U.S. Government Deals a Devastating Blow to For-Profit Education

With total student debt in the U.S. rising to over $1 trillion, the federal government took a stand this week against one college at the heart of the for-profit education industry.


Source: Dwight Burdette.  

This Wednesday, the Consumer Financial Protection Bureau (CFPB) announced it has filed a lawsuit against for-profit college ITT Educational Services (NYSE: ESI  ) , alleging it has engaged in predatory student lending. In a powerful stance, the CFPB said ITT has "exploited its students and pushed them into high-cost private student loans that were very likely to end in default," and as a result it is "seeking restitution for victims, a civil fine, and an injunction against the company." 

The announcement sent the stock of ITT plummeting, and it was down almost 15% in the days following the announcement. The company has not responded to the suit at the time of writing.

Beyond ITT
Other for-profit schools should also be concerned as the CFPB director, Richard Corday noted, "our action today is just the first step the Consumer Bureau is taking to address consumer issues in the for-profit college market." And as Brian Stoffel notes in The Student-Debt Debacle in For-Profit Education, while ITT was the worst in having its students default, other private schools were not far behind:

Click each institution for default rates. Source: U.S. Department of Education. *Represents core Everest schools. **Represents University of Phoenix. *** Represents core DeVry schools.

However, the actions against ITT from the CFPB were stern, and they revealed just how poorly things had turned.

Stunning allegations
In its suit, the CFPB lists 191 points outlining why it has taken action against ITT. It includes allegations that ITT pushed students into high-cost loans in an effort to boost enrollment, while knowingly understanding its students were unlikely to complete a degree and would in turn be faced with crippling debts at interest rates as high as those on credit cards.

The suit notes incoming students at ITT typically have a credit score under 600 -- those considered "subprime" -- and an income of just $18,000, but are then enrolled in two- or four-year degree programs with a staggering cost of $44,000 or $88,000, and as a result, students are forced into taking on debt to finance their education.

The CFPB outlines the financial aid staff at ITT would push students into automated loan processes without giving them "a fair opportunity to understand the loan obligations involved," and many didn't even know they had the private loans until collection agencies began calling. And too many students faced those phone calls, as ITT's own analysis revealed a staggering 64% of students were expected to default on the loans taken out.

Beyond bad loans
Yet the problems extended beyond the unethical lending practices to the actual management of the core operations of education provided by ITT. The suit claims ITT failed to allow its students to transfer their credits earned at ITT to more affordable institutions like local community colleges or other nonprofit universities. As a result, ITT would use "the prospect of expulsion and the loss of the money already spent during the student's first year to coerce students into taking out the private loans."

Source: Flickr, Svadilfari.

Even more than the lack of the ability to transfer credits, the government also notes "upon graduation, ITT students faced another sobering reality," as the prospects for new high-paying jobs as a result of the degrees were over-promised and under-delivered. The CFPB suggests ITT "exploited students" by exaggerating the salaries its students received upon graduating. In fact, the National Center of Education Statistics reveals graduation rates at for-profit colleges was just 28% in 2004.

The average salaries of students in the class of 2011 at ITT only stood at $32,061. Staggeringly, the salary of graduates of ITT is closer to those with high school degrees -- $28,000 -- than to those with college degrees -- $45,500 -- among those age 25 to 32, according to the Pew Research Center. The CFPB also suggests the below-average numbers at ITT were exaggerated because it only revealed the salaries of those who graduated and did not account for countless students who were unable to complete their degrees.

Source: Flickr, @RunRockPrincess.

The bottom line
Intervention from the federal government often over-extends typical standards and seems predatory itself. However in this example, the actions of the CFPB should be applauded.

It is too early to tell what this will mean for other schools, but as Cordray notes, "today's action should serve as a warning to the for-profit college industry that we will be vigilant about protecting students against predatory lending tactics," which is a stance that should be celebrated. A mind is indeed a terrible thing to waste, and institutions that appear to waste minds and money may in fact be the worst of all.

