Finance

Little for Students in ‘Historic’ Settlement of Education Management Case

November 17, 2015

AP Photo/Andrew Harnik
The U.S. attorney general, Loretta E. Lynch, and the education secretary, Arne Duncan, announced the settlement of a false-claims lawsuit against the Education Management Corporation on Monday. Ms. Lynch said EDMC had broken the rules against paying incentives to student recruiters, but the company admitted no wrongdoing in the settlement agreement.
For all the claims that the $95.5-million settlement, announced on Monday, of a federal false-claims lawsuit against the Education Management Corporation was "historic," "unprecedented," and "a very clear warning to other career colleges out there," the deal actually won’t do a whole lot for the thousands of students who may have been pressured to enroll by the company’s admissions recruiters over the past decade.

In fact, some of the biggest financial beneficiaries will be the lawyers for the four sets of whistle-blowers who brought the allegations of "boiler room"-style recruiting to light, beginning in 2007. The federal government joined the lawsuit in 2011. Assuming the company pays the full amount — it has a payment schedule that runs until 2022 — the lawyers will receive nearly $20 million of the total.

EDMC, as the company is known, has denied the allegations against it and has admitted no wrongdoing as part of the settlement.

But at a news conference on Monday at the Department of Justice, the U.S. attorney general, Loretta E. Lynch, said the company had broken the rules against paying incentives to its admissions representatives by "running a high-pressure recruitment mill."

"Their widespread practices did generate a substantial drain on the public fisc," said Ms. Lynch, but she said the parties had agreed to settle for a small fraction of that amount "after factoring in the company’s ability to pay." The last time it reported finances publicly, EDMC said it had lost $664 million on revenue of nearly $2.3 billion for the year ending in June 2014, and in 2015 it closed a number of campuses. It now operates 110 locations in 32 states and in Canada.

A $78.5-million settlement that the University of Phoenix agreed to pay in 2009 had previously been the highest for a higher-education false-claims case.

'The company agrees not to break the law going forward? None of this sounds like remedy to me.'
A companion settlement of a multistate consumer-fraud case, brought by the attorneys general of 39 states plus the District of Columbia, requires a range of new consumer-protection practices for EDMC, and potentially for other companies. That could have a broader effect, student advocates said. But several of them were skeptical of that, too.

In exchange for having broken laws, "the company agrees not to break the law going forward? None of this sounds like remedy to me," said Toby Merrill, director of the Project on Predatory Student Lending, at Harvard Law School. "The company has taken billions of federal funding and distributed that to its executives and shareholders," but students will see very little of it, Ms. Merrill said.

EDMC, which owns Argosy University, the Art Institutes, Brown Mackie Colleges, and South University, has agreed to forgive about $100 million in loans it made to as many as 80,000 students who briefly attended its colleges from 2006 to 2014. Eligible borrowers would receive an average of $1,370 in loan relief.

But to the dislike of several student advocates, the federal settlement makes no specific provision to help students who are still on the hook for billions of dollars in federal student loans they obtained to attend EDMC institutions. The secretary of education, Arne Duncan, said students who believe they qualify for a loan discharge because EDMC misrepresented information to them would have to present those claims to the Department of Education. "We’re open for business" to hear those claims, he said at the news conference.

"I am disappointed that the department’s only plan for EDMC students is to hear their complaints," said Robyn Smith, a lawyer at the National Consumer Law Center.

"Once again, student victims are left holding the bag," said Stephen Burd, a senior policy analyst in the education-policy program at New America who writes frequently about for-profit colleges. Mr. Burd, who was formerly a reporter for The Chronicle, said he was pleased that the states and the federal government had pursued the cases against EDMC but faulted the resolution.

"Too many of these cases are settled without finding fault," he said, "and the for-profit industry has been able to say, ‘Oh, nothing is proven.’"

Settlement With State Attorneys General

The settlement of the consumer-fraud case will require EDMC to provide all prospective students with a simple, one-page disclosure on the costs of a program and typical students’ debt and career outcomes. The agreement will also require that all students who borrow to attend use a new interactive tool, being developed in collaboration with the federal Consumer Financial Protection Bureau, to give them a personalized picture of their projected costs and future earnings.

EDMC would also be required to offer an orientation program of unspecified length to students with fewer than 24 credits, and to allow online students to withdraw without cost after 21 days, or after seven days for students in face-to-face classes.

Iowa’s attorney general, Tom Miller, speaking for the coalition of attorneys general who reached the settlement, said he hoped the practices would become a model for other for-profit colleges, including those run by two other companies with whom the attorneys general are now negotiating settlements: the Career Education Corporation and ITT Educational Services. The University of Phoenix already offers an orientation program, and Kaplan University offers a 21-day opt-out option through its Kaplan Commitment program.

Mr. Miller, speaking at the news conference, said the disclosures were designed to protect "students who really shouldn’t have been recruited" in the first place.

A spokesman for the Association of Private Sector Colleges and Universities said its leaders needed more time to review the settlements and to discuss them with association members before commenting.

Consumer advocates said the requirements were a step in the right direction, but stopped short of full praise.

"Disclosures are relatively weak tools for consumer protection," said Ms. Merrill. What’s more, she said, it took a 39-state investigation for EDMC to agree to the code of practice, she said. "Do we think the rest of the schools will just do it for fun?"

David Halperin, a lawyer and frequent critic of many for-profit colleges, said required disclosures and tough regulations are a start, "but there needs to be real penalties" to go with it.

Goldie Blumenstyk writes about the intersection of business and higher education. Check out www.goldieblumenstyk.com for information on her new book about the higher-education crisis; follow her on Twitter @GoldieStandard; or email her at goldie@chronicle.com.