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STEALING FROM YOUR STUDENTS: THE HIDDEN KEY IN THE HIGHER EDUCATION ACT TO HOLD LEADERS OF FOR-PROFIT COLLEGES PERSONALLY LIABLE FOR FRAUD

By: Kylee Evans, Volume 106 Staff Member

Student debt in the United States has hit a historic high.[1] The estimated total student loan debt as of March 2022 is $1.749 trillion.[2] Of that, the federal government owns about $1.61 trillion.[3] Legal scholars have long compared this debt to the mortgage bubble that led to the Great Recession in 2008.[4] Political advocates have called on President Biden to forgive large swaths of that student debt.[5] Although the President has largely ignored such calls, the Administration has been quietly forgiving student loans for certain for-profit colleges.[6] As of March 2022, the Education Department has forgiven nearly $10 billion for those students.[7] This came after the Education Department ruled that DeVry, Everett, ITT Tech, University of Phoenix and more had defrauded their students.[8] Despite this ruling, the Education Department has never used its power under the Higher Education Act[9] to hold those leaders personally liable for the damages to their students.[10]

This Post will look at a brief history of for-profit colleges and the impact their fraud has had on their students. Then it will look at the history of the Higher Education Act to understand why the Department was given the power to hold leaders of those colleges personally liable for their fraud. Moreover, it will assess the reasons the Department has declined to use the power thus far. Finally, the Post will argue that the Department should begin to use its power under the Act to hold leaders of for-profit colleges personally liable for defrauding their students. This will allow the federal government to unload some of the burden of student loan debt onto the leaders who perpetuate those damages while still providing relief to students who have been defrauded.

I. FOR-PROFIT COLLEGES AND HOW THEY DEFRAUD

Advertisements of for-profit colleges are everywhere.[11] Whether on your TV telling you to “stop wasting your life” or on your social media news feed, showing you success stories of single parents and minority students, these ads are persistent.[12] Yet, even after all those ads, for-profit colleges only enroll about 10% of the students in higher education.[13] Most of those students are non-traditional students: single parents, minorities, veterans, and low-income individuals.[14] The secret these colleges don’t disclose to prospective students is that their students, although only accounting for 10% of students nationwide, account for about half of all student loan defaults.[15] This is largely because their student outcomes are much worse than their anecdotal ads suggest.[16] Thus, even when students do graduate from these colleges—and many do not—they are unable to find jobs that pay enough to repay their student loans.[17]

Consider the case of ITT Technical Institute. This for-profit university was booming in the early 2010s, with 137 campuses nationwide, until it was forced to close in 2016.[18] That closure came after the federal government cut off student aid to the college because it had “lied about its graduation and job-placement figures.”[19] Since its closure, former ITT employees have revealed the college’s aggressive recruiting techniques. Recruiters were instructed to “call a minimum of three times a day for the first three days,” frame selling points to match the students’ personal questionnaire, and look for students who would be both “desperate to enroll” and likely be eligible for the “highest amount of financial aid.”[20] The company itself set the standard for data collection in for-profit universities. The company would “draw on public records, credit card information, and social media profiles, then use sophisticated modeling to identify desirable prospects based on everything from age and gender to neighborhood density [and] political affiliation.”[21] During the height of its success, ITT Tech greatly expanded its program offerings, eliminated entrance exams and screening for some programs, all while raising tuition fees.[22] By the time ITT closed, it was charging nearly $50,000 for an associate degree. Yet, its students had almost no job prospects lucrative enough to repay that debt.[23]

II. CONGRESS’S RESPONSE TO THE FAILINGS OF FOR-PROFIT COLLEGES

Congress has not been silent on this issue. In the early 1990’s, the Senate released a report finding that for-profit colleges were “plagued by fraud and abuse.”[24] The report admonished the Education Department for “abdicat[ing] its [Guaranteed Student Loan Program] oversight responsibilities” thereby allowing colleges which fail to “provide the students with a quality education” to profit from federal student loans.[25] In response, Congress amended the Higher Education Act to provide clearer standards for institutions of higher education. Importantly, this included a provision granting the Commission the power to impose an “assumption of personal liability, by one or more individuals who exercise substantial control over such institution . . . [for] financial losses to the Federal Government, student assistance recipients, and other program participants for funds under this subchapter, and civil and criminal monetary penalties authorized under this subchapter.”[26]

