Commission Sales Comes to Higher Ed, Uncle Sam Seeks to Shut It Down
Closing the deal has become key to enrolling students at career and trade colleges, as the competition among schools can be stiff. Those students bring federal dollars in the form of federal student loans. Without this source of revenue, these schools could not function.
Commission-based compensation for the sales force at some of these schools has surfaced also. Working for commission is part of the landscape in auto sales, real estate and elsewhere, but it’s against federal law when it comes to recruiting customers—read: students—in higher ed.
The sales force at these colleges doesn’t stop with a one-time meeting on campus. Prospects that don't bite the first time get robo calls to their cell phones or landlines.
Now federal regulators are on the case. Pittsburgh-based Education Management Corporation (EDMC) will pay $102 million in loan relief to some of its former students plus $95.5 million to settle Department of Justice (DOJ) charges that it illegally used incentive compensation for recruiters who lured unsophisticated students through deceptive and misleading market practices. Most of the $95.5 million will go to the federal government, with smaller portions going to 38 individual states whose respective attorneys general sued EDMC. Illinois, for example, will get $1.9 million from the settlement.
“EDMC’s recruitment mill swindled federal taxpayers out of nearly $11 billion over the course of more than ten years and lured thousands of students into taking on mountains of federal student loan debt for a worthless diploma,” said Senator Dick Durbin (D-Ill.) at a presser on Monday. “Where’s the accountability for the executives who ran this scheme and ran away with our tax dollars?”
Attorney General Loretta Lynch also said that EDMC has been "operating essentially as a recruitment mill.”
But in what has become a rote exercise among cases brought by federal regulators, EDMC admitted to no wrong-doing in its agreement to settle the Department of Justice charges. What's more, Lynch said the DOJ did not demand that EDMC pay the $11 billion it scammed from Uncle Sam because no one thinks the money is there. Some observers are concerned that by letting EDMC pay a one-time make-good for an acknowledge fraud, the DOJ was giving EDMC another opportunity to game the system.
In a statement, EDMC said it was pleased to have resolved the civil claims raised by the Department of Justice and state attorneys general. “Though we continue to believe the allegations in the case are without merit,” the school said, “putting these matters behinds us returns our focus to educating students.”
ECMC currently enrolls 100,000 students at dozens of its subsidiary schools: Argosy University, the Art Institutes, Brown-Mackie College and South University. Formerly a publicly-traded company, EDMC disclosed in its most recent public filing on March 2014 that it had $177 million in cash, about $20 million less than it will need cover the total cost of the fines. With the current state of its finances unknown, it’s not clear how the cost will be covered. EDMC was delisted from the Nasdaq in November 2014. An EDMC spokesperson could not be reached for comment.
The deal struck by the DOJ and EDMC began as a whistle blower lawsuit filed by Lynntoya Washington, an assistant director of admissions at the Art Institute of Pittsburgh Online Division, and Michael Mahoney, director of training at EDMC's higher ed division. Both former EDMC employees joined the DOJ's federal case.