How the Explosion of the For-Profit Career Colleges Are Swindling Students and Draining the Country's Coffers
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Co-founder of Alta Colleges Inc., Kirk Riedinger chuckled to a reporter in 2002 as he looked back at the company he helped found. In an interview in the Denver Business Journal, June of that year, Riedinger was quoted, sniggering: "We didn't have two nickels to our name."
Along with fellow Harvard Business School graduate Jamie Turner, Riedinger acquired the Denver Institute of Technology in 1987 with the help of 'hard money' from an organization called the "Funded Search." The two entrepreneurs were looking to cash in on the burgeoning 'for-profit career colleges' that have recently sprung up like Pay Day Loans, only they're subsidized by taxpayer funds in the form of federal grants.
The Denver Institute of Technology was eventually morphed into Alta Colleges, Inc., headquartered in Denver with over 12,000 students at 19 campuses in California, Colorado, Georgia, Illinois, Texas and Virginia. It boasts 20,000 graduates. That's a lot of federal money flowing to the private coffers of Alta Colleges, Inc., over $300 million by some estimates. What better way to do business and garner easy cash for investors than to offer a 'career education' to typically low income, working class students -- generally students of color -- who then qualify for taxpayer-funded financial aid which is immediately transferred to the college.
At this point it seems that Alta Colleges, Inc. and their budding entrepreneurs will need more than a few nickels to rub together. On April 20, 2009 after an intense investigation of their practices, Alta Colleges Inc. and its wholly-owned collegiate schools in Texas agreed to pay the United States Government $7 million to resolve allegations under the US False Claims Act. The False Claims Act permits private citizens to bring lawsuits on behalf of the United States and to share in any recovery. Under the just reached settlement, the whistleblowers who initiated the federal lawsuit against Alta Colleges, Inc. will receive $1.19 million for their efforts.
The explosion of the for-profit Career College Industry
The for-profit career college industry was not always a multi-billion dollar business. The whole notion of a career college dates back to the mid-19th century when urban stenography schools saw a rise in enrollment as working people looked for entry into the new industrialized economy. Once advertised as vocational, trucking, beautician and mixology schools, today, thanks to dramatic changes in the rules and regulations under the Bush administration, for-profit career colleges have not only gained favor as for-profit competitors with traditional public schools, but the for-profit industry also received substantial governmental assistance under the Bush regime which simply dismantled consumer-protection rules.
In 2002, for example, around the time Alta Colleges, Inc. saw tremendous growth and soaring profits, Sally Stroup, the top lobbyist for the University of Phoenix, was appointed the Department of Education's assistant secretary for post-secondary education. During her tenure, which ended in 2006, the Department of Education softened rules that prevented the career colleges from obtaining more than 90 per cent of their income from federal aid.
Under Stroup, the feds also reduced the level of scrutiny for the accreditation agencies (ibid). Ironically, Dr. Laura Palmer Noone, former president of the University of Phoenix is now on the Alta College's Westwood College board. She resigned from the University of Phoenix in 2006, coincidently around the same time Stroup's tenure ended.
Now instead of becoming a dental assistant or truck driver, you can take out federal grants and loans to obtain a $33,000 online bachelor's degree in "Homeland Security" from the American Public University System, a for-profit college that consists largely of a Web site (ibid). And at Alta Colleges, Inc., one can even get a degree in criminal justice.
Even though a settlement was reached with the United States Government, Alta Colleges, Inc. is hardly out of hot water. The law firm of James, Hoyer, Newcomer, Smiljanich, and Yanchunis out of Florida is now representing four former students of Westside College, one of Alta's campuses in Denver, in a demand for a class-action arbitration suit against Alta Colleges, Inc., as well as their multi-faceted subsidiaries, of which there are many. You can go to the brief filed by the law firm representing the students and see the attached exhibit of the corporate organizational chart that is Alta Colleges, Inc.
The diagram included with the brief looks like an organizational chart straight out of the criminal division of the Department of Justice, or an episode of the HBO special, the Wire. On September 21, 2009 the law firm reported on their website that an arbitrator had been finally appointed to hear the suit.
Allegations against Alta Colleges, Inc.
According to the class action binding arbitration suit filed by the law firm on behalf of the four claimants against Alta Colleges, Inc. and their subsidiaries:
There's two main parts to this suit. The first is for "deceptive and unfair trade practices" which is the legal way of saying "they lied to and misled students." The main issues we address are failure to properly disclose costs, misrepresentation of accreditation status, misrepresentation of transferability of credits, misrepresentation of job placement opportunities, and misrepresentation of sales people as admissions representatives. The second part is about a specific program at Westwood College called "the Apex loan program." This is a loan that is created by the school if there is a balance between the traditional federal and private student loans and the cost of the college. Any amount remaining unpaid at the end of school is loaned to the student so the student account is zeroed out. The balance is moved to an Apex loan that carries an 18 per cent interest rate for the life of the loan.
