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Obama Administration Will Crack Down On Fraud By Colleges

A new fraud unit could lead to more schools being punished - and more federal student loans being written off.

Posted on February 8, 2016, at 3:30 p.m. ET

(AP Photo/Christine Armario)
Christine Armario / AP

(AP Photo/Christine Armario)

After a string of scandals involving for-profit colleges abusing the federal financial aid system, the Education Department is taking matters into its own hands: creating an office dedicated to investigating fraud by colleges. The department announced Monday the establishment of the Federal Student Aid Enforcement Unit, a division that would ferret out abuses, particularly those by for-profit schools.

"It's simply imperative that students taking on significant financial obligations not be subject to enrollment abuses, that they get accurate information, and that their financial aid is properly allocated," said Ted Mitchell, the Education Department's under secretary for higher education.

The unit's creation is in some ways a reorganization — a dusting-off of many tools that the department has long had in its arsenal, such as the power to investigate colleges and pull their eligibility to receive financial aid. Two of the four of the agencies under the new unit's umbrella already exist, and are simply being re-shuffled.

But Mitchell said the new unit, because it was separated from day-to-day oversight and "focused on enforcement work," would allow the department to "move more quickly and decisively" in the case of fraud. The new enforcement unit, Mitchell said, "Isn't a big break — it builds on the work of the last seven years."

In its oversight of colleges so far, the Education Department has largely been focused on more routine tasks like monitoring the flow of cash to schools and students, said Elizabeth Baylor, the director of postsecondary education for the Center for American Progress.

The new investigations unit, Baylor believes, will do a better job of actually discovering, and reacting to, deliberate fraud.

The department's current procedures are "lots of record keeping things — it's not necessarily going to be at the vanguard of catching actual misrepresentation," Baylor said. "What we've seen over the past few years is a real pattern of institutions misrepresenting things to students,so having [an investigations unit] with a mindset and an orientation towards fraud, that is new. I find it very encouraging."

Defrauding the financial aid system can be a lucrative enterprise, as the Education Department’s own recent investigations have shown. Marinello Schools of Beauty, a for-profit chain with more than 4,000 students nationwide, handed out questionable high school diplomas like candy — for a $75 fee — and forced low-income students pay part of their tuition out of pocket rather than giving them federal loans. It collected $87 million from taxpayers last year. (Marinello denies the allegations, saying "believes it has done nothing wrong.")

And the Computer Systems Institute, a 2,600-student computer school, fabricated a “home healthcare” business where it said dozens of its graduates were employed — businesses that, as it turned out, most students had never heard of, much less worked at. One business was nothing but an empty warehouse; its owner a homeless man.

These two alleged violations, uncovered last week by the Education Department, had one main purpose: to allow the colleges to continue collecting millions of dollars in financial aid, skirting rules about student eligibility, accreditation, and revenue. When the department investigated and uncovered the violations, it abruptly cut off the schools’ access to that financial aid — money the schools were so reliant on that Marinello was forced to shut down all of its 56 campuses nationwide in a matter of days.

Until now, such definitive and large-scale crackdowns by the Education Department were rare. The department controls the flow of billions of taxpayer dollars every year to American colleges and universities, but it left detailed investigations, and strong enforcement actions, primarily to other federal agencies, and, theoretically, to college accreditors, the federal-government’s so-called “watchdogs.”

Some critics said the creation of the unit amounted to too little, too late. "This strikes me as more of a branding exercise than an actual enforcement procedure. It's more of a PR trigger," said Barmak Nassirian, an analyst at the American Association of State Colleges and Universities who has criticized both the department and the for-profit college industry. "It's hard to object to the department saying it's going to enforce the law, but I don't think the system is going to get any safer tomorrow."

Though the Education Department touted the recent successful actions against Marinello and CSI, the announcement Monday was also framed by its most high-profile failure. The department has spent the past year weathering heavy criticism that it did not do enough to quickly investigate and curb fraud by Corinthian Colleges, once one of the country’s largest for-profit college chains.

