The Obama Administration Is About to Crack Down on Shady For-Profit Colleges — and Possibly Offer Billions in Debt Relief for Students

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Everest College Closes
Photo: Al Seib/2015 Los Angeles Times

Despite ripping off students and taxpayers for decades, the for-profit-college industry has proved remarkably resilient. Take the University of Phoenix, which paid millions of dollars in fines to the Feds for such unscrupulous practices as recruiting homeless people years ago. A serial offender, the 40-year-old college is now under investigation by the Federal Trade Commission and several state attorneys general for deceptive advertising and recruitment abuses of veterans, among other vulnerable groups.

Shares of its parent company have fallen 80 percent over the past five years, and enrollment has halved, but the University of Phoenix still received about $1.7 billion in government student loans last year, making up 80 percent of its revenues. And recently it struck a $1.1 billion deal to sell itself to private-equity giant Apollo Investment Group.

Apollo might want to wait before signing the final deal documents, though. That’s because, in the waning days of the Obama administration, the government may take its boldest step yet to hold schools like the University of Phoenix accountable for their questionable business practices — and questionable business model. Indeed, Obama’s Department of Education plans to issue a rule that would forgive billions of dollars in loans granted to hundreds of thousands of students at for-profit schools that have defrauded or misled them. The government is also planning ways to make the schools pay for the debt relief. Critics hope the rule will ultimately persuade the government to quit funding loans for troubled colleges.  

This is a potentially decisive way to drive bad operators out of business,” says David Halperin, a public advocate and attorney who has lobbied extensively on for-profit-college reform and is working with a broad coalition of groups including the AFL-CIO, the American Federation of Teachers, the NAACP, the League of United Latin American Citizens, and even the Vietnam Veterans of America to press the Department of Education for strong action on a rule governing student-debt forgiveness.

Unlike public universities backed by taxpayers, or private nonprofit ones dependent on endowments, for-profit colleges are at the mercy of their shareholders. The business strategy has been one of open admissions and expensive tuition that requires recruiting students who can’t afford college and are dependent on loans from the government. This dependence has long been a concern, and during the Clinton era these schools were prohibited from getting more than 90 percent of their revenues from federally backed student loans. But that has led to another problem: widespread abuses in targeting veterans by taking advantage of a loophole that excludes their student grants from the 90-10 calculation.  

Since 2009, the Obama administration has been trying to rein in shady for-profit colleges, largely in the form of a so-called “gainful employment” rule that seeks to ensure graduates of the schools can earn enough to pay off their student loans. That rule is going into effect this year after surviving a legal challenge from the industry. 

But the gainful-employment rule is not nearly as far-reaching as the new one, which could give blanket debt forgiveness to students who’ve attended fraud-plagued colleges. A student debt strike following the 2014 implosion of Corinthian Colleges, which had been one of the largest for-profit schools (and one that Florida senator Marco Rubio once begged the government to continue funding while it was under investigation), appears to have forced the department’s hand. A group called the Debt Collective, an offshoot of Occupy Wall Street, mobilized Corinthian students to stop paying those loans after it discovered an obscure provision in the U.S. Higher Education Act, called “borrower defense to repayment,” which provides for broad-based discharge of debts for those who attend colleges that defraud or mislead their students. But, at least until there is a rule governing the law, borrowers can’t just quit paying the loans without risking garnishment of wages, among other serious penalties. Many apparently still don’t realize relief is possible. Corinthian had 77,000 students in 2013, but only 20,000 people have formally asked for debt forgiveness — and that’s not the only school whose students can apply. So far, the piecemeal effort has been slow: The Department of Education has agreed to cancel some $27 million in debt for 3,421 borrowers, many of them former Corinthian students, The Wall Street Journal reported last month.

These degrees are worthless, and millions of Americans have been scammed by these schools,” says Ann Larson, a co-founder of the Debt Collective. “Why is federal money going to this in the first place?” 

The Department of Education is expected to release a proposed rule sometime in June, according to the Office of Management and Budget. As it has moved through its cumbersome negotiated rule-making process, the agency came up with an initial proposal that gives some indication of what the final one will look like. It suggested relief would be provided under three circumstances: if a judgment was entered against the school, if the school made substantial misrepresentations, or if it breached its contract with students. The final rule won’t be decided until late this year, after a public comment period. 

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An optimistic slogan.

In the meantime, thousands of people, like Los Angeles resident Nathan Hornes, have simply quit paying. “Today I work two minimum-wage jobs. I owe $78,000 in student-loan debt even though Everest [run by Corinthian] is being sued for fraud. Still, the Department of Education has refused to cancel my debt. I want to know: Why is the Department of Education supporting a scam for-profit school instead of students?” asks Hornes. A graduate of Corinthian’s Everest College with a bachelor’s degree in business and a 3.9 GPA, he joined the Corinthian student strike and posted his story on its web page.