The accusations set forth in the class action suit allege that Westwood College aggressively pursued the enrollment of all potential students without any consideration for the means used to recruit them. The suit alleges that the college marketed programs to academically unqualified students, urged them to take the maximum in loans and grants, gave them an inadequate education that was not regionally transferable and then sent them packing on to low paying jobs, or no jobs at all, where they would be shackled with thousands of dollars in student loans and private and federal debt.
This is not unusual, according to a report released in August of 2009 by the inspector general for the U.S. Department of Education, it is estimated that as many as 40 per cent of graduates from for-profit career schools default on student loans, compared with 12 per cent for college students overall.
The suit continues on, alleging that 'Admissions Representatives' employed by Alta College's Westside Campus, regularly and deliberately failed to disclose relevant material information necessary for the students' to make informed decisions. How did they do this? Simple: by failing to disclose to students the accreditation status of the college, the difference between regional and national certification, the costs and fees of attendance, the private 'Apex Loan' and the academic qualifications of the 'Admissions Representatives'.
The lawsuit specifically alleges (1) a violation of the Colorado Uniform Consumer Credit Code against loaning money to students and (2) directly alleges that Alta College and its subsidiaries also violated C.R.S. Section 6-1-105(1) (g) of the Colorado Consumer Protection Act by representing that the national accreditation granted to Westwood College was equal or greater to regional accreditation and by misrepresenting or omitting the true value of credits obtained at a nationally-accredited institution, as judged by the transferability of the credits to a regionally-accredited institution.
To begin with, Alta Colleges, Inc. and Westside College are not licensed lending agencies under the Colorado Uniform Consumer Credit Code. Yet in spite of this, approximately thirty per cent of the students at Westside College are given privately funded 'Apex' loans by the school, indicating that the school is regularly engaged in the business of in-house loan sharking. The education-related loans carry a finance charge of eighteen per cent and a balance of less than seventy-five thousand dollars. The suit also goes on to allege that Alta college, Inc. violated C.R.S. Section 6-1-105(1) (l) of the Colorado Consumer Protection Act by providing misleading, confusing and inconsistent calculations regarding the costs and fees associated with enrollment and by omitting any information or providing false or misleading information about the existence of an internal loan program, and the terms and conditions of the Apex loan.
In terms of the second allegation regarding accreditation, it is common industry knowledge that a regional accreditation is more widely sought after than national accreditation. Yet Alta Colleges, Inc., according to the suit filed for arbitration, offered exclusively national accreditation and knew or should have known that national accreditation is not widely accepted by other universities for credit transfers or degree recognition. By way of example, one Admissions Representative promised a potential student that Westwood College credits would be transferable to the University of Florida or Florida State University if the student ultimately got an offer from a "classier, shinier school", as long as the course descriptions were the same. However, representatives from both Florida colleges said they would not accept credits from Westwood College under any circumstance because Westwood is not regionally-accredited.
The 'Admission Representatives' and 'Drive by Ed'
One of the keys to understanding how the alleged scam works is to look at the Admission Representatives that Westside College and Alta Colleges, Inc. hired to "aid" students. The Admissions Representatives are represented as academic advisors with the necessary credentials to guide students through important educational decisions. Yet according to the brief filed against Alta Colleges, Inc., nothing could be further from the truth. These 'representatives' are little more than 'sales agents' with quota requirements and enrollment-based incentive programs. According to the arbitration suit:
Admissions Representatives promote a school-assisted placement rate of over 85 per cent from 2005-2008, though the Representatives cannot provide any support for how those figures are calculated. The 2002-2005 employment rates were 54.3 per cent, with only one-third of graduates acquiring positions with school assistance. Moreover, the Admissions Representatives are encouraged to lie to students about placement opportunities by falsely touting relationships with companies like Sony and Electronic Arts (EA). The Admissions Representative represents to the student that the Admissions Representative is capable of addressing any of the student's concerns about the school, including quality of the education, costs and fees, financial aid options, course offerings, and credit transferability. However, the job description for this position has no relationship to an educational background. Rather, the job listing specifies that the job category is "Sales" and a candidate is required to have "one to three years of sales experience," an "ability to work in a sales driven environment" and a "strong track record of sales success."
When speaking with prospective students, the Admissions Representatives are instructed by management never to mention the "online fee" for students enrolling in the online program. According to the firm representing the students, this fee is currently as high as $7,800.00. The suit goes on to allege:
Certain students do not qualify for private, credit-based loans or cannot acquire enough loans to cover the cost of the program. Rather than tell the student that the program is unaffordable, Westwood creates and arranges a private, unsecured loan called the Apex loan. The Apex loan program is a Westwood-created vehicle for financing the sizable gap between traditional financial aid options and the cost of tuition and fees. The loan has no limit, is not credit-based and carries an 18 per cent interest rate.
