BUSINESS
02/26/2014 05:34 pm ET Updated Feb 27, 2014

For-Profit College Accused Of Luring Students Into Predatory Loans

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The federal consumer protection agency filed suit on Wednesday against ITT Educational Services, accusing the major for-profit college corporation of forcing students into high-interest, private loans expected to leave a majority of borrowers in default.

The case marks the first time the Consumer Financial Protection Bureau has taken action against the for-profit college industry, which is facing heightened scrutiny for its marketing practices and student debt burdens from more than a dozen attorneys general and the U.S. Department of Education.

The suit from the federal consumer protection agency alleges that ITT, which operates more than 150 institutions across nearly 40 states, systematically deceived thousands of mostly low-income students by rushing them through the financial aid process and enrolling them in high-cost loans with interest rates of more than 16 percent. Some financial aid counselors threatened to expel students if they didn't sign up for the private loans.

"Although ITT marketed itself as improving consumers' lives, it was really just improving its bottom line," said Richard Cordray, director of the CFPB. "While many of the students got poorer, the investors and shareholders got richer."

The lawsuit argues that students "entered into loans that they could not afford, did not want, did not understand, or did not even know they had."

An ITT spokeswoman, Nicole Elam, said the company believes the agency's claims are "without merit" and plans to "vigorously defend" the suit. She declined to comment further.

ITT's bachelor's and associate's degree programs cost more than twice as much as similar programs at public universities or community colleges, with some two-year associate's degree programs running as high as $44,000. Like many other for-profit college companies, ITT enrolls large numbers of lower-income students who rely on federal student loans and Pell grants to pay for school.

Because the tuition at ITT's schools is more than the maximum federal student aid limit, students have to fill in the gap with cash or outside financing.

To encourage prospective students to enroll, ITT lured them with a zero-interest "temporary credit" loan to pay for the first year of school, according to the suit. Most students could not pay off the temporary loan within nine months, as required, so financial aid officers then pressured them into "repackaging" the debt into a private loan with much higher interest rates.

According to the suit, financial aid officers at ITT were incentivized based on how many students they could get into the private loan programs. Staff used a variety of strong-arm tactics to convince students, including barring them from class, withholding course materials and transcripts, or threatening to expel them, according to the agency.

Many students were rushed through the financial aid process, using computer programs that pre-populated the students' information when applying for the loan programs. All that was required was an e-signature, according to the suit.

The private loan program helped ITT in two ways, according to the suit: By partnering with third-party lenders, the company was able to count the loan money as income, "improving its free cash flow and the appearance of its financial statements." In addition, the private loans helped satisfy a federal requirement that at least 10 percent of a school's revenue comes from sources other than federal loans or grants.

ITT and other for-profit colleges have historically struggled to comply with the federal rule because they enroll such a large proportion of low-income students. According to its most recent annual filing, ITT received about 80 percent of its revenue from federal student aid programs.

"Simply to enhance its financial statements and appearance to investors, ITT sacrificed its students' futures by saddling them with debt on which it knew they would likely default," the suit claims.

According to the consumer agency, ITT projects that nearly two-thirds of the borrowers in its private loan programs will default. Private student loans such as the ones offered by ITT are rarely dischargeable, even in bankruptcy.

The agency's suit largely focuses on a period of six months in 2011, when ITT generated a large volume of the private loans through two lending programs. The suit says one of the lending programs ended in 2011, when the funding with a third-party lender ran out. It was unclear why the other private loan program ended in 2011. A CFPB spokesman directed questions to ITT. The ITT spokeswoman declined to comment.

The consumer protection agency is seeking unspecified civil penalties, an injunction against the company and restitution for victims.

ITT, along with Education Management Corp., Career Education Corp. and Corinthian Colleges Inc., is the target of another recently disclosed probe of for-profit colleges by at least a dozen state attorneys general.

Corinthian Colleges also disclosed in January that the CFPB sent a letter to the company saying it is considering taking legal action.

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