This provision of the Act is quite powerful. Not only can the Department fine an institution or remove its accreditation in response to fraud,[27] but the Department can also hold the institution’s directors financially liable for the damage to students. This power is particularly important because, “[w]hen an institute for higher education closes, students who attended that institution at or near the time of closure have a right to discharge all federal Direct Loans” they received while at the institution.[28] Thus, the $10 billion in student loans that the Department has forgiven or discharged has fallen heavily on taxpayers. [29] Although the Department has required most institutions to post a “letter of credit” to guard against losses, those are “often woefully insufficient.”[30] For example, when ITT Technical Institute closed, the Department incurred hundreds of millions of dollars in losses for student loan discharges and bankruptcy losses.[31] However, the “letter of credit” ITT had to post was a mere $94 million, a mere fraction of the financial damage done by the institution.[32] Using the Higher Education Act, the Department could recoup some of those losses from the leaders of those institutions, who themselves made millions.[33]

III. THE EDUCATION DEPARTMENT’S REFUSAL TO SUE FOR PERSONAL LIABILITY AND WHY IT REALLY SHOULD

So why hasn’t the Department used its power under the Higher Education Act? The answer is complicated. First, many leaders of these institutions are well-known in the education sphere, making it socially difficult for Department officials to go after them personally.[34] Plus, it can be difficult to maintain enforcement efforts when the winds of politics change, as evidenced by the Trump administration dramatic reduction of regulations against for-profit colleges.[35] Moreover, attempting to recoup losses from an individual can be costly, “with no guarantee of success.”[36] Ultimately, the Department has to prioritize which efforts to put its time and money into; for years that calculus has favored getting students debt relief over the cost of suing leaders.[37]

However, these decisions ignore the purpose of the 1992 amendments to the Higher Education Act.[38] The goal of the statute as amended was to incentivize low-quality institutes of higher education to make real reforms.[39] And with the inclusion of personal liability suits, the ultimate goal was to prevent leaders of these institutes from profiting while their students suffered.[40] When the Department declines to hold leaders personally liable, it sets a dangerous precedent wherein leaders can escape from their fraud unscathed while the Department cleans up after them.[41] The continued success of for-profit colleges like DeVry University and the University of Phoenix[42] demonstrate the need for the Department to hit leaders where it really hurts, their own pocketbooks.

Advocates, Senators, and even members of the Education Department itself have called on the Department to begin utilizing its power under the Higher Education Act.[43] Although the Department has recently made statements suggesting that it might use this power to hold leaders of DeVry University personally liable, there hasn’t been much more than talk.[44] If there was ever a time to do it, it would be now. The student debt crisis is reaching a fever point and for-profit colleges are advertising more aggressively now than ever. The Education Department should finally use the power it was granted by Congress in 1992 to hold the leaders of fraudulent for-profit colleges personally liable for the financial damage they cause.

 

[1] See, Melanie Hanson, Student Loan Debt Statistics, EducationData (Mar. 1, 2022),

https://educationdata.org/student-loan-debt-statistics [https://perma.cc/NU8H-89H9]. Note that student loan debt did not rise as much during 2021 and early 2022 because the federal government put a freeze on students loans. This also prevented the government from assessing interest against the loans.

[2] Id.

[3] Id.

[4] See, e.g., Jessica L. Gregory, The Student Debt Crisis: A Synthesized Solution for the Next Potential Bubble, 18 N.C. Banking Inst. 481, 481–82 (2014) (calling the resemblances between the student debt crisis and the 2008 mortgage crisis “uncanny”); April A. Wimberg, Comparing the Education Bubble to the Housing Bubble: Will Universities be too Big to Fail?, 51 U. Louisville L. Rev. 177, 190–96 (arguing that the education market is “mirroring the same path [as the] housing [market]”); Seth Frotman, Broken Promises: How Debt-Financed Higher Education Rewrote America’s Social Contract and Fueled a Quiet Crisis, 2018 Utah L. Rev. 811, 814–16 (arguing that the federal government has broken its promise to prevent another 2008-level crisis by ignoring the student debt crisis); Jesse L. Noa, The Student Loan Bubble: A Pending Crisis or Overblown Threat?, 20 Trinity L. Rev. 65, 79–80 (2014).

