For-profit Education - 2010 Pell Grant Fraud Controversy

2010 Pell Grant Fraud Controversy

For-profit higher education in the US has been the focus of concern regarding business practices. In August 2010, the Government Accountability Office reported on an investigation that randomly sampled student-recruiting practices of several for-profit institutions. Investigators who posed as prospective students documented deceptive recruiting practices, including misleading information about costs and potential future earnings. They also reported that some recruiters had urged them to provide false information on applications for financial aid.

Out of the fifteen sampled, all were found to have engaged in deceptive practices, improperly promising unrealistically high pay for graduating students, and four engaged in outright fraud, per a GAO report released at a hearing of the Health, Education, Labor and Pensions Committee held on August 4, 2010. Examples of misconduct include:

• offering commissions to admissions officers,
• employing deceptive marketing tactics by refusing to disclose total tuition cost to prospective students before signing a binding agreement,
• lying about accreditation,
• encouraging outright fraud by enticing students to take out student loans even when the applicant had $250,000 in savings,
• promising extravagant, unlikely high pay to students,
• failing to disclose graduation rate, and
• offering tuition cost equivalent to 9 months of credit hours per year, when total program length was 12 months.

The four for-profit colleges found to be engaging in fradulent practices were:

1. Westech, California: Encouraging undercover applicant with falsified $250,000 in savings to falsely increase the number of dependents in the household in order to qualify for a Pell Grant, as well as take out the maximum amount in student loans;
2. Medvance Institute in Miami, Florida: Financial aid representative told an applicant not to report $250,000 in savings, comparing student loans to a car payment in that, "no one will come after you if you don’t pay.” In fact, a student loan default may remain in the debtor's credit history, prevent them from taking out a car loan, mortgage or rent, and may have their pay garnished up to 15%, until the student loan is paid in full. Another admissions officer at Kaplan College in Pembroke Pines, Florida, alluded to fraudulent behaviour stating to the applicant when inquiring about the repayment of loans, "You gotta look at it...I owe $85,000 to the University of Florida. Will I pay it back? Probably not...I look at life as tomorrows never promised... Education is an investment, you’re going to get paid back ten-fold, no matter what.";
3. Anthem Institute in Springfield, Pennsylvania: Financial aid representative editing applicant's FAFSA form by omitting $250,000 in savings;
4. Westwood College in Dallas, Texas: Admissions representative telling applicant to falsely add dependents to qualify for Pell Grants, assuring the applicant that the dependents would not be verified through previous income tax returns nor Social Security numbers, and financial aid representative encouraging applicant not to report the $250,000 in savings, stating that "it was not the government’s business how much money the undercover applicant had in a bank account.", when the Department of Education requires students to report such assets, along with income, to determine how much and what type of financial aid will be awarded.

It was found that 14 out of 15 times, the tuition at a for-profit sample was more expensive than its public counterpart, and 11 out of 15 times, it was more expensive than the private counterpart. Examples of the disparity in full tuition per program include: $14,000 for a certificate at the for-profit institution, when the same diploma cost $500 at a public college; $38,000 for an Associate's at the for-profit institution, when the comparable program at the public college cost $5,000; $61,000 for a Bachelor's at the for-profit institution, compared to $36,000 for the same degree at the public college.

This is counter to International Education Corporation CEO Fardad Fateri's claims of the lack of use of unorthodox recruiting practices and a for-profit's "value" in an IEC open letter to Congress, the tuition cost of certificates and Associate's degrees being 28 and 6 times more than at a public college, respectively; Fateri writes, "Credit should be given to non-profit universities that have been able to convince students and their sophisticated parents to pay approximately $400,000.00 for an undergraduate degree that will seldom lead to an academically related career." However, the most expensive college in the US, Sarah Lawrence College in Bronxville, NY, had a tuition cost of $41,040 for 2009 fiscal year, bringing the tuition of a four-year Bachelor's degree to just above $160,000.

