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 (OTC:ESINQ), 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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.