Two weeks ago, heightened federal scrutiny led to the sudden closure of South Florida’s Dade Medical College. On Monday, a much larger for-profit college operator — Education Management Corp. — used its hefty checkbook to make its U.S. Department of Justice problems go away.
The payout: $95.5 million.
For that price, the nation’s second-largest for-profit college chain, with seven Florida campuses, will settle multiple lawsuits alleging the company broke federal law in how it paid its recruiters. The DOJ had joined one of those lawsuits, giving it extra weight.
Monday’s settlement also includes loan forgiveness for some students who enrolled at EDMC schools. The company, which did not acknowledge any wrongdoing, operates the Art Institutes, Argosy University, Brown Mackie College and South University.
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The Florida campuses are in Miami, Fort Lauderdale, West Palm Beach, Sarasota, Orlando, Tampa and Jacksonville. A spokesman for Florida Attorney General Pam Bondi said Florida students will receive $6.5 million in loan forgiveness. Nationally, students will receive more than $100 million in loan forgiveness, although no one has yet spelled out how that will work.
In a Washington news conference carried on C-SPAN, U.S. Attorney General Loretta Lynch called the settlement a “historic step forward in our collective and ongoing fight against fraudulent and abusive practices in the for-profit education industry.”
But Lynch acknowledged that the $95 million payout would have been higher if not for EDMC’s current financial problems. The company has been closing campuses and laying off hundreds of employees — a dramatic fall from a few years ago, when Goldman Sachs owned a 43 percent stake and its stock traded as high as $27.99. It closed Monday at seven cents.
“An important part of this settlement was factoring in the company’s ability to pay,” Lynch said. “So it does not reflect the total amount of federal funds that we believe were fraudulently obtained.”
EDMC President and CEO Mark McEachen, in his comments on the company website, wrote: “Though we continue to believe the allegations in the cases were without merit, putting these matters behind us returns our focus to educating students.”
Monday’s announcement comes at a shaky time for the for-profit college industry in general. Another for-profit giant with 10 Florida campuses, ITT Tech, is being sued by the U.S. Securities and Exchange Commission for an alleged “fraudulent scheme” that misled Wall Street about the true state of the company’s finances.
The company has been closing campuses and laying off hundreds of employees — a dramatic fall from a few years ago, when Goldman Sachs owned a 43 percent stake and its stock traded as high as $27.99. It closed Monday at seven cents.
Florida’s own Dade Medical College — owned by a high school dropout who drove a Bentley — abruptly went out of business last month, leaving roughly 2,000 students stranded with heavy loan debts and college credits that aren’t accepted at traditional schools.
Pittsburgh-based EDMC still enrolls more than 100,000 students, and still gets about 90 percent of its revenue from taxpayer-funded financial aid programs such as Pell grants and federal student loans, Lynch said. Over the years, EDMC received billions of dollars in Pell grants and loans — a U.S. Senate Committee found EDMC received $1.8 billion in federal funds in a single year, 2010.
“That’s all of our money, all of us, as taxpayers,” U.S. Secretary of Education Arne Duncan said Monday.
Duncan said “the settlement should be a very clear warning to other career colleges out there. We will not stand by when you profit illegally off of students and taxpayers.”
But Joe D’Angelo, a partner at a New York restructuring firm that works with for-profit colleges, said the $95 million penalty pales in comparison with the billions in taxpayer funds EDMC was accused of illegally obtaining.
“Think about the numbers here,” said D’Angelo, a partner at Carl Marks Advisors. “They settled for $100 million for the alleged crime of attracting three and a half billion in government revenue. What would you do? I’d go recruit and get another $3 billion in revenue… I don’t know that it was much of a deterrent at all.”
As part of Monday’s announcement, EDMC says it will offer loan forgiveness to “former students who enrolled with less than 24 hours of transfer credit and who left within forty-five (45) days of the first day of their first term, and whose final day of attendance at an EDMC school was between Jan. 1, 2006, and Dec. 31, 2014.”
One of the schools, Brown Mackie, leased space on the sixth floor of the Herald’s previous headquarters on Biscayne Bay.
Several states, including Florida, joined the EDMC litigation. The lawsuits were started by whistle-blowing former EDMC employees, who alleged that the salaries of college recruiters were based solely on how many students they signed up.
Documents in the lawsuit included an email from an admissions director to his assistants, stressing the importance of hitting enrollment numbers.
“This number is not a casual level that I want you to be at but rather a number that you must hit to have a good review, get promoted, or keep your position here,” Gregg Schneider, admissions director, wrote on Oct. 11, 2006.
Federal law prohibits recruiters from being paid based on the number of students they bring in. The federal prohibition is in place to discourage overly aggressive recruiting tactics.
This number is not a casual level that I want you to be at but rather a number that you must hit to have a good review, get promoted, or keep your position here.
Admissions Director Gregg Schneider on Oct. 11, 2006.
A recent Miami Herald investigation, Higher-Ed Hustle, highlighted how for-profit colleges have grown tremendously in Florida, and how the industry now accounts for nearly one in five Florida students. Some former students say they were pressured to enroll by college recruiters and sometimes lied to about the accreditation of their program, or how much it would ultimately cost.
Floridian Rose Grier, a former EDMC student at Argosy University, told the Herald that the school’s recruiter misled her into believing her Pell grant would be enough to cover tuition, and she wouldn’t have to take out loans. Grier ended up with thousands of dollars in loans that she hadn’t expected.
Grier said she was particularly vulnerable when the Argosy recruiter called, because her husband was on his death bed from a terminal disease. Grier said she told the school of her situation and the recruiter still lied to her.
“I told him that my husband was very ill… I was his full-time caregiver, and there was no money coming in to the house,” Grier said. “I made him very aware that we had nothing, and I had two small children.”
EDMC’s official policies called for a number of other “quality factors” — besides student sign-ups — to be considered in setting salaries for recruiters. In court, the company argued that this policy proved it was still in compliance with federal law, but the plaintiffs in the lawsuits, former insiders with the company, alleged that the quality factors were a sham.
“To put it starkly, plaintiffs allege a coordinated, multi-billion dollar corporate-wide fraud,” U.S. District Judge Terrence McVerry wrote last year, when denying EDMC’s attempt to get one of the lawsuits dismissed.