Over the last few years, for-profit schools have been under fire for a range of issues including deceptive recruiting practices, misrepresentations about job placement, and poor management of finances.
“Decisions on how to interpret data, allocate funds, and create the curriculum are determined based on a profit motive rather than the best interests of the student body.”
For-profit schools are private schools that are run by companies that operate according to the needs of investors and stockholders. The term “for-profit” should not be confused with private schools that operate as non-profits. These types of institutions function as a non-profit and follow the leadership of a board of trustees. The difference aside, key decision-making is altered due to the influence of a company’s investors. Decisions on how to interpret data, allocate funds, and create the curriculum are determined based on a profit motive rather than the best interests of the student body.
These issues have come to light due to numerous allegations and lawsuits from students in various for-profit schools. The repeated allegations from the students led enforcement agencies and attorneys general around the country to also file lawsuits against various for-profit schools for a variety of offenses, but most notably, fraud. While litigation is pending, the Department of Education has implemented additional regulations for for-profit schools which have been alleged to be misleading prospective students. One of the for-profit schools that drew the attention of the government is ITT Technical Institute (ITT).
In August, the Department of Education (DOE) barred ITT from enrolling new students who receive federal aid. This was a crushing blow to the school which raked in most of its revenue from federal aid. In 2015, sixty-eight percent of the company’s $850 million revenue was derived from federal aid. Contemporaneously, the Department of Education required that ITT increase surety by holding a reserve of $247.3 million, or forty percent of the federal funding that ITT received in 2015. In addition, ITT had to acquire the increase in security within thirty days of the demand, or else the Department of Education would close the school. Unable to fulfill the requirement, ITT filed Chapter 7 Bankruptcy on September 6, 2016 in the United States Bankruptcy Court in Indianapolis.
“[W]hen the students graduated, they found that the employment opportunities were exaggerated and the jobs that they invested thousands of dollars into were unavailable.”
The DOE imposed the regulations after arriving at the conclusion that ITT’s poor management of finances put the students at greater risk of defaulting on student loans. Primarily, the DOE did not approve of the ratio of federal aid to other assets on ITT’s books. The way ITT managed their finances put students at risk of investing in education with high loans and little career opportunity to help repay loan obligations.
The national accreditor, the Accrediting Council for Independent Colleges and Schools (ACICS) approved ITT for federal aid several years ago under the auspices that ITT would provide education for careers with promising employment opportunities. For years, ITT accepted and educated thousands of students, all while advertising that their specific curriculum would help students acquire the necessary skills in order to succeed in certain industries. However, when the students graduated, they found that the employment opportunities were exaggerated and the jobs that they invested thousands of dollars into were unavailable. In light of this trend and complaints from students, lawsuits started to emerge. Two years ago, the Consumer Financial Protection Bureau filed a lawsuit against ITT alleging predatory lending. A year later, the Securities and Exchange Commission filed suit against ITT and two executives for fraud alleging that they concealed losses in student loan programs. With litigation pending and ITT’s balance sheet displaying that most of its revenue was derived from federal loans, the DOE felt that imposing harsh regulation on ITT was a reasonable measure. The DOE has made it clear that the restrictions were imposed to protect taxpayers and students.
“The rest of the for-profit school industry is struggling in other various ways”
A year ago, Corinthian College declared Chapter 11 bankruptcy after experiencing a barrage of state and federal lawsuits. Similar allegations were aimed towards Corinthian as they became notorious for misrepresenting job placement statistics and encouraging students to take on loans with a high rate of default. A Corinthian College investigation discovered that many admissions officers at the school were former telemarketers. When Corinthian College closed, 16,000 students were displaced. The government forgave the debts of those students costing American taxpayers $171 million.
The rest of the for-profit school industry is struggling in other various ways. Researchers at the Federal Reserve have found that since 2004, annual default rates for students attending four-year for-profit schools have been two to three times those of public or nonprofit private institutions.
The DOE has already taken action against the ACICS by revoking their accrediting recognition. Emma Vadehra, the Chief of Staff to the Education Secretary, sent a letter to the organization revoking their status and explained that ACICS’ track record did not inspire confidence in their ability to be an effective watchdog over student’s interests and tax dollars. Last year, ACICS oversaw 725 institutions and overlooked $3.3 billion in federal aid. The ACICS plans to appeal the decision and reinstate their accrediting recognition.
“Students should be able to receive loan forgiveness, however, loan forgiveness also extinguishes all credit a student has received at that institution. Students, in essence, will have wasted the time that they were in school.”
Students have the opportunity to apply for debt forgiveness from the federal government through a “closed school discharge.” Students enrolled as of the date ITT declared bankruptcy or who withdrew from the school in the past 120 days is legally entitled to have their federal student loans forgiven under a closed-school discharge. Students should be able to receive loan forgiveness, however, loan forgiveness also extinguishes all credit a student has received at that institution. Students, in essence, will have wasted the time that they were in school.
Another option for students is to transfer their credits to another school that will accept them. The issue with this option is the tendency of a student to simply transfer to another for-profit institution whose practices are likely similar to ITT. For-profit schools who target students from another failing for-profit institution have been referred to as “vulture schools.” Vulture schools simply prolong the struggles that many students have withstood at a previous for-profit school.
Students can also apply to have their federal loans discharged if they can prove a school used illegal or deceptive tactics in violation of state law to persuade them to borrow money for college, a process known as a “borrower defense to repayment.” In order to be granted debt forgiveness, students must prove that the school that they attended used illegal recruiting tactics or conducted some type of fraud. Should the students obtain this type of discharge, their received credit is also extinguished.
In light of ITT’s bankruptcy, other for-profits are getting the picture to improve the curriculum and make more accurate representations about attending the school to prospective students. In addition, the DOE knows that the department needs to be more stringent in selecting accrediting agencies to better identify institutions that could potentially harm prospective students. ITT’s story is a tale that demonstrates that both the for-profit school industry and the government need to implement more comprehensive oversight mechanisms to better protect students and ensure that tax dollars are not wasted.