Higher Ed Watch

A Blog from New America's Higher Education Initiative

< Back to the Education Policy Program

For-Profit College Supporters Take Aim at Justice Dept Over Whistleblower Lawsuit

Published:  September 21, 2011

In August, the U.S. Department of Justice (DOJ) joined a federal False Claims lawsuit against Education Management Corporation (EDMC), charging that the for-profit college company defrauded the government by defying a federal law prohibiting colleges from compensating recruiters based on their success in enrolling students. If the case is allowed to proceed, it could lead to embarrassing revelations not just about EDMC, but about the for-profit higher education industry writ large.

So it shouldn’t come as a surprise that career college leaders and lobbyists have mounted what appears to be a public relations campaign aimed at pressuring the Justice Department to either back down or enter into settlement talks with EDMC before any more of the industry’s dirty laundry is exposed.

As part of this effort, industry officials have enlisted reliable allies to take up their cause. Last week, Rick Hess of the American Enterprise Institute and the editorial writers at the Wall Street Journal blasted the EDMC case, arguing that it’s just another example of the Obama administration beating up on an industry that is doing “God’s work” -- educating low income and non-traditional students who have been ill-served by traditional colleges.

“It’s the for-profits that have a selfish, practical incentive to find ways to add students, even those with families, obligations and unpredictable schedules,” Hess wrote. “Of course, this aggressive competition can result in unseemly, unsavory, or outright fraudulent behavior – but you’d think a president championing post-secondary access would be a lot less willing to toss out the baby along with the bathwater.”

On Sunday, the for-profit college lobby received a boost from an unlikely source: Joe Nocera, a New York Times columnist who has been quite critical of the financial industry. In a column entitled “Why We Need For-Profit Colleges,” Nocera faulted the Obama administration for taking a “more than a little punitive” approach to dealing with the industry’s “transgressions.” He argued that policymakers should not allow the sector’s “excesses” to “obscure what really ought to be the most important fact about the industry: the country can’t afford to put it out of business. On the contrary, America needs it – and needs it to succeed – desperately.”

But what Nocera, Hess, and the Wall Street Journal’s editorial writers conveniently ignore is the incredible amount of harm that these “transgressions” and “excesses” have caused the very same students that these schools are touted for serving. As has become abundantly clear in recent years, the biggest players in the industry have pursued a “recruit at any cost” strategy to meet Wall Street’s demands for constant growth and ever-higher quarterly earnings. This had led these companies to aggressively recruit unqualified students and load them up with unmanageable levels of debt that they have little hope of ever repaying.

Take Kaplan Higher Education, for instance. According to internal company documents [starting on p. 27] that the U.S. Senate Health, Education, Labor and Pensions Committee released in June, Kaplan officials in 2009 estimated that a shocking 80 percent of the subprime private loans they provide to students each year end up in default. These officials based their estimates largely on the fact that their schools target extremely disadvantaged students, the majority of whom drop out within a year of enrolling.

“Our students drop out at a rate of 5% per month, and this rate equates to an annual drop rate of 60%,” Carole Valentine, Kaplan’s vice president for student finance, wrote in a memo to the company’s corporate controller in June 2009. “More than 80% of drop students fail to pay back their educational loan debt.”

These Kaplan Choice Loans are “last resort” loans for students who do not qualify for private loans from outside lenders due to their low credit scores. The company allows these students to take out up to $15,000 in loans through this program, on top of the full load of federal loans they borrow. In 2009, Kaplan charged students a fixed rate of 15 percent on these private loans, although the company has since lowered the rate. [Meanwhile, Kaplan officials expect that changes they made to the company’s admissions policies late last year will result in fewer drop outs.]

For Kaplan, the losses the company sustains on these “institutional loans” are not a big deal, as they are more than offset by the federal financial aid dollars these low income students bring to its schools. For the students, however, it’s an absolute nightmare. Defaulting on these high-risk loans can lead to a spiral of debt from which they have little prospect of escaping.

As we’ve said before, the appalling treatment of low-income and working-class students at the hands of these giant for-profit college companies is a national scandal. That’s why we at Higher Ed Watch think that it is absolutely essential for the Justice Department to see its case against EDMC through to its conclusion. Settling this case would simply allow the industry and its allies at conservative think tanks and in the news media to remain in denial about the extent of abuses that have occurred and the extraordinary amount of damage that has been done.

Join the Conversation

Please log in below through Disqus, Twitter or Facebook to participate in the conversation. Your email address, which is required for a Disqus account, will not be publicly displayed. If you sign in with Twitter or Facebook, you have the option of publishing your comments in those streams as well.

Related Programs