Too Small to Fail: How a Beauty-College Owner Beat the Education Dept.

The Blush School of Makeup, in San Francisco, touts itself as one of a kind: “Northern California’s only Nationally Accredited State Approved Private Boutique School for Makeup Only.”

“If you’ve ever dreamed of becoming a successful professional makeup artist,” says the school’s website, “this program is for you.”

In reality, Blush is far from unique; it’s just one of hundreds of small, privately owned for-profit colleges that dot the higher-education landscape. Several dozen students enroll each year in Blush’s “master makeup artist” program, a 21-week set of day courses priced at nearly $13,000, including supplies. They study at Blush’s small campus — a few rented rooms sandwiched between a physical-therapy clinic and a men’s salon in the Embarcadero Center, a popular mall and tourist destination.

The giants of the for-profit college industry — publicly traded, corporate behemoths with five- and even six-figure enrollments — make big targets for both the media and regulators. The U.S. Department of Education has led the charge in recent years against those behemoths, shutting down major players in the sector, such as Corinthian and ITT.

Schools on the industry’s margins, like Blush, often escape such close scrutiny. And when scrutiny does come, they rarely have the tools to fight back.

That made an obscure legal agreement last July all the more surprising. After waging a prolonged David-vs.-Goliath campaign against the department, Blush scored a legal coup by persuading the agency to settle a lawsuit filed against it by Blush’s owner, Manhal Mansour. Few individual colleges end up suing the department. And among those, only a small percentage can claim any kind of victory: The law and the courts provide a lot of deference to the agency for its regulatory actions.

The department had previously rejected Mansour, a man with a long history of business problems, from participating in the federal student-aid program that many schools rely on as their lifeblood. As a result of the settlement, Blush was allowed to reapply for those dollars, awarded under Title IV of the Higher Education Act. The school was approved in March.

For Mansour, the settlement was “never about money”; it was about “the most important thing to me, my reputation,” he wrote in an email. “A school I own (even if minimally) is allowed to participate and I get to rebuild my trustworthiness over time.”

But critics of the settlement, inside and outside the department, see it as a worrisome harbinger — a sign that, under Education Secretary Betsy DeVos, the Education Department’s interest in regulating for-profit colleges is waning.

The decision to settle, after more than two years of legal proceedings, was an abrupt change in strategy by the Education and Justice Departments, said Jennifer Woodward, a former lawyer for the Education Department who worked on the case. And she worries that the settlement will invite bad actors into the federal student-aid programs at the same time as the department is lowering its guard.

The story of Blush raises issues that go beyond the regulatory retreat of the current administration. Much of the discussion about holding colleges accountable has focused on how to kick troublesome colleges out of federal student-aid programs. But how far can the government go to keep a school or owner from getting back in?

The rules for participating in federal student-aid programs are already too lax and too difficult to enforce, policy experts say. The only way to keep someone out of the program indefinitely is if they have been found guilty or pleaded no contest to a charge of fraud. And when the mechanisms for keeping troubled businesses out of the system are weak, experts argue, students pay a bigger price than the government.

“We have engineered a set of rules for institutional and owner eligibility that make it seem like it’s a right to run a school, not a privilege,” said Ben Miller, senior director for postsecondary education at the Center for American Progress.

When Mansour began his career as a higher-ed entrepreneur, the boom in for-profit colleges had not yet gained the full attention of federal regulators. It was 1990, and Mansour opened a beauty school named Elite Progressive School of Cosmetology, in Sacramento, Calif.

Two years later, just a few months before President Bill Clinton started his first term, Woodward began working as a lawyer for the Education Department. Most of her “bread and butter” work came alongside student-aid officials — managing paperwork and hearings after the department issued reports of noncompliance to colleges, she said.

Over time, the Clinton-era department cast a more skeptical eye on the burgeoning for-profit industry, and Woodward found her passion pursuing bigger cases, like investigating the Computer Learning Center, a chain of for-profit tech schools that was fined $187 million by the Education Department in 2000 for paying recruiters based on the number of students they enrolled.

