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For-profit college Latin lesson: caveat emptor

Ed Lotterman: Real World Economics
Ed Lotterman: Real World Economics

Twelve state attorneys general — not including Idaho’s — 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.

Their request presents evidence that ACICS has given accreditation to schools with low-quality programs, enabling them to market their courses to students under false pretenses. Students allegedly spend years of work and tens of thousands of dollars for education that will not qualify them for jobs or income promised.

These accreditations also are necessary for students to qualify for federal student aid or to use the GI Bill. Loss of accreditation can be a death blow for a for-profit school, because those schools are much more dependent on enrollees running up large federal student loans than traditional nonprofit or state colleges.

This raises some interesting economic questions:

▪  Why accredit schools at all?

▪  Why should government play a role, considering that the accrediting bodies are private-sector entities that predated the 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 involved. Without this, mistakes are made and resources wasted.

However, information is costly. Most decisions must be made with imperfect information. Often, this lack of information is small enough that resulting harm to satisfaction of needs is minor. For example, half the off-brand canning lids I bought didn’t seal. The zipper on my blue sweatshirt pulled apart in days. And the oddball V-6 engine in the used GMC pickup I once bought 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: Just handling a plank or a pair of pajamas tells you a lot. Other goods are so common that public opinion is reliable, e.g., traits of Ford versus Dodge pickups. It takes a while for information on a new product to accumulate, and early buyers may be hurt, as with the Chevy Vega in the 1970s. But characteristics of different models soon become known, and markets correct.

Schools, however, are not as uniform as pickups or lids. Most people expect to buy a post-secondary education only once. Education costs time and money. A bad decision may mean the loss of years. These days, it often involves going into debt. So losses from making bad decisions based on wrong information impose real personal costs and waste resources on a large scale.

Such losses are bad enough when blamed on miscalculation. They are worse when induced by systematic deception. That occurs often in for-profit schools. And it is facilitated if a body, like ACICS, that is supposed to be generating impartial and accurate information, instead facilitates the deception.

Deliberate deception so erodes economic efficiency that there long have been legal limits on it. Lying is an innately human activity. It is impossible to curb shading of the truth in commerce. We have a Latin name for this: caveat emptor — let the buyer beware. The problem is when the deception becomes systemic in a business sector with few checks or balances.

Which brings us to our other two points. When markets fail, one alternative may be government action. True, if some intermediate solution can be found, this is often better. Regional accrediting associations arose spontaneously. The North Central Association that accredits most private colleges in my region 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 curricula necessary for an adequate law or medical school.

However, cases like ACICS show it is necessary to have a mechanism to police the police. There is a close parallel between accrediting schools and the rating of bonds prior to the recent financial crisis. For both, it is important to prospective buyers to have reliable information. But such information is costly to accumulate, and once made available, is difficult to limit to those who pay. 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, conflicts of interest arise. Supposedly reliable bond-rating agencies fell all over each other to get business by implicitly offering false bond ratings. Similarly, ACICS, as alleged, could be providing its member institutions with undeserved accreditations.

And when federal dollars are on the line, in steps the government. The Department of Education does play a supervisory role in this, and now we have the attorneys general request.

One of our country’s greatest strengths has been the diversity of our post-secondary education system, with its 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, but others were cheated.

The action of the attorneys general is useful. It could restore lost efficiency in use of resources and curb harm by deception. We’ll see how this turns out.

St. Paul economist and writer Edward Lotterman can be reached at