The institutions identified in the Committee hearing in respect to the GAO report numeration were:

1. University of Phoenix – Phoenix, Arizona
2. Everest Institute – Mesa, Arizona
3. Westech College – Victorville, Ontario, Moreno Valley, California
4. Kaplan – Riverside, California
5. Potomac College – Washington, D.C.
6. Bennett Career Institute – Washington, D.C.
7. Kaplan – Pembroke Pines, Florida
8. College of Office Technology – Chicago, Illinois
9. Argosy University – Chicago, Illinois
10. University of Phoenix – Philadelphia, Pennsylvania
11. Anthem Institute – Springfield, Pennsylvania
12. Westwood College – Dallas, Texas
13. Everest Institute – Dallas, Texas
14. ATI Career Training – Dallas, Texas

Students at for-profit institutions represent only 9% of all college students, but receive roughly 25% of all Federal Pell Grants and loans, and are responsible for 44% of all student loan defaults. University of Phoenix tops this list with Pell Grant revenue of $656.9 million with second and third place held by Everest Colleges at $256.6 million and Kaplan College at $202.1 million for the 2008-2009 fiscal year, respectively. In 2003, a Government Accountability Office report estimated that overpayments of Pell Grants were running at about 3% annually, amounting to around $300 million per year. Some of the universities that are top recipients of Pell Grants have low graduation rates, leaving students degreeless, and graduating alumni may find it excessively difficult to find work with their degrees, leading some former students to accuse recruiters of being "duplicitous", and bringing into serious question the effectiveness of awarding Pell Grants and other Title IV funds to for-profit colleges. University of Phoenix's graduation rate is 15%. Strayer University, which reports its loan repayment rate to be 55%, only has a repayment rate of roughly 25%, according to data released by the U.S. Department of Education on August 13, 2010. The low repayment rate makes Strayer ineligible for receiving further Title IV funds in accordance with new "Gainful employment" regulations brought forth by the Department of Education, which are to take effect on July 2011. If passed, the minimum loan repayment requirement for any institution receiving Title IV funds, subject to suspension and expulsion if not compliant, will be 45%.

For-profits top the Department of Education's list for the 2005–2007 cohort default rates, with campuses at ATI and Kaplan reporting default rates far above 20%. Most of the for-profits' expansion has been in the states of California, Arizona, Texas and Florida, with the metro areas of Los Angeles, Phoenix, Dallas and Miami-West Palm Beach being centers of their growth. For comparison, in Miami, Everest Institute reports a default rate for two of its campuses to be 18% and 20%; Miami Dade College, the district's community college, which serves as a primary channel for local beginning students, reports a default rate of roughly 10%; Florida International University, a public university serving the Miami metropolitan area, reports approximately 5%.

In an August 4, 2010 Health, Education, Labor and Pensions Committee hearing, Gregory Kutz of the GAO stated that the fraudulent practices may be widespread in the For-Profit industry, noting a University of Phoenix executive chart that encouraged deceptive practices. Joshua Pruyn, a former admissions representative, disclosed to the committee hearing several internal emails distributed among admissions officers in March 2008 which encouraged applications and enrollments through the use of a commissions reward system. Chairman of the committee Senator Thomas Harkin noted the conflict of interest due to the ACCSC, a national accrediting agency that accredits many for-profit colleges nationwide, receiving compensation directly from the institutions to which it awards accreditation. The Inspector General issued an assessment in late 2009 recommending the limiting and possible suspension or expulsion of the Higher Learning Commission of the North Central Association of Colleges and Schools due to conflicts in the manner in which the accrediting agency reviews credit hours and program length for online-colleges, specifically American InterContinental University, a For-Profit college. The NCA HLC accredits the University of Phoenix and Everest in Phoenix, Arizona. The Department of Education Inspector General is currently reviewing the GAO's documents and report on for-profit colleges dated August 4, 2010.

On November 30, 2010, the GAO issued a revised report, softening several examples from an undercover investigation and changing some key passages, but stood by its central finding that colleges had encouraged fraud and misled potential applicants.