Education Management Corp. Engages In 'Predatory Lending,' Whistleblower Claims

The Art Institute of New York City, one of more than 100 college campuses owned by Education Management Corp.

Another former recruiting manager has come forward with allegations that a prominent for-profit college chain routinely misled students about tuition costs and future job prospects.

The employee, a former associate director of admissions at Pittsburgh-based Education Management Corp., alleged a widespread scheme to boost federal student aid in a whistleblower lawsuit that was unsealed this week.

The suit compares Education Management, the nation's second-largest for-profit college corporation, to predatory lenders. The company is "motivated by profit rather than student success or rankings," and has "every incentive to maximize enrollment by recruiting unqualified students who will not be able to repay their loans," the suit says.

The case is the second pending whistleblower lawsuit against Education Management, which is partially owned by Goldman Sachs. The Justice Department last year intervened in a separate case brought by former employees who alleged the company doled out illegal bonuses and raises to college recruiters based entirely on the number of students they enrolled.

The Justice Department has not intervened in the case that was unsealed this week, according to the federal court docket.

For-profit colleges such as those owned by EDMC have faced heightened scrutiny from the Obama administration, Congress and state attorneys general in recent years, amid evidence of disproportionately high defaults on federal student loans and poor graduation rates.

The suit, brought by Jason Sobek, who worked as an admissions manager at Education Management's South University online, likens the company's business model to "the predatory lending industry, taking zero risk in signing up students for federally guaranteed loans."

"Defendants had a corps of recruiters, all well-trained in sales and closing techniques, who perfected the art of preying on the hopes and dreams of vulnerable students desperately seeking better lives," the complaint reads.

A spokeswoman for Education Management did not respond to an e-mail seeking comment on the suit. The company's lawyers have moved to dismiss the other whistleblower suit, arguing that Education Management's recruiter compensation plan did not violate federal law.

The lawsuit unsealed this week alleges Education Management defrauded the federal government by making false assurances that its admissions counselors were complying with federal higher education laws. The suit alleges recruiters were trained to mislead students about the types of jobs they could expect to get after graduation.

Sales pitches often overstated past students' success in securing employment, according to the complaint. Recruiters cited job placement rates of more than 85 percent, but those numbers didn't include students working in jobs outside their field of study, the suit alleges.

The company considered low-wage jobs successful placements, the suit alleges. For example, a bank teller earning $22,800 was counted as a successful placement for a graduate of a bachelor's degree in business. A fashion marketing graduate who made $14,000 working at a sneaker outlet store was also considered a successful placement, according to the suit.

The suit says the company trained recruiters to avoid discussing the total costs of a degree program, alleging that costs were mentioned "only if the student repeatedly asked, and even then, a response was generally only given as to cost per credit hour of the course, not the total price of a program."

New federal regulations require colleges to disclose information such as program costs, debt levels and student completion rates. A bachelor's degree in graphic design at The Art Institute of Pittsburgh, one of Education Management's colleges, costs more than $90,000, according to the school's disclosure. Education Management has more than 150,000 students across more than 100 college campuses. The company's schools include the The Art Institutes, Argosy University, South University and Brown-Mackie College.

Many of the high-pressure sales tactics described in the complaint mirrored the accounts of former employees who came forward for a Huffington Post investigation of Education Management last fall.

Whistleblower suits such as this are filed under the federal False Claims Act, meant to provide a check against companies that swindle the government. Such suits can technically recover three times the amount of fraudulent claims made to the government, in addition to penalties of up to $11,000 for each claim.

When cases are filed, they must remain sealed for at least 60 days. The Justice Department must investigate the evidence and has the option to intervene.

Two former employees of the University of Phoenix, the nation's largest for-profit college, filed a whistleblower lawsuit against the chain in 2003 that involved billions of federal student assistance dollars. The case was eventually settled with an agreement to pay the federal government $67 million in 2009, which amounts to about a fourth of the company's most recent quarterly income.