[5] See, e.g., Ariel Gelrud Shiro & Richard V. Reeves, The For-Profit College System is Broken and the Biden Administration Needs to Fix it, Brookings (Jan. 12, 2021), https://www.brookings.edu/blog/how-we-rise/2021/01/12/the-for-profit-college-system-is-broken-and-the-biden-administration-needs-to-fix-it [https://perma.cc/8TVS-X6RE]; Annie Nova, Former Education Secretary Under Obama Calls on Biden to Cancel Student Debt, CNBC (Feb. 24, 2022), https://www.cnbc.com/2022/02/24/former-education-secretary-calls-on-biden-to-cancel-student-debt-.html [https://perma.cc/6GTE-XNEK].

[6] Extended Closed School Discharge Will Provide 115K Borrowers from ITT Technical Institute More Than $1.1B in Loan Forgiveness, U.S. Educ. Dep’t (Aug. 26, 2021), https://www.ed.gov/news/press-releases/extended-closed-school-discharge-will-provide-115k-borrowers-itt-technical-institute-more-11b-loan-forgiveness [https://perma.cc/HLS5-PXGR].

[7] Id. (noting that by Aug. 26, 2021 the Education Department had discharged $9.5 billion in student loans from the fraudulent colleges); Gabriel T. Rubin, Education Department Forgives $415 Million in Debt for For-Profit College Students, Wall Street J. (Feb. 16, 2022), https://www.wsj.com/articles/education-department-forgives-415-million-in-debt-for-for-profit-college-students-11645050691 [https://perma.cc/JJV9-MGDA] (noting that the Education Department discharged another $415 million in early 2022).

[8] See sources cited, supra note 7.

[9] Specifically, Congress gave the Department power to hold leaders personally liable under 20 U.S.C. § 1099c(e)(1)(B).

[10] See Cory Turner, When Colleges Defraud Students, Should the Government go After School Executives?, NPR (Mar. 1, 2022), https://www.npr.org/2022/03/01/1062679587/for-profit-colleges-student-loan-borrowers-fraud [https://perma.cc/Y28M-6N5P] (noting that the Education Department did not use its authority under § 1099c, even after the historic collapse of the for-profit Corinthian College, which defrauded its students out of billions of dollars in student loans).

[11] In fact, for-profit colleges dramatically increased their advertisements in 2020, likely preying on the uncertainty that the pandemic brought to low-income families. See Taela Dudly, College Marketing in the COVID-19 Economy, Century Found. (Aug. 18, 2020), https://tcf.org/content/report/college-marketing-covid-19-economy [https://perma.cc/8UYT-EPZ7].

[12] Id.; see also Sara Weissman, Report: Colleges Ramp Up Advertising During COVID-19, Especially For-Profits, Diverse Educ. (Aug. 19, 2020), https://www.diverseeducation.com/covid-19/article/15107598/report-colleges-ramp-up-advertising-during-covid-19-especially-for-profits [https://perma.cc/63WC-UY6Q] (noting particularly “aggressive marketing” toward veteran students as a means to capitalize on GI bill money).

[13] Shiro & Reeves, supra note 5.

[14] Stephanie Riegg Cellini & Cory Koedel, The Case for Limiting Federal Student Aid to For-Profit Colleges, 36 J. Pol’y Analysis & Mgmt 934, 935 (2017).

[15] Specifically, between 2009 and 2014, 46% of all student loan defaults were students at for-profit colleges. Howard R. Gold, Who’s at Fault for Student Loan Defaults?, Chi. Booth Rev. (May 13, 2019), https://www.chicagobooth.edu/review/whos-fault-student-loan-defaults [https://perma.cc/JS73-W2VU].

[16] Id.

[17] Id.

[18] Kirk Carapezza, Where are the 40,000 Students ITT Tech Left Behind When it Closed?, NPR (Oct. 4, 2016), https://www.npr.org/sections/ed/2016/10/04/496422628/where-are-the-forty-thousand-students-itt-tech-left-behind-when-it-closed [https://perma.cc/MU6Q-DJZQ].

