For-profit colleges face yet another day of reckoning

The Federal Trade Commission announced a record-setting $191 million settlement with the University of Phoenix (UOP) and its parent company, Apollo Education Group, Inc., following allegations that the school deceptively advertised the benefits of a UOP education.

The Complaint Allegations

In its complaint filed in federal district court in Arizona, the FTC alleged that since at least 2012, UOP adopted a multi-media advertising strategy aimed at convincing prospective students that the school’s relationships with many high-profile corporate employers such as Adobe, Microsoft and Twitter, created employment opportunities specifically for its students. The complaint contained further allegations that the school deceptively claimed it worked with such companies to develop curricula tailored to the companies’ specific job needs.

In reality, a four-year long FTC investigation revealed that these companies were not working with UOP to create job opportunities specifically for UOP students or to develop curricula. In fact, the job opportunities that UOP posted for its students were widely available on other websites. UOP employees merely copied these postings onto its own career portal. The FTC investigation further revealed that many of the companies that the UOP advertised as “corporate partners” were companies who would promote UOP’s academic programs in exchange for their own employees to receive a tuition reduction.

In other words, many UOP students were already employed by those companies prior to attending UOP. One senior vice president at the university described this advertising practice as “smoke and mirrors.”

In addition, instead of developing curricula tailored to these companies’ needs, UOP relied on third-party lists of standard job competencies and matched those general skills with its academic programs.

Records indicate that UOP enrollment numbers significantly dropped between 2010 and 2012. UOP’s deceptive advertising schemes, running from late 2012 to early 2014, appeared to be successful at achieving the overarching goal of attracting higher enrollment numbers into its 55 campuses throughout the United States and its online programs. According to the FTC complaint, a study conducted around May 24, 2013 reported that UOP’s advertising increased the percentage of consumers who would consider attending UOP from 12% to 29%. Notably, between fiscal years 2013 and 2015, UOP poured over $1.7 billion into its advertising and marketing campaigns.

The Settlement Reached Between the FTC and UOP

Section 5(a) of the FTC Act, 15 U.S.C. Section 45(a), prohibits “unfair or deceptive acts or practices in or affecting commerce.” While the university did not admit any wrongdoing in connection with the allegations charged in the FTC complaint, wiping out nine figures worth of debt on behalf of tens of thousands of former students is no small feat. In a statement posted on its website, the university said it “continues to believe it has acted appropriately and has admitted no wrongdoing” and that “this settlement agreement will enable the university to maintain focus on its core mission of improving the lives of students through career-relevant higher education.”

The settlement agreement between the FTC and UOP, announced on Dec. 10, permanently enjoins/restrains UOP from making any misrepresentation regarding relationships with any companies or employers, or any benefit to students from such relationships. In addition, the settlement requires UOP to pay $50 million to the FTC, which will be used to refund former students who first enrolled during the period starting Oct. 1, 2012, and ending Dec. 31, 2016. The university will also cancel $141 million in student debt owed directly to the school by qualifying students who enrolled during this same time period, as they were likely exposed to UOP’s deceptive advertising. This settlement does not affect students’ federal or private loan obligations.

The university must also provide written notice to qualifying students informing them that they are covered by the settlement, and it must instruct credit reporting agencies to delete the debts from students’ credit reports. The university is further prohibited from denying students access to diplomas or transcripts on the basis of any qualifying debt.

The Current State of the For-Profit Education Industry

This is the largest settlement ever reached between the FTC and a for-profit school. In 2016, the agency reached a $100 million settlement with DeVry University over similar claims involving deceptive advertisements promoting high employment success rates and income levels upon graduation. In August 2019, the agency reached a $30 million settlement with Career Education Corporation (CEC) — which operates American InterContinental University, Colorado Technical University, and Le Cordon Bleu — following an inquiry into the company’s deceptive advertising to prospective students. The same company announced another settlement earlier this year with attorneys general from 48 states and the District of Columbia, where it agreed to forgive nearly $500 million in outstanding student loans owed directly to CEC. Also caught in the fire is the now closed ITT Technical Institute, which was forced to grant $600 million in debt relief from a 2018 bankruptcy settlement with former students.

