Suits claim for-profit schools lie to enrollees, target those needing federal loans

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September 9, 2010

Suits claim for-profit schools lie to enrollees, target those needing federal loans 

A Government Accountability Office investigation found that many for-profit colleges made deceptive or questionable statements to prospective students, including underestimating the costs of their programs, giving false statistics for employability after graduation, and encouraging applicants to lie on their federal financial aid forms. Students and shareholders have filed several class actions.

By Courtney L. Davenport

Several class actions have been filed against for-profit colleges in recent months, following the disclosure last month of a U.S. Government Accountability Office (GAO) undercover investigation that found that they consistently boost federally subsidized enrollment by deceiving applicants and sometimes encourage them to lie on financial aid forms.

For-profit colleges are occupation-specific institutions that offer degrees and certifications in everything from cosmetology to criminal justice. Most of their revenue—sometimes as much as 89 percent—comes from federal student loans or grants, making high enrollment a priority. The industry has been largely self-regulated, but an explosion in enrollment growth over the last few years has spurred closer government scrutiny.

The GAO determined that the schools charge much more for their courses than public universities and private nonprofit colleges. For instance, one charged almost $14,000 for a computer-aided drafting degree, compared with $520 a nearby public college charged for a similar degree. The U.S. Department of Education (DOE) has previously determined that for-profit school graduates have an “alarmingly high” rate of student loan debt and defaults.

“These colleges do not appear to have any enrollment standards, and cost appears to be irrelevant because the federal government is paying for the vast majority of this,” said Gregory Kutz, the GAO’s managing director of forensic audits and special investigations, at a hearing before the Senate Committee for Health, Education, Labor, and Pensions the day the report was released. “So the aggressive marketing of anybody walking in the door should not be a surprise here to anybody.”

Shareholders have filed class actions against several colleges in recent weeks, claiming the schools artificially inflated their profits by fraudulently inducing students to enroll. The investors lost money when stock prices fell after the GAO report was released. (Moreaux v. Lincoln Educ. Servs. Corp., No. 2:10-cv-04160 (D.N.J. filed Aug. 13, 2010).)

Two enrollees at a for-profit school that operates in six states, Westwood College, also filed a class action, alleging the school’s staff lied to applicants about the cost of their education, their ability to later transfer their credits to other schools, the schools’ accreditation, and the potential of finding a job in their field after graduation. The enrollees claim sales agents masquerading as admissions specialists are compensated based on how many applicants they sign up and target people who are most likely to require financial assistance. The case was previously dismissed by an arbitrator because there was no class action clause in the arbitration provision. (Bernal v. Burnett, No. 1:10-cv-01917 (D. Colo. filed Aug. 11, 2010).)

A handful of other class actions are pending against Westwood, including one filed in Wisconsin in July.

“The schools said basically anything to get individuals to agree to enroll and borrow money from various sources, all of which were guaranteed by the federal government,” said Tampa attorney John Yanchunis, who represents the plaintiffs in the Westwood lawsuits. He said he’s talked to about 800 students and former employees of the colleges, and people are coming forward “at a level I’ve never seen.”

The GAO investigation confirmed the enrollees’ claims. Of the 15 colleges its undercover employees visited as potential applicants, all made deceptive or questionable statements. Staff at four colleges encouraged applicants to lie on their federal financial aid forms by telling them not to report $250,000 in savings or inheritance money or to claim dependents they didn’t have.

Investigators found that all of the colleges underestimated the costs of their programs and gave false statistics for employability after graduation. Some refused to let applicants speak to financial aid advisers until after they applied.

The DOE has issued two proposed rulemakings to strengthen enforcement over the industry. One will analyze a program’s debt-to-income ratios and loan repayment rates to assess whether the training results in gainful employment, a prerequisite to federal funding. The other would impose a number of regulations, such as prohibitions on incentive sales compensation and misrepresentations.

The Senate plans to further investigate industry practices and scrutinize the companies that accredit the schools.

“We have to ask the question—are the students and U.S. taxpayers getting a good value for the billions of taxpayer dollars they’re investing in these for-profit schools?” said Sen. Tom Harkin (D-Iowa) at the hearing. “Are we talking about a few bad apples, or are we talking about the entire orchard being contaminated?”

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