The Department of Education under Betsy DeVos and the Trump administration is seemingly doing everything it can to eliminate consumer protections from schools of higher education that cause consumers to take out loans to attend.
Secretary DeVos has been pushing for rollbacks on the Borrower Defense to Repayment program that gave students a way to extract themselves from loans that were pushed on them in an attempt to defraud them. The Gainful Employment rule that is being significantly slashed was designed to make schools accountable that the cost of the school resulted in a benefit.
The Bankruptcy Trustee in the bankruptcy of ITT Educational Services paints a very vivid picture of why these borrower protections are needed. While the current argument why they are not needed is because students need to be responsible for the decisions they make to attend school and take out loans.
That sure sounds like common sense advice.
But what happens when students are not given all the facts to make good common sense advice decisions? Should schools be accountable for withheld information and students have a path towards recourse if they are misled?
Education Secretary Betsy DeVos says “No fraud is acceptable, and students deserve relief if the school they attended acted dishonestly.” And it’s not until it is. The Department of Education is dragging their feet and proposing only partial loan forgiveness now under their new Borrower Defense to Repayment program.
What makes the bankruptcy trustee action against the student loans lenders and funders interesting is that there has now been enough time to conduct substantial research and uncover what the facts were.
Here is what is now asserted about the actions of ITT Educational Services when it came to selling education.
All the quotes come from this court filing.
“ITT’s PEAKS Loan Program was a for-profit education version of the sub-prime mortgage lending catastrophe, in which students rather than new homeowners were the victims. For the benefit of ITT insiders and Defendants, the PEAKS Loan Program allowed ITT to defraud students and evade regulators, while shielding the fruits of ITT’s fraud from claims of students through a complicated structure involving multiple trusts and a circuitous flow of funds between ITT and Defendants.”
“As with other for-profit colleges, much of ITT’s growth occurred after it became eligible to receive federal student aid loans and grants under Title IV of the Higher Education Act of 1965, 20 U.S.C. §§ 1070 et seq. (“Title IV”) [Federal Student Loans] in 1972. Before that year, only non-profit and public institutions were eligible for title IV student aid funds. Between 1970 and 1975, enrollment in for-profit schools increased by 112 percent, as compared with growth of 30 percent for all higher education sectors.”
“Throughout its existence, nearly all of ITT’s revenue was derived from student tuition and fees. Accordingly, ITT’s growth was dependent upon raising tuition and/or enrolling more students. Recruiting students was also of great importance because a large number of students who enrolled at ITT withdrew before completing their degree programs. According to the Senate Committee Report, “[o]verall, ITT’s withdrawal rate closely tracks the sector-wide withdrawal rate of 54 percent.”
“Furthermore, students at for-profit institutions like ITT defaulted on their federal loans far more often than students at non-profit schools. According to the Senate Committee Report, by 1990, the student loan default rate at for-profit schools was double that of higher education overall. Defaults by students at for-profit colleges represented almost half of the nationwide total. At the time of the Senate Committee Report, the expected defaults by ITT’s students for 2009 was approximately 34 percent.”
“As part of their efforts to drive profits (and thereby increase their own compensation), ITT’s Former Management committed substantial resources to advertising and marketing efforts to recruit new students. For example, in 2010, ITT’s Former Management caused ITT to employ 2,550 recruiters and to allocate $252 million — about 19.1% of ITT’s total revenue — to marketing and recruiting, according to the Senate Committee Report.”
“ITT’s recruiting efforts were aggressive. On information and belief, ITT’s Former Management pushed recruiters to maximize sales, requiring them to make around 140 calls a day to prospective students, and compensating recruiters based on results. As discussed below, there is substantial evidence that ITT’s recruiting practices frequently violated state and federal consumer protection laws.”
“Because the great majority of its students could not afford to pay the school’s tuition on their own, retaining and aggressively recruiting students was not enough, by itself, to make ITT’s business model work. The vast majority of ITT’s revenue — hundreds of millions of dollars annually — came from Title IV loans to students.”
