Guest Post: California Dreamin’ Becoming Proprietary Students’ Nightmare

By Betsy Imholz

For the past three years, there has been absolutely no state oversight over the for-profit colleges and trade schools that operate in California — leaving nearly half a million proprietary school students in the state without any protection against unscrupulous institutions. The lack of regulation is testament to the for-profit higher education industry’s political ties in Sacramento and Washington, which it has used to eviscerate what was once the toughest proprietary school regulatory regime in the country.

Now, with a new Administration in Washington, and hundreds of millions of federal stimulus dollars for job training at stake, the proprietary sector appears to have had a change of heart and is championing a bill (AB 48) in the California Legislature that would re-instate regulation. But don’t be fooled. As written, this legislation would do more harm than good, allowing financial aid dollars to flow to the schools without meaningful state oversight, while their students become ever-more burdened with student loan debt.

The history of for-profit higher education in California is replete with scandal — so much so that the state, for years, was known as “the diploma mill capital of the nation.” When the U.S. Senate Permanent Subcommittee on Investigations (aka the Nunn Committee, named after its chairman, Sen. Sam Nunn of Georgia) investigated abuses in federal student aid programs in the early 1990s, proprietary schools in California stood out as being among the most unscrupulous in the country. Many of these proprietary institutions were found to be feeding on federal financial aid by recruiting homeless people straight off soup kitchen lines and out of welfare offices and signing them up for federal grants and loans.

Outraged by these types of abuses, state legislators cracked down on these schools. In 1989, the California legislature unanimously approved a bill that contained bright lines for state approval, requiring career programs to graduate 60% of students enrolled and place 70% of the graduates in the jobs for which they trained. The legislation also allowed for a “private right of action” so students could sue to enforce the law; established a Student Tuition Recovery Fund (STRF) to compensate students if their schools went out of business unexpectedly; and lodged regulatory and enforcement responsibility in a new, independent “Council for Private Postsecondary and Vocational Education.”

The Industry Fights Back

Unsurprisingly, California’s proprietary schools were unhappy with the new regulatory scheme. As the political winds began to shift in the state, the schools found powerful allies in Sacramento to help them upend the reform structure.

In 1997, Gov. Pete Wilson convinced the state legislature to disband the independent council and transfer its oversight authority to a bureau in the Department of Consumer Affairs (DCA), which was under gubernatorial control. That was the end of meaningful enforcement in California. [Nearly a decade later, a state-appointed monitor examining the bureau’s performance found that the DCA had failed to promulgate meaningful regulations to protect students’ interests.]

When the law came up for renewal again in 2006, the legislature approved a bill that would have extended the law’s “sunset” date for one year and established a working group of stakeholders to explore any changes that were needed. However, Gov. Arnold Schwarzenegger, under pressure from proprietary school lobbyists, vetoed the bill, promising that he would provide his own draft bill early in the next session. That did not happen.

In the vacuum that followed, the schools received crucial help from the Bush Administration’s U.S. Department of Education. Under the federal Higher Education Act, colleges must be “legally authorized” by states in order to award federal financial aid. As a result, the closing of the bureau appeared to endanger the schools’ access to the aid programs. However, the Education Department issued an opinion saying that the schools could continue to participate in the programs as long as they were accredited by agencies recognized by the Education Secretary. In other words, the schools were allowed to operate as usual, giving them little incentive to come back to the negotiating table.

Without any state oversight of these schools, the problems of misrepresentation and abusive recruiting practices have continued. In 2007, for example, the California Attorney General settled a deceptive practices case against Corinthian Colleges, a large national chain headquartered in California, requiring the company to pay a $6.5 million fine, and provide some restitution to students. The suit charged Corinthian with misleading prospective students about its schools’ job placement rates and the starting salaries of their graduates, running 11 sub-standard programs, and falsifying records provided to the government. [As part of the settlement, Corinthian did not have to admit to any wrongdoing.]