“I had a particular interest in the litigation against schools that had taken advantage of students,” said Woodward.

Shortly after she joined the department, Elite had become eligible for federal student aid.

Over the next few years, the school’s struggles gave department regulators like Woodward plenty to be interested in. In 1996, the school lost its accreditation and with it, its access to federal dollars, according to court documents. The Accrediting Commission of Career Schools and Colleges revoked Elite’s accreditation because the school failed to submit a required self-evaluation report, according to the department’s account in the court documents.

The school stayed open, and Elite was approved to receive federal dollars again in 2000. But by 2007 it was back in trouble with the Education Department.

Department investigators found that Elite had been running a second campus that had not been approved by its accreditor or the department, according to documents in Mansour’s suit against the department. Between 2004 and 2007, the department found, Elite gave out millions in federal aid to hundreds of students at a site in Stockton, Calif.

In a 2015 letter to Mansour and his lawyer, recounting Elite’s history with the department, regulators wrote that Mansour initially “denied that Elite disbursed Title IV funds to students attending the Stockton location.” When given evidence that the department had interviewed students who completed their entire program at the campus, however, Mansour “changed [his] story and stated that [he] could not determine whether Stockton students received Title IV funds,” according to that letter.

“It is inconceivable,” the department said in that letter, “that you did not know that in fact, Elite disbursed more than $2.2 million in Title IV funds to 328 students enrolled at the Stockton campus.”

The department’s review also found serious problems with Elite’s management of financial and student information. “Elite maintained three separate accounting systems,” the department found, only one of which was provided by the company, R. Gonzalez Management, or RGM, hired to manage the schools’ financial-aid reporting.

Elite also had problems submitting several required compliance audits and financial statements between 2003 and 2008, the department said. And when the audits were submitted, they often contained incomplete or inconsistent information. In one of several examples cited by the department, a 2007-8 financial-aid form “was supposedly signed and dated by the student and the student’s parents on July 14, 2004, the department found in its 2008 report.”

Late in 2008, as the Education Department was for the second time ending Elite’s eligibility to participate in the federal student-aid program, Mansour was negotiating to sell the school to B&H Education Inc. He used a portion of the money he received from the sale to pay fines assessed by the agency. (B&H, in turn, closed its chain of 56 Marinello Schools of Beauty in February 2016, after the Education Department found that company had violated numerous regulations.)

The department painted a picture of a company that was inept if not untrustworthy. Even as Elite settled its fines with the department, a 2009 settlement agreement barred Mansour from being employed by that school “in any capacity related to the administration of” the Title IV programs.

In letters to the department and legal filings, Mansour’s lawyer, Ronald L. Holt, acknowledged some problems while arguing that Elite had made big improvements.

“While Elite’s financial aid department indeed made numerous mistakes in the time period from 2003 to 2006,” Holt wrote in a March 2014 letter, the school “made improvement in its administration of financial aid prior to the sale to B&H, as evidenced by the annual compliance audit liabilities of only $6,687 for errors made during fiscal 2007.”

Mansour told The Chronicle that the sale fully paid for all his liabilities to the department and kept the institution open. “I paid back every dollar the Department assessed needed to be returned as a result of the errors in managing the Title IV programs at Elite,” he wrote, “and did not shutter the doors in the face of my students and leave them and the Department to manage a mess like many others have done in recent years.”

In 2010, when Mansour opened Blush, the for-profit college sector was squarely in the Education Department’s cross hairs. Under President Barack Obama, who had taken office the previous year, the agency began an expansive effort to rein in what many saw as the sector’s repeated abuses. The department targeted proprietary colleges with new rules, including one that requires graduates of career colleges to earn enough to repay their loans and another that allowed students to have their loans forgiven if they were defrauded by colleges.

The administration put more pressure on all colleges by creating a website on which students could see the outcomes of most institutions, such as graduation rates, average amounts of student debt, and earnings. And the department leaned on accreditors to hold their member colleges more accountable for student outcomes; it even took the unusual step of removing the federal recognition of one accrediting agency that chiefly oversaw proprietary colleges.

