Director: Daniel C. Levy

For-Profit Fraud in U.S. Higher Education

(Entry by Kevin Kinser)

PROPHE Summary:

These two articles address the issue of fraud in the for-profit sector. In the first, the University of Phoenix stands accused of paying admissions representatives on a commission basis in violation of federal law. The charges were brought by former Phoenix employees using the False Claims Act, which allows individuals to sue on behalf of the state if they witness fraudulent use of government funds. The second article discusses a Congressional hearing on for-profit institutions, which focuses on several allegations against major for-profit companies in addition to the Phoenix case. An investigative report by the TV news program 60 minutes on a series of problems in the sector that emerged in 2004 and 2005, primarily relating to securities violations by publicly-traded education corporations, spurred congressional interest in for-profit fraud.

For the full stories (shown with permission) see the Chronicle of Higher Education, January 28, 2005, "Justice Department Supports $1-Billion False-Claims Suit Against U. of Phoenix," by Goldie Blumenstyk, http://chronicle.com/temp/reprint.php?id=dev71pjsex07qqhn82s0ygn8juk243g; the Indianapolis Star INDYSTAR.com, February 3, 2005, "For-profit colleges fall under federal scrutiny,' by J.K. Wall, http://www.indystar.com/articles/4/219418-5104-223.html.

PROPHE Observation:

For-profit institutions have been eligible for federal student aid since 1972, and through the 1970s and 1980s, fraud in the sector was significant. In the late 1980s a series of rules were put in place that in large measure solved the problems of the previous decades, most significantly in controlling high default rates on student loans. Since that time, however, a new group of large for-profit corporations has emerged, and with them a new set of problems. Their fast expansion has led several to run afoul of student recruitment rules and eligibility requirements for federal aid. Others find the Securities and Exchange Commission serves alongside the Department of Education and Justice as an additional watchdog of their relationship with investors. The significance of regulatory intervention in the for-profit sector of today, however, is not often appreciated. These high-profile cases make it clear that enforcement of consumer protection statutes and accountability for the use of government funds has not become moot in the new for-profit higher education environment. Because the U.S. has been the unquestioned leader in the for-profit higher education sector in general and the new corporations in particular, what happens in the US regarding growth and regulation should be of wide interest internationally.