“In 2013, for example, approximately 82% of ITT’s revenue came from Title IV funding. In the past ten years alone, ITT created, by a conservative estimate, $7.3 billion in student loan debt, both federal and private.”
“Because ITT received the Title IV funds so long as students took out loans and signed up for classes, ITT would profit from the increased availability of Title IV monies, even if it eventually turned out that many of the students would be unable to repay the loans they were induced to take out.”
“ITT’s Former Management quickly took steps to attempt to ameliorate the impact of the worldwide financial crisis on ITT’s business. To help increase revenue, ITT’s Former Management redoubled its recruiting efforts to increase the pool of potential applicants. These efforts paid off, as enrollment soared from 48,155 students in 2006-07 to 88,004 in 2010-11. At the time of the Senate Committee Report, ITT was adding 8-10 new locations per year, and had identified 50 additional locations as “viable opportunities to continue to expand.”
“However, because Title IV loans could not be used to pay more than 90% of students’ tuition, increasing enrollment could not solve the crisis faced by ITT. For ITT’s business to survive, it also needed to provide potential students with a new source of “private” funding, so they could continue to obtain the federal loans that accounted for most of ITT’s revenues.”
“ITT was hit particularly hard by credit tightening during the recession because its aggressive recruiting efforts resulted in enrollment of a great many students with very poor credit profiles and low earnings, as ITT’s Former Management was acutely aware. According to Fitzpatrick, the average ITT student earned around $18,000 per year and had a credit score under 600 at the time he or she enrolled. Upon information and belief, the average ITT student without family earned only a few thousand dollars above the poverty line and had a deeply sub-prime credit profile, and the average student with a family lived below the poverty line.”
“There is overwhelming evidence, however, that ITT actively misled students regarding the Temporary Credits, the nature of the education they would receive, the transferability of class credits, and virtually everything else associated with ITT.”
“The Class Action Complaint further asserts that ITT’s army of 2,500 recruiters targeted prospective students who were in desperate circumstances, and regularly made misrepresentations to such students about ITT’s programs and their value, the transferability of its credits to other schools, and ITT’s loan programs and other financial aid.”
“The Senate Committee Report also concluded that “ITT recruiters were trained to mislead prospective students about the cost of attending the school.” Recruiters were encouraged to utilize a method of questioning students described as the “Pain Funnel,” in which students were made to feel they were not adequately dealing with life problems if they were not sufficiently “committed” to getting a degree at ITT despite its high cost. In this regard, tuition at ITT’s Indianapolis campus was $44,895 and $93,624 for Associate’s and Bachelor’s degrees, respectively, in business administration, versus $9,385 and $43,528 for the same two programs at Ivy Tech Community College and Indiana University in Bloomington, respectively.”
The Consumer Financial Protection Bureau (CFPB) had previously been involved in making sure schools were not harming consumers. “On May 18, 2012, ITT received a Civil Investigative Demand (“CID”) from the CFPB, which stated that the purpose of the investigation was, in part, “to determine whether for profit post-secondary companies, student loan origination and servicing providers, or other unnamed persons have engaged or are engaging in unlawful acts or practices relating to the advertising, marketing and origination of private student loans.”
The current CFPB no longer gets data from the Department of Education and Acting Director Mulvaney says the CFPB is no longer focused on issues involving federal student loans. – Source
“Unfortunately for the students who were defrauded by ITT, the Peaks Loan Program — with its complicated shuffling of funds and student notes among various trusts — was plainly structured to hinder and delay students’ attempts to recover damages from ITT and the lenders participating in the program, notwithstanding federal legislation designed for their protection.”
Nobody Should Be Surprised
It can’t come as a shock that for-profit schools have to drive revenue to make shareholders happy. But when it is done with federal student loans that then leave people trapped in debt that was deceptively sold, shouldn’t the student have some recourse to get out from under the deceptive debt? What does common sense say to you? What possible reason could the Department of Education have for eliminating that programs that provide student loan protection and forgiveness? Hum?
Steve Rhode
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This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.