In the past few years, the U.S. Department of Education (DOE) has struggled to get a handle on the growing student debt crisis. For-profit colleges receive much of their revenue from federal aid programs, such as subsidized student loans and Pell Grants. Fraudulent marketing campaigns and dishonest recruiting tactics have caused enrollment in for-profit colleges to rise significantly in recent years. While profits for these institutions often exceed a billion dollars, more than 22 percent of students attending for-profit colleges default on their student loans within a three-year period, which is almost twice the rate of students at public universities. Now, the DOE has developed a road map for putting these unscrupulous institutions out of business.
On July 3, California-based Corinthian Colleges Inc., reached an operating agreement with the DOE to sell off 85 of its schools and close down operations at 12 others. The agreement is the most recent move for the troubled institution, which is also being investigated in a dozen states over allegations that it falsified job placement rates and student attendance records in order to boost enrollment. After Corinthian failed to satisfy a request by the DOE to turn over its records on job placement, the agency placed a three-week hold on the school’s access to federal student loan and grant money, the main source of its revenues.
The DOE has established a method to force corrupt for-profit colleges out of business by applying current regulations more stringently. Due to the three week moratorium on Title IV funds, Corinthian had to choose between agreeing to wind down its operations or potentially shutting down due to its insolvency. With only $28 million in funds as of May 6, the company could not wait any longer for government-subsidized tuition payments and signed a Memorandum of Understanding with the DOE on June 22. This allowed an immediate release of $16 million of Title IV funds to continue normal operations. Under the operating agreement, the DOE will provide $35 million in student tuition payments; however, the company’s activities will be closely supervised by an independent compliance and business monitor. This action by the DOE signals a change in enforcement tactics that should concern for-profit schools nationwide. Contact Jake Jeter, a lawyer in our firm’s Consumer Fraud Section, for more information on this subject at 800-898-2034 or by email at Jake.Jeter@beasleyallen.com.
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