U.S. to Join Suit Against For-Profit College Chain

The Justice Department plans to intervene in a whistle-blower lawsuit charging that one of the nation’s largest for-profit college companies, the Education Management Corporation (EDMC), defrauded the government by illegally paying recruiters based on the number of students they enrolled, according to a Securities and Exchange Commission filing on Monday.

An EDMC affiliated college, the Art Institute of Wisconsin, recently began operations in Milwaukee's Third Ward, in close proximity to the Milwaukee Institute of Art and Design (MIAD). It is one of several for-profit colleges, including Everest College, that have recently opened branches in the city.

The Art Institute anchored a controversial development that received $6.5 million in federal New Market tax credits from the Milwaukee Economic Development Corporation. I had written a letter in opposition to subsidizing this development with New Market tax credits because they are designed to promote development in poor communities, not gentrified areas like the Third Ward, and because of the large number of lawsuits against EDMC alleging unscrupulous business practices.

The Security and Exchange Commission filing by Education Management, known as EDMC, said “several states” also planned to join in the False Claims Act case, in federal court in Pittsburgh, alleging violations of their state laws.

According to the New York Times' Tamar Lewin:

This is the first time prosecutors have joined such a case, one of dozens in recent years that accuse the for-profit college industry of illegal practices devised to increase federal student aid revenue.


The company, which enrolls nearly 150,000 students, operates several career-college chains, including the Art Institute, Argosy University, Brown Mackie College and South University.


EDMC, 40 percent of which is owned by Goldman Sachs, said in its securities filing that its compensation plan for recruiters did not violate the law, and that it would “vigorously defend itself.”


In federal whistle-blower, or qui tam, suits filed under the False Claims Act, private citizens file fraud complaints on behalf of the federal government, seeking to recover public money that was wrongly paid out. The lawsuits are filed under seal, giving the government an opportunity to investigate and decide whether to intervene, so the one against EDMC has yet to be made public.


Some such suits have been settled for significant amounts of money. In 2009, Apollo Group, which operates the University of Phoenix, the largest chain of for-profit colleges, agreed to pay $78.5 million to settle one.


For-profit schools enroll about 12 percent of the nation’s higher-education students yet receive about a quarter of all federal student aid; their students account for almost half of all defaults. In general, these institutions get more than 80 percent of their revenues from federal student aid.


The United States Department of Education and Senator Tom Harkin, an Iowa Democrat who is the chairman of the Health, Education, Labor and Pensions Committee, have become concerned in recent years that such colleges too often leave their students with mountains of debt and no marketable job skills.


The Education Department has taken action to rein in abuses by the for-profit sector but has so far delayed the most controversial regulation it has proposed, the “gainful employment” rule that would cut off federal aid to programs whose graduates have high debt loads and not enough income to pay them.


The for-profit schools are lobbying intensely against the rule, and last week more than 100 members of Congress wrote to President Obama asking that his administration drop the gainful employment rule, which they say would cut off access to higher education for many poor minority students.

Supporters of the rule say it would not harm poor students but rather protect them from taking out large loans to enroll in expensive programs that would not lead to good jobs.

Civil Rights Coalition Backs Tough Rules for For-Profit Colleges

The Leadership Conference on Civil and Human Rights, a coalition of more than 200 national organizations, on Thursday released a letter strongly endorsing the proposed "gainful employment" regulations that would deny federal financial aid to programs that do result in employment with compensation sufficient to repay the loans.

The proposal is opposed by for-profit colleges that have spent hundred of millions of dollars lobbying against it.

The letter is designed in part to counter the lobbying campaign of the for-profit colleges which has argued that they institutions are helping low-income, minority students advance economically.

"For-profit colleges have launched an all-out campaign using the American Dream as bait to trap vulnerable students into underperforming schools and saddle them with a lifetime of debt,” said Nancy Zirkin, executive vice president of the Leadership Conference, in a statement. “We support the Education Department’s efforts to hold these schools accountable by issuing this rule and vigorously enforcing it.”

