Congressional Study Shows Private, For-Profit Trade Schools Over-Promise and Under-Deliver

by Eric Pearson

In this sluggish economy, where jobs are hard to find, one American industry is thriving: for-profit colleges and trade schools. Enrollment at for-profit trade schools expanded about 20 percent a year the last two years, more than double the pace from 2001-7, according to the Career College Association. These privately owned institutions charge tuition that can exceed $30,000 per year and promise lucrative careers in fields like health care, law, accounting, computers and electronics.

While these trade schools are private, for-profit companies, they derive most of their income from the federal government in the form of student financial aid. Sources estimate that more than $30 billion in Pell Grants is given annually to for-profit schools, a huge increase from just a few years ago.

So what are the federal government and the American taxpayers getting for their money? Not much, according to many critics. They contend that many schools exaggerate the value of their degree programs, selling young people on dreams of middle-class wages while setting them up for default on unmanageable debt, low-wage work and a struggle to avoid poverty.

“If these programs keep growing, you’re going to wind up with more and more students who are graduating and can’t find meaningful employment,” said Rafael I. Pardo, a professor at Seattle University School of Law and an expert on educational finance. “They can’t generate income needed to pay back their loans, and they’re going to end up in financial distress.”

Pardo and other critics argue that these for-profit trade schools have used the recent recession and high unemployment rates as a lucrative marketing tool. “They tell people, ‘If you don’t have a college degree, you won’t be able to get a job,’ ” said Amanda Wallace, who worked in the financial aid and admissions offices at the Knoxville, Tenn., branch of ITT Technical Institute, a chain of schools that charge roughly $40,000 for two-year associate degrees in computers and electronics. “They tell them, ‘You’ll be making beaucoup dollars afterward, and you’ll get all your financial aid covered.’”

Ms. Wallace left her job at ITT in 2008 after five years because she was uncomfortable with what she considered deceptive recruiting, which she said masked the likelihood that graduates would earn too little to repay their loans. As a financial aid officer, Ms. Wallace was supposed to counsel students. But candid talk about job prospects and debt obligations risked the wrath of management, she said. “If you said anything that went against what the recruiter said, they would threaten to fire you,” Ms. Wallace said. “The representatives would have already conned them into doing it, and you had to just keep your mouth shut.”

Concerned with the recruiting practices of these for-profit schools, the Department of Education announced a rule in June 2011 that it would cut off federal financial aid for schools if they could not provide data showing – through debt levels, repayment rates and debt-to-income ratios – that their students were obtaining “gainful employment” after graduation. But with literally billions of dollars at stake, the private colleges and trade schools fought back hard, suing the government in federal court. Their tactics worked. The regulation has been watered down and will be phased in over several years, allowing these unscrupulous companies to continue bilking taxpayers. If the rule as enacted had been enforced, more than 193 programs at more than 93 different educational institutions would have lost their federal funding by now.

Iowa Senator Tom Harkin has been one of the harshest criti9cs of these for-profit trade schools and colleges. When asked to describe their business model, he responded: “exorbitant tuition, aggressive recruiting practices, abysmal student outcomes.” At Harkin’s urging, the Senate Committee on Health, Education, Labor and Pensions just completed a two-year study of private colleges and trade schools. Among their findings:

  • These schools spend much more money recruiting students than trying to help them find jobs: in 2010, these for-profit schools employed more than 35,000 recruiters compared to 3500 career services staff;
  • During a two-year period, these same schools spent more than $4.3 billion on marketing and maintained a healthy profit margin of nearly 20%;
  • These for-profit schools spent only 17% of their funding, including their billions in government aid, on instruction for their students;
  • More than half of all students attending these for-profit institutions, and nearly 63% of students seeking two-year associate degrees, left without a degree or diploma within a median of four months;
  • When students withdraw, as hundreds of thousands do each year, they are left with high monthly payments but without a commensurate increase in earning power from new training and skills;
  • According to a National Center for Education Statistics study, 23% of students who attended for-profit schools in 2008-9 were unemployed and seeking work.

Based on these results, the Congressional Committee concluded that without significant change, “the sector will continue to turn out hundreds of thousands of students with debt but no degree, and taxpayers will see little return on their investment. “

If you or a family member has been victimized by these for-profit schools and find yourself with mountains of debt and bleak job prospects, you may be entitled to compensation. To find out if you may have a case, contact the lawyers at Heygood, Orr & Pearson by calling toll-free at 1-877-446-9001, or by filling out our free online case evaluation form.

by Eric Pearson

Eric Pearson is a licensed attorney and a partner at HO&P who handles commercial and personal injury lawsuits. Eric has been selected to the Super Lawyers List, a Thomson Reuters publication.