Industry heavyweights are already pushing back against the rule. Among the most powerful is former Washington Post owner Don Graham, whose Graham Holdings owns Kaplan University, one of the seven largest for-profit schools that have been under investigation in recent years and collectively received $8 billion in student government-loan money last year. The entire industry receives about $30 billion a year in federal loan money, though that number amount is beginning to decline as enrollment falls off and schools shut down.

Last month, Graham met with senior administration officials about the new rule, arguing in a PowerPoint presentation that it would create an “unprecedented new set of student rights that could create massive liability for taxpayers; give unilateral fiscal power to the federal education department; and result in the bankruptcy of countless U.S. colleges and universities, devastating higher education.”

Kaplan estimated that a little under one-fifth of federal student loans during the 2014–2015 school year — $16 billion out of $96 billion — were awarded to students at for-profit schools. Those loans become part of the larger $1.3 trillion student-debt burden that has gotten so out of control it has emerged as an issue in the presidential campaign, bringing millions of young voters out to support Democratic nominee Bernie Sanders in part because he argued that public-college tuition should be free. While student debt is often a problem for even the best students coming out of top universities, it can be a catastrophe for economically disadvantaged students — including many veterans — coming out of for-profit schools. Nearly half of the 20 percent of students whose loans are in default attended for-profit colleges, according to the National Bureau of Economic Research. Student loans cannot be discharged through bankruptcy, either, so a new federal rule could offer relief to at least some of those debtors.

Until recently, curbing the predatory practices of the for-profit schools has seemed all but impossible, given the industry’s clout in Washington on both sides of the aisle. The two most recent Republican presidential nominees, Mitt Romney and Donald Trump, both have owned for-profit schools plagued by fraud accusations. A civil suit against Trump by former students of Trump University has become the focus of intense media attention — especially after Trump said that the judge overseeing the case should be recused because of his Mexican heritage. (The now-defunct Trump University wasn’t an accredited school, so its students couldn’t apply for federally backed loans.)

High-profile Democrats, including former president Bill Clinton, have also received money from for-profit schools over the years. After earning millions of dollars in speaking fees, he resigned as honorary chancellor of for-profit Laureate International Universities when Hillary Clinton was ramping up her White House run and began attacking the sketchy schools. But since the Corinthian debacle, a dozen Democratic senators, led by Elizabeth Warren of Massachusetts, have taken up the cause and are also pressing the Department of Education to take strong action.   

Among other problems, for-profit schools often cost more than traditional colleges and often don’t prepare students for the jobs they were supposedly educated to perform. This month, a new working paper from the National Bureau of Economic Research found that students from nonprofit schools earn less after they attended them than before they went.

A tough standard will force the Department of Education to think twice about granting loans to students going to bad schools, argues Halperin. “In the end this will save the taxpayer a lot of money.” As always, the devil will be in the details. Halperin says his group is pressing for a broad rule. “If there is a finding or a settlement that relates to deception, or the department itself makes a finding, then all students should be presumptively and automatically entitled to full discharge of their loans unless the student checks a box saying I don’t want loan forgiveness,” he argues.

With a multi-billion-dollar problem on its hands, the government’s thorniest issue is how to claw back money from the schools, since covering the loans could bankrupt many of them. In its initial proposal, the Department of Education said it planned to require that problem colleges show that they have the money to repay the loans or post a letter of credit anywhere from 10 percent to 50 percent of the amount it received in federal loans during the prior year, with the amount dependent on the likelihood of debt relief. 

To show it’s serious, this week the government asked ITT Educational Services, which for almost a decade has been under investigation by multiple agencies, including the Securities and Exchange Commission, and is at risk of losing its accreditation, to increase the amount of its letter of credit to 20 percent of its loans in order to show it can meet its liabilities to its 43,000 students and taxpayers if it shuts down suddenly. When Corinthian failed two years ago, there was not enough money to cover the costs of its student loans, even though the college had received $1 billion in loans during its final year.

Because for-profit schools have always depended on government money, their lobbying effort and ties to powerful politicians have been critical to their success. None have been better at it than the University of Phoenix, whose founder, the now-deceased John Sperling, was a key Democratic power broker in D.C. The tradition is continuing with the publicly owned Apollo Education Group that owns the university. (It has no prior connection to Apollo Investment Group, which is the buyer.)

To grease the deal, which ultimately the Department of Education will need to bless, the University of Phoenix and Apollo brought in a small private-equity firm, Vistria, which has close ties to Obama, as a partner. Vistria founder Marty Nesbitt is one of President Obama’s closest friends and the chairman of the Obama Foundation. Tony Miller, Vistria’s chief operating officer and a partner, was deputy secretary of Education between 2009 and 2013. He will become the new chairman of Apollo Education Group when the deal closes in August.

For too long and too often, the private education industry has been characterized by inadequate student outcomes, overly aggressive marketing practices, and poor compliance,” Miller said when the deal was announced, promising the University of Phoenix will become a model citizen under new management. If the Obama administration is serious about stopping the abuses, the University of Phoenix will have no other choice.