Consumer and minority groups urge tougher rule on for-profit colleges

A broad coalition of student, consumer and minority groups on Wednesday exhorted President Obama to issue a "strong and enforceable" rule aimed at ensuring that vocational programs prepare their students for "gainful employment."

The letter from 38 groups cites a series of practices in which "some" career education programs have deceptively recruited students, inflated and falsely reported job placement statistics, and buried students in debt, and urges the administration not to back away from its tough but "common sense" regulation. "We will support you every step of the way," they write, a nod to the intense lobbying in which opponents of the rule have engaged.

The signatories to the letter include higher education associations like the American Association of Collegiate Registrars and Admissions Officers and the Student Senate for California Community Colleges, unions like the American Federation of Teachers and the American Association of University Professors, and consumer groups such as the National Consumer Law Center and Public Citizen. But it may be most notable for the large number of minority advocacy groups represented, since advocates for for-profit colleges have lined up numerous minority lawmakers and business groups to laud the institutions' success in educating black and Latino students. Signers of Wednesday's letter include the League of United Latin American Citizens, the NAACP, and the National Council of La Raza.

The letter is linked here.

For profit college lobbyists work to undermine efforts to protect college students

For-Profit Colleges Step Up Lobbying Against New Rules

The New York Times' Tamar Lewin reports:

For-profit colleges have increased their lobbying against proposed Education Department rules to cut off federal financial aid to programs whose students take on too much debt for training that provides little likelihood of leading to a well-paying job.

In addition to making personal visits to Capitol Hill, executives at the colleges have provided employees with “personalized” letters to send to Washington and urged students to speak out against the proposals.

So far, the department has received about 45,000 letters on the proposed “gainful employment” regulations, in the comment period that ends Thursday.

Last week, John Sperling, the founder of the nation’s largest for-profit college, the University of Phoenix, e-mailed every member of Congress, seeking help opposing the regulations, and attached a sample letter to be sent to Education Secretary Arne Duncan, asking him to withdraw them.

Donald Graham, the chairman and chief executive of The Washington Post Company, which gets most of its revenue from its Kaplan education business, visited Senator Tom Harkin, Democrat of Iowa, whose Health, Education, Labor and Pensions Committee is holding hearings on the for-profit education industry.

Under the proposed regulations, announced July 23, for-profit education programs would qualify for federal student aid only if enough former students were repaying their student loans, or if graduates generally earned enough to repay their debts.

Many for-profit colleges have urged students, professors and administrators to send in criticisms of the proposals.

The Education Management Corporation (owned by Goldman Sachs), the second-largest for-profit company, hired DCI Group, a public relations firm, to contact its employees for information that would be used to create a personalized letter, which would then be delivered back to the employee for signature, along with a stamped, addressed envelope.

“EDMC believes it is important, that during this public-comment period on the proposed Federal Gainful Employment Rule, that our students, faculty and staff have the opportunity to voice their opinion, if they choose to do so,” said Jacquelyn Muller, a spokeswoman for the company.

EDMC also has a Web site, the Higher Education Action Center, guiding students or employees to oppose the regulations, offering “pre-crafted” letters. Argosy, a unit of EDMC, said last month in an e-mail soliciting more comments that more than 2,000 people had used the site in the previous week. It is unclear how many comments were generated by for-profit colleges’ campaigns.

Some of the letters show little familiarity with the proposed regulations. For example, a Education Department official said, students at a particular school sent in dozens of hand-written letters asking for continued aid to for-profit colleges, but never mentioning the regulations. He said he called a letter-writer to ask whether the letter was intended as a comment on the regulations, and was told, “This is what the school asked us to write.” He would not identify the school.

The department said the new regulations would protect students from programs that saddled them with heavy debts and gave them credentials that proved to be of little value in finding a good job.

Last month, the Government Accountability Office said an investigation found fraud or deceptive practices at all 15 of the for-profit locations it visited.

Students at for-profit colleges, about 10 percent of those enrolled in higher education, are far more likely to default on their loans.

