ITT Executives Have Only Themselves to Blame for the Company’s Demise

Don’t cry for ITT. Judging from all the accusations that
have been made against the ITT in recent years, its leaders have only
themselves to blame for the company’s collapse.

Unsurprisingly, ITT officials and other apologists for the
company, such as the editorial writers at The Wall St. Journal, don’t like that explanation. They would like to portray
ITT as being another victim of the Obama’s “regulatory assault” on the
for-profit higher education industry. But they don’t explain why American
taxpayers should continue to support a company that appears to have
deliberately defrauded students, shareholders, and the federal government,
while raking in billions of dollars in federal financial aid every year.

In preparation for the all the blowback the White House and
the U.S. Department of Education are likely to get now that ITT has officially shut down, I thought it would be
helpful to provide brief summaries of the allegations that federal and state
regulators and former employees have made against ITT over the last several
years. They paint a disturbing picture of a company that enriched its leaders
at the same time that it harmed students, misled investors, and put itself on a
crash course to financial collapse.

The New Mexico Attorney
General’s Lawsuit Against ITT

In February 2014, Gary King, New Mexico’s Attorney General,
sued ITT over recruiting and financial aid abuses that allegedly occurred at
ITT Technical Institute in Albuquerque.

Most Disturbing
Allegations

• The school lured students into its
  associate-degree nursing program by misrepresenting the program’s accreditation
  status. ITT recruiters told prospective students that the program was
  accredited by the Accreditation Commission for Education in Nursing, the
  organization that accredits associate degree nursing programs, or was in the
  process of being accredited by the commission, despite the fact that neither
  claim was true. As a result, students were misled into believing that they
  would be able to transfer the credits they earned at the school into a B.S.
  Degree in Nursing or other advanced degree. 
  But other colleges didn’t accept credits from an unaccredited program.
  As a result, students went heavily into debt to enroll in a program that ended
  up being a dead end for most of them.

• The institution changed its nursing curriculum in
  midstream, forcing many of its students to go deeper in debt in order to retake
  courses that they had already passed.  In
  addition, the school misled the New Mexico Board of Nursing by saying that
  these curricular changes would only affect new students, when in fact they
  applied to all students, including those who had already taken the classes.

• The school signed students up for high-cost
  private loans through its PEAKS Loan program without fully informing them of
  “the loan terms or informing students that the loans were not federal student
  loans.” For many of these students, the interest rates on the loans exceeded
  14.5 percent. In addition, the institution signed some students up for these loans
  without telling them. Financial aid administrators “e-signed student loan
  documents without fully-informed consent and authorization from the student,”
  the lawsuit says.

Consumer Financial  Protection Bureau Lawsuit Against ITT

The
Consumer Financial Protection Bureau (CFPB) also sued ITT in February 2014,
accusing the company of engaging in an elaborate scheme to “coerce” the
generally low-income students who enrolled into taking out institutional
private loans that “included 10 percent origination fees and interest rates as
high as 16.25 percent” to fill the gap between what students owed and the
federal financial aid they received. According to the lawsuit, company
officials knew that the majority of students who took out these loans would
never be able to repay them.

How This Scheme Allegedly Worked

Because
ITT’s programs were so expensive, students were generally left with a funding
gap even after maxing out their federal loans. To fill this gap, ITT provided
students with what appeared to be a generous offering – short-term loans that
were interest free. But there was a catch. These loans had to be fully repaid
within nine months. Knowing that most students wouldn’t be able to meet this
requirement, ITT essentially gave students a choice once the temporary loans
came due: drop out or pay off this debt by taking out much more expensive and
onerous private loans through its institutional PEAKS Loan program.  ITT made these loans even though it projected that
more than 60% of them would end up in default.  If that wasn’t bad enough, the schools’
financial aid administrators weren’t always upfront with students about the
terms of the loans. “As a result of being pressured into do so by ITT,
approximately 8,600 consumers entered into loans they could not afford, did not
want, did not understand, or didn’t even know they had,” the CFPB’s lawsuit
states. Unsurprisingly, at least two-thirds of these loans have not yet been
repaid. Meanwhile, collection agencies have been pursuing these students, whose
credit records have been ruined.

U.S. Securities
and Exchange Commission Lawsuit Against ITT and its Leaders

In May 2015, the U.S. Securities and Exchange Commission (SEC)
filed a lawsuit against ITT and two of its leaders, accusing them of engaging “in
a fraudulent scheme to defraud ITT investors by concealing the extraordinary
failure” of its institutional private loan program, and the harm it was doing
to the company’s finances.

