GAO Finds Fraud, Deception and Questionable Marketing Tactics at For-Profits

Thisguy walks into an admissions office and announces that he has recently inherited $250,000 and wishes to apply to the school. Although the inheritance is sufficient to pay for the estimated cost of the applicant’s tuition for the next four years, an admission officer encourages the applicant to seek student loans and assists in committing fraud, thus making him eligible for grants and subsidized loans.

This is not a joke. According to the United States Government Accountability Office (GAO), this is standard practice at some for-profit colleges and universities.
In August of last year, the GAO released a report and Gregory D. Kutz, managing director, forensic audits and special investigations at the GAO, testified before the Committee on Health, Education, Labor and Pensions in the U.S. Senate on practices at for-profit colleges. The U.S. Department of Education commissioned the GAO to conduct undercover testing to deter-mine whether for-profit college representatives engaged in fraudulent, deceptive or otherwise questionable marketing practices and to compare the tuitions of the for-profit colleges tested with those of other colleges in the same geographic region.
The GAO sent several undercover agents to 15 for-profit colleges in Arizona, California, Florida, Illinois, Pennsylvania, Texas and Washington, D.C., had them pose as prospective applicants, and secretly videotaped the meetings between applicants and admissions officers. The colleges were selected based on several factors, one of which was that the school received 89 percent or more of its revenue from federal student aid.
“We identified four colleges where representatives encouraged our undercover students to commit fraud on their federal financial aid applica-tions, and deceptive or otherwise questionable practices at all 15 colleges related to sales and marketing. We also reported good practices identified during our investigation,” says Kutz.
Other college representatives exaggerated undercover applicants’ potential salary after graduation and failed to provide clear information about the college’s program duration, costs or graduation rate, despite federal regulations requiring them to do so.
In recent years, enrollment at for-profit colleges has grown from about 365,000 students to almost 1.8 million, far faster than enrollment at tradi-tional schools. For-profits offer degrees and certifications in programs ranging from business administration to cosmetology. In 2009, students at for-profit colleges received more than $4 billion in Pell Grants and more than $20 billion in federal loans provided by the Department of Education. For-profit colleges range from small, privately owned colleges to colleges owned and operated by publicly traded corporations. Fourteen such cor-porations, worth more than $26 billion as of July 2010, have a total enroll-ment of 1.4 million students. With 443,000 students, one for-profit college is one of the largest higher education systems in the country – enrolling only 20,000 students fewer than the State University of New York.

Gregory D. Kutz, Managing Director, Forensic Audits and Special Investigations, GAO

Gregory D. Kutz, Managing Director, Forensic
Audits and Special Investigations, GAO

“We identified four colleges where representatives encouraged our undercover students to commit fraud on their federal financial aid applications, and deceptive or otherwise questionable practices at all 15 colleges related to sales and marketing.”
— Gregory D. Kutz, Managing Director, Forensic Audits and Special Investigations, GAO

Using fictitious identities, GAO personnel posed as potential students to meet with colleges’ admissions and financial aid representatives and inquire about certificate programs, associate degrees and bachelor’s degrees. Undercover students inquired about one degree type and one major. The GAO tested each college twice. First an undercover applicant posed as a prospective student with an income low enough to qualify for federal grants and subsidized student loans. Then a second undercover applicant posed as a student with a higher income and assets to qualify the student for certain unsubsidized loans.
Using additional bogus identities, investigators posing as four prospec-tive students filled out forms on two websites that asked questions about their academic interests, matched them to colleges with relevant programs, and provided the students’ information to colleges for follow-up about enrollment.
To compare the cost of attending for-profit colleges with that of non-profit colleges, the GAO used Department of Education information to select public and private nonprofit colleges located in the same geographic areas as the 15 for-profit colleges the undercover applicants visited. The GAO compared tuition rates for the same type of degree or certificate between the for-profit and nonprofit colleges.

