Business is booming at America’s for-profit colleges. With steady high unemployment rates, many of the job-hungry have opted to pursue higher or specialized degrees in an effort to make themselves more marketable. Pricy for-profit institutions, like the 400,000 strong University of Phoenix, are flourishing with this increased demand as students flock to their courses to invest in new career prospects.
But recent regulatory activity at both the state and federal levels may signify that the party is over … or, more likely, that it must settle down quite a bit. Questionable recruiting and student financing practices at some career colleges have brought these education companies to the attention of many state attorneys general, the Department of Education, and the Senate Committee on Health, Education, Labor and Pensions, with the latter holding hearings on student financing at for-profit colleges.
Federal-level issues largely center on less-than-desirable statistics regarding federal student loans. Apparently, nearly half of federal student loan defaults come through these for-profit colleges, while financing for students at the institutions grows rapidly. Significant to these statistics is how expensive for-profit colleges are as compared to state schools. A 2010 GAO Report noted that, while enrollment in career colleges jumped from 1 million to 1.8 million students from 2003-2008, federal student aid to those institutions tripled from $8 billion to $24 billion.
State-level issues revolve around alleged violations of consumer protection statutes through aggressive recruiting tactics. For instance, for-profit colleges are being investigated for potential false or deceptive claims to prospective students on accreditation for degree programs and post-graduation career prospects. Also at issue are colleges’ disclosures of student loan financing and loan default rates.
Some ten states’ attorneys general formed a task force in March to combine efforts and share investigative information as they pursue actions against these institutions. According to a recent op-ed by Kentucky Attorney General Jack Conway, who is leading the task force, the number of states investigating has jumped to 18. States, including New York and California, are and have been going after for-profit colleges on their own (including a recent action by New York AG Schneiderman against Trump University).
At the federal level, the Department of Education has been busy establishing new regulations for career colleges. The most notable of late, the “gainful employment” rule, will require colleges to demonstrate that at least 35 percent of students are repaying their loans, or that loan repayments do not exceed 30 percent of their discretionary income or 12 percent of their total earnings. Schools failing to meet the standard in three out of four years will no longer be able to accept student payment with federal loans.
These government efforts may make it seem that career colleges are nothing more than greedy institutions preying upon the unemployed during bad economic times, and that the white hat-donning government regulators are nobly reining them in.
However the economics of, or the basis of, for-profit colleges does not appear to have been considered: for-profit colleges are not as much in the business of educating and graduating stellar students as they are in the business of making money. These companies have an interest – and obligation to their shareholders/investors – to maximize profit and minimize cost. The more money they can charge students and the less money they must dole out for the service they provide (i.e. education), the better off they are. And again, that is their overarching duty to their investors.
In a perfect free market, career colleges could not charge exorbitant fees to attend their schools if their students could not get jobs after graduation – because students would not pay. But in our current structure where the cash cow of federal student loans exists, both for-profit colleges and prospective students have almost unlimited access to big funds. For-profit colleges would be irresponsible to their investors if they did not tap this resource. Students often are not responsible enough to understand the consequences of accruing significant student loan debt.
Bottom line, much of the issue of for-profit colleges in the social context is that they have both a financial and legal duty to act in their own interest. The problems federal and state regulators seek to address are largely problems created by the federal government’s presence in the first place. Without the federal cash cow, private lenders (who would be the sole source of student financing) would insist both for-profit colleges and students behave differently. Colleges would have to improve performance and students would have to be more judicious about how they spend their money.
This is the fourth of a regular series of posts that summarize and wrap up our latest thoughts that have appeared recently on Ifrah Law’s blogs.
1. Proposed Gaming Bill Could Make Nevada First to Legalize Online Poker
Nevada, long an innovator in the gambling arena, may soon take another major step by becoming the first state to legalize online poker. We discuss the state’s importance in the gaming world, the chances of passage of the bill, and the groups that stand to benefit.
2. Brady Violation Leads to Reversal of Conviction in D.C.
When it comes to Brady violations, sometimes late is no better than never, it seems, as the D.C. Court of Appeals reverses a conviction for assault with intent to commit murder. We explain what information the prosecutors withheld and why it was important.
3. ‘Taking the Fifth’ Before Congress: A New Ethics Twist
It’s unethical for a prosecutor to put a witness on the stand with knowledge that the witness will exercise the privilege against self-incrimination. We look into a new D.C. Bar ethics opinion that gives a novel answer to the question of doing the same thing before a congressional committee.
4. Is FTC Action Needed Against Pricey Apps?
It’s true that children shouldn’t be buying expensive Smurfberries and other online goodies for their apps with real money (on Mom or Dad’s credit card). The FTC has been asked to take action. We discuss whether the agency is the right place to turn, or perhaps Mom and Dad are.
5. Does Google Need to Police Its Ads for Fraud?
There are unscrupulous merchants out there on the Internet. Does Google need to look into every advertiser before accepting its money? A consumer group’s letter to the FTC has awakened interest in this issue.
