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For-profit colleges face new wave of state investigations

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Education,FTC,CFPB,Follow the Money,Attorney General,Richard Cordray,Bloomberg News

For-profit colleges, bruised by years of investigations and rule-making, may face additional financial pressure from a new wave of state probes by attorneys general and the U.S. Consumer Financial Protection Bureau.

Education Management Co., the education chain partly owned by Goldman Sachs Group Inc.; Corinthian Colleges Inc.; ITT Educational Services Inc.; and Career Education Corp. have said since Friday that they've received demands for information from a network of at least 12 attorneys general. The Federal Trade Commission has stiffened guidelines for marketing vocational training programs, which many for-profit colleges offer.

The CFPB, created in 2011 to regulate financial products, has said it's preparing to tackle student debt, which has climbed to $1.2 trillion and is pervasive among former students at for-profit colleges. Richard Cordray, head of the consumer bureau and a former Ohio attorney general, said in written testimony to a House panel yesterday that the bureau has received thousands of complaints and comments about private student loans and debt.

“A coordinated approach benefits all the parties involved,” Kentucky Attorney General Jack Conway, who is chairman of a group of state attorneys general investigating the education industry, said in a telephone interview. “It helps to have federal agencies looking at this as well in order to make sure that federal education money and taxpayer dollars are being spent wisely.”

If they find wrongdoing, attorneys general typically file civil suits that seek monetary damages or restitution and changes in corporate behavior, said Allison Martin, a spokeswoman for Conway.

Obama’s pledge

President Barack Obama pledged in his State of the Union address Tuesday to “work with Congress to see how we can help even more Americans who feel trapped by student loan debt.” Sabrina Simone Jenkins, a former DeVry Education Group Inc. student with $90,000 in education loan debt, was invited to sit in the first lady's box, the White House said yesterday.

“The challenges she and other students face in financing their studies is also a concern, shared across higher education, and an issue that we continue to work on with the Administration and Congress,” Ernest Gibble, a DeVry spokesman, said in an email. DeVry hasn’t received a subpoena, he said.

Education Management, which is 43 percent owned by New York-based Goldman Sachs, slid 8.5 percent to $7.94 at the close in New York. ITT Educational, based in Carmel, Indiana, dropped 5.8 percent to $37.32, and Santa Ana, California-based Corinthian Colleges fell 1.3 percent to $1.49. Career Education, based in Schaumburg, Illinois, declined 5.7 percent to $5.58.

Increased scrutiny

“Increased scrutiny from the CFPB, combined with recent coordinated actions by the group of state AG’s, suggests continued and perhaps increasing pressures on the for-profit education industry,” said Peter Appert, an analyst with Piper Jaffray & Co. who’s based in San Francisco.

The investigations add to the woes for-profit colleges have felt since Congress, U.S. attorneys and the Education Department intensified scrutiny of industry marketing and other business practices in 2010. At the same time, competition for students has grown as more for-profit and traditional universities have offered online classes.

Average annual enrollment at Apollo Education Group Inc., owner of the University of Phoenix, dropped to 310,100 at the end of August 2013 from 460,900 in 2010, according to corporate filings. The company hasn’t received demands for information in the latest wave of investigations, Ryan Rauzon, a spokesman, said in a telephone interview.

Primary factor

“The industry fundamentals have deteriorated,” Appert said in an interview. “That’s the primary factor now, more than the regulatory issues facing the industry.”

The other states that have sought information from education companies are Arkansas, Arizona, Connecticut, Idaho, Iowa, Missouri, Nebraska, North Carolina, Oregon, Pennsylvania, Tennessee and Washington. No additional subpoenas of companies are planned at this time, Conway said.

“Amongst the larger companies that operate in a multitude of states, there are enough questions about the activities of these four that our group of AG’s found it necessary to issue the subpoenas,” he said.

For-profit colleges provide education and career skills to many students who lack access to traditional universities, said Noah Black, a spokesman for the Association of Private Sector Colleges and Universities, a Washington-based industry group. The investigations and regulatory efforts restrict access to education for students trying to improve their lives, he said in an e-mail.

Companies respond

“We treat our students with integrity and respect, and have extensive processes in place to help the company comply with applicable laws and regulations,” Kent Jenkins, a spokesman for Corinthian Colleges, said in an email.

Education Management has a track record of helping students succeed, Chris Hardman, a spokesman, said in an email. Career Education said it’s focused on high-quality education and job placement. ITT Educational didn’t return calls for comment.

Education companies have changed their practices since 2010, when Democratic Senator Tom Harkin of Iowa, chairman of the Health, Education, Labor and Pensions Committee, led a series of hearings on industry marketing and lending practices, said Trace Urdan, an industry analyst with Wells Fargo Securities in San Francisco.

‘More circumspect’

“It will be interesting to see if there’s anything after 2010 that the AG’s want to tackle,” he said in a telephone interview. “The new data from the companies is going to be more circumspect, I promise you.”

In November, Corinthian and ITT Educational said the CFPB asked for information about their advertising, marketing and lending practices. Over the past few days, attorneys general have sought information about student recruitment, job placement statistics, graduation and professional licensing rates and student loans.

Each of the companies named has said it’s cooperating with the investigations. Michelle Person, a spokeswoman for the CFPB, declined to comment.

While for-profit colleges make up 10 percent to 13 percent of higher education enrollment, students who attended a for- profit college accounted for 47 percent of all federal student loan defaults in 2008 and 2009, according to an investigation by the Senate HELP Committee.

gainful employment

The Education Department is rewriting a package of regulations, called “gainful employment,” that the industry successfully challenged in court in 2011. The rules linked eligibility for federal student grants and loans — the source of as much as 90 percent of revenue at some for-profit colleges — to student debt levels and graduation rates.

The Federal Trade Commission, which works to prevent consumer fraud and deception, said in November that it had stiffened guidelines for businesses that provide vocational training. The Washington-based agency said it has rewritten guidelines for misrepresentations of job placement and graduation rates in student recruitment materials; whether courses qualify graduates for licensing; how long courses take to complete; availability of financial aid; and transferability of course credits.

“It sounds like they’re focused on the same issues the state attorneys are interested in,” Appert said. FTC officials didn’t respond to a request for comment.

‘Better protection’

Barmak Nassirian, director of federal policy for the American Association of State Colleges and Universities, said he has met with FTC officials to urge them to scrutinize for-profit college marketing.

“Those of us who want to see better protection for citizens, veterans and low-income communities have attempted to get other agencies focused on exercising what jurisdiction they have, and certainly FTC has some jurisdiction here,” he said in a telephone interview.

Different states have been named to lead investigations into companies. Pennsylvania is the point of contact for the investigation into Pittsburgh-based Education Management, Connecticut for Career Education, Iowa for Corinthian Colleges and Kentucky for ITT Educational, according to company filings.

Apollo said in 2011 that it had received notices from attorneys general in Massachusetts, Florida and Delaware regarding investigations under consumer protection laws. Last year, the company said it had received another demand from Massachusetts.

“We believe that there may be an informal coalition of states considering investigations into recruiting practices and the financing of education at proprietary educational institutions,” Apollo said then in a filing.

Congress has continued to eye industry practices. Illinois Democratic Senator Dick Durbin sent letters to Corinthian Colleges and its accreditors, the Accrediting Council for Independent Colleges and Schools and the Accrediting Commission of Career Schools and Colleges, in December to follow up on reports that the company engaged in deceptive sales practices and marketing claims.

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