Education Management called last year's whistleblower suit a "groundless grab for money."

"The 'hope of gain,' unsupported by fact or law, does not permit the government to bring a massive, nationwide fraud claim as leverage with which to fill its coffers," the company's lawyers wrote in a motion to dismiss the case.

Comments

[Grevend]

12:50 AM on 03/25/2013

This school is definitely involved in predatory lending. I'm a graduate and remember specifically hearing from the recruiter about the high successful job placement in the field for graduates. They also told me that graduates earn a starting salary of 50,000 or more with a 90% job placement in their field of study. None of which is true. 10 years after graduating and my degree has counted for nothing and still unable to pay back my loans.

[ProgressivePatrol]

09:23 PM on 08/01/2012

I taught for this outfit for a few years. In my opinion, they are worse they regular organized crime operations because they have the full force of the government to act as their leg breaker. Don't want to pay your loans, the IRS, the police, the FBI and anyone else Goldman Sachs needs will find you and shake you down. Stay away from these guys.

[karilee76]

07:21 PM on 06/19/2012

To date this school will have on my behalf....
Academic Year 1-Tuition - $10,200.00-Loans - $9454.00-Payment Plan $746.00

[karilee76]

07:20 PM on 06/19/2012

help. I am a current student who has been threatened with a notification stating i will be not be able to log into my class because of a financial aid issue. First i was told the only way to help me was to get a pell grant, so i did, and both financial aid people called me and i have an email stating this issue was resolved and that i would not be contacted regarding the matter any longer. But once an week for several weeks i got a email stating there was an issue....so I called the school. When I call them the girl laughed at me and said someone was working on it so do nothing, but told me i still owed money because it was an institutional loan (700$) for 2011 and not for 2012...the 2012 is paid off now thou. She said that i didnt have to do anything but wait for the guy to contact me....then i got a statement, again same thing..they told me to do nothing. last three weeks i once again have this threatening message when i log into my class that states I need to contact financial aid or be locked out in two weeks. Now they are telling me i have to take out another loan...unemployment (240wk, 214aftrtax), how can they do this to me. They want someone on enemployment to apply for a loan to pay off a loan????

[karilee76]

07:22 PM on 06/19/2012

To date this school will have on my behalf....
Academic Year 1-Tuition - $10,200.00-Loans - $9454.00-Payment Plan $746.00 (this one is the one they are going to lock me out for.(institutional loan for 746)
Academic Year 2-Tuition - $10,200.00-Loans - $9454.00-Payment Plan $746.00.(institutional loan)
Revised Academic Year 2-Tuition - $10,200.00-Loans - $ 8150.00-Grants$ 2050.00
This school is horrible. I am not getting a good education. I have had instructors who had kids making bunny ears in background while she was kissing her husband.
Another instructor recorded her lecture in a lunch room with a microwave behind her that is constantly in use ...she could not take 45 min of one day to record a lecture that was respectful to us. The latest one is a dewsey.....she could not form a single sentance! Answered the phone while recording the lecture...had no idea what she was to be teaching. Some instructors want to provide an education and you can tell they feel kind of bad about the quality of it. Most teacher just read some slide show with the answers of the test that is due sunday.

[The book girl]

08:18 PM on 04/24/2012

As a former employee at a for-profit in financial aid administration, I have to say that yes, the recruitment side of the business model does victimize unknowing students & parents but the financial aid fraud needs to be publicized too.

Financial aid employees routinely gained access to student accounts by getting their passwords & PINs and went into the system and esigned documents as students or parents. Some cases, the parents or students did not even know they had loans because the financial aid people were applying and signing promissory notes as them! This was just ONE of the massive fraudulent practices I witnessed.

I was fired & blackballed in my community for speaking out against insidious fraud I was URGED to commit every day. I have paperwork and emails and tape recordings to prove this went on at my school. Is the Department of Education interested? APPARENTLY NOT, since I've been contacting them for OVER THREE YEARS to report this. Sooooo, your tax dollars continue to flow freely into these places, making billionaires out of the CEOs and shareholders.

