03.01.22

By: Corey Turner
Source: NPR

When colleges defraud students, should the government go after school executives?

In a shocking investigation, the U.S. Senate declared the federal student loan program "plagued by fraud and abuse." Its report heaped scorn on for-profit trade schools for serving 22% of federal student loan borrowers but accounting for 44% of defaults.

"The school keeps the student aid money ... and the student is left holding the bag with a poor credit rating, no job and no income to repay the student loan," U.S. Rep. Marge Roukema, R-N.J., declaimed in her crusade against for-profit "bad apples."

Sound familiar?

This clamor for accountability erupted back in 1991, more than two decades before the epic collapses of Corinthian Colleges and ITT Technical Institute cost students and taxpayers millions of dollars in wasted loans and worthless degrees. More recently, in February, the U.S. Department of Education announced it would erase more than $70 million in student loans for former DeVry University students who had been misled by the school's false advertising.

Believe it or not, back in 1992, in response to all this hand-wringing about for-profit colleges, Congress gave the education secretary a nuclear option: the power to hold leaders of fraudulent colleges — including executives and investors — personally liable for their wreckage. The problem is that 30 years later, the department has yet to use that power.

Now, some lawmakers, higher education experts and department officials argue: It's time.

Advocates say the Education Department has an obligation to hold school leaders liable

The point of holding the owners of fraudulent schools personally liable for student and taxpayer losses is twofold: to give the government another way of recouping those losses and, just as important, to discourage the future sale of education snake oil by shaming the sellers.

If ever the department could have — and arguably should have — used this power, student loan experts tell NPR, it was after the historic collapses of Corinthian and then ITT Tech.

That's when department attorneys concluded that both schools had enticed students with false and misleading claims and had committed "pervasive" misconduct and that, as a result, "the value of an ITT education — like Corinthian — is likely either negligible or non-existent."

Eileen Connor directs the Project on Predatory Student Lending, which recently published an exhaustive deep dive into ITT Tech's fraudulent practices. In a news release about that report, Connor said, "The loans were the object, not education or career training. It is genuinely shocking that this 'school' was able to fool regulators and accreditors for so long."

After the collapse of ITT Tech and Corinthian, advocates pushed the Department of Education to give eligible borrowers relief from their federal loans, which, along with other losses related to the collapses, cost the U.S. government roughly $1 billion.

Why didn't the department use the nuclear authority that Congress gave it in 1992 to hold the schools' leaders liable for some of those losses? It's complicated.

First, there's the human explanation. When the department helped arrange the sale of Corinthian to a debt collector, Connor says, department officials interacted with its CEO multiple times. "It's harder to slap a fine on someone you've just had lunch with."

Then there's the resources explanation: that the department can do only so much at one time.

Instead of focusing on holding the perpetrators of the fraud accountable, it focused on providing debt relief to their victims, trying to "ensure that borrowers were being helped on the back end," says Dan Zibel, who worked in the department's Office of the General Counsel from 2014 through 2017. Zibel says the department's rush to use an old legal provision, known as borrower defense, to erase student loans took considerable time and energy.

Likewise, any attempt to claw back money from individuals would have taken enormous department resources — with no guarantee of success. Even an effort that recoups millions of dollars from an executive has to be viewed in the broader context of the government's losses.

"For a school that created, I don't know, $7 billion in debt over a decade, that's just a drop in the bucket," says Connor. But she argues that holding executives liable isn't just about recouping losses; it's about creating a powerful, symbolic deterrent for future would-be fraudsters.

"I wouldn't just say that they have the authority" to go after school executives, says Connor. "I'd say they have the obligation to do it."

Now out of the Education Department, Zibel agrees.

"The system should not be that owners get to walk away with the profits and the taxpayers are left holding the liability," says Zibel, who is now chief counsel at Student Defense, a nonprofit advocacy group, and a vocal proponent of the department finally using its liability authority.

There is precedent for government action. Sort of.

The Education Department may have resisted pursuing individual claims against the leaders of Corinthian and ITT Tech, but other government agencies did act.

