For-Profit Colleges

There was a time not so long ago that Education Management Corporation (EDMC) was considered to be one of the better for-profit higher education companies in the business. The arts schools that it had run since the early 1970s were generally well regarded, and the company seemed to be focused on its long-term success, rather than just its quarterly profits.

Today, EDMC is the target of a multibillion dollar lawsuit brought by the U.S. Department of Justice and half a dozen states, accusing the publicly-traded company of defrauding the federal government by defying a federal law that prohibits colleges from compensating recruiters based on their success in enrolling students. Meanwhile, attorneys general in four states -- Florida, Kentucky, Massachusetts, and New York --are investigating the company, as is the Department of Education’s Inspector General

Among other things, EDMC has been accused of pumping up its enrollment numbers by aggressively recruiting unqualified students, loading them up with debt, and failing to help them find gainful employment in the fields in which they trained. The company has also been charged with cooking the books on the job placement rates that it discloses to students and reports to accreditation agencies and state regulators.

Despite all of this scrutiny, EDMC has been among the most resistant for-profit higher education companies to reforming its practices -- going so far as to quit a lobbying coalition it started after that group began developing a voluntary code of conduct for its members to follow.

So what happened? That question can be answered in two words: Goldman Sachs.

Kentucky Attorney General Jack Conway has exposed yet another trick of the trade that some for-profit schools use to mislead prospective students about their success in placing graduates into jobs.

Last week, Conway filed a consumer protection lawsuit against National College, accusing the small for-profit school chain of deceiving prospective students by disclosing job placement rates for its Kentucky campuses that are significantly higher than those it reports to its accreditor. The company, which enrolls about 5,000 students in the state, trains students in fields such as “medical office assistant, surgical technology, nursing, information systems engineering, and business administration,” the lawsuit says.

According to the complaint, from 2008 through the end of 2010, National College published on its website the following “successful employment” rates for graduates at its Kentucky campuses:

• 94% at Lexington

• 96% at Louisville

• 84% at Pikeville

• 91% at Richmond

But during the same period of time, the lawsuit says the company disclosed to the Accrediting Council for Independent Colleges and Schools (ACICS) much lower rates for each of these campuses. For example, National College reported the following rates for students who graduated from these schools from July 1, 2009 to June 30, 2010:

• 79.5% at Lexington

• 60.1% at Louisville

• 70.3% at Pikeville

• 78.2% at Richmond

So what accounts for these differences? National College officials have not officially responded to this question yet. But after learning that Conway was investigating their schools, they showed their hand.

[Over the last two months, Higher Ed Watch has examined how many for-profit colleges cook the books on the job placement rates they disclose to prospective students and regulators. In prior posts, we have looked at how the manipulation of these rates is a widespread problem throughout the industry; revealed some of the most common tricks of the trade for-profit schools have used to inflate these numbers; and showed how accreditors and regulators have been asleep at the switch as these abuses have been occurring. Today, we continue our series by reporting on the Obama administration’s unsuccessful effort (so far) to curb these practices.]

As part of the Obama administration’s Gainful Employment regulations, for-profit colleges and other vocational schools are required to disclose to prospective students more-detailed consumer information about the programs they offer. The aim of this effort is help students make better-informed decisions about the postsecondary educational programs they are considering.

But at least in one area, the information that prospective students are getting is fundamentally flawed. That’s because the job placement rates that for-profit higher education companies are required to disclose under the new rules are the same ones they report to accreditors and state regulatory agencies. As we wrote last week, the methodologies that career colleges use to calculate these rates vary state by state and accreditor by accreditor, making them impossible to compare. And because neither accreditors nor state regulators put much of an effort into verifying these rates, the schools don’t seem to have any qualms about gaming them.

It wasn’t supposed to be this way. Obama administration officials had an opportunity to establish a standard methodology for career colleges to use when calculating these rates, but they appear to have bungled it. And it isn’t clear whether they will get another shot at it anytime soon.

The job placement rates that for-profit colleges report to prospective students and regulators are fundamentally flawed.