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Read/Post Comments (22) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 02, 2014, at 2:45 PM, Guamsun wrote:

    I have observed this industry, from a very close range, operating for more than 15 years and reached a cautious conclusion that it is run by educated charlatans for the purpose of lining their pockets at the cost of public good. The management move in and move out with high salaries and benefits while exploiting the education and training system. As a matter of fact, in reality, for profit institutions have become public institutions. Most of their income is sourced from public coffers of DOD’s Tuition Assistance (TA) benefits for military students and Title IV funds for legitimate programs offered by these institutions for deserving students. However, these institutions offer questionable education while exploiting faculty and staff due economic and market conditions. The majority of their graduates lack skills and unemployable in this hyper competitive market conditions. They offer promises they cannot keep or having any intentions of keeping. They hawk shoddy goods. The Department of Justice must investigate the management of this industry.

  • Report this Comment On March 02, 2014, at 7:24 PM, foolsall wrote:

    Private Corporations will screw you every time; since their sole purpose for being is to make a profit by, "hook or crook." Just another attempt to siphon money from the Federal Government; like the large Corporate Types have been doing for years.

  • Report this Comment On March 02, 2014, at 10:29 PM, Alexander1776 wrote:

    ITT is a cheat and a scam artist. Why would anyone even want a diploma with their name on it? For one, it is not a university and lacks regional accreditation. American Public is pretty good and they cater to the military. I think another big one that I like because it is non-profit is Western Governor's University. You want college with a decent name and that is regionally accredited by the same authority as the state universities. Take American Public for example is accredited by the same authority as the Ohio State University. ITT who are they, they are nobody except a business trying to scam people who are trying to better themselves.

  • Report this Comment On March 03, 2014, at 12:22 AM, hotdaddy13 wrote:

    I have not been a supporter of most things the Obama administration has done over the 5+ years it has been in office. But as a retired university educator, I applaud them for taking this bold beginning step. They also need to go after some, if not all, of the for-profit, on-line "universiities" as well -- with a sweat shop "campus" in almost every part of the nation. They all pray on the poor in spirit and ignorant of experience -- often leading them on to a life of misery and unnecessary financial hardship because most of their victimized "students" have never heard two significant aphorisms from American History: "There is no such thing as a free ride!" And, "There is a sucker born every minute!"

  • Report this Comment On March 03, 2014, at 1:14 AM, Infotech wrote:

    I went to IT and it's a waste of time. The instructors are dicks. They lowball my grade, don't push my talent and skills waste a lot of my time and money and then put me in debt. The diploma looked crappy as he'll and after graduation where are hype jobs? I wish the government use the hell out of them.

  • Report this Comment On March 03, 2014, at 1:15 AM, Infotech wrote:

    Sue

  • Report this Comment On March 03, 2014, at 8:35 AM, Taker471 wrote:

    I would like to know how to get my name on the list for this lawsuit. I went to ITT and am having all kinds of problems with student loans, finding a job, and ITT says I owe them money that I was never told about. They have a collection agency contacting me saying I have failed to pay them money...

  • Report this Comment On March 03, 2014, at 9:03 AM, LeCupcake wrote:

    I joined this site just to share my experience with ITT.

    I attended the school for one quarter, and I truly liked the three instructors I had. They were all supportive, and I even wrote a letter of recommendation for the one that challenged me the most. This is the one good remark I have about the experience.

    For a lack of a better word, I was hornswaggled by an ITT representative regarding the transferability of credits, which is one of the reasons I started at the "institution" to begin with: I wanted to go to a school that would not only help me with a certain IT field, but that would also allow me to earn credits to carry forth to another school. The representative I was given was a former military member, most likely because I was a military spouse at the time. He told me flat out that national credits were better than regional credits, and that ITT's credits would transfer to "many learning institutions." As I progressed through the quarter, I became concerned about the fact that I may be wasting a ton of financial aid and personal monies. I emailed this person and re-fortified my worries. He forwarded my email to another representative, and she wrote to me to let me know that a school in Nevada took the credits. Well, yippee, I thought.

    The final straw was when I found an online article written by someone who quoted, verbatim, what he was told by an ITT representative regarding credits, and would you not know it was the exact speech I was given? I was floored: here was the exact wording I heard weeks before. Exact.

    I finished the quarter and considered the experience one to learn on, and I enrolled in another institution. But before I enrolled in another school, I took three months off to reset my financing, set up registration tests, and all the stuff involved with re-entering college as a non-traditional student.

