Engineers Council for Professional Development, which accredits engineering programs, dates to 1932. Other professional associations such as the American Bar Association and American Medical Association specify the minimum curriculum necessary to have an adequate law or medical school.

    However, cases like ACICS show it is necessary to have some mechanism to police the police. Here, we find a close parallel between the accreditation of schools and the rating of bonds, especially during the recent financial crisis. In both cases, it is important to prospective buyers to have reliable information about the thing they contemplate buying. But such information is costly to accumulate, and once made available, it is difficult to contain. Therefore, there is no incentive for buyers to fund the rating agencies through fees.

    The response was to make sellers pay for rating or accreditation. But as we found out a decade ago, when the seller pays, severe conflicts of interest can and do arise — supposedly reliable bond rating agencies fell all over each other to get the business of rating the bonds, possibly by unethically guaranteeing false positive bond ratings. Similarly, ACICS, as alleged, could be providing its member institutions with positive accreditations they may not deserve.

    Add that federal taxpayer dollars are on the line in the form of aid, grants and loans, and in steps the government. The federal Department of Education does play a supervisory role in this, and now we have attorneys general action and Swanson’s lawsuit.

    One of our country’s greatest strengths has been the diversity of our post-secondary education system, with a mix of public and private institutions. The private ones always have been predominantly nonprofit, but some for-profit schools long have played a useful role. This sector burgeoned over the past two decades — largely, it seems, in response to federal student aid. Many students have gotten value for money from these schools, and some have been cheated.

    The action of the attorneys general is a useful one that could restore lost efficiency in use of resources as well as curb harm by deception. We’ll see how these cases turn out.