Creating the Illusion of Oversight

Now, with a new Administration in Washington, $488 million in federal stimulus dollars in the wings for job training in California, and financial analysts expressing concern about whether the Education Department’s new leadership will continue to support the agency’s controversial opinion, proprietary schools have a strong incentive to address the regulatory void in California. They have championed AB 48 by Assemblymembers Anthony Portantino and Roger Niello, with support of the Schwarzenegger Administration. It’s pallid by comparison to the 1989 reform Act, and far from what’s needed.

AB 48’s flaws fall into 5 categories. First, the bill would create a framework that provides no state review in determining eligibility for state approval. The bill would exempt all regionally accredited schools, including University of Phoenix, which paid a $9.8 million fine to the U.S. Dept. of Education in 2004 after the agency found that it had engaged in deceptive recruiting practices. [The University never admitted to any wrongdoing.] All other schools would also be automatically approved, as long as they were accredited by an Education-Department-approved agency.

At first glance, this may sound reasonable. But accreditation is a self-regulatory process with schools funding review by their peers. Accreditation has been shown over and over again to be wholly inadequate as an indicator of minimal quality in the proprietary sector. Also, accredited institutions are those that receive federal financial aid, i.e. those are the schools with the most revenue and the largest number of students. Thus, when they mislead students or engage in other deceptive practices, the impact in dollars and consumers affected is huge. And once state approval is granted it is very difficult to revoke.

Second, the bill would delegate authority to the DCA, an agency that has proven itself incapable of carrying out its duties. Besides California, no other state, to my knowledge, lodges regulation of trade schools and vocational programs in a consumer/business agency rather than an education one. Placing it in DCA was a trade-off made ten years that has proven, as multiple reports and audits have shown, to be a serious error.

Third, the bill would provide inadequate resources to carry out effective oversight. AB 48 would eliminate fees for the large swathe of exempted schools, caps annual fees at low levels for schools requiring approval, and prohibits the bureau from raising needed fees without additional legislation. A cynic might say that bureau is being set up to fail.

Fourth, the school disclosures the bill would require are inadequate to protect students. It is all too common for proprietary schools to engage in high pressure sales tactics –including misrepresenting their success in graduating students and placing them into jobs. To prevent these types of deceptions, schools need to be required to disclose clearly understandable, uniformly defined, and accurate graduation, job placement and exam pass rates, and credit transfer information that would allow students to make apples-to-apples comparisons before investing tens of thousands of dollars to enroll at these institutions.

When it comes to consumer disclosures, the devil is in the details. The job placement definition in the bill, for example, would allow schools to count “graduates employed in the field” rather than requiring them to count only those “employed in the job trained for,” as was the case under prior law. Real life examples abound of schools playing fast and loose with such definitions — for example, counting students sweeping floors at a fast food restaurant as a “culinary program job placement.” Also, the bill would allow schools to count as a job placement a graduate who stays on a job for just an hour.

Finally, the legislation would provide the bureau with weak enforcement authority. The sanctions in the bill — notices to comply” and “citations”– will not discourage unscrupulous school operators from violating the law.

Real Consumer Protections Needed

The unprecedented economic crisis facing California means more laid off workers desperate for re-training are likely to be susceptible to high-pressure sales pitches that prey on their hopes and dreams. The stakes for consumers are high, with short-term programs running in the tens of thousands of dollars. Sadly, as a result of this crisis, the state has had to cut $680 million out of the budgets of community colleges, while billions of dollars continue to flow to proprietary schools that are operating without any oversight.

After years of neglect, California needs a system that will again ensure fundamental consumer protections for California’s half-million proprietary school students; safeguard the public dollars invested in these schools; and secure the integrity of California degrees, diplomas and certificates in the job market. Unfortunately, AB 48 will create only the illusion of oversight, leaving students as vulnerable to fraud and abuse as they were two decades ago.

Betsy Imholz is Special Projects Director for Consumers Union, nonprofit publisher of Consumer Reports. She is located in CU’s San Francisco office, and has worked in the California Legislature on consumer protection for proprietary school regulation since 1997. Prior to her work at Consumers Union, Ms. Imholz was the Consumer Law Coordinator for Legal Services of New York City where she worked extensively in Albany, NY and Washington DC on proprietary school and financial aid issues on behalf of low-income students. Her views are her own and do not necessarily reflect those of the New America Foundation.