The Consumer Financial Protection Bureau has taken its first public enforcement action against a company in the for-profit college industry, filing a lawsuit against ITT Educational Services, Inc. The company, based in Indiana, is a for-profit provider of post-secondary technical education, with tens of thousands of students enrolled online or in the school’s 150 institutions. The agency is accusing the for-profit college chain of engaging in predatory student lending by pushing students into high-cost private student loans that, in Director Rich Cordray words, “were destined to default.” In fact, the company itself projected a default rate of 64 percent, predicting that well over half of students who borrowed would be unable to repay. The CFPB is seeking refunds for victims, a civil penalty, and an injunction against the company, among other forms of relief.
The CFPB asserts that ITT coerced students into taking on high-cost loans with interest rates of more than 16 percent. These loans additionally had opaque terms, with some students not even aware they had a private student loan until they received a collection call. The CFPB alleges that the company knew students would have no way to pay the temporary loans they were encouraged to take out to fund tuition gaps (the amount of tuition owed after federal financial aid resources were exhausted). ITT’s programs cost significantly more than similar programs at public colleges, and because the tuition is higher than the maximum federal student aid limit, many students had to fill that gap with outside financing. To fill this hole ITT offered students no-interest loans that looked appealing, but were due in full at the end of a student’s first academic year. When the end of the year came and students couldn’t repay, the company pushed them into new high-cost private student loans to repay both their temporary loans and their second year of tuition. ITT’s CEO even told investors that the plan all along was for students to end up converting the temporary loans to long-term loans. In addition to misleading students on loans, the company also misled them on future job prospects, leading students to believe they would earn enough money upon graduation to repay their loans even though past experience showed otherwise.
Four state attorneys general, from Illinois, Iowa, Kentucky, and New Mexico, joined the CFPB in announcing legal actions. New Mexico Attorney General Gary King—who filed a separate suit in New Mexico—explained: “A significant percentage of the New Mexico students that entered the ITT nursing program were unable to complete the program; cannot get a job in their chosen field; because their ITT credits will not transfer, they must start over at another institution; and, these students continue to suffer under their heavy student loan debt.” Kentucky Attorney General Jack Conway, who is heading a group of 32 attorneys general investigating for-profit colleges, added that “some of these schools are more interested in getting their hands on federal and state dollars than educating students.”
The CFPB is using its authority under the Dodd-Frank Act to take action against institutions engaging in “unfair, deceptive, or abusive practices” in this case. Relatedly, the CFPB also recently finalized a rule, which takes effect on March 1, allowing the agency to supervise certain nonbank servicers of private and federal student loans.
— Rebecca Thiess