Against that backdrop, six years after his previous school was denied participation in federal student-aid programs, Mansour and a partner, Armand Adkins, sought the department’s approval for Blush to gain access to those dollars. (From 2004 to 2012, Adkins worked for ICDC College, a for-profit institution that closed in May 2016. He did not respond to a request for comment.)

The federal-aid application form asked if any person associated with Blush had owned a school that participated in Title IV or was now in the program. Mansour made no mention of his ownership of Elite, even though he was required to do so. He listed only the fact that his wife, Cristina Grimm, separately owns cosmetology schools in Seattle and Dallas.

The department rejected the application. “Blush’s failure to completely and truthfully answer” the question “is a material omission, and is inconsistent with the fiduciary standard of conduct,” the department wrote in a February 2014 letter to Mansour. What’s more, it wrote, Elite’s checkered history in the federal student-aid programs “demonstrates that you cannot be trusted to act in the capacity of a fiduciary of federal funds.”

The department’s decision was the beginning of a nearly three-year legal tussle. Over the next several months, Holt sent numerous letters disputing the agency’s rationale, asking for reconsideration, and seeking conditions under which Mansour could become eligible for federal dollars. (For example: What if he posted a 100-percent letter of credit and guaranteed that he would not be involved in managing the financial aid?)

Mansour’s failure to mention his ownership of Elite was “simply an inadvertent omission” that happened because he wanted to make sure the department knew his wife owned schools that were receiving federal student aid, Holt wrote in a March 2014 letter. And Mansour assumed that the department would be well aware of his previous ownership of Elite, Holt added, because of the school’s troubled history.

“Nobody, including Mr. Mansour, could have reasonably believed that Mr. Mansour’s past association with Elite would not be noted by the Department,” Holt wrote.

But the department held its ground, and Mansour filed a federal lawsuit in March 2015, charging that the Education Department had committed a de facto debarment — excluding him from the Title IV program — without due process.

In the case of the Elite school, there was no allegation of civil fraud, Holt said in an interview: The department issued fines that Mansour paid and went on his way. If the government really thought that what happened at Elite was so bad, Holt added, then Mansour deserved to have had a debarment case considered by the agency. There had been none.

From relatively early in the case, the judge seemed to discount the core of Mansour’s argument.

“Mansour cannot sustain a de facto debarment claim because Blush has been approved to participate in other federal programs with Mansour as its president,” wrote Judge Donna M. Ryu of the U.S. District Court for the Northern District of California. Blush had already been approved by the U.S. Department of Veterans Affairs to receive tuition assistance for veterans and their dependents under the GI Bill, the judge noted in a January 2016 order. (Since 2014, Blush has received nearly $276,000 in federal dollars for veterans or their family members, according to federal data.)

The judge gave Blush a limited opportunity to interview two department officials involved in denying the school’s Title IV application, but Blush’s later attempts to compel more investigation of the officials fell flat.

Mansour and Holt, however, persisted in keeping their suit alive beyond the point where many efforts fail. In December 2016, both sides argued for summary judgment — essentially allowing the judge to determine the merits of the case without going through a full trial.

A month later Donald Trump took office. His Education Department, led by Secretary DeVos, welcomed a host of new political appointees with strong ties to the for-profit college sector.

In late February 2017, DeVos hired Taylor Hansen, a former lobbyist for a group of proprietary colleges, to work on the “beachhead team” to manage the department’s transition under the new administration. That March, before Hansen stepped down, the department hired Robert S. Eitel, a former executive with Bridgepoint Education Inc., which owns the for-profit college Ashford University.

The department began to loosen the Obama-era rules that had the greatest negative impact on the for-profit industry. In March 2017, the department delayed enforcement of the gainful-employment rule, which was designed to judge career-oriented programs based on the student debt and earnings of their graduates. It also withdrew guidance that limited fees that student-loan servicers could charge to borrowers.

