Attorney Generals Expand Probe into For Profit Colleges

Some for-profit college student lending practices are being investigated by the Consumer Financial Protection Bureau and state attorneys. Jack Conway, Kentucky Attorney General, chairs a group of 32 state attorney generals who are investigating for-profit colleges. He says states are working with the CFPB to eliminate unfair or misleading student lending and other practices.

 Corinthian Colleges Inc. COCO -1.27% and ITT Educational Services Inc. ESI -0.97% disclosed in regulatory filings in recent weeks that the CFPB is considering legal action over the companies’ lending practices. A CFPB spokeswoman declined to comment.

The probe focuses mostly on loans that were provided through the colleges by outside investors and the for-profit colleges job placement promises.

The investigation is causing increasing pressures on the industry. Federal regulators and the for-profit school sector have been accused by democratic lawmakers and the Obama administration of exaggerating students’ future earnings, as well as charging high-interest loans and not fully disclosing the loan terms.

Probes will be conducted by the Securities and Exchange Commission and the Justice Department. There are plans to deny federal student aid dollars to vocational programs at community and for-profit colleges where students have a high default rate or high debt levels after graduation.

ITT and Corinthian disclosed SEC probes last year. Corinthian disclosed in September a Justice Department investigation into whether the company manipulated attendance records to retain federal education funds. The probe also looked at the company’s recruiting and financial-aid practices.

Officials for the CFPB are concerned about whether or not students have been informed of loan risks. Director Richard Cordray said they have seen instances where the schools expect a default rate of 50%: “They’re not telling the students that, but they are disclosing that information to their investors.”

“We believe that all of our actions were lawful and we intend to vigorously defend ourselves,” an ITT spokeswoman said of the CFPB and SEC probes. A Corinthian spokesman said all students are provided with detailed descriptions of the terms of their loans and are told “clearly and in writing that no student or graduate can be guaranteed employment.”

California Attorney General Kamala Harris sued Corinthian, citing internal documents saying the company had targeted students who were isolated or had low self-esteem through telemarketing campaigns and TV ads. For-profit colleges have made up a large amount of financial aid in recent years. According to a report by the Center for Analysis of Postsecondary Education and Employment, the amount of aid rose from 11% in 2000 to 23% in 2010.

Corinthian and ITT have lending agreements that comply with a federal mandate stating that private colleges get 10% of their revenue from sources other than federal financial aid. Some of the loan arrangements have high interest rates and default rates of 50% or more. Their critics say the colleges are willing to lose money on loans to ensure that they pass the 10% test to receive the federal funding. ITT disagrees, saying that they award more than $170 million in scholarships in a year.