Senate Grilling of For-Profits; Listen on Line

June 23, 2010, 03:35 PM ET
Senate Grilling of For-Profits: Join the Conversation Online
By Marc Parry Chronicle of Higher Education

All eyes will be on the for-profit-education industry Thursday as the U.S. Senate convenes the first in a series of hearings examining federal spending on proprietary colleges. If you care about online education, it's worth paying attention because for-profits are gobbling up a growing share of the e-learning market.

Here's how you can follow along and join in the conversation online:

The hearing kicks off at 10 a.m., Eastern Daylight Time, and will be Webcast here. I'll be reporting live from the event on Twitter (@marcparry). If you're on Twitter, you can contribute to our coverage by using the hashtag "#4profit." All tweets with that tag will be published in a box on The Chronicle's home page.

A key witness testifying will be Steven Eisman, a hedge-fund manager who predicted the housing bubble and is now issuing similar warnings about for-profit higher education. He played a part in Michael Lewis’s best-selling book, “The Big Short: Inside the Doomsday Machine.”

For more on the issues at play Thursday, check out this morning's story by Chronicle reporter Paul Basken: "New Grilling of For-Profits Could Turn Up the Heat for All of Higher Education." hearing.

Investor says for-profit colleges are morally bankrupt and socially destructive

By Andy Kroll

Steve Eisman, the outspoken investor whose huge wager against the subprime mortgage market was chronicled by author Michael Lewis in his bestselling book The Big Short, has set sights on a new target: for-profit colleges of the kind of you might see advertised on daytime TV and at bus stops. Think ITT Educational Services, Corinthian Colleges, or Education Management Corporation.

In a speech titled "Subprime Goes to College," delivered Wednesday at the Ira Sohn Investment Research Conference, Eisman blasted the for-profit education industry, likening these companies to the seamy mortgage brokers who peddled explosive subprime loans over the past two decades. "Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong," Eisman said. "The for-profit education industry has proven equal to the task." (All of Eisman's remarks come from a copy of his prepared remarks...)

Eisman, a blunt, no-frills portfolio manager at FrontPoint Financial Services Fund, a Morgan Stanley subsidiary, became an overnight sensation as one of the main characters in Lewis' latest. After witnessing the first wave of subprime madness in the 1990s, Eisman grew skeptical of the industry as a whole, Lewis writes. Then, when subprime surged again in the 2000s, he put his knowledge to work. Needless to say, he's a lot richer than he was two years ago.

The for-profit education sector has soared over the past decade, making companies like ITT and Apollo Group into heavyweights. Driving much of the growth, Eisman explained, was the sector's easy access to federally guaranteed debt through Title IV student loans. In 2009, he said, for-profit educators raked in almost one-quarter of the $89 billion in available Title IV loans and grants, despite having only 10 percent of the nation's postsecondary students.

Eisman attributes the industry's success to a Bush administration that stripped away regulations and increased the private sector's access to public funds. "The government, the students, and the taxpayer bear all the risk and the for-profit industry reaps all the rewards," Eisman said. "This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper." (Calls to several for-profit colleges, including ITT and Corinthian, were not immediately returned.)

Another similarity between subprime lending and for-profit education is this, Eisman said: Both push low-income Americans into something they can't afford—in the schools' case, pricey programs that leave the students heavily in debt; what's more, the degrees they get mean little in the real world: "With billboards lining the poorest neighborhoods in America and recruiters trolling casinos and homeless shelters—and I mean that literally—the for-profits have become increasingly adept at pitching the dream of a better life and higher earnings to the most vulnerable."

Eisman went on to cite the industry's dropout rates of 50-plus percent as another sign of poor quality; the numbers are likely understated, he added, given that the industry reports them voluntarily. "How good could the product be if dropout rates are so stratospheric?" he asked. "Default rates are already starting to skyrocket. It's just like subprime—which grew at any cost and kept weakening its underwriting standards to grow."

