Consumer Federation of California

Bill Update: Governor Brown signed legislation on September 26 that requires for-profit colleges to inform prospective students about their accreditation status, salaries, student loan default rates, and whether graduates have found work in the fields they were trained for.

CFC Position:  Support

In April 2012, a class-action lawsuit was filed in federal court by students against the private, for-profit, postsecondary Art Institute of California and its owner, Educational Management Corporation. The lead plaintiff of the suit claimed the Art Institute of California, Hollywood, led her to believe that federal grants and loans would cover the entire $89,000 cost for a bachelor’s degree in interior design.

The complaint alleges that after three years with the Institute, the plaintiff was notified that she had reached the federal loan limit and had to pay $37,000 to complete her degree. She dropped out of the Art Institute of California with approximately $52,000 in student loans.  Because the Institute’s credits are not transferable, she alleges that she has been left with a large debt and nothing to show for it.

This student’s experience with a for-profit college is far too commonplace. For-profit colleges often lure students into programs that are costly, and many are fraudulently advertised as a way to garner employment in skilled occupations.  Students graduate without skills needed for living-wage jobs and often default on their loans at rates exceeding those of students attending public and independent (non-profit) colleges. The result can be bankruptcy, ruined credit, and unemployment or poverty-wage jobs.

The Consumer Federation of California is calling on state lawmakers to crack down on for-profit private colleges that hoodwink students into programs that promise career advancement, yet deliver worthless diplomas and pile on debt that can lead to financial ruin.

In stark contrast to public and non-profit colleges and universities, the for-profit colleges are businesses that answer first to the financial interests of shareholders, not to the educational needs of their students. These businesses rely on federal and state tax dollars for most of their funding, yet there are virtually no performance standards, regulation of unfair business practices, or restrictions against false advertising established in exchange for the taxpayers’ largesse.

While many for-profit colleges are accredited by a regional accreditation agency, accreditation does not ensure that the school’s programs of instruction have gone through a rigorous review.  Employers are well aware that the quality of instruction at many of these institutions is substandard. Graduates applying for jobs soon find out that many employers do not view a degree or certificate of completion as evidence of adequate training for a job requiring technical or professional skills.  California community colleges, state universities and non-profit universities also take a dim view of the for-profits’ coursework, and will not grant course credits to students transferring to complete their higher education.

Federal law enables these for-profit institutions to rely on federal tax dollars for up to 90% of their revenues. This comes in the form of federal student loans. They fill much of the remaining 10% requirement for funding outside the federal loan system with other taxpayer support, including Cal Grants for students in our state.

Prospective students deciding whether to incur debt for school often look at salaries earned by a program’s graduates. Under current law, schools can report the average salaries generally earned in the occupations for which they claim to train students, often misleading them into thinking those salaries are actually being earned by graduates. For-profits would be embarrassed to publicize the poverty wages that many of their graduates end up earning. Under AB 2296, schools would have to disclose the actual salaries of their graduates, not some make-believe dollar amount.

Under current law, for-profits can claim nearly any job that a graduate held; including a minimum wage job entirely unrelated to the coursework that the graduate held for one hour, as a job placement success. AB 2296 requires institutions to disclose actual rates of placement for sustained periods of time in jobs that resemble the job for which the student was purportedly trained.

AB 2296 also requires for-profit colleges to post fact sheets, a complete course catalog, and their most recent report to the Bureau for Private Postsecondary Education (BPPE) on the institution’s website.

California has a long record of failure to regulate the for-profits. The Bureau of Private Post Secondary Education was established in 1987 as California’s “authorizer” of the for-profit colleges. The Bureau performed its oversight job poorly. It failed to issue basic regulations on the running of the Student Tuition Recovery Fund and failed to collect assessments from schools, which left its account depleted and the Department without funding to administer it. A 2004 law established an ‘Enforcement Monitor’ to report on the Bureau’s performance. The Monitor’s 2005 report found a “twenty-year record of repeatedly identified, fundamental problems in every one of the Bureau’s key operations.”  The Bureau ceased to operate in 2007.

In 2008, Governor Schwarzenegger vetoed legislation that would have re-established agency oversight with tougher enforcement standards. From 2007 to 2009, these for-profit schools continued to collect federal student aid, in violation of a federal regulation requiring a state ‘authorizer’ in California. The funding continued to flow because the Bush Administration’s Department of Education had issued a letter permitting them to qualify for federal student loans in California, notwithstanding the lack of a state agency.

In 2009, the Obama Administration signaled its intention to revoke this Bush-era letter. The for-profit college industry rushed to Sacramento to support legislation (AB 48 – Portantino) that re-established a toothless Bureau of Private Post Secondary Education (BPPE) in the Department of Consumer Affairs.  This state ‘authorizer’ was put in place in time to keep the industry’s federal tax dollar subsidies flowing, but the enabling legislation established no meaningful rules or enforcement power against the most flagrant forms of unfair business practices, consumer fraud or poor quality of instruction.

California’s regulatory failure is echoed throughout the nation. A report by the Government Accountability Office in 2010 documented misleading sales and marketing tactics used by several for-profit institutions.  Critics have also pointed out that more than half of for-profit revenues are either spent on marketing or extracted as profits, with less than half spent on instruction.

Disadvantaged students disproportionately comprise the students of the for-profit businesses covered by the Bureau. These vulnerable students, and all Californians contemplating enrolling, need accurate information to make choices about postsecondary training. AB 2296 will help students select quality programs that meet their needs and can lead them to success.

Tags: CFC, For-Profit Colleges, Student Loans