Some Fraudulent For-Profit Colleges Are Still Receiving U.S. Funds

Students waited for information in April after Corinthian Colleges announced it would shut down Everest College in City of Industry, Calif. Credit Christine Armario/Associated Press
Students waited for information in April after Corinthian Colleges announced it would shut down Everest College in City of Industry, Calif. Credit Christine Armario/Associated Press

When the Obama administration agreed this summer to erase the federal loan debt of some former students at Corinthian Colleges, a for-profit school that filed for bankruptcy in the face of charges of widespread fraud, education officials promised to “protect students from abusive colleges and safeguard the interests of taxpayers.”

But the Education Department, despite a crackdown against what it calls “bad actors,” continues to hand over tens of millions of dollars every month to other for-profit schools that have been accused of predatory behavior, substandard practices or illegal activity by its own officials or state attorneys general across the country.

Consider the Education Management Corporation, which runs 110 schools in the United States for chefs, artists and other trades. It has been investigated or sued in recent years by prosecutors in at least 12 states. The Justice Department has accused the company of illegally using incentives to pay its recruiters. And last year, investors filed a class-action lawsuit, contending that the company engaged in deceptive enrollment practices and manipulated federal student loan and grant programs.

Education Management nonetheless received more than $1.25 billion in federal money over the last school year.

The career training and for-profit college industry has been accused in recent years of preying on the poor, veterans and minorities by charging exorbitant fees for degrees that mostly fail to deliver promised skills and jobs.

Despite stepped-up scrutiny, hundreds of schools that have failed regulatory standards or been accused of violating legal statutes are still hauling in billions of dollars of government funds. They include tiny beauty schools with staggering loan default rates and online law schools with dismal graduation records and no bar association accreditation. Without government funds, which account for the overwhelming bulk of revenue, few of these institutions could attract students or stay in business.

The continuing flow of money illustrates the quandary facing federal education officials. On one hand, they have moved forcefully to try to protect taxpayer funds and prevent students from falling deeply into debt without anything to show for it. On the other, they must avoid running roughshod over private for-profit schools that have not been found guilty of wrongdoing. Agency officials point out that they cannot withhold money based on accusations, but must have proof of misconduct.

For example, Education Management, which says it is cooperating with prosecutors, says it “strongly disagrees” with the Justice Department allegations.

Regulators are caught between an industry that says it is being unfairly demonized by opponents and critics who complain not enough is being done to prevent fraud and abuse of vulnerable students.

A Quandary

“For-profits successfully serve a lot of students, and the department has been very sensitive to having all students suffer for what may only affect some students in some programs,” said Kevin Kinser, an associate professor who studies for-profit colleges at the State University of New York at Albany. “So they are reluctant to throw the baby out with the bath water.”

Mr. Kinser pointed out that the Education Department had little flexibility under the law when it came to cutting off federal student loan and grant money to potential abusers. “There are individual triggers in place for financial viability, institutional integrity, et cetera,” he said, “but no three-strikes-and-you’re-out rule.”

Education officials say they have clamped down on many for-profit schools, restricting their ability to expand their programs or the number of campuses, capping the number of students eligible for student loans, or requiring schools like Education Management to post a letter of credit to gain access to federal student loans and grants. The letter is meant to protect students and taxpayers if the company is unable to cover federal student-aid liabilities.

“What’s clear to all of us is that the best way to solve this problem is at the front end and not to let bad schools operate,” said Ted Mitchell, the under secretary of education. The agency’s “more aggressive stance,” he said, helped contribute to an 18 percent drop in enrollment at for-profits from 2011 to 2013.

Still, critics say that even schools with egregious violations have become adept at exploiting loopholes, sidestepping rules or taking advantage of yearslong appeals processes. Companies with several campuses can pool graduation, financial, enrollment, staffing and other statistics to mask weak performers, experts say.

“Bright-line standards are good, but they can also be managed,” said Ben Miller, senior director for postsecondary education at the Center for American Progress, a liberal research and advocacy group. “It’s why almost nobody gets caught. The big schools know how to work the numbers to avoid failing.”

For example, the government can withhold student loan payments when a college’s default rate surpasses 30 percent three years in row — a signal that a school has a high dropout rate or that its students are not making sufficient income to pay back their loans. But several schools have figured out how to lower their rates by getting students temporary deferments or forbearances so they fall outside the three-year window.

Nearly 100 schools have a student loan default rate that exceeds 30 percent. Last year, they received $116 million in federal aid from the Education Department.

A new study by Adam Looney, of the Treasury Department, and Constantine Yannelis at Stanford University, found that since 2000, “most of the increase in default is associated with the rise in the number of borrowers at for-profit schools.” For-profit schools enroll about 12 percent of the nation’s college students, yet they account for nearly half of student loan defaults.

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Source: The New York Times | PATRICIA COHEN