Presidential transitions can be disruptive, as a new administration turns over staff and shifts the priorities from the preceding executive. But the climate under President Trump and Secretary DeVos was completely new, said Woodward, who had already worked under four other presidents.

“Everything had to go through the transition team, which really didn’t know how everything worked,” Woodward said. “The programs are complicated, and the learning curve is very steep. I did a lot of teaching to the transition team, but it was falling on deaf ears,” she said. “It became a very unpleasant place to work.”

Her frustration grew that March when, two years after the school filed its suit against the Education Department, Mansour offered terms for a settlement that would allow him to reapply for the Title IV program.

Woodward saw no reason to entertain Mansour’s offer: In most instances, it’s the defendant who makes an offer to settle. And in her mind, all the signs pointed to a victory for the department. She counseled department officials that the settlement pitch was highly unusual: The agency’s typical approach was not to settle a case after it had been fully litigated and was awaiting a ruling from the judge.

Officials at the office of Federal Student Aid, meanwhile, opposed the notion of settling, Woodward said, feeling that they had a duty to safeguard student-aid dollars.

So it came as a surprise to her when she learned that agency officials were seriously considering Mansour’s proposal. It was “mind-boggling,” she said, when they decided to take the offer.

A spokeswoman for the department said that officials “considered the benefits of the settlement and the costs and risks of continued litigation and determined that the settlement was in the best interest of students and taxpayers.”

The settlement has also confused some of the for-profit sector’s longtime observers and critics. David A. Bergeron, a senior fellow at the Center for American Progress, said the debarment process Blush hung its argument on is usually meant for limited federal contracts, not continuing programs like the federal student-aid system.

“Someone with poor performance in the aid programs in the past shouldn’t be able to get a do-over,” he said.

Holt counters that there were several reasons why the settlement was in the interest of both Mansour and the department: A ruling in the case could have been legally damaging for either side, he said.

The settlement includes many provisions that initially limit Mansour’s role in owning and running the Blush School — “conditions,” Mansour told The Chronicle, that “safeguard against potential errors and/or repeat mismanagement.” For a period of three years, Mansour must own no more than 25 percent of the business, and the school must hire a separate company to manage Blush’s participation in the federal financial-aid programs.

But it wasn’t just Mansour who made concessions. The Education Department made a big one of its own. The agreement contained an unusual provision that limited the department from considering Mansour’s past to determine whether Blush, or any other school he might run, could be eligible for Title IV. “In making its eligibility determination the Department will not deny eligibility to any such institution based solely on Mr. Mansour’s conduct prior to Dec. 31, 2015,” according to the final terms of the settlement.

That history, according to public records, includes much more than management problems at Mansour’s previous school. In 1995, the California Board for Professional Engineers, Land Surveyors, and Geologists suspended Mansour’s license as a civil engineer, following charges of “fraud, misrepresentation and/or deceit, violation of contract, negligence, and/or incompetence in his professional practice.” The following year, the board vacated the suspension and completely revoked Mansour’s license, finding that he had violated the probationary terms of the suspension.

Since then, Mansour’s business record includes dozens of civil-court judgments and state and federal liens for unpaid taxes, including two notices from the Internal Revenue Service as recently as 2015.

“Over the years, yes there were state and federal liens in times of financial hardships,” Mansour said. “However, every one of those liens was paid including interest and penalty.”

After being presented with a list of civil judgments filed between 1995 and 2011, many for unpaid bills, Mansour said that at the time he had not understood “what it all meant and the impact of allowing things to get that far with bills or collections.”

“I was a first-time business owner in my 20s in a new country,” he wrote in an email. “Not an excuse, just an explanation of a state of mind from 25 years ago.”

At the heart of the Blush case is a question posed by Miller, the education-policy analyst: “Is the country better off by having that school participate in the federal-aid program?”

His answer: “No.” But once an institution is approved by the Education Department, it becomes very difficult to kick that institution out, he says.

