HUFFINGTON POST: Behind the Fraud Charges Against ITT Education

Career College Central Summary:

  • The Securities and Exchange Commission yesterday announced fraud charges against ITT Education Services, a for-profit company that operates career training schools. The SEC alleges that ITT executives engaged in a scheme to hide looming losses from loans the company guaranteed to students attending its colleges. The company denies the fraud.
  • Regardless of whether investors were misled, why on Earth would a company make or guarantee loans that it expects many borrowers will not repay? I will explain.
  • There are three steps to getting rich off the federal college aid programs. First, you target students who qualify for the largest amount of government aid. That would be the low-income adults, Obama moms, who qualify for about $15,000 in grants and loans. Second, you figure out how to spend as little as possible on the actual education: offer classes online or in an office building, use a standardized curriculum that does not require labs or equipment, and hire part-time instructors. Don't list your faculty on the web site; certainly don't give anyone tenure. The large for-profit companies typically spend less than one-fifth of their revenue on actual teaching.
  • Third, focus the largest portion of your government-provided revenue on advertising and recruiting. That way, enrollment grows fast, without the need for additional investors. Enrollment in ITT schools grew quickly, from 28,000 in 2000 to 88,000 in 2010. Like magic, a small investment leverages taxpayer funds that can lead to billions of dollars of "shareholder value."
  • Except there is one little regulation that you have to watch out for. Because of similar previous scandals, the government requires for-profit colleges to demonstrate that they have at least a few real customers, people who are paying for the education without federal aid. This rule is called 90-10 because schools must show that they get at least ten percent of their revenue from somewhere other than the U.S. Department of Education.
  • There are two different ways a school can meet the 90-10 requirement: an ethical approach, and a scheme that perverts the underlying purpose of the rule. In the 1990s, the University of Phoenix did it the right way. The pioneering for-profit marketed itself to employers and mid-career professionals who were paying with their own money. These customers had both the knowledge and the financial incentive to insist on value (price and quality together), and the college was better for it. In 2000, the company reported that about half of its students had their tuition paid by their employers.

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