The methodology that career colleges use to calculate the rates vary state by state and accreditor by accreditor, making them impossible to compare. And because neither accreditors, state regulators, nor the federal government make a serious effort to verify these rates, they are easily manipulated (see here for some of the most common tricks of the trade).

As Deanne Loonin of the National Consumer Law Center wrote back in 2005, the lack of oversight and enforcement regarding job placement rates “leaves nearly absolute discretion in the hands of schools that have every incentive to inflate the numbers.” As a result, “school officials know that there are unlikely to be consequences for failure to report data or for reporting erroneous or unsubstantiated data.” Unfortunately, little has changed since Loonin’s report, “Making the Numbers Count: Why Proprietary School performance Data Doesn’t Add Up and What Can Be Done About It,” came out.

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.

Earlier this week, the U.S. Department of Education released data by institution of higher education on the federal student loan cohort default rate. These data show the percentage of a school's borrowers who entered repayment on federal loans in fiscal year 2009 (October 1, 2008 through September 30, 2009) and defaulted on those loans in either fiscal year 2009 or 2010 (ending September 30, 2010). These data are now available on the Federal Education Budget Project’s website, http://www.edbudgetproject.org, where users can easily search the data by institution and view data on price, demographics, and outcomes alongside the default rate data.

These most recent default rates have caused quite a stir among education stakeholders because they suggest that default rates have increased since the 2008 data were released. For example, 8.8 percent of federal student loan borrowers who entered repayment in 2009 defaulted on their loans by the end of fiscal year 2010. In comparison, only 7 percent of borrowers who entered repayment in 2008 had defaulted by the end of 2009. Student borrowers that attended for-profit institutions showed even greater increases in default rates from 2008 to 2009, increasing 3.4 percentage points to 15 percent default in 2009.

It is important to note that these default rates are only a snapshot in time – they show borrowers who defaulted within two years of going into repayment. However, many borrowers default after two years and those defaulters are not captured in the data. However, the Department of Education will soon be releasing three-year cohort default rates to partially address this issue. Additionally, the default rates do not include students that have gone into deferment or forbearance, options that allow borrowers that can’t repay their loans to avoid default.  

News reports suggest that these increasing default rates are attributable to the floundering economy because high unemployment rates usual mean that recent graduates are not earning enough income to pay back their loans. Moreover, this is the first set of default numbers that capture borrowers who began repayment in 2008 and 2009, when the economy and layoffs were at their worst.  Additionally, a federal official suggested that growth in the number of students borrowing to attend for-profit institutions also contributed to the increase in default because graduates of those institutions typically default at higher rates.

The Federal Education Budget Project’s website allows users to test some of these hypotheses through the comparison function. For example, the comparison function allows us to view institutions that have similar default rates.

Let’s say we are interested in Heald College in Fresno, California – a large, two-year for-profit institution with a 2009 federal loan default rate of 13.0 percent. By conducting a comparison of other institutions with default rates within 10 percent of that, we find that 90 two-year for-profits have similar default rates. When we expand the comparison to include other types of two-year institutions, we discover that 204 non-profit and public institutions have default rates that are within 10 percent of that Heald College campus. While Heald College in Fresno does not have the highest default rate – many for-profit institutions have default rates well above 20 percent – this suggests that many non-profits and public institutions have similar default rates as large for-profits.

Overall default rates, however, are determined by individual student, not by institution, the actual number of federal borrowers that go into default at each institution matters as well. Luckily, the FEBP database also includes data on total enrollment and number of federal borrowers at each institution as well. By including these data in the comparison, we can even better assess the degree to which for-profit institutions are fueling federal loan default rates. For example, Heald College in Fresno had 1,481 subsidized and 1,416 unsubsidized Stafford loan recipients in 2009. In comparison, the Onondaga Community College in New York (a public institution) had 2,723 subsidized and 2,165 unsubsidized Stafford loan recipients in the same year and the same default rate as Heald College in Fresno. This suggests that some large public and non-profit institutions could also be driving high default rates because they also have high levels of enrollment in federal loan programs. (Click here to view the data from this particular comparison.)

