The growing gap in the United States between a job market increasingly in need of workers with a specialized college education and the number of young people actually earning diplomas is a problem that appears to cry out for a free-market solution, with for-profit education companies stepping in to fill that void.

“There’s a saying that the bigger the problem, the bigger the opportunity,” Michael Moe, CEO of GSV Capital, a Silicon Valley venture capital firm focused on education-related investments, said during a recent Wharton panel discussion on the role of for-profit education. Noting that currently 80% of job openings require college degrees but just 30% of Americans are graduating from four-year universities, he added: “In today’s world of education, we can’t imagine a greater problem or a greater opportunity.”

But panelist Peter Smith, senior vice president for academic strategies and development at Kaplan Higher Education, which runs one of the nation’s largest for-profit universities, acknowledged that a major new initiative in the last year is actually sharply reducing Kaplan’s enrollment — by allowing new students to opt out of its programs at no charge after a brief trial period. He noted the so-called “Kaplan Commitment” experiment is expected to cost his firm $150 million annually but is a necessary response to rising rates of students who default on loans because they either don’t graduate or struggle in the job market after receiving their degrees.

“The longer a student lasts, the more valuable he or she is to you,” said Smith, a former U.S. congressman. “The worst thing in the world is to lose a student.”

The tension between the vast promise of capitalism-based solutions to America’s education crisis and its real-world problems — including record levels of student debt and loan defaults, with several well-known for-profit universities also under investigation for alleged boiler-room-style recruiting tactics — were on full display during the panel discussion, entitled “Are For-profit Educational Corporations Good for Democracy?” The panel took place at Wharton as part of the Penn Program on Democracy, Citizenship and the Constitution’s annual speaker series, which this year is focused on the corporation and citizenship.

The Wrong Debate

Despite a surge in negative headlines over the last year, including new federal rules aimed at cracking down on for-profit universities with high loan default rates, the panel of education entrepreneurs remained highly upbeat throughout a two-hour discussion. They insisted that profit-seeking companies will play a positive role in two of the biggest problems in American education: poor student achievement and the need for increased access to college.

The ability to make changes on a wide scale will be critical for addressing these problems, said Jonathan Harber, founder and CEO of, which develops educational assessment software used to improve classroom instruction in major school districts, such as Atlanta. (The company was bought last year by Pearson for $230 million.) After running through a litany of well-known issues facing America’s still largely public educational system — from high-school drop-out rates as high as 50% in some inner city schools to the country’s slipping academic-achievement rank among industrialized nations, especially in math and science — Harber noted that technology will play a key role in any turnaround. Because they lend themselves to large-scale implementation, tools like the assessment programs created by will be the quickest way to bring best practices across a nation with a hodgepodge of roughly 15,000 public K-12 school systems along with a growing number of charter and non-public schools, he argued.

Moe, whose GSV Capital has invested in Kno, a company offering textbooks for Apple’s iPad device, noted that patients rarely worry about whether the hospital they go to is a public facility or a for-profit one; they are mainly concerned with who is offering the best care. It’s common sense to look at the challenges in education through the same lens, he said. Given the magnitude of the problems in its education system, America should be grasping for a mix of solutions that bring results. “It really shouldn’t be a debate between profit and non-profit. The real issue in the years ahead is going to be ROE — Return On Education.”

The panelists suggested that the growing role of for-profit colleges — such as Smith’s Kaplan University but also the University of Phoenix or the Art Institutes owned and run by Pittsburgh-based EDMC — is a classic case of the market rising to meet a real demand. Moe noted that the nation’s elite universities like Harvard have grown little in undergraduate enrollment since a century ago, when just 3% of the population attended college; since 1990, however, college populations have swelled across the board from 15 million to 22 million, including a dramatic increase in older students requiring the flexible schedules offered by for-profit schools and more degree programs offered online. For-profit education could become a valuable part of the toolbox for closing the gap between the country’s haves and have-nots, he argued, by expanding the opportunities for middle-class Americans to attend college, and ultimately increasing their earning power.

