Schooled in Fraud
These days, educational loan abuse and fraud involving federal funds have their share of whistleblower cases being brought under the False Claims Act (FCA). In the past decade, over a dozen FCA suits have been brought against for-profit institutions of higher education for obtaining student loans and grants funded with federal tax money under improper circumstances. Multi-million-dollar moneymaker schools have settled allegations made against them for millions of dollars.
By the end of 2015, student loans owed to the federal government totaled $1.2 trillion. The overwhelming majority of this money was authorized by the Higher Education Act’s Title IV provisions. Given how much money is in play, it might come as no surprise that student aid fraud plagues a number of for-profit colleges, the ones most likely to have students who use these funds.
The HEA and How Some Schools Have Cheated It
In 1965 under the Higher Education Act (HEA), a number of federal student loan and grant programs were established by Congress to help students obtain education beyond high school. The institutions attended by students who receive federal money are required to abide by strict requirements. However, time and again, a number of for-profit institutions have failed to meet the requirements, blatantly concealing alleged fraud in order to keep the federal money rolling into their coffers.
Educational loan fraud is similar to contract fraud in that illegal actions such as kickbacks and misappropriation of funds are common.
Additionally, some schools are alleged to have:
- Created nonexistent (“ghost”) students to obtain federal funds.
- Kept government money after a student withdrew.
- Failed to refund money to students who have credit balances.
- Made their recruiters’ pay dependent on the number of students the recruiters are able to enroll.
- Obtained funds for students who were not eligible to attend the school, such as those without high school diplomas. (It is alleged that at least one school has helped students cheat their way into obtaining a diploma.)
- Falsified post-schooling placement data to make it appear as if graduates are landing good jobs in the fields for which they trained, when in fact they are not.
Recent Educational Fraud Cases
Here are just three cases out of several that have been settled over the past few years that illustrate some of the kinds of fraud listed above:
- February, 2016: The U.S. District Court of South Carolina awarded a default judgment of nearly $9.3 million against Lacy School of Cosmetology and its president, Earnest “Jay” Lacy, for false claims involving the U.S. Department of Education and federal student loans and grants. The school intentionally engaged in unauthorized disbursements of funds, failed to give students refunds when they had credit balances, and deliberately hid illegal actions by turning in false compliance statements.
- November, 2015: In four qui tam cases that resulted in a landmark settlement with the second-largest for-profit education corporation in the U.S., Education Management Corp. (EDMC) agreed to pay $95.5 million. It is alleged that EDMC used high-pressure sales tactics and paid recruiters based solely on the number of students they managed to enroll while falsely certifying their compliance with Title IV of the Higher Education Act (HEA). Title IV forbids an educational institution from basing a recruiter’s pay on successfully enrolling students. Whistleblowers in the four cases will share $11.3 million.
- November, 2015: The insurance carrier for Marinello Schools of Beauty, a for-profit cosmetology school that is no longer operating, paid $8.6 million to resolve allegations that the school acquired federal student loan funds for students with sham high school diplomas. Allegedly, students could take the tests that would grant them diplomas without the supervision of proctors and while looking up answers. They were also allowed to take tests over and over again until they passed. Six whistleblowers will share the $2.5 million award.
Focus on ITT Tech
In February, 2016, a new enforcement unit was created inside the U.S. Department of Education that is devoted to investigating and prosecuting student loan fraud at colleges, as well as providing debt relief to federal loan borrowers who were defrauded by these schools. This new enforcement unit has made some for-profit schools squirm. In fact, some of the new restrictions had previously been characterized as a “death sentence” for ITT Technical Institute, which ended up declaring bankruptcy and shutting its doors in September of 2016.
ITT Tech was one of the earliest for-profit schools; they made billions over the years. In 2015, ITT Tech had $850 million in revenue, of which nearly 70 percent—$580 million—came in the form of federal student loan money. Without vast infusions of federal student loan money, ITT Tech simply could not continue to operate.
During January, 2016, a whistleblower suit was unsealed that accused ITT Tech of operating fraudulent schemes that used deceitful practices to enroll students. The suit was originally filed in April, 2015, by a former dean for academic affairs on the ITT Tech Tallahassee campus. The dean claims he was fired after reporting student loan abuses to his superiors. The Department of Justice has declined to intervene in the case.