The CFPB announced yesterday they filed suit against ITT Educational Services, the owner of a number of for-profit colleges.
The Consumer Financial Protection Bureau (CFPB) filed a lawsuit against ITT Educational Services, Inc., accusing the for-profit college chain of predatory student lending. The CFPB alleges that ITT exploited its students and pushed them into high-cost private student loans that were very likely to end in default. The CFPB is seeking restitution for victims, a civil fine, and an injunction against the company.
“ITT marketed itself as improving consumers’ lives but it was really just improving its bottom line,” said CFPB Director Richard Cordray. “We believe ITT used high-pressure tactics to push many consumers into expensive loans destined to default. Today’s action should serve as a warning to the for-profit college industry that we will be vigilant about protecting students against predatory lending tactics.”
Like the mortgage market in the lead-up to the financial crisis, the for-profit college industry may be experiencing misaligned incentives. These colleges benefit when students take out large amounts of loans, regardless of the students’ long-term success. The CFPB is concerned that some of these corporations may be employing practices to coax consumers into taking out more federal and private student loans. Today’s announcement is the Bureau’s first public enforcement action against a company in the for-profit college industry.
ITT Educational Services, Inc. is an Indiana-based for-profit provider of post-secondary technical education. Tens of thousands of students are enrolled online or at one of ITT’s roughly 150 institutions in nearly 40 states. ITT’s tuition costs are among the highest in the country in the for-profit industry. Earning an associate’s degree at ITT can cost more than $44,000. Bachelor’s degree programs can cost $88,000. That is significantly higher than the cost of similar degrees at a community college or a public four-year institution.
Most of ITT’s students borrow large sums to pay the high tuition costs and the majority of this money is borrowed from federal student loan programs. But private student loans also provide critical revenue for ITT. Because most ITT students’ federal aid does not cover the full cost of an ITT program, most students face a “tuition gap” requiring them to find other sources of funding.
The CFPB’s lawsuit alleges that ITT encouraged new students to enroll at ITT by providing them funding for this tuition gap with a zero-interest loan called “Temporary Credit.” This loan typically had to be paid in full at the end of the student’s first academic year. But ITT knew from the outset that many students would not be able to repay their Temporary Credit balances or fund their next year’s tuition gap.
The CFPB lawsuit alleges that between July 2011 and December 2011, ITT pushed its students into repaying their Temporary Credit and funding their second-year tuition gaps through high-cost private student loan programs. Students were left in the dark about the fact that taking out these high-cost loans would be required to continue their studies. However, ITT’s CEO revealed in investor calls that converting the temporary loans to long-term loans was the company’s “plan all along.”
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has the authority to take action against institutions engaging in unfair, deceptive, or abusive practices. Specifically, in today’s lawsuit, the Bureau alleges the following conduct by ITT:
- Pressured into predatory loans: ITT used its financial aid staff to rush students through an automated application process without affording them a fair opportunity to understand the loan obligations involved. In some cases, students did not even know they had a private student loan until they started getting collection calls. The loans were high-cost. For borrowers with credit scores under 600, for example, the costs of the private student loans included 10 percent origination fees and interest rates as high as 16.25 percent.
- Credits not transferable: ITT was accredited by a national organization that accredits many for-profit schools, but the credits that students earned typically did not transfer to local community colleges or other nonprofit schools such as public or private colleges. ITT used the prospect of expulsion and the loss of the money already spent during the student’s first year to coerce students into taking out the private loans.
- Misleading future job prospects: The Bureau believes that ITT’s representations led students to think that when they graduated they were likely to land good jobs and enough salary to repay their private student loans. In this way, ITT exploited student expectations while it knew that a majority of students would default.
- Loans likely to fail: ITT knew that most of its students would ultimately default on their private student loans; it projected a default rate for its students of 64 percent. Defaulting on private student loans can have grave consequences for consumers. It can make it difficult to get any kind of loan for years and even affect a borrower’s job prospects. And, because private student loans are difficult to discharge in bankruptcy, the debt can be very difficult to recover from. – Source
According to the ITT complaint filed:
“ITT, a publicly traded, for-profit corporation, assures consumers who enroll in classes at one of its 149 locations throughout the country, or in its online programs, that it will help them obtain more desirable jobs and higher income to better their lives.
This offer comes with a high price tag, however, and the low-income consumers whom ITT targets can rarely afford to pay its high tuition out-of-pocket. Therefore, ITT’s business model relies on convincing these consumers to obtain federal aid, mostly loans, to pay ITT.
Federal aid, mostly loans, taken out by consumers comprises the overwhelming majority of ITT’s revenue.
Federal aid, including federal loans, does not typically provide an ITT student with enough money to cover ITT’s entire tuition, however. Few of ITT’s students can afford to cover this tuition gap with their own money.
To close this tuition gap, when ITT recruited new students, it offered them zero-interest, short-term loans payable in a single payment nominally due nine months later, at the end of that academic year. ITT referred to these loans as “Temporary Credit.”
Through December 2011, ITT’s Temporary Credit operated merely as an entry point to private student loans that ITT students would be pushed into in order to repay their Temporary Credit and pay for any tuition gap in subsequent years of study.
Students who were given Temporary Credit received no warning of what ITT ultimately planned to do. If students were not able to pay off the Temporary Credit at the end of the academic year—something ITT knew few students would be able to do—ITT coerced them into paying off their Temporary Credit amounts with high-interest, high-fee private loans payable over ten years. At the same time, to cover the tuition gaps for the upcoming year, students were coerced into taking out additional private student loans. If students were unable to pay off the Temporary Credit and pay the second-year tuition gap, and they refused the private loans, they were threatened with expulsion.
The ITT staff of campus financial aid offices (the “Financial Aid staff”)—who were compensated based in part on how many students they were able to force into these private loans—engaged in a variety of aggressive tactics, such as pulling students from class or withholding course materials or transcripts, to get those students to sign up for these private loans.
While students were left unaware that the zero-interest Temporary Credit was just an entry point for these expensive private loans, ITT did consistently tell its investors, from the time the loan programs were put in place, that it was ITT’s “plan all along” that students’ Temporary Credit would be paid off through private lending programs. ITT had established the lending programs to ensure that income and free cash flow would improve, which in turn improved the appearance of ITT’s financial statements.
Indeed, ITT designed these private loan programs—ostensibly run by third parties, but in reality controlled by ITT and backed by an ITT guarantee that protected those third parties from loss—to ensure that students with Temporary Credit balances could repay those balances and finance future tuition gaps no matter what their credit profile; ITT required in the lending criteria for those loan programs that they accept virtually any second-year ITT student who had been given a Temporary Credit by ITT.
Default rates for ITT students on all loans have been high, but ITT itself projected, as far back as May 2011, that more than 60% of the students who had received the private loans would default. Simply to enhance its financial statements and appearance to investors, ITT sacrificed its students’ futures by saddling them with debt on which it knew they would likely default.” – Source