ITT Technical Institute had a nearly fifty year reputation and a massive infrastructure of 130 schools across the United States that left students feeling confident in their for-profit choice for a quality education. Although enrolled students can try to transfer their course credits or seek forgiveness on their federal student loans, the closure of the university costs 45,000 students in terms of years and broken dreams. Where 8,000 ITT employees face the loss of their jobs, hundreds of thousands of ITT alumni now bear the name of a discredited and defunct school on their resumes, which raises concerns about their credentials and future. For everyone else, the death of ITT Tech offers several lessons in education and business.
As a for-profit school, ITT Technical Institute set out to prove the power of choice and the incentive of profit could result in improved educational outcomes. With a weak graduation rate across its schools and the eventual loss of accreditation, among other issues, ITT Tech was clearly not an academic leader. Costing between $45,000 and $100,000 a year, ITT demonstrated profit is often just profit. One lesson here is that profiteering alone does not improve the quality of a service or reduce the cost of providing that service. Only when the added expense of profit improves the quality of a service and/or reduces the cost to deliver that service is profiteering beneficial. Profit becomes beneficial when the profit acts as an economic incentive to improve performance.
Absent well-crafted mechanisms designed to incentivize and shape individual actions, profit is simply an added expense. Unfortunately, most people do not truly understand how incentives work. An economic incentive can only work when it is encouraging an economic behavior while incentives tend to be short-term in nature. In addition, only individuals are motivated by incentives, not businesses. Performance bonuses for verifiably improved outcomes can improve performance. When management receives bonuses for the long-term success of their business, they are incentivized to improve performance. When management receives bonuses for short-term boosts in profits and cost reductions, they are incentivized to pursue quantity over quality.
As such, profit diverted to ITT shareholders served as an added cost and incentive to simply recruit as many students as possible. Similarly, numerous not-for-profit colleges and universities have diverted their “profits,” i.e. federal subsidies funneled through students, into unnecessary infrastructure, thereby adding costs to education and incentivizing unsustainable recruitment targets. ITT Tech would have likely been far better off relying on students, who pay their way without financial aid, and servicing the training needs of industrial partners. Instead, easy access to federal dollars allowed ITT to grow to an unmanageable, unsustainable size. Unfortunately, public and private not-for-profit schools face this same dilemma. Where ITT used students to divert its excess revenue to growth and profit, not-for-profits built athletic facilities and dormitories. In essence, ITT was just a part of a larger academic bubble that will burst at some point.
As ITT Technical Institute derived nearly 70% of its revenue from government sources, it may have been a for-profit company and it may have been a private school, i.e. non-government owned, but it was thoroughly dependent on government spending. While the management of ITT Tech was quick to deflect blame onto the Obama Administration, this is the hazard that comes from overreliance on federal dollars. Clearly, ITT students must feel resentment toward the Obama Administration, but this is the consequence of government correcting bad policies it should have long ago corrected. As a for-profit, ITT should have failed long ago. The longer it takes to recalibrate bad policies, the bigger the problems associated with those policies become, the more people are affected, and the far more damaging policy necessary corrections become.
The role of government in education is to maintain standards, i.e. regulate, and funding to ensure America’s competitiveness. Because the government poorly regulated ITT and inappropriately overfunds schools like ITT Tech, government fostered bad business practices. In an effort to start correcting standards and stop the wasteful spending of US taxpayer dollars, which was also indebting ITT students, ITT Tech was destroyed in the process. Where it would have taken years to decades for ITT to correct its ways, ITT’s swift death saved billions in taxpayer dollars and future ITT students from costly false promises. The big lesson here is that overreliance on government funds is a liability, not a certainty. The even bigger lesson is that government must be allowed to properly regulate, before the lack of regulation leads to devastation.
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