How This Scheme
Allegedly Worked

In order to get banks to make PEAKS Loans to its students,
ITT had to guarantee the loans against default. As a result, the amount that
ITT had to pay to these lenders grew as more and more of these loans defaulted.
To avoid having to make these massive payments, company officials came up with
a plan: they would secretly make the minimum payments on the loans of students
who were in danger of defaulting without disclosing that they were doing so to
investors. While this strategy paid off in the short term by at least
temporarily preventing these loans from going into default, it actually made
things much worse for the company over the long haul because interest continued
to accrue on these loans. The added interest “increased ITT’s overall PEAKS liability,”
the lawsuit states, and “these effects compounded each period that ITT
continued the practice.”  Because ITT
left them in the dark, ITT’s shareholders didn’t have any idea about how poorly
these loans were performing. But eventually, the loan companies that held the
PEAKs Loans forced ITT to come clean and abandon the practice. At that point,
ITT’s stock price plunged, “falling by approximately two-thirds,” the lawsuit
states.

Former ITT
Official’s False Claims Lawsuit

In January, a federal district court in Tallahassee, FL
unsealed a False Claims lawsuit that Rodney Lipscomb, who was the dean of
academic affairs at ITT’s Tallahassee campus from 2011 to 2015, filed against
the school, accusing it of engaging in a variety of recruiting and financial
aid abuses.

Most Disturbing
Allegations

• The school routinely enrolled students who
  couldn’t benefit from its programs. For example, the institution admitted a
  blind student into a computer networking program that required students “to
  read codes, and identify various plugs and wires by color in order to repair
  technical issues with computers.” When Lipscomb heard that the school was
  pressuring an admissions representative to enroll the student, he brought his
  objections to the director of recruiting, who told him “that it was not ITT’s
  problem or place to dissuade the student from enrolling in the program.”
  Predictably, this student dropped out of the school within four weeks, but not
  before he had taken out “an entire quarter’s worth of student loan debt” that he
  would have to repay even though he hadn’t received any benefit from the program.

• Recruiters for the school regularly misled
  prospective students about “the programs they offer, and the training they
  provide.” For instance, admissions representatives were told to deceive prospective
  students by telling them that the institution’s criminal justice program prepared
  students for “jobs doing forensic science work like they see in CSI Miami.”  In reality, students need to take advanced
  chemistry and other science courses, which were not offered at the school, to become
  “a crime scene investigator or forensic scientist.”

• Financial aid administrators at the school
  routinely encouraged students to lie on their federal student aid application
  forms about their income and the number of dependents in their household so
  that they could receive larger financial aid awards from the government. They
  were also instructed to tell prospective students who were nervous about taking
  on debt to attend the school that “nobody pays back the loans anyways.”

The Massachusetts
Attorney General’s Lawsuit Against ITT

In April, Maura Healey, Massachusetts’ Attorney General,
sued ITT’s schools in the state “for engaging in unfair and harassing sales
tactics and misleading students about the quality of its Computer Network
Systems program, and the success of the program’s graduates in finding jobs.”

Most Disturbing
Allegations

• The schools routinely misled prospective
  students about their success in placing graduates of the Computer Network
  Systems program into jobs related to their fields of study. While the
  institutions’ recruiters claimed that 80 to 100 percent of program’s graduates
  were employed in jobs in or related to their field of study, “the real
  placement rates were actually 50 percent or less at each campus.”  The schools appeared to count any job involving
  computers as being a successful placement. For example, the company “claimed
  that jobs simply selling computers at big box stores counted as placements.” They
  also credited the schools for graduates who had internships or short-term jobs
  lasting less than a week.

• The schools regularly enrolled students who were
  unlikely to benefit from the programs being offered. Former recruiters told the
  AG of “prospective students who had fourth grade reading levels or learning
  disabilities that would have prevented them from succeeding at ITT, who were
  nevertheless enrolled.” Predictably, these students were left off worse than
  before they enrolled – with “substantial debt” but without the training they
  needed to get jobs that would help them pay it off.

• These schools routinely deceived prospective students
  about the quality of the programs they offered. While the institutions promised
  that they would provide “practical, hands-on experience,” students told the AG
  that the “hands-on instruction was nonexistent or involved the use of outdated
  technology.” Instructors often didn’t know much about the subjects they were
  teaching. Some would read straight from the text book, while others would tell
  students to “google the answers.” A few didn’t bother showing up for class at
  all.