6. Online Sellers Need to Beware of State Attorneys General
A Philadelphia online electronics store is the target of Pennsylvania’s attorney general for alleged bait-and-switch practices. But it’s not just the state of origin that can target an online seller.
The Federal Trade Commission is taking steps to show that it is quite serious about enforcing the so-called blogger disclosure rules that it issued last year.
The rules say, essentially, that when someone endorses or reviews a product or service, the person must disclose any relationship with the company that produces the product. So if a blogger gets a free item from a manufacturer, the blogger has to say so in his or her review. The idea is that consumers would want to know if the objectivity of a review is tainted in any way.
This type of problem occurs frequently in affiliate marketing, since the affiliates of a manufacturer can discuss the manufacturer’s products in their blogs. This would be a relationship that would have to be disclosed.
But the rule isn’t limited to bloggers or affiliates. The commission just served notice that public relations and marketing firms are squarely in its focus. What if a PR firm’s employees are endorsing their clients’ products without disclosing that they are, essentially, being paid to do so?
That issue just came before the FTC. Tracie Snitker, the founder and sole officer of Reverb Communications, a small PR firm in the Sacramento area, signed a consent order that became final in late September. She agreed to remove any reviews on iTunes that discussed apps produced by Reverb’s game developer clients that were actually written by Reverb employees who posed as ordinary customers and failed to disclose the relationship.
In addition, Snitker agreed not to post any further reviews on iTunes that fail to make that kind of disclosure – in effect, she and her employees are not allowed to pose as independent consumers.
Mary Engle, the director of the FTC’s Division of Advertising Practices, said at the time that the basic principle is clear: “Companies, including public relations firms involved in online marketing, need to abide by long-held principles of truth in advertising.”
The agreement that Snitker signed is legally binding. It follows a less stringent action that the FTC took in April against Ann Taylor Stores, which gave up to $500 in gift cards to bloggers who attended a preview of its summer 2010 design collection. Not all the bloggers disclosed this financial connection.
In the Ann Taylor case, the agency simply closed the matter with a nonbinding “closing letter,” in which it stated that it expected Ann Taylor to “take reasonable steps to monitor bloggers’ compliance with the obligation to disclose gifts they receive.”
Affiliate marketers need to be aware of these two government actions of increasing severity. Endorsements are fine; you can say what you want, but you had better disclose your financial ties, whether you are an affiliate, a paid endorser, a PR firm employee, or simply the recipient of a free gift card.
Is there a way to hold a government agency like the Federal Trade Commission (FTC) accountable for the cost to businesses of what a company says are abrupt and systemic changes in regulatory standards? POM Wonderful LLC, a Los Angeles-based juice company, is trying to do just that by suing the FTC in District Court.
The FTC is reportedly investigating POM for alleged false advertising but hasn’t filed a complaint against the company. POM claims in its own lawsuit, filed in U.S. District Court in the District of Columbia, that the agency is already inventing new deceptive-advertising law on its own – without going through the required rule-making procedures — and is getting ready to enforce it against POM.
Specifically, POM says the FTC is now requiring that advertisers obtain prior approval by the Food and Drug Administration before making claims that a product treats or prevents disease and that they must have two well-controlled studies before making non-disease claims.
POM alleges that the FTC has put out these new, obligatory advertising standards for the entire food industry not by going through formal rule-making that would give the industry a chance to have input, but simply by publishing consent orders that it entered into with Nestle U.S.A. and Iovate Health Sciences, Inc. POM says the FTC gave POM copies of these consent orders and told POM that these standards now have the force of law and delineate the “new definition of deception.” POM says this action flies in the face of 20 years of FTC rules and regulations on food advertising.
POM alleges that the FTC is violating POM’s First Amendment rights to engage in truthful speech and is damaging POM’s good will and brand identification as a healthy juice company. Another notable argument that POM makes is a claim of due process deprivation in violation of the Fifth Amendment. The company alleges that the FTC’s actions have disrupted its business and devalued the “tens of millions of dollars” invested in research that was conducted in accordance with the FTC’s prior standards.
POM makes valid points. Companies ought to be able to reasonably rely on government standards so that they can decide how to allocate their resources. That is why federal agencies are required to undertake formal rule-making procedures and to allow businesses time to respond to proposed rules and, if necessary, to modify their practices in advance of the rules’ implementation.
But regulators sometimes see such procedures as tedious and time-consuming. Hence the common practice of many agencies of making changes on the fly through settlement agreements with investigated companies. As POM alleges was done by the FTC, an agency may settle out with a company by requiring that company to implement more stringent measures. Since the agreement is private and between two parties, that document may contain any measure the two parties agree upon – whether or not common practice and whether or not more stringent than current regulatory standards. One of the wrinkles in agencies’ use of such settlement agreements, though, is that these agreements often impact more than just the parties to the agreement.
The parties to the consent decree win (sort of) in that they keep the agency at bay. The agency wins in that it expeditiously (and extrajudiciously) gets to tighten its reins on companies subject to its regulations. But outside companies – which have diligently and reasonably relied on published regulations – may find themselves at a significant loss.