The U.S. Securities and Exchange Commission filed a civil complaint, alleging that Corinthian's then-CEO, Jack Massimino, and Robert Owen, its then-chief financial officer, failed to disclose the company's financial weaknesses before its collapse.

The complaint, though, was not about harm done to students, but to shareholders.

The pair settled with the SEC, which fined Massimino $80,000 and Owen $20,000. That's a small fraction of what each earned from 2010 to 2012 — about $9.5 million for Massimino and roughly $2.5 million for Owen, according to documents filed with the SEC.

In a scalding letter to the SEC chairman, a handful of Democratic senators, including Elizabeth Warren of Massachusetts, called the settlement "an insult to the victims of Corinthian's fraud."

There have also been efforts at the state level to go after for-profit college executives.

A for-profit school advocate supports the department using this power in limited circumstances

Even the head of Career Education Colleges and Universities, a national association representing many for-profit trade schools, supports the department taking a harder line on what, more than 30 years ago, Roukema called "bad apples."

"Absolutely," says Jason Altmire. "In any case that involves substantial fraud or the owner withdrawing capital before a closure, done specifically to avoid liability for the business, they absolutely should be subject to this. That is the reason that authority exists."

Altmire cautions, however, "If you're going to apply accountability standards, just apply them to all schools in all sectors." Translation: Make sure for-profit trade schools aren't the only kinds of colleges held under the microscope.

Perhaps the most notable voice that has called for the department to use this authority is Ben Miller, formerly of the left-leaning Center for American Progress — because he is now a top adviser inside the Department of Education.

"This must change," Miller wrote in 2019. "Any executive from a college that closes precipitously should be financially liable for damage done to students and taxpayers. The U.S. Department of Education should take back money paid to school executives in salary or bonuses and instead use it to cover the cost of loan forgiveness and refund tuition paid by students."

Does that mean the Biden administration might be willing to do what previous administrations have not?

A top student loan official hints at a new attitude toward failed for-profit colleges

As was the case back in 1991, when Roukema, a Republican, inveighed against fraudulent colleges, so too are a handful of lawmakers again pushing for stepped-up accountability.

"This abdication of the Department's duties has not only cost taxpayers, but has also encouraged future lawbreaking by executives who feel confident they can enrich themselves at the expense of students and taxpayers," half a dozen Democratic U.S. senators, including Warren, wrote to then-Education Secretary Betsy DeVos in October 2020.

Then came the Biden administration and a little-noticed hearing in October 2021during which Rep. Bobby Scott, D-Va., questioned Richard Cordray, head of the Education Department's Federal Student Aid office.

Scott reminded Cordray that the department has the power "to seek recovery of financial losses against owners and executives" of fraudulent college programs. Not all executives should be held liable, Scott argued, just the worst: those who profit from defrauding borrowers. Is the department finally willing to go after them?

Scott had already sent a letter to Biden's education secretary, Miguel Cardona, asking the same. He even offered a laundry list of schools that could fit the bill.

"We see eye to eye on this," Cordray responded to Scott. "I thought [your letter] was a good bit of a kick in the behind for us to make sure we're moving down the road on this."

Cordray suggested the same recently, when the department announced it would provide loan relief to defrauded borrowers while the school that misled them, DeVry, remains open.

"We do intend to try to hold leaders of schools that fail students responsible in every case we can," Cordray told reporterson the day of the DeVry announcement.

On the same call with reporters, Undersecretary of Education James Kvaal was even more forceful: "There will be liabilities for the current owners of these schools to deter wrongdoing not just at DeVry, but everywhere that it might otherwise occur."

In its announcement about DeVry, the department noticeably called out two executives who presided over the company when it misled students about their job prospects after graduation: "Senior leaders at DeVry during this time included Daniel Hamburger, who served as President and CEO from 2002 through 2016 and David Pauldine, who served as the executive vice president and/or president of DeVry University from 2005 through 2014."

Beyond that press release, though, the Biden administration has done no more than previous administrations to hold college leaders and owners personally liable for ripping off students and taxpayers. Which is to say, it's done nothing at all.

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