Education Department Letting For-Profit Schools Off Because They’re ‘Too Big To Fail,’ Report Says

Banks aren't the only "too big to fail" companies that put taxpayers at risk.

02/17/2016 06:47 pm ET | Updated Feb 18, 2016

Some giant for-profit colleges are ripping off students and squandering billions of taxpayer dollars, and the U.S. Department of Education is doing little about it because it considers them "too big to fail," a new report alleges.

Chris Hicks, a consultant to unions on student debt issues, argues that the Education Department's refusal to use its vast authority to penalize schools that violate state or federal rules amounts to an abdication of its responsibility to protect students and the integrity of the federal student aid program.

With college costs and student debt rising -- some 42 million Americans, or 1 in 8, collectively owe more than $1.3 trillion -- concerns are mounting that far too many households have been defrauded by colleges making unsupported claims about their students' career prospects while peddling credentials of questionable value and saddling students with unpayable debt.

State and federal authorities have ramped up their scrutiny of for-profit colleges that collectively enroll hundreds of thousands of students, probing their advertisements and claims to prospective students about their former students' graduation rates and success at landing jobs in their fields.

Already, the federal Consumer Financial Protection Bureau, Federal Trade Commission and several state attorneys general have sued giant for-profit college chains such as DeVry Education Group, Corinthian Colleges Inc. and ITT Educational Services Inc. for allegedly misleading students by advertising false job placement rates. The FTC and California's attorney general are investigating the University of Phoenix and its owner, the Apollo Education Group. The companies have denied wrongdoing.

For-profit colleges say they enroll students shunned by traditional public and nonprofit colleges, and give them ample opportunity to obtain credentials that employers value.

These colleges largely depend on taxpayers' money for survival. Nearly all of their revenues can come from the federal government, via student loans and grants from the Education Department; GI Bill funds from the Department of Veterans Affairs; and cash from the Department of Defense's Tuition Assistance program.

Most of for-profit colleges' revenues come from the Education Department, which has final say over which schools can receive a slice of the nearly $130 billion in federal student aid the department doles out annually.

But the Education Department isn't supervising colleges closely enough to prevent dodgy ones from taking advantage of students or taxpayers, according to Hicks.

He identified a range of possible tools Education Department officials haven't fully utilized, such as the power to demand that at-risk colleges stump up substantial letters of credit in case schools abruptly close, or former students who borrowed to pay for school assert their federal right to debt cancellations in instances where their school lied to them.

Letters of credit are assurances that cash would be available to the Education Department upon demand. The department can require schools to obtain letters of credit equivalent to at least 10 percent of their previous year's total haul of student loans and grants to ensure that schools -- and not taxpayers -- shoulder potential costs. 

For example, according to Hicks, the department missed numerous opportunities to obtain a letter of credit from Corinthian after it failed key federally mandated tests the department uses to gauge schools' "financial responsibility" and their "administrative capability."

Instead, when Corinthian ran into financial trouble in 2014, the Education Department bailed the school out in an effort it claimed would protect its 72,000 students. The department brokered a sale of dozens of Corinthian’s campuses, then watched the company abruptly collapse in 2015, leaving its remaining 16,000 students without classes to attend and taxpayers with a stack of bills because the company declared bankruptcy.

Education Department officials ignored key warning signs, according to Hicks, and rather than protecting taxpayers, it allowed the company to enroll new students and receive millions of dollars in additional taxpayer funds -- "an indication that the department viewed Corinthian as too big to fail."

Dorie Nolt, an Education Department spokeswoman, didn't have an immediate comment. Her former boss, former Education Secretary Arne Duncan, who oversaw the practices that came under withering criticism in Hicks' report, left the department in December. Duncan's replacement, acting Secretary John King Jr., has not yet been confirmed by the U.S. Senate.

The department's inspector general and Congress' watchdog, the Government Accountability Office, have both repeatedly criticized the Education Department's oversight of colleges, particularly big for-profit schools.

Hicks said the lack of information from the Education Department makes it impossible to calculate taxpayers' potential costs if another Corinthian were to occur. But it's clear that the department has the authority and responsibility "to take decisive action when it finds these schools are incapable and not responsible enough to continue to be trusted with billions of dollars from taxpayers and the livelihoods of the thousands of students enrolled at them."

"As long as the department continues to treat these large for-profit colleges as too big to fail, the colleges will continue to cause harm to students and waste billions in taxpayer dollars," Hicks said.

UPDATE: Feb. 18 -- In an emailed statement, Nolt told The Huffington Post that one particular for-profit college chain, Marinello Schools of Beauty, shut down immediately after the department terminated its access to federal student aid.

She also said that some for-profit college companies have blamed a new department rule for some campus closures. The rule, which went into effect in July, cuts off student loans and grants to career programs that saddle their graduates with debt far greater than their annual earnings. Student advocates have criticized the rule as weak.

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