Like loan officers in the sub-prime mortgage industry, the Admissions Representatives are required to meet minimum enrollment quotas to maintain employment and gain promotions. Similar to aggressive military recruiters, they are encouraged to sign-up as many students as possible by participating in competitive "games" based on applications, actual enrollments and boiler room sales tactics. "Winners" are rewarded with paid vacation days, gift cards to local restaurants, parties and exotic vacations. The allegations in the suit claim the company:
fostered a competitive sales environment by regularly sending emails updating the Admissions Representatives on new sales. By way of illustration, an Admissions Representative sent an email from "The Drivers" team stating "Everyone Hit the DECK!!!!!!!!!!!!! A Drive BY JUST Occurred!" with a violent depiction of a drive-by shooting to let other teams know that one sales representative had secured his second application of the day.'A copy of "The Drivers" email is attached as Exhibit F in the suit.
Diploma Mills and Debt Peonage: How it all works
The way the whole scheme allegedly works is that once the Admissions Representative successfully convinces a student to enroll in the college, the focus of the deceptions and misrepresentations then shift to financing the astronomical cost of the 'education'. The cost of the programs can be over exorbitantly high. climbing in some cases to $80,000.00.
As soon as the students are handed over to the loan officers by the 'ad reps', they are told that Westwood touts a four-tier loan system for funding the education of enrolled students: (1) federal grants, (2) federal loans, (3) private loans, and (4) a "Westwood" or "Apex" loan. Each student is contractually obligated to apply for and accept all traditional loan options. Once this is done, Westwood guides them through "alternative lending." If a balance remains on a student's account after federal and private loans are applied, the internal "Apex loan program" kicks in. The Apex loan is unilaterally created by the school and carries an 18 per cent interest rate. Here is the way the scam allegedly works.
We've all seen advertisements for vocational schools in which smiling young working class men and women boast about getting their lives back on track by going back to college to get the coveted degree. Capitalizing on economic frustration the 'career schools' hold out economic success as candy to consumers.
Take the case of Michael Mensch, a member of the 'class' suing Alta Colleges, Inc. As a student, Mensch entered into an Online Program Enrollment Agreement with Westwood College Online that included limited financial terms and disclosures relating to his enrollment. Mensch never received or signed a Retail Installment Contract or any other form of promissory note authorizing the issuance of a Westwood loan, nor was he ever informed that such a loan would be created in his name.
During the enrollment process, Mensch relied on the guidance of the college's Admissions Representatives to direct him through the enrollment process. He was under the impression they were experts who were qualified to provide him with the assistance needed to make enrollment decisions. Mensch detrimentally relied on the Admissions Representative's representations of cost, fees, job placement opportunities and statistics, and accreditation in making his decision to attend the college. Specifically, Mensch was also told that he could expect a job making over $100,000.00 in video game design.
Mensch attended school from October 2007 through April 2008, completing two terms and beginning a third. He received high marks in the classes he completed and was commended for being one of the outstanding students. During the course of the third term, Mensch's family began to receive billing statements from a Sallie Mae loan. Mensch became concerned by the amount of the loans and the fact that the payments were coming due, so he decided to stop attending classes. He withdrew on April 24, 2008. The total cost for Mensch's brief attendance was $15,182.45.
Around November 10, 2008, Mensch received a billing statement from Unisa, Inc., a loan servicing system, for a loan from the "Apex loan program". The bill was in the amount of $2,026.45 with a fixed interest rate of eighteen per cent. The loan's debt date is October 21, 2008, which is five months and two days from the date that Westwood processed his withdraw paperwork. This was the first time he had heard anything about a loan from Westwood College.
There's more, much more. Too much for this article to cover but you can read student testimonials and find out about the case here.
The Obama Stimulus Package goes to college
The recent $787 billion stimulus package passed by the Obama administration included $17 billion to increase by $500 the amount of money each student may receive to pay for college classes under the Pell Grant program, which provides money to low-income undergraduates. The American Recovery and Reinvestment Act was designed to help people recover financially. As President Obama said during a March 2009 speech:
We're already taking steps to make college or technical training affordable. All in all, we are making college affordable for seven million more students, with a sweeping investment in our children's futures and America's success.
It seems that instead of actually helping prepare people for future success, the stimulus program is setting many students up for a lifetime of debt peonage in the midst of a sweltering economic depression. How could this happen? The answer is complicated and involves neo-liberal policies of deregulation and privatization along with the fact that large corporations, like Alta Colleges, Inc., have figured out how to work the federal student aid system while at the same time selling counterfeit dreams to low-income students. Sound like the sub-prime mortgage crisis or the '"ownership society"? One thing is for sure: at Alta Colleges, Inc. one can truly get a neo-liberal arts education.