The newly created Consumer Financial Protection Bureau took its first public action against the for-profit education industry with a lawsuit against ITT Educational Services for what investigators called "predatory lending."
Tuition for an associate degree at ITT can cost more than $44,000, while ITT's bachelor's degree programs can cost $88,000. Those costs are "significantly higher" than the cost of a corresponding degree at a community college or four-year university, investigators said.
Because federal student loans don't cover all tuition costs for most ITT students, most of the students attending the chain's institutions face a "tuition gap." ITT provided a temporary, zero-interest loan to those students that typically had to be paid back during the first year -- even though the company knew it was unlikely many students would be able to do so, according to the lawsuit.
Federal investigators allege that the school's financial aid staff pressured students to rush through an automated application process to get "temporary credit."
Only later did students discover that they were on the hook for loans with interest rates as high as 16.25 percent, which provided a significant source of income for the school system. That's akin to financing a college education using a credit card.
The lawsuit, filed in federal court in Indiana, seeks restitution for victims, an injunction against the company and a civil fine from ITT, which operates as ITT Tech, Daniel Webster College and other entities.
The Indiana-based school system maintains a campus in Chattanooga at Eastgate Town Center. Chattanooga's campus is one of 150 locations in nearly 40 states. Other Tennessee locations include Johnson City, Knoxville, Memphis and Nashville.
Nicole Elam, ITT's vice president of government relations and external affairs, wouldn't comment on specific allegations in the complaint, but said the school would fight the lawsuit.
"We don't comment on pending litigation, other than to say that we believe the bureau's claims are without merit and we intend to vigorously defend ourselves against the charges," Elam said.
The crux of the bureau's complaint is that ITT officials "knew that most of its students would ultimately default on their private student loans," with internal projections for a default rate hovering at 64 percent.
But despite this knowledge, the school continued to pressure students to take out the loans.
In an investor call, ITT's CEO revealed that converting the temporary loans to long-term loans was the company's plan all along, said Richard Corday, director of the CFPB and former Ohio attorney general.
"We believe many for-profit colleges may be saying one thing to students as they load them up with debt but saying another thing to investors as they sell their business model," Corday said. "In the end, the outcomes for many of these students do not live up to the promises the schools made to them."
The lawsuit is the latest in a string of actions targeting the for-profit college industry, which has among the highest student loan default rates and lowest graduation rates in higher education and has faced criticism for its recruitment tactics. Attorney generals in California, Massachusetts, Colorado, New York, and Illinois also are pursuing action against various for-profit institutions, Cordray told reporters on a conference call Wednesday.
For-profit colleges could also be hurt by "gainful employment" regulations expected to be proposed soon by the Education Department that would measure the ability of students to get a job or repay their loans after attending job training programs. Federal student aid could be revoked from programs deemed ineffective.
On Capitol Hill, Sen. Tom Harkin, D-Iowa, chairman of the Senate Health, Education, Labor and Pensions Committee and other Democrats have pushed for more oversight of the industry, which Republicans object to. An investigation by Harkin's committee found that between 2008 and 2009, more than 1 million students started college attending companies reviewed by the committee, but by 2010, half had left school without a certificate or degree.
For-profit colleges saw an explosion in growth last decade but their enrollments have since declined. Proponents of these programs say they provide valuable job training and flexibility through distance learning and by other means that many students like-- particularly those who are nontraditional.
For bachelor's degree students starting a four-year program in 2004, just 28 percent of students attending for-profit institutions graduated within six years, Corday said. This was half the rate for students at four-year public institutions.
But since many credits earned at ITT don't transfer to other schools, the school system used the prospect of expulsion to coerce students into taking out the loans, the CFPB said.
"Students may think they are climbing a ladder to success when instead they are getting knocked down, crushed by student debt that does not help them gain a better job or a better life," Corday said. "Moving forward, the Consumer Bureau will subject the financial products and services offered by for-profit colleges and their partners to the same standards as any other consumer financial product or service."
The Associated Press contributed to this story.
-- Contact staff writer Ellis Smith at email@example.com or 423-757-6315