    Within two week, I received a bill from ITT for $1,800. Our financial aid covered the rest of the 12 credits I took, and were were non-commissioned officer paid, but we still owed the $1,800 (of almost four grand ... ouch!). The letter said we had ten days to pay it, and if we did not do so, then our names would be sent to a collection agency. Two days after this, I received an email from a friend that her husband had died in Afghanistan, and I forgot everything else. My parents generously paid for me to attend the funeral.

    But on the morning of the funeral, I received a phone call on my cell from a collection agency about the ITT bill. The collection agency representative told me this was Day 11, and that I was now in risk of having ruined credit, but fear not! ... if I paid immediately, I could receive a ten percent discount on the bill, meaning I would only owe $1,620.

    I agreed, and I said I could move the money around and pay in ten minutes, but I was going to call ITT and get a callback number from the school that was verified. The rep became irate and asked why I would do that. I responded that I never gave my financial and personal information over the phone to a call that I received and did not initiate, and that if the call was valid, she had nothing to worry about; she would get her moneys. No dice.

    The person on the phone turned over the call to her supervisor, and he started a full-stage war with me about not hanging up. When I told him I was on my way to a soldier's funeral and had to hang up, to call ITT, he went nuts.

    I did hang up on him, and I called ITT, and I made a complaint about the service. I then received a phone number for the agency, and when I called, I paid the receptionist a full $1,620 and laid it to rest. Or so I thought. No dice.

    Six months later, I receive phone call and letter after phone call and letter for an errant $180. I guessed later the rep from the collection agency did not give me the ten percent discount because I did not give him my information, but rather I gave the "commission" to the receptionist (which could have been avoided if the genius just asked me to ask for him when I got a real number...). This threat to my credit lasted a year or more. I called ITT numerous times to make sure that we were settled, but the affair dragged out to close to 18 months. It took forever for someone to validate that I did not owe the institute any more money.

    So, yes, ITT does participate in predatory fund-collecting. Yes, ITT reps lie to the students regarding accreditation. Yes, ITT charges a great deal of money for one quarter. And yes, on a side note, it does stink to get into an argument with a commission-hungry collection agent half an hour before the funeral of an American soldier and friend.

    And I couldn't even transfer my 4.0.

  • Report this Comment On March 03, 2014, at 9:21 AM, fittobetied wrote:

    The first major red flag that anyone interested in attending one of these private schools should look at, is it accredited by the state and will credits transfer to other institutions? If credits don't transfer then don't waste your money. If the govn't really wanted to crack down on these bogus schools of so called higher learning they would make them have to be accredited to qualify for govn't student loan program. These institutions need to be regulated and that includes the latest scam the "charter schools" that are popping up all over the country.

  • Report this Comment On March 03, 2014, at 11:40 AM, Grandpastu wrote:

    Just another Republican scam!

  • Report this Comment On March 03, 2014, at 1:36 PM, piasabird wrote:

    It was only a few years ago that the US Government took over the student loans and bacame a bank unto itself. Then they immediately raised the interest rate on loans. I think the Federal Government wants to outlaw competition with its own government banking system????

    So is this communism or what?

  • Report this Comment On March 03, 2014, at 5:27 PM, eldetorre wrote:

    Plasabird they rose interest rate on loans for the exact OPPOSITE reason of communism. They wanted to drive students to the private sector where although loans were more expensive there was less paper work. Raising the Gov't student loan rate made the difference between private and public small enough to push some people towards private for convenience.

  • Report this Comment On March 03, 2014, at 5:28 PM, eldetorre wrote:

    There is a place for private education, but it absolutely has to meet some body of standards and have some government oversight.

  • Report this Comment On March 03, 2014, at 5:37 PM, tomdiesel wrote:

    In the Union we had apprenticeship schools good education low cost,electrician.

  • Report this Comment On March 03, 2014, at 6:47 PM, xetn wrote:

    Footsall

    "Private Corporations will screw you every time; since their sole purpose for being is to make a profit by, "hook or crook." Just another attempt to siphon money from the Federal Government; like the large Corporate Types have been doing for years."

    The big difference between private corporations and the government is you don't have to pay a private company, but you are forced to pay the government whether you want to or not.

