How The Obama Administration Is Making It Harder To Shed Student Debt

Education Management Corp., the nation’s second-largest for-profit college company, appears to have a good friend in Education Secretary Arne Duncan.

On Monday , it agreed to pay $95.5 million over the next seven years to end a joint federal-state lawsuit that alleged the company, also known as EDMC, ran a “high pressure boiler room” scheme for years that defrauded taxpayers out of at least $11 billion in federal student loans and grants from 2003 to 2011. The Department of Justice and a group of state prosecutors alleged that EDMC lied about its eligibility to receive those funds.

EDMC also agreed to forgive $102.8 million in loans it gave to some students who dropped out shortly after enrolling to dispatch a separate lawsuit filed by another, larger group of state attorneys general. Some accused EDMC of advertising false job placement statistics in an effort to lure students into enrolling.

Officials referred to the separate deals as a global settlement that resolved whistleblowers' allegations that EDMC’s schools -- The Art Institutes, Argosy University, Brown Mackie College, and South University -- systematically deceived students, states, and the federal government for financial gain.

Consumer advocates and higher education experts said the settlements were paltry compared to the total amount of alleged fraud and that they failed to provide meaningful debt relief for allegedly defrauded students. They're also angry that EDMC not only isn’t required to acknowledge wrongdoing, but can expressly deny the allegations.

Attorney General Loretta Lynch said the settlement reflected EDMC’s ability to pay. In Tuesday trading , the company’s nearly worthless stock reached its highest price since June.

As part of the settlement, EDMC also received two gifts: First, the Department of Education agreed to not use the settlement or any related evidence investigators dug up as the basis for holding the company accountable through in-house means for its alleged years-long crime spree, such as restricting EDMC’s access to federal student aid funds.

Second, and perhaps most importantly, Duncan repeatedly declared that EDMC hadn’t misled students. “To be clear, what was found here was not misrepresentation to students,” Duncan said  on Monday. “It was breaking the law and lying to us.”

That’s important, because if the Education Department found that EDMC misled students into enrolling and taking out federal student loans -- or if EDMC had admitted to it -- those students could then petition Duncan’s department to discharge their debts under a provision in federal law that aims to shield borrowers from having to make payments on fraudulently-originated federal student loans. Duncan, in turn, could then order the company to refund the federal government for those amounts.

“It seems that there is an acceptable cost of doing business if caught engaging in illegal acts,” said David Halperin , a Washington attorney critical of the for-profit college industry. “Unless there is better enforcement and stronger penalties, crime will continue to pay.”

The threat of having to repay the federal government for loans discharged under the so-called "defense-against-repayment" provision was one reason why state and federal prosecutors were unable to persuade EDMC to admit to any wrongdoing, said one state official involved in the settlement negotiations.

“No for-profit school would sign a settlement that contained an admission,” the official said.

Mark McEachen, EDMC’s chief executive officer, said the lawsuits “were without merit ” and that the company settled so it could focus on its students.

Yet Duncan’s statement appears to contradict at least one of the whistleblower lawsuits that the Justice Department settled, which alleged that EDMC misled students into enrolling with false statements about its accreditation and success at getting students jobs, as well as a separate lawsuit filed by the state of Iowa. Dorie Nolt, an Education Department spokeswoman, later implied that Duncan was referring to just one of the lawsuits that federal authorities settled.

Student advocates and some state prosecutors worry that Duncan has no intention of canceling debts owed by former EDMC students who may have been misled into taking out federal student loans.

Duncan’s statement that EDMC didn't lie to students “is flat-out false,” said Barmak Nassirian, director of federal relations and policy analysis at the American Association of State Colleges and Universities. “It’s candidly a nonsensical assertion. I hope it’s not an attempt to curtail victims’ right to get some relief here. I hope that’s not the purpose of the statement.”

Piggy-backing off a 2007 whistleblower lawsuit, the Justice Department claimed in 2011 that EDMC paid bonuses to its recruiters solely based on how many students they enrolled -- a violation of federal rules that led “to the enrollment of unqualified and uninformed students” -- and repeatedly lied to the federal government whenever it claimed it wasn’t paying such bonuses, making the company’s schools ineligible to receive taxpayer-backed payments from students who got the funds from the Education Department.

Some state officials and consumer advocates contend that EDMC’s allegedly false statements to the Education Department about its bonus practices also constitute fraud against its former students. According to these experts, EDMC allegedly deceived students into enrolling and taking out loans by not telling them that the company was engaged in practices that would render it ineligible to receive federal student aid funds.

“At the end of the day, a lot of students were lied to when they were brought into [EDMC’s] schools and they’re not going to see any relief,” said Elizabeth Baylor , director of postsecondary education at the Center for American Progress. “It’s not justice.”

Massachusetts Attorney General Maura Healey urged the federal government to use its share of the EDMC settlement funds to pay down former EDMC students' debt on federal student loans.

EDMC collected about $1 billion in federal student aid during the most recent academic year, Baylor said. In past years, it received about double that amount.

Instead of taking EDMC to court to recoup those funds, the government instead accepted a relatively small payment. The company’s former students who initially received those loans will likely be forced to repay the money over the course of their lives, thanks to the Education Department’s extraordinary ability to garnish wages and seize tax refunds.

“This settlement provides zero justice for the people who have been harmed by EDMC,” said the Debt Collective, a pro-borrower group that has organized a nationwide “debt strike” against the Education Department.

But that’s not how the Education Department sees it, according to Nolt.

Despite four years of government litigation against EDMC, Education Department officials “do not know of, or have the evidence to support, claims of misrepresentation to students because that was not the focus of the case,” Nolt said.

Former EDMC students can still file applications with the Education Department to have their debts canceled, she added.

“If there is evidence of misrepresentations to students, we want to hear that and we’re open for business,” Duncan said.