For-Profit Colleges Misled Students, Witnesses Say

For-profit college recruiters pressured students to sign up for courses and lied about the cost of programs to boost enrollment, witnesses said at a U.S. Senate hearing today.

Government investigators posing as applicants were told by recruiters from for-profit colleges that students had to sign up for courses before they could get financial-aid information, and recruiters themselves were misled about the quality and cost of education companies’ programs, according to the testimony at a Senate Health, Education, Labor and Pensions committee hearing in Washington. Schools cited in the study by the Government Accountability Office include branches of Phoenix-based Apollo Group Inc.’s University of Phoenix; the Washington Post Co.’s Kaplan College; Santa Ana, California-based Corinthian Colleges Inc.’s Everest College; and Pittsburgh-based Education Management Corp.’s Argosy University.

President Barack Obama proposed rules that would limit eligibility for financial aid and crack down on enrollment practices at for-profit colleges, which received $26.5 billion in U.S. loans and grants in 2009. Rewarding top recruiters with money and perks is an invitation to mislead applicants, who frequently have no idea of the value of their degrees or how much debt they’re accruing, said David Hawkins, director of policy and research for the National Association of College Admissions Counseling, based in Arlington, Virginia.

‘Harmful Consequences’

“The boiler-room style of recruitment has had real harmful consequences for students and taxpayers,” said Hawkins, who’s scheduled to testify today, in a telephone interview before the hearing. “We’ve watched this unfold over the past decade and we’re seeing that it’s played out almost exactly as we predicted.”

Joshua Pruyn, a former recruiter for Westwood College Online, a unit of closely held Alta Colleges Inc. in Denver, said the company offered him trips to Cancun, Mexico, paid time- off and gift cards as incentives to sign up students. Recruiters who didn’t get results were “harassed and threatened” by supervisors, he said in written testimony released before the hearing.

Lies, Misconceptions

Pruyn said some of his fellow recruiters lied to or misled applicants about the cost of Westwood’s $75,000 bachelor’s degree program and told them a degree from Westwood would get them jobs that paid more than $100,000 a year.

Company officials also perpetuated false impressions about the educational programs and their costs, said Pruyn, who worked at the college for five months in 2007 and 2008. Recruiters were told that many graduates of a video-game design program were working in the industry, when none were, he said. Pruyn said company officials told him that a Westwood in-house financial- aid program provided loans to students at zero percent interest, when students were charged 12 percent after they left the college, he said.

“It was hidden from us; it was never revealed,” he said in an interview before the hearing. “I realized that you couldn’t work there and work ethically.”

Changing the rules that allow colleges to pay recruiters on the basis of the number of students enrolled, a practice called incentive compensation, won’t protect students and will lead to higher legal costs for companies, the Career College Association, a Washington-based industry group, said yesterday in an e-mailed statement. The current rules give schools guidance as to what kind of compensation they can provide, the group said.

Lawyers’ Benefit

“Removing eighteen years of Departmental guidance and regulations in one fell swoop will only benefit lawyers who thrive on uncertainty,” the association said in the statement.

Data collected by the Accrediting Commission of Career Schools & Colleges, also based in Arlington, suggest that most for-profit colleges comply with recruitment guidelines that prohibit lying to applicants, said Michale McComis, executive of the group, which primarily accredits for-profit career colleges.

The body requires the 789 institutions it accredits to report on how they’ve determined that recruitment programs are ethical and appropriate, and conducts site visits to determine compliance, McComis said in testimony released before the hearing.

Site Visits

In 629 site visits over the past two years, 8 percent of the accreditor’s findings related to advertising, recruitment and admissions, and just 4 percent of those were related specifically to recruitment, McComis said. A survey of students at 69 colleges earlier this year showed that 93 percent believed all costs were explained to them, and 90 percent said a representative provided them with all facts and details about the school. About 86 percent said they understood the size of their loans and repayment plans.

“Overall, I am proud of the commission’s diligence in enforcing its recruitment, advertising, and admissions standards,” McComis said in his testimony. “And while I believe that the unacceptable and abhorrent activities presented for this hearing are not in evidence for an entire sector of the higher education community, I am aware that more vigilance among all accrediting agencies, with regard to all institutions is necessary.”

The publicly traded colleges investigated in the study are most likely Phoenix-based Apollo Group Inc.’s University of Phoenix campuses in Hohokam, Arizona, and Philadelphia; Corinthian Colleges Inc.’s Everest College in Mesa, Arizona; and the Washington Post Co.’s Kaplan College in Riverside, California, said Trace Urdan, an analyst with Signal Hill Capital in San Francisco. The findings to be presented at the committee hearing are unlikely to represent widespread recruitment violations in the industry, Urdan said.

‘No Conspiracy’

“There is no conspiracy to defraud or even evidence to support the notion that the offenders are habitual bad actors or that these situations are commonplace,” Urdan said yesterday in a note to clients. “Though we make no excuse for the examples of misrepresentation cited by GAO, we have never encountered anything like this in our own calling efforts, nor do we think these practices are sustainable in a market-based system.”

An index of 12 education stocks rose 4.2 percent at 11:12 a.m. New York time. Apollo, the biggest U.S. education company, rose 44 cents, or less than 1 percent to $45.25 in Nasdaq Stock Market composite trading. Education Management Corp., based in Pittsburgh, fell 2 cents, or less than 1 percent, to $14.80 and Bridgepoint Education Inc., based in San Diego, fell 46 cents, or 2.6 percent, to $17.07 on the New York Stock Exchange.

Apollo doesn’t know if it’s involved in the study, a spokesman said.

‘Very Seriously’

“We take very seriously the issues raised in the recent GAO study,” said Manny Rivera, the spokesman for Apollo. “If we are made aware of violations of our code of conduct we will promptly and thoroughly investigate the matter and, if found true, will take disciplinary action up to, and including, termination of the employee involved.”

A study by the Government Accountability Office that was formally released at the hearing said that enrollment counselors at all 15 for-profit colleges that were investigated had lied or had misrepresented the nature of their programs to investigators posing as applicants. Employees at four of the colleges encouraged the investigators to make fraudulent statements on financial-aid applications to get government funds.

The GAO study “points to a problem that is systemic to the for-profit industry: a recruitment process specifically designed to do whatever it takes to drive up enrollment numbers, more often than not to the disadvantage of students,” Iowa Democratic Senator Tom Harkin, chairman of the committee holding today’s hearing, said in an e-mail yesterday.

Exaggerating Benefits

The GAO probe examined for-profit colleges in Arizona, California, Florida, Illinois, Pennsylvania, Texas and the District of Columbia. Both closely held and publicly traded education companies were included.

Representatives at one for-profit college in Florida committed multiple violations during the recruitment process, said Gregory Kutz, the GAO’s managing director for forensic audits and special investigations, who conducted the study. Representatives scolded the agency’s investigators posing as applicants for hesitating to enroll and encouraged an investigator to sign an enrollment agreement, saying it wasn’t binding.

Fixed Salary

Hawkins’s group, a nonprofit association of more than 12,000 college admissions counselors and high school advisers, recommends that all such employees should be paid a fixed salary, Hawkins said in his testimony.

Driving recruiters to enroll as many applicants as possible encourages misrepresentation and fraud, and does a disservice to the students who enrollment counselors are intended to help, Hawkins said.

Students are on the short end of an information gap where for-profit college recruiters have much more information, Hawkins said.

“In an unregulated environment, the potential for misrepresentation and outright fraud is a clear and present threat, which can result in harm to students and, in the case of federal aid and loans, to the taxpayer,” Hawkins said.

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

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