WASHINGTON – For-profit, or proprietary, institutions of higher education came under fire Thursday as the Department of Education’s inspector general, a former student, a Wall Street investor, and a former California deputy attorney general testified before the Senate Health, Education, Labor and Pensions Committee and alleged fraud and abuse by those institutions.
Steven Eisman, portfolio manager of the FrontPoint Financial Services Fund, compared for-profit colleges to the subprime mortgage lending industry.
“The government, the students and the taxpayer bear all the risk, and the for-profit industry reaps all the rewards,” he said. “This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper.”
According to Eisman, the industry accounts for 9 percent of the students; 25 percent of all Title IV loan and grant disbursements, and 44 percent of all defaults. At many of those institutions, he added, Title IV loans and grants make up 90 percent of total revenues. He cited ITT Educational Services as an example, noting that it “is more profitable on a margin basis than even Apple.” Eisman predicts that, in the next 10 years, close to $500 billion in Title IV loans will be funneled to for-profits and that its students will owe $330 billion on defaulted loans.
How did it get to this point?
In her testimony, Kathleen Tighe, the Education Department’s inspector general, cited numerous examples of fraud and abuse, including falsified records to qualify students to receive and continue getting federal financial aid and enrolling students in programs that do not meet minimum program eligibility requirements; failure to refund Title IV funds when a student drops out of an institution; and added “creative accounting schemes” to falsely demonstrate that the institution is meeting the 90/10 Rule so they can continue participating in federal student aid programs.
Tighe also said that her office has received complaints that institutions are violating a ban on incentive compensation for recruiters to increase enrollment. Unfortunately, the current regulations of the Department of Education shield schools from administrative civil and criminal liability, but that could change if recently proposed rules are adopted.
