Federal regulators have taken more interest in for-profit colleges since GW Bush left office. Until recently, regulations have been lax or poorly enforced. Meanwhile, a growing number of these for-profit institutions of higher learning have served as giant conduits for sucking federal financial aid money out of the public trust and into the hands of the private investors who own the colleges. Most of the money is student loan dollars, which are non-dischargeable debt owed by the student.
Until this week, the highest profile action against a for-profit school was the U.S. Department of Education's lawsuit against the University of Phoenix, which settled in 2007 for $9.8 million. Now the New York Times reports that:
The Department of Justice and four states on Monday filed a multibillion-dollar fraud suit against the Education Management Corporation, the nation’s second-largest for-profit college company, charging that it was not eligible for the $11 billion in state and federal financial aid it had received from July 2003 through June 2011.
The most interesting thing about this lawsuit (aside from the potential $33 billion in damages) is that the ownership of Education Management Corporation includes some names you might recognize: Goldman Sachs, and Maine senator Olympia Snowe.
I have some personal knowledge of how the higher education financial aid system works, having taught at an open enrollment, private, non-profit college in the past. My students were extremely diverse, but they had one thing in common: very few of them had a good educational background. Many had GEDs, or did poorly in high school. Most of them were poor. The school's open enrollment policy allowed them the opportunity to try. Financial aid was primarily in the form of loans. Some of them stayed in school. Some of them didn't make it and were on the hook for their loans. Either way, the school collected their tuition money, directly from the fed, and passed along the overage to the student for living expenses and books. Tuition per credit hour at private schools is four to five times as expensive as a state university. The overage checks are a big motivator for cash-strapped students to enroll.
According to the USDOJ complaint, Education Management wasn't very picky about who they enrolled:
The complaint said the company had a “boiler-room style sales culture” in which recruiters were instructed to use high-pressure sales techniques and inflated claims about career placement to increase student enrollment, regardless of applicants’ qualifications. Recruiters were encouraged to enroll even applicants who were unable to write coherently, who appeared to be under the influence of drugs or who sought to enroll in an online program but had no computer.
Federal rules prohibit schools that receive federal financial aid from using enrollments as their only metric for determining compensation of recruiters. Education Management denies that enrollments were their only metric.
The lawsuit would never have been filed if not for two former Education Management employees who acted as whistleblowers to the fed. Under the False Claims Act, which penalizes individuals and companies that obtain federal funds under false pretenses, defendants are subject to treble damages. Since Education Management received $11 billion in financial aid money between 2003 and 2010 (federal money accounted for 89.3 percent of its revenues in 2010), damages could add up to $33 billion.
Private, for-profit colleges have grown in numbers between 2000 and 2011, probably because they're so lucrative. According to another New York Times article, they now enroll 12 percent of all students in the United States, but those students account for half of all student loan defaults. The Department of Education has attempted to regulate the for-profit school industry, but has met with strong opposition from the regulated community:
The new default rates are only one point of dispute in a larger battle over the department’s efforts to impose new rules on the commercial colleges, which enroll about 12 percent of the nation’s college students...At the heart of the fight is the department’s new “gainful employment” rule, which would cut off federal financial aid to programs whose graduates have big student loans, low income and low loan-repayment rates.
The colleges have fought back by suing the government:
On Wednesday, a group representing commercial colleges sued the G.A.O., accusing it of negligence and malpractice over what the suit called an “erroneous and completely biased” report criticizing commercial colleges.
I give the Obama administration and Senator Tom Harkin credit for attempting to regulate this bunch, who aren't going to go down without a fight. An Associated Press article says:
A committee led by Sen. Tom Harkin, D-Iowa, has held multiple hearings on for-profit colleges over the past year — most recently in early July, after the Obama administration issued its new "gainful employment" rules. Those rules require schools to meet at least one of three conditions to continue receiving Pell Grants and other federal paid-tuition: a loan repayment rate by former students of least 35 percent; annual loan payments of no more than 30 percent of an average student's discretionary income; or annual loan payments that don't exceed 12 percent of a typical graduate's salary.
What's interesting is how deep the entanglements go. According to the New York Times, Wall Street is involved with Education Management in a big way:
Education Management, which is based in Pittsburgh and is 41 percent owned by Goldman Sachs, enrolls about 150,000 students in 105 schools operating under four names: Art Institute, Argosy University, Brown Mackie College and South University.
And Congress has its hand in the Education Management pie as well:
In 2003, Education Management’s chief executive was Jock McKernan, a former governor of Maine who now serves as chairman of the board. Mr. McKernan is married to Senator Olympia J. Snowe, a Maine Republican whose 2010 financial disclosure form lists Education Management stock and options worth $2 million to $10 million.
Another for-profit school, Kaplan University, is owned by none other than the Washington Post and has been a major profit center for the paper, which has experienced declining revenues in its news operation for several years. On July 26, the Florida Sun-Sentinel reported that Kaplan settled a False Claims Act lawsuit, also brought by whistleblowers, for $1.6 million.
What about nonprofit schools? Are their hands clean? Not exactly. Although they don't have private investors or shareholders to enrich with federal money, they work around the edges of their nonprofit status by hiring armies of administrators and compensating them well. Very well. The president's salary at my school is rumored to be over $500,000. Board members don't serve for free, either.
They say that if you teach, eventually everything will happen to you. I agree, but the most bizarre moment of my teaching career didn't happen in the classroom. It happened at a social event between faculty members and senior administration at my school. With a fatuously sincere look that only a republican could summon for the occasion, one administrator told me that our school is superior to the state universities because "we don't depend on the government for handouts."
I needed my job at the time, so I didn't laugh in his face. But now I wish I had.