How does this kind of industry even stay in business? That, Eisman asserted, has much to do with accreditation. There are two main tiers of college accreditation: national and regional—the latter being the more valuable. (Big schools like Yale and the University of Michigan are regionally accredited.) As Pulitzer Prize-winner Dan Golden has reported, for-profit colleges with the weaker national accreditation have started acquiring financially troubled colleges for their regional accreditation. In a Bloomberg report, Golden cites ITT's acquisition of New Hampshire-based Daniel Webster College in June 2009 for $20 million, a purchase that could ultimately reap $1 billion or more for ITT.

Eisman saved the ugliest part for last: As he sees it, the industry's era of massive profits—ITT is more profitable on a margin basis than Apple, he notes—are about to end, thanks to new government regulations in the pipeline. He predicts big hits to the per-share earnings of Apollo Group, ITT, Corinthian Colleges, Education Management Corporation, and the Washington Post Company—which owns and relies on Kaplan for profitability. For ITT and Corinthian, Eisman foresees 2010 losses of nearly 40 to 50 percent. Regarding EDMC, he noted in his prepared remarks that the company's 2010 fiscal estimate is "massively negative."

Eisman ended with a warning:

Are we going to do this all over again? We just loaded up one generation of Americans with mortgage debt they can’t afford to pay back. Are we going to load up a new generation with student loan debt they can never afford to pay back? The industry is now 25 percent of Title IV money on its way to 40 percent. If its growth is stopped now and it is policed, the problem can be stopped. It is my hope that this administration sees the nature of the problem and begins to act now. If the gainful employment rule goes through as is, then this is only the beginning of the policing of this industry.

But if nothing is done, then we are on the cusp of a new social disaster.

Not all experts on the for-profit education foresee such an ominous future. Trace Urdan, a managing director at Signal Hill who analyzes the industry, told Mother Jones earlier this week that pending regulation from Washington could indeed complicate the future for for-profit colleges. He added, however, that "if you're short on the industry right now, you think there's a game-over scenario on the way"—something Urdan himself doesn't necessarily see happening.

Should the Education Department strongly crack down on for-profit schools, Urdan said he predicted losses of 8 to 12 percent—far less than Eisman's 40 to 50 percent projection.

Andy Kroll is a reporter at Mother Jones. For more of his stories, click here. Email him with tips and insights at akroll (at) motherjones (dot) com.

Dilpoma mills spend millions to stop regulation

In response to for-profit colleges' escalating student loan default rates and deceptive recruitment practices the federal government has proposed tough new regulations.

In response,these lucrative diploma mills like Corinthian College Inc. and the Education Development Management Corporation (EDMC) which have announced plans to begin operations in Milwaukee are spending millions of dollars on lobbyists to undermine the legislation.

The Chronicle of Higher Education reports that:

For-profit lobbyists and executives are swarming Capitol Hill and federal agencies...

For-profit colleges, faced with the threat of program closures, have gone on a lobbying and public-relations blitz, spending hundreds of thousands of dollars in an attempt to beat back an Education Department proposal to cut off federal student aid to for-profit programs whose graduates carry high debt-to-income loads.

In the five months since the department offered its controversial "gainful-employment proposal," for-profit colleges and their chief association have spent at least $620,000 lobbying members of Congress, the Education Department, and the Office of Management and Budget, which is reviewing the department's proposed rule (see related article, with tables). The University of Phoenix, the nation's largest for-profit institution, has taken out ads in major publications, including The Chronicle, defending the sector and arguing against the rule, while for-profit colleges are urging their students to sign on to a petition opposing the plan.

Last year, Corinthian alone spent $460,000 and the EDMC $270,000. In 2009-2010Proprietary colleges spent a total of $3.1 million on lobbying.