This trend in lawsuits against for-profit universities shares something in common: for-profit schools nationwide accumulating enormous profits by recruiting students with false promises of enhanced job opportunities and successful careers. It is not surprising then that the for-profit education industry largely targets low-income students and veterans. Notably, the FTC says “UOP has been the largest recipient of Post-9/11 GI bill benefits since the program’s inception.”

The Center for Responsible Lending, using institutional-level data that were retrieved from the U.S. Department of Education in 2018, estimates that the completion rate for students enrolled at for-profit institutions in California was 36.6% (compared to 63.3% and 64.5% at public and private not-for-profit institutions, respectively). Specifically, the FTC says that “nearly 62% of first-time students and 80% of non-first time students drop out of UOP instead of earning a degree.” The National Center for Education Statistics estimates that on average it takes students about nine years to complete a bachelor’s degree at a for-profit institution.

It is also unsurprising that students enrolled at these for-profit schools borrow much more money in the form of federal student loans than students at public and private universities. This is why a settlement such as the one reached between the FTC and UOP may not be as impactful for eligible students as it may seem. Most students at these schools have federal loans (and private loans), which are not covered by the settlement. The Project on Predatory Student Lending states that 98% of all federal student loan cancellation applications in 2016 and 2017 came from students enrolled at for-profit institutions.

While the government has made some progress to protect students’ rights against the for-profit education industry, the progress has been slow and much work remains to be done. For example, in 2016, the Department of Education published the new Borrower Defense Regulations, which were to become effective on July 1, 2017. The regulations prohibit all schools, including for-profit institutions, participating in the federal Direct Loan Program from using pre-dispute arbitration clauses, class action waivers, and mandatory internal dispute resolution processes against students asserting borrower defense claims.

The regulations were delayed for over a year due to the California Association of Private Postsecondary Schools’ (CAPPS) efforts to enjoin their enforcement, and a subsequent stay issued by the Department of Education. The Borrower Defense Regulations finally took effect on Oct. 16, 2018 following a district court decision in Bauer v. DeVos, 325 F. Supp. 3d 74 (D.D.C. 2018), a lawsuit brought by student borrowers finding the delays unlawful.

To be clear, these regulations do not make arbitration agreements and class action waivers, which are commonly used by for-profit institutions as a condition of enrollment, unenforceable. They simply prohibit institutions that participate in the federal Direct Loan Program from enforcing these clauses against students asserting borrower defense claims in relation to making a federal Direct Loan. While CAPPS’ request for a preliminary injunction against the regulations was denied in CAPPS. v. DeVos, 344 F. Supp. 3d 158 (D.D.C. 2018), the merits of the regulations’ limitation on arbitration agreements and class action waivers are yet to be decided. The Department of Education recognized that the Federal Arbitration Act might protect schools’ rights to require arbitration agreements as a condition of enrollment. The government must therefore do more to assist students who have been defrauded by for-profit schools, in their efforts to seek loan cancellation — beyond just the Direct Loan program.

In addition, the process by which students may seek federal debt cancellation is still largely unknown to many students and difficult to navigate. Just two days after the announcement of the UOP settlement, Secretary of Education Betsy DeVos announced that the Department of Education will restart processing claims for federal debt cancellation that have built up under her tenure (approximately 200,000 pending applications). However, the amount of relief that a borrower will be entitled to will be based on the borrowers’ current incomes, and not the total amount of debt owed. This means that borrowers may only be eligible for partial relief from their federal student loan obligations, even for those who were defrauded by these institutions.

For-profit schools promise an easier way into a successful career and higher-income job opportunities for students who may not qualify for traditional schools. However, as these settlements show, the deceptions will more often lead unsuspecting students down a path of debt they cannot escape. 