For-profit schools need better oversight and more empowered students

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The report, issued this week by the Senate Health Education and Pensions Committee chaired by Senator Tom Harkin (D-Iowa), shows that for-profit colleges, once viewed as a viable option for adults to learn skills and improve their job prospects, have become profit centers focused on the bottom line instead of on providing students with a quality education.

But more oversight is just one needed remedy. We also must strengthen rights for consumers to pursue legal remedies when they suffer harm.
That’s because the fine print of many school enrollment contracts and loan promissory notes make it difficult for aggrieved students to seek redress.
The contracts contain a non-negotiable provision that denies students the ability to pursue claims against for-profit colleges in court. Instead, they must resolve disputes in individual arbitration, a private system governed by corporate-written rules. Students’ lack of access to justice is compounded by a 2011 U.S. Supreme Court decision, AT&T Mobility v. Concepcion, which also permits companies to insert prohibitions on class actions alongside the forced arbitration clauses.

Distressed students and other consumers already have felt the impact of Concepcion.

Consider a case last year involving two students who enrolled in the fashion merchandising and criminal justice programs at Westwood College in Colorado. They attempted to bring a class action on behalf of other students. Among other claims, they alleged that Westwood misrepresented key facts about its operations and employed deceptive sales tactics to increase enrollment, and violated Colorado consumer protection laws. 

However, the Westwood enrollment documents contained an arbitration clause and banned students from joining together in class actions. The students attempted to show the futility of individual arbitration versus public court. They contended that the secretive and individual nature of arbitration would force the key witnesses to testify more than 800 times. But ultimately the college was successful in forcing arbitration, requiring each student to pursue his or her case on an individual basis.

Although the Colorado District Court required arbitration in keeping with Concepcion, the court was “sympathetic” to the students’ argument. It observed that Concepcion was a “serious blow … and likely foreclosed the possibility of any recovery for many wronged individuals.” 

Indeed, operators of for-profit colleges have practically boasted in their Securities and Exchange Commission filings that they direct students’ legal claims, even similar ones that potentially could be decided collectively, into individual arbitration.

The alarming detail provided in the congressional report shows just why students need better access to the courts: industry investments in recruitment which are many times more than investments in actual school resources, such as student service representatives and career placement services; poor retention rates and job prospects for students; and costly tuition which end up saddling students with tens of thousands of dollars each in student loan debt. Indeed, the industry has found reliable investment returns in federal student loans. According to the report, the industry received $32 billion in one year alone in federal taxpayer handouts.

For-profit colleges, which were once independent trade and skill schools, are now primarily owned by private equity firms and publicly traded companies. Goldman Sachs, for example, owns 40 percent of for-profit college operator Education Management Corporation. The sector soon became a revenue-generating tool with little to no oversight or accountability. 

Consumer advocates and bankruptcy attorneys seeking to assist financially strapped student loan borrowers have long called for more scrutiny and supervision in the for-profit college sector and appropriate bankruptcy relief for student loan debt. Meanwhile state attorneys general, including Illinois and Kentucky, recently have opened investigations of school operators to enforce compliance with state consumer protection laws.

The evidence is clear that without transparency, stronger regulation and legal accountability, the harm caused to students may remain hidden to the public and the questionable business practices of the industry and its Wall Street owners will endure.

Hines is consumer and civil justice counsel at Public Citizen.