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For-Profit Crackdown

For-profit colleges are being scrutinized financially and legally.

Photo by Library Loft (Flickr)

Education is not cheap, but a substandard education is even more costly.  Many for-profit schools are finding out that opening educational institutes only to make money is becoming a less-than-profitable venture.  The government has recently been cracking down on for-profit colleges that do not meet promised financial and educational expectations.In early May, the Securities and Exchange Commission (SEC) brought suit in federal court against ITT Tech, a well-known for-profit college.  The suit alleges that ITT ran two of its student loan programs fraudulently via creative accounting by hiding the poor performance of the programs.  In turn, investors of the loan pool were misled as to the value of their investment.   ITT had been making the bare minimum payment due to its investors to avoid paying multi-million dollar fines.

Shares of ITT began to drop in 2014 when the SEC took notice of possible fraudulent activity.  Fortunately, ITT’s actions do not appear to affect its students directly.  However, the school’s image has been further tarnished, thus making it more difficult to enroll students in an already tough educational market.

If the for-profit college is unable to meet a specified student debt versus gainful employment ration, it risks losing all federal funding.

For-profit colleges, which are schools operated by private businesses, have come under significant fire lately for misleading students.  During the fall of 2014, the Department of Education issued “gainful employment” rules.  These rules aim to discourage colleges from charging exorbitant amounts for tuition if the degrees they offer are mostly worthless in the job market.  Because students are often unable to find jobs in their field after graduation, they default on their student loan payments.  In turn, the government loses a significant revenue stream.

If the for-profit college is unable to meet a specified student debt versus gainful employment ration, it risks losing all federal funding.  The schools at risk must also publish to all students, current and prospective, that there are identified issues and that aid could be taken away in the future.

The Association of Private Sector Colleges and Universities filed suit against the Department of Education, attempting to halt the rules.  In February of 2014, the APSCU filed for summary judgment, claiming that the rules “exceeded the Department’s statutory authority.”  Because the Department of Education is a cabinet department of the government, it likely does in fact have authority to promulgate such rules in order to promote quality education.  Additionally, APSCU alleged that the rules will force one-third of private for-profit institutions to close at the detriment to students because many of the students will not have transfer options. A decision has yet to be released in the case; however the recent mass shutdown of for-profit schools seems to indicate that the rules will stay in place.

A Department report found that Corinthian was paying companies to hire recent graduates immediately to boost its job placement rates.

Most recently, Corinthian Colleges shut down all of its campuses, including Everest College, WyoTech, and Heald College locations.  A week prior to the shutdown, Corinthian was fined $30 million by the Department of Education for publishing false job placement rates.  These published rates, which were essentially false advertising, misled both prospective and current students.  A Department report found that Corinthian was paying companies to hire recent graduates immediately to boost its job placement rates.  Additionally, the college would count any employment in its placement rates, whether or not the graduate was working in her chosen field.

Corinthian students were forced to abandon their educations while still working towards a degree.  The Department of Education planned to help these students find other education avenues.  Still, the students are left with the debt for the loans they borrowed to pay for Corinthian tuition.  With the college chain now defunct, students may find difficulty pinpointing just who to sue to pay those outstanding loans.

Corinthian’s demise can be chalked up as a success in the attempt to rid the United States of predatory for-profit schools.  In 2013, Jennifer Kerr sued Vatterott College for exaggerating job placement abilities.  She claimed the school told her that earning a medical assistant certification would quickly land her a job making a livable wage.  However, after completing the program, she discovered that she needed a different certification to obtain the promised job.  Although she only asked for $27,000 in loan repayment, the jury awarded her $13 million.

The government is also cracking down on advertisement loopholes utilized by for-profit colleges.

Similarly, the Richmond School of Health and Technology, Inc. agreed to pay $5 million as settlement for a class-action lawsuit.  The plaintiffs claimed that the school intentionally targeted low-income African-Americans by advertising on BET in order to reap student aid money.  Yet, according to the suit [pdf] , the programs the school offered did not nearly provide students the necessary education to pass certifications for their chosen career track.  School employees were also accused of changing grades for failing students in order to continue billing for tuition.  The institute has since rebranded as Chester Career College, but was still required to truthfully report on job placement rates as part of the settlement.

President Obama’s 2016 budget proposal would drastically cut the amount of federal aid for-profit institutions receive when enrolling veterans.  Currently, schools may only receive 90% or less of their funding through government sources.  However, this rule fails to account for GI Bills, which are not considered part of the 90% cap.  Therefore, many for-profits advertise to veterans in an attempt to receive GI Bill tuition.  Under Obama’s plan, GI Bills would count towards the 90% limit, affecting many schools that rely on the revenue.

Hitting close to home, Charleston Law School announced in early May that it may not enroll a 1L class for the coming fall, and may be in danger of shutting down.  The for-profit law school in downtown Charleston is in debt, and fears that it may not be in a position to let students take out federal aid in the near future.  The news has angered many in light of the $25 million profit that the owners received from 2010 to 2013.  Last year the school rejected attempts from InFiLaw, a for-profit company that owns Charlotte School of Law and Florida Coastal, to buy out the school.  Above the Law recently reported that Charleston Law is reconsidering the offer in order to save the school if InFiLaw will have them.

By no means are all for-profit schools scams, nor are all for-profit colleges expected to go out of business in the near future.  The recent negative publicity is certain to make consumers more weary of their educational choices, and may additionally bring a plethora of lawsuits from current students and former graduates of the schools. But with the recent activity in the courts, the government is sending a message—for-profit colleges must offer valuable education to its students.

Paige Miles Feldmann, Managing Editor
About Paige Miles Feldmann, Managing Editor (20 Articles)
Paige Miles Feldmann is a 2016 graduate and served as the Managing Editor of the Campbell Law Observer for the 2015-2016 academic year. Originally from Erie, Pennsylvania, she graduated from Penn State with a finance degree. Following her first year of law school, she interned with the Clerk of Superior Court for Chatham County, the Wake County Family Court, and the Wake County Public Defender. She also competed on a Campbell Law Trial Team in the Buffalo-Niagara Mock Trial Competition. Paige worked with the Wake County District Attorney as an intern in the misdemeanor section during her third year.
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