Fraud and Deception

Four admissions officers at four of the 15 schools encouraged the applicants to falsify their FAFSA in order to qualify for financial aid, although the applicants indicated that they had just come into an inheri-tance worth approximately $250,000. The Department of Education requires students to report assets and income, and the $250,000 the undercover applicant was said to have in the bank was more than enough to pay for tuition without securing loans.
“The primary examples of encouraging our applicants to falsify our FAFSA related to first telling us not to report the $250,000 of savings we had reported and disclosed to the colleges, and second, to add bogus dependents to our application. The effect of these actions would have been to make our undercover students eligible for federal Pell Grants and subsi-dized loans that they were not really eligible for,” says Kutz.
Bob Cohen of the Association of Private Sector Colleges and Universities (APSCU, formerly the Career College Association) calls the tapes the GAO presented as evidence to the congressional committee “mystery shopping videotapes” and says that while the APSCU cannot comment on the specifics of the situations raised by the tapes, he insists that admissions and financial aid officers must deal with prospective students in the most honest and ethical manner possible and that compliance is key. He went on to say that just one instance of misrepresentation by any school, whether a private sector college or university or traditional college or uni-versity, is one instance too many. “College enrollment is a major decision, and prospective students need full and complete information on which to base their determination. APSCU and its members have put much more emphasis on compliance since the report was issued. For instance, APSCU tightened its member Code of Conduct,” says Cohen.
Cohen contends that the “GAO report has been substantially revised since it was originally released, correcting many overstatements by GAO in the original report of alleged faults, calling into question the true nature of the findings and potential bias against the sector in the GAO inquiry.” It is true that the GAO reissued its testimony on Nov. 30, but Chuck Young of the GAO public affairs office says that it was revised to clarify and add more precise wording on two pages and some examples cited in certain tables. “The overall message of the report did not change,” says Young.
Kutz says that when schools encourage and enable applicants to com-mit fraud, federal taxpayers end up funding college for ineligible appli-cants through Pell Grants of subsidized loans. “When we went into the test, we assumed that because we did have the ability to pay for the education, that Pell Grants and student loans, especially subsidized ones, would not be applicable to our students,” says Kutz. But with a little help from crooked admissions officers, they were.
While fraud was practiced at only four of the 15 schools GAO personnel visited, deception ran rampant at many, according to the report. Admissions or financial aid representatives at all 15 for-profit colleges pro-vided deceptive or otherwise questionable statements. Admissions repre-sentatives at four colleges either misidentified or failed to identify their col-leges’ accrediting organizations. Although all the for-profit colleges were accredited, federal regulations state that institutions may not provide stu-dents with false, erroneous or misleading statements concerning the par-ticular type, specific source or the nature and extent of its accreditation.
At one college, a representative indicated that the school was accredit-ed by the same organization that accredits Harvard and the University of Florida. It is not. At a small beauty college in Washington, D.C., a represen-tative indicated that the school was accredited by an agency affiliated with the government, although federal and state government agencies do not accredit educational institutions.
“As the APSCU Code of Conduct makes clear, students deserve com-plete, clear and accurate information. Individuals or schools, regardless of sector, who knowingly misrepresent the facts or purposely mislead prospective students deserve to be sanctioned. Again, the manner in which investigative results are gathered plays a critical role here. The fact that the GAO has significantly revised its findings raises major questions about the validity of the agency’s findings,” says Cohen.
Concerning graduation rates and potential earnings at for-profits, on 13 separate occasions and by 13 different college representatives, GAO’s applicants were provided deceptive or questionable information. According to federal regulations, a college may not misrepresent the employability of its graduates, including the college’s ability to secure employment for its graduates. Representatives at two colleges told under cover applicants that they were guaranteed or virtually guaranteed employ-ment upon completion of the program. At five colleges, applicants were given potentially deceptive information about prospective salaries. At a small beauty college, a school’s representative told a GAO applicant that barbers can earn $150,000 to $250,000 a year, although statistics show that 90 percent of America’s barbers earn less than $43,000 a year.
Many individuals interested in attending for-profit schools hold down full-time jobs, are raising families and are older than traditional college students. These individuals are often concerned with the duration and, of course, the cost of their education. During the GAO investigation, repre-sentatives from nine colleges offered deceptive or otherwise questionable information about the duration or cost of their colleges’ programs. Representatives at these colleges used two different methods to calculate program duration and cost of attendance. Colleges described the duration of the program as if students would attend classes for 12 months per year, but reported the annual cost of attendance for only nine months of classes per year, thus disguising the program’s total cost.
Those applicants who inquired about financial aid were denied access to important information by the colleges, although federal regulations require schools to provide such information. Six colleges in four states would not allow the undercover applicants to speak with financial aid rep-resentatives or find out what grants and loans they were eligible to receive until they completed the college’s enrollment forms and paid a small appli-cation fee.

