Feds Failed on For-Profit Schools - Today's Outrage

All of a sudden, the government is cracking down on for-profit colleges. What took so long?
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BOSTON (TheStreet) -- We hear a lot of talk about education from officials in Washington, but when they put their money where their mouth is without due diligence or scrutiny, it is a bad lesson for students, tax payers and investors.

Across the nation, there are about 2,000 for-profit colleges eligible to get federal student aid, and their enrollments have grown far faster than traditional higher-education institutions. The aggregate market capitalization of 14 publicly traded corporations in the for-profit school space was $26 billion as of July 14, according to the U.S. Government Accountability Office.

Their students got more than $4 billion in Pell Grants and more than $20 billion in federal loans last year from the Department of Education.

In summary, a $26 billion-plus industry benefits from $24 billion of government largesse and loans each year. And yet, it was only this month that any serious effort was made to determine if this was federal money well spent.

The GAO, at the request of Congress, embarked on a sting of for-profit schools. Though it is unfortunate the resulting report, at least initially, did not name names, it shows enough in the way of patterns to reveal an industry on the precipice of corruption.

Making matters worse, new Department of Education data show that only 36 percent of the colleges' students repaid federal loans.

The one-two punch of recent days may be taking its toll on the industry.

By mid-afternoon on Monday,

Corinthian Colleges Inc.

(COCO)

was down 22% and

ITT Educational Services Inc.

(ESI) - Get Report

shed 13%.

The Washington Post Co.

(WPO)

, owner of Kaplan Inc., was down nearly 8%.

Strayer Education Inc.

(STRA) - Get Report

sank 18%. (Bucking the trend,

The Apollo Group Inc.

(APOL)

(APOL), which owns the University of Phoenix, was up more than 6% as of 3 p.m.)

As part of the GAO report, investigators posing as prospective students applied for admissions at 15 for-profit colleges in six states and Washington, D.C. The colleges were selected based on several factors, including those that the Department of Education reported receiving 89% or more of their revenue from federal student aid.

All 15 schools visited made deceptive statements to the applicants. Some applicants were encouraged by college personnel to falsify their financial aid forms to qualify for federal aid. Representatives routinely exaggerated applicants' potential postgraduation salary and failed to provide clear information about program duration, costs and graduation rate, despite federal regulations requiring them to do so. Admissions staff frequently forced applicants to sign a contract for enrollment before allowing them to speak to a financial adviser or loan counselor.

In addition, GAO's prospective students got numerous, repetitive calls attempting to recruit them when they registered with online sites that link for-profit colleges with prospective students. One applicant got more than 180 phone calls in the span of a month, some as late as 11 p.m.

Programs at the for-profit colleges typically charged substantially more for associate degrees and certificates than nearby public colleges. A student interested in a massage therapy certificate costing $14,000 at a for-profit college was told that the program was a good value; the same certificate from a local community college cost only $520. As for earning potential: A beauty college told an applicant that barbers can earn as much as $250,000 a year, even though the Bureau of Labor Statistics says 90 percent of barbers make less than $43,000 a year.

Sky-high tuition costs, misrepresentations about salary expectations, the con-artistry used to ensure that students qualify for loans and the shuck-and-jive tactics used to keep them away from financial advisers until after they sign on the dotted line makes the likelihood of default far from surprising.

And that is where our wallets get raided. When students don't make payments on their federal loans, the federal government and taxpayers assume nearly all the risk and are left with the costs. Students who default suffer from a poor credit record, which makes it difficult to obtain auto loans, mortgages and credit card.

And yet, a representative at one college in Florida told an undercover applicant that student loans were not like car loans because, "No one will come after you if you don't pay."

It's a costly situation for all involved, and one that has been subsidized by the feds due to their blind eye.

Last year, President Barack Obama proposed increased scrutiny regarding enrollment practices at for-profit colleges. But progress has been slow.

Now, of course, jolted by the GAO report as well as its own findings, the Department of Education is pledging to hire more investigators and measurably increase the number of investigations related to for-profit schools. Education Secretary Arne Duncan has publicly said "the unethical and potentially illegal practices uncovered" are "unacceptable."

Just as unacceptable is that taxpayers and students have been fleeced for so long.

-- Reported by Joe Mont in Boston.

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