[19] Id.

[20] Rowan Moore-Gerety, What Former Employees Say ITT Tech Did to Scam its Students, NPR (Dec. 7, 2016), https://www.npr.org/sections/ed/2016/12/07/502601724/what-former-employees-say-itt-tech-did-to-scam-its-students [https://perma.cc/J5SW-EPR2].

[21] Id.

[22] Id.

[23] Id.

[24] S. Rep. No. 102-58, at 33 (1991).

[25] Id. at 34.

[26] 20 U.S.C. § 1099c(e)(1)(B).

[27] See id. at (a), (e)(1)(A).

[28] Daniel A. Zibel & Alice W. Yao, Protection and the Unseen: Holding Executives Personally Liable Under the Higher Education Act, Nat’l Student Legal Def. Network, Oct. 2020 at 2.

[29] See id. (“[W]hen major for-profit college chains. . . have closed under the weight of federal and state law enforcement investigations, taxpayers have borne a substantial financial burden.”). Turner, supra note 10 (“The system should not be that owners get to walk away with the profits and the taxpayers are left holding the liability.”).

[30] Id.

[31] Id.

[32] Id. at 3.

[33] See Turner, supra note 10 (“The point of holding the owners of fraudulent schools personally liable for student and taxpayer losses is twofold: to give the government another way of recouping those losses and, just as important, to discourage the future sale of education snake oil by shaming the sellers.”).

[34] Id. (“When the department helped arrange the sale of Corinthian to a debt collector. . .department officials interacted with its CEO multiple times. ‘It’s harder to slap a fine on someone you’ve just had lunch with.’”).

[35] See Katie Lobosco, Betsy DeVos Scraps Obama-Era Rule on For-Profit Colleges, CNN (June 28, 2019), https://www.cnn.com/2019/06/28/politics/betsy-devos-for-profit-college-rule/index.html [https://perma.cc/67LY-F23G].

[36] Id.

[37] See Turner, supra note 10 (“[The Department] focused on providing debt relief to their victims, trying to “ensure that borrowers were being helped on the back end.”).

[38] See Zibel & Yao, supra note 28, at 4.

[39] See S. Rep. No. 102-58, at 34–44 (1991) (describing the Committees recommendations to improve the quality of higher education and make the Guaranteed Student Loan Program more effective).

[40] Zibel & Yao, supra note 28, at 4.

[41] See Turner, supra note 10 (“[H]olding executives liable isn’t just about recouping losses; it’s about creating a powerful, symbolic deterrent for future would-be fraudsters.”).

[42] See University of Phoenix Students May File Deceptive Advertising Lawsuit, Carlson L. Firm (Mar. 29, 2021), https://www.carlsonattorneys.com/news-and-update/deceptive-advertising [https://perma.cc/NYD6-RKJX] (“The for-profit university joined DeVry in being held accountable for harming students by the promise of a brighter future. A promise that for-profit colleges rarely deliver on.”).

[43] See e.g., id. (referring to a 2021 hearing in which Representative Scott called on the Department to hold leaders liable); Letter to Betsy DeVos, Former Secretary of Education, from Senators Elizabeth Warren, Christopher S. Murphy, Sherrod Brown, Margaret Wood Hassan, Richard Durbin, and Richard Blumenthal (Oct. 26, 2020) (calling on then-Secretary DeVos to change the Departments approach to executives of for-profit colleges); Ben Miller, College Executives Need to Pay Up When Their Schools Close Abruptly, Am. Progress (Mar. 19, 2019), https://www.americanprogress.org/article/college-executives-need-pay-schools-close-abruptly [https://perma.cc/T3AC-H8UX] (arguing that the Department should hold executive accountable; Miller is now a top advisor inside the Department); Letter to Miguel Cardona, Secretary of Education, from Robert C. Scott, Chairman of the Committee on Education & Labor (Aug. 16, 2021) (requesting documents from the Department explaining why it has refused to pursue personal liability against certain for-profit executives).

[44] See Turner, supra note 10 (“Beyond that press release, though, the Biden administration has done no more than previous administrations to hold college leaders and owners personally liable for ripping off students and taxpayers. Which is to say, it’s done nothing at all.”).