Before it was closed in 2015, Corinthian had been repeatedly accused by state attorneys general and several federal agencies of fabricating job placements, much like Computer Systems Institute, and lying to students about their chances of finding employment; the first case, in California, dated back as early as 2006. But the department continued to hand over billions of dollars in federal financial aid to Corinthian until 2014, when it imposed a minor delay on Corinthian’s access to federal funds that sent the school into bankruptcy.

The department has long said that it was essentially powerless to cut off federal aid to Corinthian, as it remained accredited throughout its troubles. But critics said it should have moved more quickly on the allegations of fraud by states, and that it failed to cooperate with federal agencies that were also investigating the school, like the Department of Justice.

"This should have been done at the start of [Obama's] tenure," said Nassirian. "Your seventh year in office is not the time to suddenly discover that laws are being violated. There's not enough time to create the change of culture and ethos [in the Education Department] that real change would require."

Still, the step-up in enforcement by the Education Department will likely lead to more closures like those last week, which abruptly ended the education of almost 7,000 students at Marinello and CSI. Schools caught by the unit’s new investigations group in serious violations, like Marinello was, could have their financial aid eligibility yanked — essentially, an instant death sentence for schools that draw most of their revenue from the federal government.

More school closures may be hugely costly for taxpayers, who could end up footing the bill for loan forgiveness for tens of thousands of current and former students.

It has long been the case that when schools are shut down abruptly, their current students can have their loans discharged. But the stakes for taxpayers are especially high because of the growing use of "defense to repayment” claims by borrowers, who petition to have their loans forgiven by citing a once-little-known clause in federal law covering former students of colleges caught defrauding students.

In addition to investigations, the Student Enforcement Unit will also include a group that will provide support and advice to students filing these kind of claims. To file them, students must provide evidence that they’ve been defrauded — evidence that, if the department increases its official findings of fraud, would be in ample supply.

In its investigation of Marinello, for example, the department found that the school had systematically misled its students, systematically overcharged them, and deprived them of financial aid that they were legally due. Those findings, especially because they come directly from the department, could potentially allow thousands of former Marinello students to file borrower defense claims.

Some 7,500 students have applied for loan forgiveness in the wake of the shutdown of Corinthian. In that case, the department put hefty weight on its own findings of fraud, saying that its investigation was enough for Corinthian students to prove they had been cheated.

The move to double down on fraud investigation in-house is also a sign that the Department may be putting far less trust into college accreditors, the independent watchdogs that it tasks with determining whether or not a school is eligible to receive financial aid.

It is usually an accreditor’s job, for example, to verify a college’s job placement claims. But in the failure of Corinthian Colleges, evidence had mounted that the school consistently lied about its job placement numbers — even though its accreditor, the Accrediting Council for Independent Colleges and Schools, or ACICS, had repeatedly given it the stamp of approval, saying it saw nothing amiss. ACICS also accredited the Computer Systems Institute.

The Education Department has been sharply critical of the accreditation system in the wake of Corinthian’s closure, with then-Secretary of Education Arne Duncan calling them “the watchdogs that don’t bite.” But, though it has the regulatory authority to approve and revoke accreditors, the department has long claimed that there is little it can do without Congress’s help to fix the “broken” accreditation system.

ACICS had approved the Computer Systems Institute, the school that allegedly invented an employer, allowing it to collect $20 million in federal funding last year, partly on the backs of its claims about finding jobs to students. But it was the Education Department that sent investigators to what was supposedly the headquarters of a business called “Home Health Consultants,” which had employed some 42 students at CSI.

After the address turned out to be the private home of a man named Zoharel Quinn, who gave vague and contradictory answers through the screen door of his porch, Department investigators interviewed the students who had supposedly been employed by Home Health, only to find that most had never heard of the business. Only one had ever been paid by Quinn, who sent her into the streets to hand out pamphlets for nonexistent healthcare services and paid her $1.25 an hour.

Another department investigator was sent to an address that was supposedly an employer of 14 CSI students called “Dream Team Hope Health Care Services.” It turned out to be an empty warehouse. The business owner, when contacted by the department, said he was a homeless man; he claimed to have interacted with CSI via a “black man” he could only name as “Chaz.”


Marinello Schools of Beauty said it denies the Education Department's allegations against the school.

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