The FEBP database provides a wealth of information on higher education finance, price, demographics, financial aid participation, and outcomes including the most recent 2009 federal loan cohort default rates. We encourage our readers to explore the data and draw their own conclusions about trends in higher education borrowing.

On Tuesday, the for-profit college industry group the Coalition for Educational Success unveiled a voluntary code of conduct for its members. The organization says that the code “will provide strong new student protections; guidelines for training, enrollment and financial aid; and include an enforcement mechanism to ensure that participating schools adhere to the principles of the new standards."

At Higher Ed Watch, we have to admit that the code is stronger than we would have thought, considering its source, a lobbying group that has been unapologetic in the scorched-earth tactics it has used to fight any and all efforts to reform the industry’s worst practices.With this document, the coalition is finally acknowledging that there have been abuses in the sector that have put students in harm’s way.

But is this is a serious effort to improve industry standards or simply a public relations gambit that the group hopes to use stave off any further government attempts to rein in the industry? The testimonials that the group circulated on Tuesday from its stalwart supporters in Congress endorsing the code only add to our suspicions. [Honestly, when you have to rely on Rep. Alcee Hastings (D-FL), a lawmaker who won his seat in Congress after having been impeached as a federal judge over bribery charges, to give his seal of approval to your ethical standards, you know you’re in trouble.]

Earlier this week, we wrote about the tricks of the trade that for-profit colleges use to inflate the job placement rates they report to prospective students and regulators.

But here’s one we haven't heard before. According to an article that ran in the Los Angeles Times yesterday, the University of Antelope Valley, a for-profit college in Lancaster, CA, has offered to pay companies to employ their graduates. Under the deal, local employers can receive $2,000 for each graduate they hire this month, as long as the former students are placed in jobs related to their field of study.

As we recently reported, there is growing evidence to suggest that some of the country's largest for-profit higher education companies have deliberately misled prospective students and regulators about their record in placing graduates into jobs. But just how do they go about manipulating their job placement rates?

A False Claims lawsuit that is pending in the U.S. District Court for the Southern District of Florida against Kaplan Higher Education provides some clues. In the lawsuit, Victoria Gatsiopoulos, a former senior career advisor at Kaplan Career Institute’s ICM campus in Pittsburgh, accused the company of cooking the books on the school’s job placement rates to ensure that the campus remained eligible to participate in the federal student aid programs.

Kaplan officials deny the charges. But at Higher Ed Watch, we find the allegations compelling because they are consistent with accusations that Kathleen Bittel, a career service advisor at Education Management Corporation’s Art Institute of Pittsburgh, made about EDMC in testimony she delivered at a U.S. Senate hearing last September.[EDMC denies the accusations from Bittel, who has since left the company.]

Together, the Kaplan lawsuit and Bittel's testimony provide a revealing look at some of the tricks of the trade that for-profit colleges use to inflate their job placement numbers. According to the former career service advisors, schools often:

By Scott Levy

The U.S. Department of Education’s recent effort to regulate the state authorization of online for-profit colleges was unnecessary and misguided -- but not for the reasons the for-profit higher education industry has given.

Over the last half-dozen years or so, the Department of Education has distributed massive amounts of federal financial aid to online for-profit schools that were unlicensed in the states in which students were being enrolled. By doing so, the Education Department flagrantly violated the Higher Education Act, which requires schools to have a state license to participate in the federal aid programs. As a result, the Department wrongly allowed these unlicensed schools to feast on billions of dollars of Pell Grants and federally-backed student loans they received on behalf of their students.

Rather than admitting to this extraordinary mismanagement, the Education Department put into effect a “state authorization” regulation that basically reiterates what’s already in the law: that online schools must obtain a license from states in which students are being enrolled to benefit from federal financial aid. Issuing a regulation that simply repeats the existing Higher Education Act requirement is counterproductive -- as it suggests that the statute, by itself, does not already include this mandate.