One way to weigh Blush’s claim to federal aid is to examine Mansour’s checkered history; another is to look at how the institution serves students. While more than 86 percent of students completed the school’s certificate program in 2014 and 2015, according to the school’s own data, the majority of the graduates who reported their salaries were self-employed and earning little or nothing from their makeup careers, while living in one of the nation’s most expensive metropolitan areas.

None of the students who completed the programs in those two years and submitted salary information to the school earned more than $30,000 annually, the school reported. The median salary in the San Francisco area is nearly $73,000, according to NerdWallet. In 2014, 29 of the 50 graduates who were “available for employment” didn’t respond to the school’s request for salary information, though that figure fell to just eight of the 48 available graduates in 2015.

Several Blush students contacted by The Chronicle had positive views of the educational experience, but said the program didn’t prepare them to find a good job.

Erin Fortes, a marketing consultant who now lives in New York, said the $12,000 tuition was absolutely worth it. After finishing at Blush, Fortes said, she worked for about a year assisting with photo shoots around the San Francisco area before switching back to marketing. “Makeup artists don’t make a lot of money for the amount of labor,” she said. “Now I do it for friends if they are getting married, or occasionally clients developing their personal brands,” she added.

“It was a really amazing experience, but the curriculum was outdated,” said Caitlyn Deutsch, who finished the makeup program in March 2015. While Deutsch praised the experience and professionalism of the faculty at Blush, she said she had to “learn a lot of things the hard way” when she began freelancing.

“I had to teach myself in the moment,” said Deutsch, who said it took her three years to pay off the school’s tuition through a payment plan. She said she is now living in Colorado and back in school to become a barber and cosmetologist. “In all honesty, I don’t think it was worth” the price, she said.

Mansour said he has not determined when Blush will begin offering federal financial aid to its students. But going forward, it may very well be those students who determine whether Blush succeeds or fails. The federal system for regulatory compliance is powerful but limited both by practice and purpose.

In practice, there are only so many staff to monitor thousands of colleges, even when you consider the accreditors and state agencies that also oversee higher education. In purpose, the laws and rules that govern participation in federal programs set a fairly low bar for participation. Even if the Education Department had debarred Mansour, that action would have been limited to three or perhaps five years. That penalty would have expired not long after he opened Blush.

The Education Department’s continuing effort to roll back the regulations on for-profit colleges may also limit any further scrutiny of Blush and similar schools. The department has gone through new rounds of rule-making to reset both the gainful-employment rule and another rule, called borrower defense to repayment, that aims to help student-loan borrowers who have been defrauded by their colleges.

Bergeron, who was also a political appointee at the Education Department under President Obama, said lowering the regulatory bar creates even greater risk for students than for the government. “The federal government can recover the time and money lost,” he says. “A student that wasted a year or two can never get that year back, and the department’s making it harder for them to get their Pell Grant eligibility back and loans canceled.”

The department did not provide a response in time for the publication of this article.

Woodward was frustrated by what she saw as political interference and second-guessing from the new administration over a relatively small case. She took it as a clear sign of the department’s retreat from holding colleges accountable.

Like Miller, she sees a bigger problem in the way such schools are given access to federal dollars. “The system is based on trust, for better or worse,” she said.

“We just say, ‘OK, you have to promise to be a trusted fiduciary,’ and that is too low a bar,” she said. “That’s silly trust, and then when you let someone in, who you know for a fact has been a bad actor, then it’s doubly ridiculous.”

To her, the settlement’s cost was more than financial; it was personal. She says the case was demoralizing to her and many department staffers who were trying to safeguard taxpayers’ investment.

After a long career in the department, Woodward was nearing retirement age and had settled years ago in Idaho. In June, she resigned from her job. “I could leave,” Woodward said of her decision. “I had worked for the department for almost 25 years and I had never seen anything like this. It was just brutal.”

Eric Kelderman writes about money and accountability in higher education, including such areas as state policy, accreditation, and legal affairs. You can find him on Twitter @etkeld, or email him at eric.kelderman@chronicle.com.