Moe added that for-profit universities will likely continue to be part of the mix because of the growing need for adults to engage in higher education throughout their lives in order to remain employable. “In 2010, the 10 most in-demand jobs didn’t exist just a decade earlier,” he pointed out.

Default Disaster?

But the rise of for-profit colleges, which now comprise about 11% to 12% of overall enrollment in the United States, has been heavily fueled upfront by taxpayers. A school such as Kaplan University reports getting some 91.5% of its income from federal student aid, including Pell grants, Stafford loans and aid for veterans. Meanwhile, statistics showing a high rate of defaults on those loans and anecdotes of students graduating with huge debt loads — sometimes exceeding $100,000 — have generated growing controversy over whether for-profit colleges are truly benefitting students or whether they largely serve the interests of shareholders.

In 2010, The New York Times reported U.S. Education Department data showing that only 28% of Kaplan students were repaying their student loans, a figure that trailed similar-sized competitors like the University of Phoenix. At the time, Kaplan was also one of eight for-profit schools under investigation in Florida for high-pressure sales tactics. Officials with Kaplan, a subsidiary of the Washington Post Co., have said that the controversy is partly the result of their efforts to enroll more students from working-class and minority backgrounds. The company responded with changes that, coupled with the bad publicity, led to a 42% drop in enrollment last year.

Kaplan’s Smith noted that there is a strong connection between the cost of tuition and student payback rates, and that some conventional public or private non-profit universities have default rates that are similar to the more expensive for-profits. The company’s new “Kaplan Commitment” program, with its goal of weeding out unqualified or unmotivated students in the first few weeks of the academic year, should help the company achieve its goal of producing well-educated and employable graduates who can pay back any loans, he said, adding: “If we can’t talk about what it is that our graduates know, then we’re in the soup.” In recent years, Kaplan’s job placement record has been mixed. For example, its Pittsburgh campus reported that three-quarters of its medical-assistant graduates found jobs in the profession, but only half of criminal justice graduates found placement.

Vestiges of Colonialism’

Despite the drumbeat of criticism against Kaplan and some of its competitors, Smith sees his work with the company as a continuation of his lifelong passion for education reform, which began more than 40 years ago when he was the founding president of the innovative Community College of Vermont, as well as his later work with the United Nations Educational, Scientific and Cultural Organization (UNESCO), which included aiding troubled schools in Africa. “My purpose at Kaplan,” he said, “is to make [the company] better by embedding best practices.”

In response to questioners who wondered whether it was better for a democracy for education to remain predominantly public, with accountability through local school boards and other elected officials, the panelists pointed out that this system is largely in place now — and producing disappointing results.

“One of the last vestiges of colonialism is the way that we do schools,” said Harber, noting how poorly urban schools have done in helping students break free from poverty. In addition to creating, Harber has been active in community schools in Brooklyn, N.Y., where he lives. He argued that a leading criticism of school boards — that they focus too much on adults, from teachers to contractors, and not enough on kids — is valid. He would prefer to see students watching lectures at home on computers and using class time for discussion and interaction, but the barriers to such a radical change are high. “The structure is so strong,” he noted, specifically pointing to teachers unions as an obstacle to making speedy and radical changes that could help students.

Citing an investment his company made recently in Dreambox Learning, a computer-based interactive math teaching tool for grades K-3, Moe said he believes that for-profit ventures can advance American education because investors need to realize a profit. “You’ve got to make a return, and you can’t do that unless it works. There’s no magic bullet — it has to be a holistic approach.”

Asked about the ongoing crisis in the poverty-stricken Chester-Upland School District near Philadelphia in southwestern Pennsylvania, which has been on the verge of insolvency because of state budget cuts and money that it owes to charter schools, the panelists responded that policy makers need to be open to a mix of solutions that could include an expanded role for profit-seeking companies in turning things around. Said Kaplan’s Smith: “We will either innovate — or we all die.”