  • Report this Comment On March 03, 2014, at 7:17 PM, volcan357 wrote:

    Institutions of higher education are a big enough ripoff as it is with costs of tuition going through the roof. The for profit ones are even worst as they are more or less are running a racket. High pitch salesmanship has no place in education. I went to a State College in 1959 and graduated in 1963. The tuition was $125 a semester. I have a hard time comprehending today's prices. I would never have considered putting myself in debt for years to get a college degree. It is only a piece of paper and does not guarantee you a good job. Higher education has become a big prestige game and the for profit ones don't even have that to offer you.

  • Report this Comment On March 03, 2014, at 7:55 PM, cmalek wrote:

    "With total student debt in the U.S. rising to over $1 trillion, the federal government took a stand this week against one college at the heart of the for-profit education industry."

    US government sues ITT Education. BIG, FAT, HAIRY DEAL! They ought to go after Harvard, Yale, Penn State, Georgetown, Syracuse and other private colleges and universities since that is where most of the Trillion dollar student debt was incurred. Let's not forget the public colleges and universities that charge $1,000 a credit. Over the last 20-30 years Wall Street Journal had occasional articles about the rise in the cost of tuition. At private colleges the cost have gone up 2, 3, 4, 5 times the rate of inflation annually. The increase in the quality of education has definitely NOT followed.

    @volcano357:

    I attended a city college 1965-1970. All I paid per semester was a $23 Consolidated Fee which paid for the paperwork and a student ID. There was no tuition costs. Of course whatever I saved on tuition, I had to pay for books (which is another rip off)

  • Report this Comment On March 03, 2014, at 8:30 PM, ripsnort wrote:

    Don't waste time or money on any of these "buy a degree" institutions.

  • Report this Comment On March 03, 2014, at 11:07 PM, IdaKnow wrote:

    Kevin Modany CEO of ITTESI made $785,000 in 2011 with a $7million bonus. "Corporate" has forced all full time instructors to only part-time; part-time or adjunct instructors are only allowed to teach 3 classes a quarter rather than the 5 adjunct instructors were allowed only a quarter ago. Potential students no longer have an entrance exam, any one who can put their "paw print" on the contact is allowed to sit in a class. Some students have trouble even spelling ITT. I used to be proud to say I worked at ITT (as I went to a competitor for my degree) but now, I do not announce where I work as I cannot be proud of a company that isn't proud, nor repsectful of their product.

  • Report this Comment On March 04, 2014, at 10:18 AM, enginear wrote:

    Good grief!... If you can't tell sharks from goldfish, stay out of the water!

    Don't be a fool. Go to a real (should I put that in quotation marks?... a state institution, or an ivy league place) school. By now even these damned thieves are 'well known'.

    School is Hard (capital H), and it takes a lot of work and a lot of time, and (although it used to be fairly inexpensive in terms of money - no more) a lot of treasure. Don't waste time, or money... both are valuable. If some slickster tells you that you can do it in your spare time, he's a dumb-#%^*. Don't be one yourself.

    What a sad, sad story! Why is it Americans are so willing both to sell and buy such garbage, such trash, such offal? To both buyers and sellers, I say pull your heads out of wherever they are and do something right for a change. Add value to humanity! Don't just try for the brass ring or the lottery win. It's a damned shame.

  • Report this Comment On March 07, 2014, at 1:52 PM, HoosierRube wrote:

    I wouldn't overlook the crippling debt for kids coming out of public schools either.

    That Asian Art History degree isn't going to get you a job either.

    Well, maybe one person will get that job.

    This isn't just about one school.. This is about all schools and school debt.

    But hey, look over here, yes, over here... Focus on this and don't look at us.. Repeat after me, government is good, people are bad.. Again, government is good, people are bad..

  • Report this Comment On March 07, 2014, at 4:19 PM, davewk2002 wrote:

    This also applies to graduate school programs without any index of progress toward their degrees. Some claim to operate to allow those to work on courses until they reach proficiency rather than to have regularly scheduled courses and exams. I ended up being ABD (all but dissertation) in a doctoral program when I ran out of money and student loans. The student loan process was built into the program from the initial event to attract students. Regular indexes of progress were not part of the program until you were so far in debt that there was no stopping for fear of having to begin to make payments on the loans.

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