Deceptive Marketing by For-Profit Colleges Uncovered by U.S. Investigation

Recruiters at U.S. for-profit colleges lied to entice students and encouraged them to commit fraud to qualify for aid, a report by the Government Accountability Office found.

Recruiters at all 15 colleges studied by the GAO, Congress’s investigational arm, misled potential students about the costs, duration and quality of their programs, according to a report obtained by Bloomberg News that will be released publicly tomorrow. The 30-page report said recruiters at four of the colleges encouraged fraud on loan applications, without identifying the institutions.

The Senate Health, Education, Labor and Pensions Committee, which commissioned the report, will hold a hearing tomorrow to examine the tactics that for-profit colleges use to recruit students and coach them to apply for financial aid. GAO investigators posed as prospective students to investigate practices in the education industry, which received at least $4 billion in U.S. grants and $20 billion in Department of Education loans last year, the report said.

“College representatives exaggerated undercover applicants’ potential salary after graduation and failed to provide clear information about the college’s program duration, costs, or graduation rate,” the report said. “Admissions staff used other deceptive practices, such as pressuring applicants to sign a contract for enrollment before allowing them to speak to a financial advisor about program cost and financing options.”

An index of 12 education stocks fell 3 percent at 10:31 a.m. New York time. Phoenix-based Apollo Group Inc., the biggest U.S. education company and operator of the University of Phoenix, fell $1.55, or 3.3 percent, to $45.59 in Nasdaq Stock Market composite trading. Education Management Corp., based in Pittsburgh, fell 83 cents, or 5.3 percent, to $14.92 and Bridgepoint Education Inc., based in San Diego, fell $1.07 cents, or 5.7 percent, to $17.88 on the New York Stock Exchange.

The GAO probe examined for-profit colleges in Arizona, California, Florida, Illinois, Pennsylvania, Texas and Washington, D.C. Both privately held and publicly traded education companies were included.

Hidden Savings

In one case cited by the report, a GAO investigator posing as an applicant was told to lie on an aid application about the number of household members to qualify for grants. When the investigators told college employees that they had $250,000 in savings, officials at three colleges told them to hide their savings in order to qualify for financial aid.

The report doesn’t make clear whether deceptive recruitment practices are limited to a few employees or are institution-wide at the companies in the study, said Harris Miller, president and chief executive officer of the Career College Association, a Washington-based industry group.

“We have more than 200,000 employees in our schools,” Miller, who has seen the report, said yesterday in a telephone interview. “I don’t know what this is representative of.”

Lying and fraud should be punished by schools and accrediting organizations, Miller said. He said he didn’t have access to employee information that would show whether companies were dismissing employees for misleading applicants.

‘Wake-Up Call’

“Clearly this is a wake-up call for schools to be more vigilant in training their employees, not just training but following up,” he said. “You’ve got to make sure that the training sticks.”

For-profit colleges overstated the quality of their programs and the organizations overseeing their accreditation, the report said. One recruiter told an investigator posing as an applicant that his school was accredited by the same one that accredits Harvard University.

“It’s the top accrediting agency,” the recruiter said, according to the report. “Harvard, University of Florida --they all use that accrediting agency.”

Recruiters exaggerated their colleges’ benefits and graduation rates, the report said. A beauty college recruiter said barbers earn as much as $250,000 a year, while the Bureau of Labor Statistics said 90 percent of barbers make less than $43,000 annually, according to the report.

FBI, CIA Jobs

Another recruiter said that a two-year associate’s degree in criminal justice might lead to a job at the Federal Bureau of Investigation or the Central Intelligence Agency. Such jobs usually require at least a four-year bachelor’s degree, the report said.

Recruiters also manipulated figures to downplay or hide the cost of their programs, the report said. Representatives from nine of the colleges projected the date of program completion as though students would be attending class 12 months a year, while projecting costs for nine months’ annual attendance.

“The results of this broad-reaching survey of for-profit school recruiting practices leave little question that these practices occur across the industry and are in no way limited to a few rogue recruiters or even schools,” said Kate Cyrul, a spokeswoman for Iowa Democratic Senator Tom Harkin, chairman of the Health, Education, Labor and Pensions Committee, in an e- mail.

$25,000 Fine

Colleges can be fined as much as $25,000 per violation and lose their eligibility for government financial aid if they’ve been found to lie to students about their programs, the report said.

President Barack Obama has proposed rules that would crack down on for-profit colleges’ ability to qualify for student loans. A new rule proposed by the Department of Education would prohibit “incentive compensation,” the practice of paying recruiters based on the number of new students they bring in. Senator Richard Durbin has raised the possibility of setting a limit on how much colleges can spend on recruitment.

Apollo Group and Alta Colleges Inc. last year settled lawsuits alleging illegal recruiting practices. Apollo, the biggest U.S. education company, agreed to pay $67.5 million to the U.S. government and $11 million in plaintiff’s attorney’s fees in December to settle a federal False Claims Act suit. Denver-based Alta agreed to pay $7 million to resolve allegations that its schools submitted false claims for student aid.

Revelations about for-profit colleges raise the risk of litigation against members of the industry, both from former employees and students said Jarrel Price, an analyst with Height Analytics LLC in Washington.

“The greatest go-forward risk may be the increased threat of litigation,” Price said in a telephone interview yesterday. “The risk of lawsuits from students, whistleblowers and non- harmed parties is rising.”

To contact the reporter on this story: John Lauerman in Boston at jlauerman@bloomberg.net.

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