It’s a business plan based on the kind of lowdown ethics that brought us subprime mortgages.
Except, instead of housing, the toxic loans packaged by for-profit education outfits like Corinthian Colleges Inc. finance overpriced, grotesquely under-performing career education courses.
For-profit colleges aggressively recruit vets, immigrants, poor minorities, even the homeless, luring them into programs that cost far more than comparable classes at public community colleges.
Then they milk the suckers for all they’re worth in federal grants and loans. To cover the balance of the pricy tuition costs, for-profits pressure students into signing up for company-sponsored high-interest loans.
Just as Florida was ground zero when it came to peddling subprime mortgages, we’re up to our ears in the toxic for-profit education mess.
One in five college students in Florida attends classes offered by for-profit operations like Corinthian, a company teetering toward collapse. Corinthian’s Florida subsidiary, Everest Universities, runs 10 schools in the state and an online operation headquartered in Tampa.
Another big player in Florida, ITT Educational Services, with 13 campuses across the state, was sued by the federal Consumer Financial Protection Bureau in February. The lawsuit claimed that ITT financial aid advisers employed strong-arm tactics to wangle students into taking out high-interest loans, barring them from classes, withholding transcripts or even threatening them with expulsion unless they signed the loan documents. The feds claimed ITT students “entered into loans that they could not afford, did not want, did not understand, or did not even know they had.”
A two-year investigation into for-profit education business by the U.S. Senate Committee on Health, Education, Labor and Pensions found that “when students withdraw, as hundreds of thousands do each year, they are left with high monthly payments but without a commensurate increase in earning power from new training and skills.”
It’s pretty easy to understand why. The Senate report found that many of the for-profit college operations “fail to make the necessary investments in student support services that have been shown to help students succeed in school and afterward.” Senate investigators reported that in 2010, for-profit colleges devoted an average of 22.7 percent of their revenue on “marketing, advertising, recruiting, and admissions” while spending just 17.2 percent on actual education. These operations claimed a bigger chunk of their revenues as profit, 19.4 percent, than they spent on teaching.
The government’s interest in this highly profitable genre of private enterprise is pretty obvious. It’s not so private, given that 15 of nation’s leading publicly traded for-profit college corporations receive 86 percent of their revenues from taxpayer dollars by exploiting federal student loans or Pell Grants or the GI Bill. For-profits enroll just 13 percent of higher-education students, but take 25 percent of the total amount of federal loans and grants distributed each year.
Taxpayers aren’t getting much for their money. Senate investigators claimed that more than 60 percent of the students drop out without so much as a two-year degree. Instead of high-paying jobs, former students often come away from for-profits with only high-interest debts. The default rate on federal education loans among for-profit college students runs five times higher than nonprofit colleges.
Meanwhile, those students who actually earn the expensive degrees find they aren’t getting much bang for the buck. The Center for Analysis of Postsecondary Education and Employment, studying the career outcomes of some 80,000 community college graduates who then transferred to either for-profit operations or to public or private nonprofit colleges, discovered the for-profit grads suffered “significant wage penalties.” For-profit graduates had an average net annual earning gain “of only $5,400, whereas public and nonprofit [private] college students experienced gains of $12,300 and $26,700 respectively.”
These aren’t merely scandalous endeavors, they’re scandalous endeavors financed with public money. Attorneys general in 16 states, including Florida, are investigating these dubious businesses. Florida Attorney General Pam Bondi’s office has been looking into allegations of predatory and misleading practices by for-profits since 2011.
Attorneys general in both Massachusetts and California have filed lawsuits against Corinthian. California charged the company was using “false and predatory advertising, intentional misrepresentations to students, securities fraud and unlawful use of military seals in advertisements.”
The California lawsuit claimed that the “placement rates published by [Corinthian] are at times as high as 100 percent, leading prospective students to believe that if they graduate they will get a job. These placement rates are false and not supported by the data. In some cases there is no evidence that a single student in a program obtained a job during the time frame specified in the disclosures.”
Instead, the California suit claimed, Corinthian would pay temp agencies to give its graduates short-lived jobs, allowing the company to inflate the job placement numbers and maintain the bare standards needed for accreditation and eligibility to tap into federal money.
In Florida, the Miami Herald’s Michael Vasquez found more than 100 pages of consumer complaints have been filed in Tallahassee by students alleging that they had been misled or bilked by Corinthian operations.
A few months ago, the U.S. Department of Education, amid a general crackdown on for-profit practices, demanded that Corinthian produce the documentation to back up its suspect job placement claims. The flow of federal money was delayed until the company complied. That was enough to send the company into a financial crisis. But last week Corinthian still hadn’t produced the numbers.
But it has been like the subprime mortgage crisis all over again. Corinthian, like the Wall Street banks, was deemed too big to fail. Rather than shut down 107 campuses and leave 72,000 students without a school, the U.S. Department of Education wrote a $16 million check to keep the company from suddenly going belly-up. (Which would stick the federal government with hundreds of millions of dollars in uncollectible students loans.). The bailout has kept the floundering corporation afloat and gave it time, under an agreement reached Thursday with the Department of Education, time to sell off its assets.
Meanwhile, Vasquez found that even as Corinthian edged to oblivion, recruiters have still been signing up new students, using the same sleazy marketing tactics, never mentioning that the students’ prospective colleges might not exist a few months from now.
But it’s not easy reining in a $32 billion industry that spends millions on lobbyists and campaign contributions. Vasquez reported that Corinthian alone has spent more than $2 million on Washington lobbyists in the past two and a half years.
You probably won’t be shocked to learn that these companies still have powerful allies in Congress, particularly in the U.S. House of Representatives, who are working to undo what scant oversight the federal government now has over the for-profit college industry.
You might also remember that similar talk during the recession about cracking down on irresponsible banking practices didn’t amount to much either.
Steve Eisman, the noted investor whose savvy wager against the subprime mortgage market was chronicled in The Big Short by Michael Lewis, gave a speech at an investment conference four years ago in which he described something very much like the subprime loan crisis on the horizon.
“Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry,” Eisman told his audience. “I was wrong. The for-profit education industry has proven equal to the task.”