Lobbying by For-Profit College Groups, 2009-10

Apollo Group Inc. $560,000
Corinthian Colleges Inc. $460,000
DeVry Inc. $460,000
Career Education Corp. $360,000
Bridgepoint Education $270,000
Education Management Corp. $270,000
Career College Association $250,000
American Public University System $240,000
Kaplan Inc. $200,000
Capella University $60,000
ITT Educational Services Inc. $30,000
Concorde Career Colleges Inc. $20,000
Total $3,180,000

Notes on lobbying expenditures: Figures are approximate because federal rules do not require reporting of actual amounts of lobbying expenditures. To avoid double-counting of outside lobbyist expenses, The Chronicle took into account that organizations employing in-house lobbyists must include the costs of outside lobbyists in their quarterly reports. Figures show spending for all of the 2009 calendar year and the first quarter of 2010.
Source: Chronicle analysis of Lobbying Disclosure Act Database, U.S. Senate

For-profit colleges fight tough new rules, cuts in federal aid

By John Hechinger and Daniel Golden, Bloomberg News

The Obama administration is preparing to produce tougher regulations that could reduce the amount of federal financial aid flowing to for-profit colleges, cutting the companies’ annual revenue growth by as much as a third.

In response, the $29 billion industry and its supporters have enlisted top Washington lobbyists and are courting black and Hispanic legislators to fight the proposed rules, which could be released as early as this month. The companies draw students from low-income and minority communities.

Federal aid to for-profit colleges has become an issue because it jumped from $4.6 billion in 2000 to $26.5 billion in 2009, according to the Education Department, prompting concern that these students are taking on too much debt.
The tougher rules would require ITT Educational Services, Career Education, and Apollo Group’s University of Phoenix to show that their graduates earn enough money to pay off their student loans. If for-profit colleges can’t meet the standard, they could lose federal financial aid, which typically makes up three-quarters of their revenue.

The proposed rules may disqualify for-profits from receiving federal financial aid if their graduates must spend more than 8 percent of their starting salaries on repaying student loans.The regulations may slow or even halt tuition increases at ITT, Education Management Corp., Lincoln Educational Services, Universal Technical Institute, and Career Education because many graduates take low-paying jobs in criminal justice, cooking, and medical office work, Trace Urdan, an analyst at Signal Hill Capital Group in San Francisco, said.

Education companies have increased revenue by as much as 15 percent and enrollment by 8 percent to 10 percent on an annual basis, while raising tuition about 4 percent to 6 percent a year, Urdan said. The new rules may slow their revenue growth by one-third by limiting their ability to raise tuition.The Education Department plans to issue the regulations without congressional approval, unlike the student-loan legislation that passed in March. Several Republicans in Congress objected to the changes.

Senator Lamar Alexander, a Tennessee Republican who chairs the Senate Republican Conference, is trying to persuade Education Secretary Arne Duncan to reconsider the regulations, said a Republican aide on the Education Committee.The new regulations would shut 300,000 students out of classes and eliminate 2,000 educational programs, according to a study commissioned by the Washington-based Career College Association, which represents for-profit colleges.

Diploma mills recruit at halfway houses and homeless shelters

Bloomberg Businessweek reports that for-profit schools are recruiting students at homeless shelters and halfway houses, enticing them into huge debts to pay for overpriced programs and sticking taxpayers with the bill.

The article also notes that Goldman Sachs, the high profile investment firm and bailout recipient whose CEO recently testified before Congress about alleged improprieties, owns (38%) the Education Management Corporation, the owner of the Art Institute of Milwaukee which is seeking a public subsidy (new market tax credits) to anchor a redevelopment project in Milwaukee's 3rd ward.

Have these billionaires no shame?


The expose is linked.

For profit colleges criticized by Education Department leader

The U.S. Department of Education's Robert Shireman compared the growth of for-profit colleges like Corinthian, the Art Institute and Strayer, all of whom have announced that they will establish campuses in Milwaukee, to the Wall Street firms that caused the nation's financial collapse.

Shireman called the colleges out by name for the vast and quickly increasing sums of federal student aid money they are drawing down and noted that most of them are accredited by agencies composed of their peers, creating a conflict of interest reminiscent of that between Wall Street and the accrediting agencies that turned a blind eye to the reckless trading that created the worst financial panic since the Great Depression.

The full story from Inside Higher Ed is linked.