Earlier this month, ITT Educational Services closed its 130 campuses and filed for bankruptcy. The move left 37,000 students without degrees, as well as 8,000 employees without jobs, according to CNN.
What caused ITT to abruptly shut down? Motley Fool's Gaby Lapera and John Maxfield discuss this and other aspects of for-profit education in this segment of Industry Focus: Financials.
A full transcript follows the video.
This podcast was recorded on Sep. 26, 2016.
Gaby Lapera: ITT Tech is in a lot of trouble. As we mentioned earlier in the show, they shut down about 130 campuses. And they weren't the only ones that got shut down. Their accrediting council also got shut down, which we'll get to in a second. But let's get into why they ended up getting shut down. A lot of it goes to what we were talking about earlier, with them receiving so much federal aid, and the federal government feeling that students were not getting a good value for the money they were paying for their education.
John Maxfield: Yeah. It's not only that they would give them a bad product, but they would use these techniques to rope people into the college, to rope people into these student loans. For example, the Consumer Financial Protection Bureau filed a lawsuit about two years ago. At the foundation of that lawsuit was an allegation that was that what ITT would do is -- let's say you want to buy a car, or get a new credit card. And you get that interest-only period, or you don't have to pay interest, or whatever it is. You get those introductory periods where the terms look really good.
ITT would do the same thing. They would give an interest-free one-year loan to get people into the college. But then, when that loan was up, then ITT -- and this was part of ITT's entire plan, according to the Consumer Financial Protection Bureau -- the people would be stuck with all this money that they had to repay. So then what ITT would do, they would have their student financial people -- the people that help students get student loans -- roll those temporary "free" loans into these really expensive private loans, where the origination cost could be as much as 10% of the actual loan.
Lapera: That's a lot of money!
Maxfield: Here's what's interesting, Gaby. When I was reading through this, and we were talking about this, when you come away from looking at this, you're like, these companies are loan originators, to a certain extent. And then they have this product that they throw in with it.
Lapera: Yeah. One of the problems with ITT Tech and for-profit universities, in general, is that they frequently preyed on people who didn't have a lot of other resources. So maybe they didn't know a lot about how their loan terms actually worked. They frequently targeted veterans, who got money from the GI Bill, who maybe were the first generation [in their family] to go to college and didn't know that the things that were happening were not normal, really, for a nonprofit university. But they were for-profit universities. I think a lot of people don't see that distinction, and they don't realize what's going on. And I think that one of the things that ITT Tech promised -- that was the worst thing, maybe, that they did -- was they told people they had 100% job placement rate. And that simply was not true. It was very frequently less than 100%, often less than 60%, which is the bare minimum required of them.
Maxfield: Yeah. And that 100% statistic comes from one of ITT's specific campuses, and it was talking about placement in its computer science program. So, they're out marketing, basically. To the point you were making about the commercials earlier -- they're basically saying to people, "If you come to this ITT campus, and you get a computer science degree, you have a 100% chance of getting a job." If you're in a tight spot, like a lot of people were in the financial crisis, and you have a family -- again, to your point about the commercials -- how can you turn that kind of opportunity down? But as the facts come out, it's closer to 50%. This is just a scam in the for-profit education context. That's what this is really all about.
Lapera: And one of the things that people are saying about these job placement rates is, they'll help you get a job, but it's not necessarily in what you studied. That's the thing. So you get an IT degree from them. They'll offer you a job selling insurance. It doesn't really 100% add up. Not only did the federal government have a problem with this, but their accreditation council also had a problem with this. They found that only 20% to 49% of any of the job placement they did had anything to do with the degrees they offered.
Maxfield: Yeah. It's a horrible situation. And even when you were within a program, a lot of those programs didn't have accreditation. You referenced the accreditation process. The nursing program at some of the campuses -- you had nursing students go to these programs -- it was horrible, a horrible situation. Students were led to believe that either the school was in the process of getting accreditation, or already had it, when in fact, neither was true. So you would get out after spending all this money on a nursing degree, and either you couldn't get those credits transferred over to an actual nursing program, because there was no actual accreditation, or you couldn't get a job with it because you didn't come from an accredited program.
Gaby Lapera has no position in any stocks mentioned. John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.