Enrollment Standards and Questionable Marketing

It would seem that any student who has the money for tuition or can secure a student loan is guaranteed a seat at the for-profit feast. At one for-profit, a representative told the GAO applicant that she needed to answer only 18 questions correctly on a 50-question test to be accepted to the col-lege. The test proctor coached her during the test. At two other schools, applicants were allowed 20 minutes to complete a 12-minute test or took the test twice. “The only apparent standard is a high school education or its equivalent. For our 30 tests, it appeared there were no standards beyond that to be admitted,” says Kutz.
Cohen says that private sector colleges and universities hire third par-ties to conduct what he calls ability to benefit examinations. But he insists that there is no excuse for unethical behavior by test administrators and that admitting students to programs for which they lack the necessary learning skills serves no purpose. “From the perspective of the institution, such a practice lowers retention rates, graduation rates and placement rates, the criteria by which many schools are judged. Such practice also lowers student morale and ultimately will prove damaging to the school’s reputation,” he says.
No school can afford to have its reputation damaged. But the competi-tion between for-profits is so fierce that many risk it and resort to aggressive marketing tactics. Four GAO investigators filled out forms on two websites that matched them to colleges with relevant programs and provided the stu-dents’ information to colleges. Within minutes of filling out the forms, three prospective students received numerous phone calls from colleges. One received a phone call within five minutes of registering and another five phone calls within the hour. Another prospective student received two phone calls separated only by seconds within the first five minutes of regis-tering and another three phone calls within the hour. One student received 182 phone calls and another received 179 phone calls in a month.

“Our tests showed a high level of motivation at the colleges we visited to enroll students. In a number of the tests, the admissions representatives pressured our applicants to sign a contract for enrollment before allowing them to speak to someone from financial aid to determine what the cost to the student would be,” says Kutz.
All schools, for-profit and nonprofit, are vying for tuition dollars. But for-profits are charging considerably more in tuition than their nonprofit counterparts. The GAO compared the cost of tuition at the 15 for-profit colleges in its study with public and private nonprofit colleges located in the same geographic area. In 14 out of 15 cases, tuition was higher at the for-profit college.
Tuition for certificate programs at for-profit colleges was often sig-nificantly more expensive than at a nearby public college. GAO appli-cants would have paid $13,945 for a certificate in a computer-aided drafting program at a for-profit compared to $520 at a public school. In Illinois, a student spends $11,995 on a medical assisting certificate at a for-profit college, $9,307 at a private nonprofit college and $3,990 at a public college.
On average, for the 15 colleges the GAO visited, it cost between six and 13 times more to attend the for-profit college to obtain an associate degree than a public college. One interested in an associate degree in respiratory therapy would pay $38,995 at a for-profit and $2,952 at a public college.
Regarding bachelor’s degrees, four out of five times a degree was more expensive to obtain at the for-profit college than the public college. In Washington, D.C., the bachelor’s degree in Management Information Systems would cost $53,400 at a for-profit college, and $51,544 at a public college. The same bachelor’s degree would have cost $144,720 at a private nonprofit college.
But Cohen defends the higher tuitions at for-profits, and for-profits in general, indicating that they charge a tuition that reflects the real cost of postsecondary education. Public colleges, he says, can charge less for in-state students because their tuition is subsidized by the taxpayers. While public institutions are paid in part by the number of students they enroll, for-profits only prosper if the outcomes justify tuition. For-profits “achieve these outcomes through value-added services, like smaller class sizes, more personalized attention, immersive learning styles and flexible course delivery. Education offered [at for-profits] actually costs taxpayers less, if public subsidies for higher education are taken into account,” says Cohen.
Cohen admits that the GAO’s report has damaged the reputation of the for-profit sector and contends that, as a result, it also has damaged its stu-dents. He fears that if the negligent practices that led to the need for so many changes in the report are repeated in future reports, the conse-quences could be as great or greater. He implores the GAO to live up to its name and act with accountability.
“Putting research in a broad context would be a good first step. Further steps in the right direction would be stating the number of schools visited in its original report (as opposed to those reported on), releasing the videotapes collected by mystery shoppers to the schools involved, and dis-continuing the use of disingenuous prompts in mystery shopping activity. We need to understand how and where this process went off the rails and take steps to assure that it never happens again,” says Cohen.