DOES ANYBODY OUT THERE HAVE THE BALLS TO STOP THIS???

[Stevie Ware]

02:02 AM on 04/27/2012

Very sorry to hear of your persecution for doing the right thing. Surprised that HuffPo printed your comment but glad that they did. I hope that you are able to find an employer who values your ethics and talents. Always be true to yourself and surround yourself with those who have your same sense of right and wrong...

[Donna63]

07:46 AM on 03/23/2012

My son & I are directly affected by this. Our admissions recruiter used every one of these deceptive tactics. Does anyone know how we can get involved with the lawsuit?

[The book girl]

08:25 PM on 04/24/2012

Contact the Attorney General Office in your state and tell them your story.

[thiazzi]

10:10 AM on 03/19/2012

"recruiting unqualified students who will not be able to repay their loans"

I attended an AI school, and it's absolutely true. Literally anybody who applies is admitted. These students will also pass through all of their classes with just horrible work, until they fail their portfolio reviews at about the end of year 2. This is when they'll give up and just have a crazy load of debt with no skills to show for their time in school.

This puts a big strain on all of the students that are actually on track to graduate, because the struggling students will obviously get the lion's share of attention from the WAY over-extended instructors.

[Mike HeXt]

08:37 PM on 03/18/2012

This should be required reading to all those vulnerable kids like on AI's facebook page.

[Donna63]

07:47 AM on 03/23/2012

VERY true!!

[Marla Louise]

04:59 PM on 03/16/2012

Then there is the other half of the equation, how they rip off their employees. 90% of the teaching staff's are 'adjuncts' which means they are 'contractors' who are not subject to minimum wage laws, have to pay their own social security (15%, not a split with the employer), have no benefits like health insurance, sick pay or vacation, and may be fired without cause for any reason (and cannot even claim unemployment benefits). Think about the quality of teaching the students are bound to receive with the teachers treated this way.

[Mike HeXt]

08:38 PM on 03/18/2012

They aren't going to complain because they find people that get blackballed in the industry desperate for work, OR even hire their own former students too.

[Stevie Ware]

02:05 AM on 04/27/2012

Most community colleges nationwide are utilizing adjuncts due to State and Federal budget cuts. Unfortunately these are actually QUALITY professors in many instances and it is the ones with tenure who cannot be touched that end up phoning their semesters in at the expense of the student body. Be well and strong in your journeys...

[yebor]

10:16 AM on 03/16/2012

duh, it's a publicly trade business. you can never expect a business to care for ANYTHING but it's bottom line.

[Steve Mahoney]

07:56 AM on 03/16/2012

How many other lawsuits are out there?

[big tom]

06:00 AM on 03/16/2012

if wallstreet is involved customers will get screwed...goldman saks owner ?

[Barbarian At The Gate]

01:18 AM on 03/16/2012

The Company is partially owned by Goldman Sachs, that says it all. I read the letter written by one of their departing executives. He made the study about Wallstreet being filled with sociopaths sound relevant.

[Mike HeXt]

09:44 PM on 03/15/2012

I went to the New England Institute of Art. They definitely have been scamming people since 2006. They lied to me and ruined my life with debt.

[eyecon]

09:10 PM on 03/15/2012

A former president of this company, Bob Gioella, was a good friend of mine. This was the absolute jewel of the industry until the investment bankers got involved. You cannot run these companies for short-term profits to bolster the P/E ratio. It simply doesn't work. It's an enviable business model but the students get the shaft. Eventually, we are going to see countless failures and the taxpayers will be on the hook for unearned Pell grants and negated student loans. This IS the next housing bubble and I have been saying that for three years.

[Stevie Ware]

02:06 AM on 04/27/2012

You are absolutely, 100% correct.