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For-Profit Colleges Accused of Fraud Still Receive U.S. Funds

When the Obama administration agreed this summer to erase the federal loan debt of some former students at Corinthian Colleges, a for-profit school that filed for bankruptcy in the face of charges of widespread fraud, education officials promised to “protect students from abusive colleges and safeguard the interests of taxpayers.”

But the Education Department, despite a crackdown against what it calls “bad actors,” continues to hand over tens of millions of dollars every month to other for-profit schools that have been accused of predatory behavior, substandard practices or illegal activity by its own officials or state attorneys general across the country.

Consider the Education Management Corporation, which runs 110 schools in the United States for chefs, artists and other trades. It has been investigated or sued in recent years by prosecutors in at least 12 states. The Justice Department has accused the company of illegally using incentives to pay its recruiters. And last year, investors filed a class-action lawsuit, contending that the company engaged in deceptive enrollment practices and manipulated federal student loan and grant programs.

Education Management nonetheless received more than $1.25 billion in federal money over the last school year.

The career training and for-profit college industry has been accused in recent years of preying on the poor, veterans and minorities by charging exorbitant fees for degrees that mostly fail to deliver promised skills and jobs.

Despite stepped-up scrutiny, hundreds of schools that have failed regulatory standards or been accused of violating legal statutes are still hauling in billions of dollars of government funds. They include tiny beauty schools with staggering loan default rates and online law schools with dismal graduation records and no bar association accreditation. Without government funds, which account for the overwhelming bulk of revenue, few of these institutions could attract students or stay in business.

The continuing flow of money illustrates the quandary facing federal education officials. On one hand, they have moved forcefully to try to protect taxpayer funds and prevent students from falling deeply into debt without anything to show for it. On the other, they must avoid running roughshod over private for-profit schools that have not been found guilty of wrongdoing. Agency officials point out that they cannot withhold money based on accusations, but must have proof of misconduct.

For example, Education Management, which says it is cooperating with prosecutors, says it “strongly disagrees” with the Justice Department allegations.

Regulators are caught between an industry that says it is being unfairly demonized by opponents and critics who complain not enough is being done to prevent fraud and abuse of vulnerable students.

A Quandary

“For-profits successfully serve a lot of students, and the department has been very sensitive to having all students suffer for what may only affect some students in some programs,” said Kevin Kinser, an associate professor who studies for-profit colleges at the State University of New York at Albany. “So they are reluctant to throw the baby out with the bath water.”

Mr. Kinser pointed out that the Education Department had little flexibility under the law when it came to cutting off federal student loan and grant money to potential abusers. “There are individual triggers in place for financial viability, institutional integrity, et cetera,” he said, “but no three-strikes-and-you’re-out rule.”

Education officials say they have clamped down on many for-profit schools, restricting their ability to expand their programs or the number of campuses, capping the number of students eligible for student loans, or requiring schools like Education Management to post a letter of credit to gain access to federal student loans and grants. The letter is meant to protect students and taxpayers if the company is unable to cover federal student-aid liabilities.

“What’s clear to all of us is that the best way to solve this problem is at the front end and not to let bad schools operate,” said Ted Mitchell, the under secretary of education. The agency’s “more aggressive stance,” he said, helped contribute to an 18 percent drop in enrollment at for-profits from 2011 to 2013.

Still, critics say that even schools with egregious violations have become adept at exploiting loopholes, sidestepping rules or taking advantage of yearslong appeals processes. Companies with several campuses can pool graduation, financial, enrollment, staffing and other statistics to mask weak performers, experts say.

“Bright-line standards are good, but they can also be managed,” said Ben Miller, senior director for postsecondary education at the Center for American Progress, a liberal research and advocacy group. “It’s why almost nobody gets caught. The big schools know how to work the numbers to avoid failing.”

For example, the government can withhold student loan payments when a college’s default rate surpasses 30 percent three years in row — a signal that a school has a high dropout rate or that its students are not making sufficient income to pay back their loans. But several schools have figured out how to lower their rates by getting students temporary deferments or forbearances so they fall outside the three-year window.

Nearly 100 schools have a student loan default rate that exceeds 30 percent. Last year, they received $116 million in federal aid from the Education Department.

A new study by Adam Looney, of the Treasury Department, and Constantine Yannelis at Stanford University, found that since 2000, “most of the increase in default is associated with the rise in the number of borrowers at for-profit schools.” For-profit schools enroll about 12 percent of the nation’s college students, yet they account for nearly half of student loan defaults.

Finding Problems

ITT Educational Services, which has about 138 campuses and 47,000 students, has been investigated or sued by 19 states, the Securities and Exchange Commission, the Consumer Financial Protection Bureau and the Justice Department. Two of its campuses also failed to meet the Education Department’s standards for financial responsibility.

Nonetheless, campuses flagged for problems by the department received more than $592 million in the 12-month period that ended June 30.

In an email, Nicole Elam, a spokeswoman for ITT, wrote: “To date, not a single lawsuit has been filed by the multistate group of attorneys general naming ITT Tech.” In addition, ITT has called the S.E.C.’s charges “unfounded” and the consumer protection bureau’s case “unjustified.”

“ITT Tech does help prospective students make informed decisions about enrollment through the disclosure of program cost, graduation and job placement rates, graduate salaries and loan debt,” Ms. Elam said.

In recent years, more than two dozen companies that run for-profit colleges have been investigated or sued by state prosecutors. To handle the load, 37 state attorneys general have teamed up to form a working group. Together, the 152 schools under investigation received about $8.1 billion in federal student loan and grant payments last fiscal year, according to a detailed analysis by Mr. Miller for The New York Times, using data provided by the Education Department.

One of those is Alta Colleges, partly owned by the Boston private equity firm Housatonic Partners. Alta, which operates campuses and an online division in several states, is being sued by the Illinois attorney general, who claims the colleges engaged in “deceptive, unfair and abusive practices in the marketing and selling of their criminal justice program,” a three-year degree that costs $75,000, according to the complaint.

Students were promised they would be primed for careers as police officers, sheriffs, corrections officers and FBI agents, but only 3.8 percent of graduates were actually employed as sworn law enforcement officers or correctional officers, the lawsuit states. The two most common jobs for graduates of the criminal justice program were as security guards or in retailing, positions that typically require only a high school or equivalency diploma. Alta schools received more than $104 million in federal aid in the last school year.

Alta filed papers in court denying the allegations. The company did not return several phone calls seeking comment.

Other schools under investigation complain they are the target of a witch hunt.

Chris Hardman, senior vice president for communications at Education Management, said that the company was cooperating with prosecutors but that many of the investigations related to past recruiting practices.

“We are dedicated to providing the opportunity for an education that, were it not for schools like ours, many of our students might never achieve,” Mr. Hardman said.

Other schools, including Lincoln Technical Institute and Kaplan Career Institute in Massachusetts, have negotiated settlements with state prosecutors.

Kaplan, which no longer runs any schools in Massachusetts, paid nearly $1.4 million, mostly used to pay down student loans, after being accused of misleading students with false information about its program and job placement and using “harassing sales tactics.”

The parent company, Kaplan Higher Education settled another suit this year with the Justice Department, for $1.3 million, after being accused of employing unqualified instructors to teach its medical assistant courses in Texas.

Neither Kaplan nor Lincoln admitted any wrongdoing.

Kaplan’s schools, including its online California law school, where only one in five students graduates, received $776.3 million worth of federal student loans and grants last year. Because it lacks bar association accreditation, most graduates outside California are not allowed to take a bar exam.

“These schools exist on the back of U.S. taxpayers,” Maura Healey, the Massachusetts attorney general, said. “It’s time to turn off the spigot of federal student loan that are flowing into these for-profit colleges.”

“They absolutely have the authority today” to cut off funds, Ms. Healey said, arguing that the federal government could rely on findings by the state attorneys general, among other evidence of abuse.

So far more than 3,000 former Corinthian students have successfully petitioned the Education Department to erase their college loan debt because their school closed. Thousands more from Corinthian have asked for relief.

Education officials met with advocates at the White House last month, to discuss whether the agency could act more quickly to cut off access to federal funds when there were warning signs of bad behavior, according to a participant.

The Defense Department recently barred the University of Phoenix, one of the largest for-profit schools, from participating in its tuition assistance program for active-duty troops or from recruiting on military bases. The Pentagon cited investigations begun by the Federal Trade Commission and the California attorney general.

Although for-profit schools are prohibited from receiving more than 90 percent of their revenue from the federal government, military benefits such as the Pentagon’s tuition-assistance program and the G.I. Bill are not counted toward that sum, a loophole that has infuriated critics.

David Halperin, a Washington lawyer who tracks investigations against for-profits, has taken federal officials to task for not moving more aggressively against schools with long records of complaints.

“The Department of Education has declared Corinthian Colleges a disaster area in need of a big taxpayer bailout, yet the department continues to send billions of dollars to other for-profit colleges that are deceiving and abusing students in the same ways Corinthian did,” he said.

Warning Signs

A formal investigation is only one of the serious warning signs that a college may be engaging in abusive practices or financial shenanigans, prosecutors, officials and advocates say.

There are 98 for-profit schools on the Education Department’s financial responsibility watch list, which Mr. Mitchell, the under secretary, has described as a “caution light.” They received roughly $600 million in the last year.

And 35 for-profit schools have been subjected to the department’s most stringent financial sanctions, which limit access to federal money in advance. Inclusion on this list can be another signal that there are regulatory problems, sometimes serious, relating to accreditation, financial statements and audits, liabilities or denial of certifications. Last year, these schools received more than $15 million.

Education advocates have also accused the Education Department of not more aggressively policing for-profit schools that convert to nonprofits as a way of sidestepping federal regulations. A report released last week by The Century Foundation concluded: “The owners of some for-profit institutions have sought to switch their schools to nonprofit status, freeing them from the regulatory burdens of for-profit colleges, while continuing to reap the personal financial benefits of for-profit ownership.”

Mr. Mitchell said that a new regulation that went into effect this summer would add a powerful weapon to the agency’s arsenal of sanctions. Known as the gainful employment rule, it measures whether graduates of for-profit vocational programs as well as nondegree programs at community colleges earn enough to pay off student loans.

The Obama administration, which sent officials on the road last month to promote his plan for free community college, has estimated that 99 percent of the 1,400 programs likely to fail under the new rules are run by for-profit schools. The industry has fiercely fought this new regulation; Democrats and Republicans in Congress have introduced legislation to roll it back.

Mr. Mitchell also criticized state accreditation agencies for not more aggressively monitoring substandard institutions.

“The fact that Corinthian was accredited through the day of its bankruptcy,” Mr. Mitchell said, “shows that there’s a lot of work to do through quality assurance.”

For-Profit Colleges Accused of Fraud Still Receive U.S. Funds